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"Adjust cover policy when necessary"

 

 

In her capacity as a board member of Euler Hermes AG, Edna Schöne is responsible for the government business of the credit insurance company. In an interview with Afrika Wirtschaft, she speaks about the expanded opportunities to secure goods and services provided to Africa with Hermes cover, and explains which products and solutions are available to exporters even in the early phases of projects.

Edna Schöne, Board Member Euler Hermes AG

The call for German SMEs to be more prepared to invest and take risks with respect to business in and with African countries is growing louder. These companies also require more intensive support in the face of growing competition on the continent. Despite this, so far state backed cover for transactions has been worse for Africa than any other continent. Why is this the case?

It’s the nature of the business that the cover possibilities are more restrictively managed in countries with higher risks than in countries with lower risks. The fact of the matter is that many countries in Sub-Saharan Africa have been allocated to the highest country category in terms of risk by the OECD. Nevertheless, in recent years the German federal government has provided billions of euros of Hermes cover for goods and services to Africa. Totalling 4.4 billion euros, around a fifth of last year’s cover was for Africa, and the largest individual guarantee was for an Africa-related transaction. Altogether, the German federal government covered goods and services in 40 different countries in Africa in 2016.

In 2016, the German federal government generated a surplus of 1.184 billion euros with export credit guarantees. There were also considerable surpluses in the years preceding this. Why isn’t this margin being taken advantage of to a greater extent?

Today’s surplus is yesterday’s deficit. A large proportion of the annual results comes from the repayment of outstanding receivables. So it’s not a surplus in the classic sense. Rather, the indemnities that previously burdened the federal budget have now been settled. For example, Iran settled its Hermes debt totalling many hundreds of millions of euros in 2016.

The contribution to the federal budget is accordingly subject to long-term fluctuations. Just as in times where the figures are in the red, such as the 1990s, the German federal government couldn’t sweepingly tighten the screws, they can’t broadly loosen them in the opposite case. The risks involved in a transaction are reviewed based on the underlying business, and are not decided based on the annual results.
    
And finally: the annual results represent just one side of the coin. The other side is the German federal government’s indemnification risk, which currently totals almost 90 billion euros.

Hermes cover has been available for transactions with public sector clients and long-term projects in only twelve additional African countries. Companies doing business in particularly difficult markets are in special need of cover. Will Hermes cover be extended to transactions with public sector clients in further African countries in the near future?

In 2014, the German federal government began to expand cover policy to selected countries in Sub-Saharan Africa. This decision was also the result of intensive discussions with German exporters and the German-African Business Association. Since then, Hermes cover for transactions with the public sector is again possible in countries whose three-digit-million euro debt was forgiven by Germany as part of the HIPC initiative in the 1990s.

Currently, transactions on credit terms with private sector clients can be secured with export guarantees in 34 out of the 54 countries in Africa. Hermes covered goods and services to the public sector on credit terms are possible in 22 countries. And it doesn’t need to stop there. The German federal government has repeatedly affirmed that cover policy can be adjusted when necessary - i.e., if there are suitable transactions.

At ten percent, the uninsured percentage for German companies is twice as high for guarantees for other emerging markets. Other OECD countries have uninsured percentages of only two percent – and they also cover countries that Germany excludes. To become internationally competitive, and to support economic development in African countries, we think the uninsured percentage should be lowered by one percent, at least for an interim period. Is something in this direction planned?

Even if the higher uninsured percentage only applies to credit transactions with public clients in the twelve countries where Germany has previously forgiven debt, this is an issue that bothers exporters and banks. And other countries have, in fact, been more generous here with their conditions. As such, this issue is a subject of intensive discussion within the German federal government. In its Pro! Afrika concept, the German Federal Ministry for Economic Affairs and Energy has advocated a reduction of the higher uninsured percentage. However, such a decision has to be made in consensus with all German federal ministries participating in the Interministerial Committee for Export Credit Guarantees (Interministeriellen Ausschuss für Exportkreditgarantien). (Editor’s note: in addition to the Federal Ministry for Economic Affairs and Energy, the committee includes the Federal Ministry of Finance, the Federal Foreign Office and the Federal Ministry for Economic Cooperation and Development.)

However, in the face of this criticism, it should be forgotten that, over the past months and years, exporters have taken advantage of the expanded policy position and applied for export credit guarantees for a number of transactions, despite the higher uninsured percentage.

German companies need to minimise risk particularly in the early phases of projects. What could an instrument look like that would serve this purpose?

I’m aware of the call for the German federal government to become involved with investment risks in the early phases of projects. The idea sounds tempting, but Hermes cover is, in principle, attached to concrete investments abroad. Due to the very high risks, which can also be difficult to price, it is not a simple task to develop such an instrument. At the end of the day, there’s always an entrepreneurial risk - this is especially true for the early phases of projects. The degree to which a company is prepared to take on risks here is also indicative of the seriousness of a project, and its prospects of realisation.

However, this doesn’t mean that the German federal government doesn’t support the early phases of projects. On the contrary – it was announced in Pro! Afrika concept of the German Federal Ministry for Economic Affairs and Energy that the range of governmental support services would be further expanded. The measures range from strengthening the AHK network, through to the founding of regional industry competency centres, to expanding the information on offer and implementing an Africa guide, in order to support German companies in their questions relating to entering the African market.

In addition, there are interesting offers by the German Association of Investment and Development (Deutschen Investitions- und Entwicklungsgesellschaft, DEG). The DEG’s Business Support Services unit offers co-financing of up to 50 percent of the costs of project preparation and accompanying measures. At most, this co-funding can be up to 200,000 euros.

We too are occasionally involved in the very early phases of projects with exporters and potential clients.

From your perspective, could supporting Hermes guarantees with elements from the development budget be considered?

The German federal government is endeavouring to intelligently integrate the various measures that are intended to support Africa politically and economically. The following example shows what this might look like: currently, development assistance funds in Germany are untied, i.e., independent of specific exports from Germany. However, if a German exporter secured a development assistance project at such a tender, the German federal government could support them with Hermes cover. However, care should be taken that this support doesn’t violate the international OECD rules on supporting exports, and thus the provisions of the WTO as well.

German companies complain about the complexity of applications. Is a simplification of these applications currently being considered?

Reducing complexity is a topic at the top of our agenda. We are currently in the process of digitising our business across the entire value chain, which will be reflected in new services and product offerings. Applications and claims settlements will also be significantly simplified. The recently launched myAGA client portal (www.agaportal.de/en) represents an important first step towards increased client orientation and simplified use of Hermes instruments.


As a mandatory of the German federal government, where would you like to have greater scope for action?


There is a clear delineation of responsibilities between the mandatory and the German federal government, and the cooperation works very well. The scope for action made available to us is entirely sufficient, and we apply it in a number of ways; both with regards to management as well as the further development of instruments. We do both keeping in mind the interests of German exporters and the financing banks.