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Leveraging ECA Support At times, government facilities, resources and specialists can be friends and indispensable allies, while at other times, government is a bureaucratic minefield, a detrimental financial burden and…well, the list goes on. Such widely divergent views are also found in the context of international business and trade across many markets – even those with significant state control, where entrepreneurial energy is gaining momentum and critical mass. At the same time as businesses express concern and frustration with government in the area of international trade – often based on limited in-market support, or lack of financial resources – they also appreciate the wide variety of programs and resources available, in support of international ventures. One illustration of the "love-hate" dynamic between business and government relates to the activities of export credit and insurance agencies in the development and support of international trade. ECAs, first active in post-war Europe as one means of supporting reconstruction, have played an important – some argue indispensable – role in the facilitation of international trade and large capital projects. While ECAs exist with different mandates, and each brings a particular view to their mission (that is, there is no common model to ECAs across markets), they all provide a variety of products and services critical to the facilitation of cross-border business: receivables insurance, guarantee programs, risk mitigation solution related to letters of credit, financing, equity investments and a range of other programs. ECAs are the subject of significant profile and attention when they fund projects with controversial consequences (as they often have), such as displacement of indigenous populations, or environmental risk and impact, or when they support large deals like aircraft purchases. They are less visible, but no less important, in supporting tens of thousands of small transactions across all industries, sectors and markets on the globe. Despite the broad-ranging value propositions of world-class ECAs, such as Canada’s EDC, the UK’s ECGD, or Australia’s EFIC, among others, there had been, pre-crisis, increasing debate about the value – and the very necessity – of having organizations of this nature in operation. Businesses, particularly entrepreneurial ventures, often have an aversion to interact with government unless absolutely necessary, and there is a common view in many markets that working with ECAs is bureaucratic, time-consuming, and complicated. Is it worth the time and effort to bring an ECA into a trade transaction? Ultimately, it depends on the situation. It depends on the characteristics of an enterprise, an industry sector, a trading relationship and a specific deal or transaction. In some instances, transactions cannot and will not take place without ECA support because of the high risk profile of a deal, market, or trading relationship. In other cases, private sector solutions may be more than adequate – even preferable – over an ECA option. Specialists in the field concur that while there are some process and bureaucracy issues, most exist for a reason, and overall, ECAs offer an additional alternative to importers and exporters: one that should be explored open-mindedly, and not dismissed out of hand. Public sector ECAs operate as arms-length agencies of government, but with access to government funds, and with credit standing as sovereign risk rather than commercial risk. The latter reality allows ECAs to offer credit enhancement – i.e. to improve the risk profile of a transaction (and therefore generally, reduce its cost) – by participating in the deal. The optics of engaging with a credible ECA can also be very helpful in mitigating any risk concerns that might preoccupy a trading partner. In terms of bureaucracy, it is true that certain ECA programs have qualification requirements, which may include domestic content thresholds in an export product, or compliance requirements that necessitate the preparation of supporting documentation. The application and documentation aspects of transacting with an ECA must be considered in context: ECAs provide support to higher-risk transactions, often without intimate knowledge of the client company or their business. In other words, given the nature of the transactions typically involved, it may be entirely appropriate for ECAs to exercise some due diligence and care in extending support to international transactions. Just as banks have shareholders, public sector ECAs have a stakeholder community, which can be even more unforgiving of losses: the taxpayer. The debate about whether or not ECAs continue to serve a useful function was convincingly repositioned over the course of the last year, as credit evaporated and risk exploded onto the scene of international commerce; in addition, the "market gap" – which ECAs theoretically work to fill in terms of insurance, guarantee, and trade finance solutions – grew wide enough to drive a truck through. ECAs have been indispensable in cushioning businesses and economies from feeling the full brunt of the crisis. In fact, even detractors of export credit agencies have noted publicly that the contributions of ECAs have been measured, thoughtful, and valuable. Take the time to assess the value proposition of several ECAs, including those in the home markets of your trading partners, to determine if they can help. The international marketplace is competitive and unforgiving: an additional asset in your pursuit of international business ought to be carefully assessed, and happily leveraged in the most efficient manner possible. |
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Northstar Trade Finance was formed in 1994 to support new and growing exporters by filling a market niche that was not being served by conventional sources of trade finance, but which is nonetheless critical to exporters' success in world markets.
