20 August 2008
ECGC: Backbone of Indian project exports
M. Sarsidharan,
Export of capital goods on deferred payment terms and execution of turnkey projects, construction works contracts as also rendering of services abroad are collectively referred to as project exports. As these transactions are not of repetitive nature and they involve medium/long term credit, ECGC's insurance cover for such transactions is provided on a case-by-case basis under specific policies. Normally these contracts are of very high value and involve longer credit periods. The country/political risks involved in such transactions are unpredictable in view of long credit period involved. Although in most cases the overseas buyers are government or semi-government organisations, there is a need for ECGC cover to safeguard the payment risks. In many cases these contracts are funded by international financial institutions and payments are secured under L/C or bank guarantee. There are cases where even government or central bank guarantees are available safeguarding payments. However, the elements of political risk such as war, civil disturbances, exchange transfer delay etc., are existent in all these cases despite having payment security. To protect such exporters, ECGC has the following types of covers. Supply contracts and turnkey projects: For covering supply contracts and turnkey projects, specific contract/shipments policy can be taken. This policy can be for covering only political risks or for covering comprehensive risks i.e. both commercial and political risks. Construction contract: For covering construction contract, a Construction Works policy can be obtained. This policy can be for either political risk alone or for comprehensive risk. The Comprehensive Risks Policy provides protection against commercial risks such as insolvency of buyer, protracted default, non-acceptance of goods shipped in addition to covering political risk of war, civil war, exchange transfer delay etc. The political risk policy, on the other hand, provides protection against the Political Risks Policy. Under the various export credit insurance policies, ECGC generally covers loss up to 90 per cent. Services Contract: For covering services contract, which involves only technical and/or professional services, a Services Policy can be obtained. This also can be either for political or comprehensive risks. In addition to the policy covers, which are issued to exporters, ECGC also extends its guarantee support to banks in India against both funded and non-funded facilities extended to project exporters. The types of guarantees issued by Indian banks are: 1] Funded: * Packing Credit * Post Shipment * Overdraft * Rupee Loan Non-Funded * Bid Bond * Advance payment * Performance guarantee * Retention Money guarantee * Overseas Lending Finance guarantee ECGC's counter-guarantee can be obtained by banks in India to protect them against any loss that they may sustain owing to invocation of the above guarantees. * Risk covered: Insolvency of the exporter/protracted default of the exporter * Percentage of loss: 75 per cent to 90 per cent covered * Rate of premium: 0.80 paise per Rs 100 p.a. & 0.95 paise per Rs 100 p.a. As per RBI's recent directive, no pre-bid approval from authorised dealer, Exim Bank or Working Group is required to be taken by project exporters. Only post-award approval is required to be taken. However, it would be in the interest of project exporters to obtain 'in-principle' clearance from their bankers and ECGC assuring them of support in the event of their securing the contracts. ECGC's approval of project exports and services contracts is based on the following aspects: (i) The capacity of the project exporter to carry out large value contracts - technical, professional and managerial, and their past experience in the line of business. (ii) Country to which the exports are to be made - stability of political set-up/government, soundness of economy, payment records, relations with IMF, World Bank and other international FIs and donor countries. (iii) Overseas contract/project - value, type of project, whether cleared by local authorities, profitability. (iv) Buyer/employer - private/government. (v) Payment terms and security, rate of interest for deferred receivables. (vi) ECGC's underwriting policy on the country and its experience, whether any transfer delay experienced. (vii) Berne union experience - whether the credit period offered is in line with Berne union understanding. (viii) Reinsurance back-up available or not. (ix) Whether need for covering the contract under National Export Insurance Account set-up by Government of India.
Financial institutions in India extend Buyer's Credit/Line of Credit to overseas buyers/institutions to facilitate export of goods and services from India. Institutions like Exim Bank, SIDBI etc., often seek ECGC for Buyer's Credit/LoC cover. Buyer's Credit/LoC cover can be obtained either for covering political risks or for comprehensive risks. Factors weighing approval of Buyer's Credit proposals are: Competence and capacity of exporter in executing the contract; commercial justification of the contract; economic viability of the overseas project for which credit is required to be offered; credit worthiness, standing and financial position of foreign buyers, and general economic conditions of the buyer's country. Lines of Credit are generally extended by Exim Bank of India to financial institutions and governments in overseas countries facilitating export of consumer goods and capital goods.
Overseas Investment Insurance OII provides cover for the investments made by Indian corporates abroad in a joint venture or their wholly owned subsidiary (WOS) either in the form of equity or loan. The Government of India or RBI should approve the JV. The basic principle is that the investment should emanate from India and benefit of dividend/interest therefrom should accrue to India. The investment should not in any way conflict with the policy of both our government and the overseas government. Normally, there should be a bilateral agreement between India and the host country for promotion and protection of Indian investment. In case there is no such agreement the Corporation should be satisfied that the existing laws of the host country adequately safeguard Indian investment. Types of investment: The overseas investment may be made either by way of equity or by way of loans. Equity: Any contribution made to the enterprise in return for shares either by cash remittances or by way of export of capital goods or services can be covered. Any fees payable towards technical knowhow, consultancy or management services etc., and agreed to be converted into capital will be considered for cover at the discretion of the Corporation. Loans: Loans advanced by way of a formal agreement but not tied to export of goods and supplies are eligible for cover. Any 'suppliers/buyers' credits and lines of credit extended to support sale of goods or services from India may be covered under the appropriate insurance schemes of the Corporation and not under investment insurance. Dividend and profit: In case of equity the investor can choose to cover the original investment as well as his share of retained earnings and dividends declared, to the extent they are eligible for repatriation. Cover on account of original investment, retained earnings, dividend receivable and any additional investment will be subject a ceiling of 150 per cent of the original investment calculated as in the proceeding paragraphs. In case of loan, the insurance will cover the principal as well as interest actually earned. Portfolio investment: Any investment in shares of overseas concerns not related to setting up, development and expansion of overseas projects would not be eligible for cover under the investment insurance. Additional investment: Additional investment can be covered subject to a ceiling of 50 per cent of the original investment. Any additional investment out of retained earnings should have been made by formal capitalisation and for the purpose of expansion for development of the enterprise. If the additional investment is made out of retained profits, which are not eligible for repatriation, such an investment will not be eligible for cover. Initially, cover is issued for three years. On expiry of the three years it is at the option of the exporter to renew the cover/review of the JV/WOS by ECGC. The duration of insurance cover shall not normally exceed 15 years but extension can be given up to 20 years for longer projects. The amount of investment eligible for cover shall be to the full extent during the first 10 years of cover. Percentage of cover is 90-can be reduced. The amount of investment eligible for cover will be reduced to 90 per cent, 80 per cent, 70 per cent, 60 per cent and 50 per cent, respectively, of the original investment during the 11th, 12th, 13th, 14th and 15th years of insurance. OII provides cover for original investment retained earning, dividend receivables and additional investment up to 50 per cent of the original investment. Cover for dividend receivables may not be given in case of risky countries; cover only for original investment. OII covers only political risks of war, expropriation and restrictions on remittances. Premium rate: Base rate: 1 per cent of the investment value. Actual premium rate will depend on the size of investment, country of investment, previous experience of the Importer etc. The exporter has to furnish the proposal form along with a fee of 1 per cent of the investment amount subject to a ceiling of Rs 25,000. If cover is agreed application fee paid shall be adjusted towards premium payable. In case the application for insurance is rejected, half the fee paid shall be refunded. Premium is taken upfront. Income from the premium is allocated over the tenor of the cover extended. Installment facility is provided by ECGC for collecting premium after analysing and approving the proposal. ECGC enters into agreement with the exporters for providing cover mentioning the terms and conditions along with the maximum liability. The exporters have to submit annual reports about the progress and working of the projects.
New initiatives ECGC has since revised its premium structure providing substantial reduction in the rates both for short term as well as for medium and long-term contracts. This will go a long way in providing cost-effective credit insurance support to project exporters, which in turn will enable them to compete effectively for international tenders. Installment facility in payment of premium that too without charging interest is another welcome step being initiated. In order to increase project exports and to encourage project exporters, the Government of India has initiated various steps. Institutions like ECGC and Exim Bank are being strengthened to provide adequate support to project exporters. A national export insurance account is being mooted to facilitate credit insurance support on government account. The government is also considering increasing the capital base of ECGC so as to enhance its underwriting capacity.
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