CONCEPT PAPER ON THE CREATION

OF A REGIONAL EXPORT CREDIT AND

FINANCE SCHEME

Submitted to the Asian Development Bank

April 19th, 2004

(Extract as of October 13th, 2004)

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TABLE OF CONTENTS

Introduction ........................................................................................................ 1

Section I: Overview of Export Credit ................................................................ 3

A. What is Export Credit?................................................................................. 3
B. What is an ECA?.......................................................................................... 3
C. What is an EXIM Bank? .............................................................................. 4
D. Main Models ................................................................................................ 4
E. ECA Market Segments ................................................................................ 6

Section II: Asian Market Dynamics, Challenges, and Gaps.......................... 11

A. MLT Support for Asian Economies........................................................... 11
B. Competitive Challenges ............................................................................. 12
C. Gap Definition ........................................................................................... 14

Section III: Review of Existing Proposals ...................................................... 18

A. Introduction................................................................................................ 18
B. Emerging Market ECA: Proposal .............................................................. 18
C. Export Finance Bank: Proposal ................................................................. 18
D. Other Market Proposals: APRI .................................................................. 19
E. Comparative Analysis of the Proposals ..................................................... 19
F. Gap Analysis.............................................................................................. 20

Section IV: Conclusions and Recommendations .......................................... 21

A. Conclusions................................................................................................ 21
B. Recommendations...................................................................................... 22

Annex A: Illustrative List of Asian ECAs and EXIM Banks........................... 26

Annex B: Survey – Asian ECA and EXIM Bank.............................................. 27

International Financial Consulting Ltd. Commercially Confidential

INTRODUCTION

The purpose of this Concept Paper is threefold. First, to provide Asian Development
Bank (ADB) and other relevant stakeholders with a more detailed understanding of the
existing market challenges and gaps facing Asian exporters in the availability of
internationally competitive export credit and export finance facilities. Second, to review
and assess a number of recent proposals aimed at addressing these key challenges
and gaps. Third, to draw conclusions and make recommendations for appropriate
responses by ADB to both the challenges and gaps, as well as the proposed initiatives.

Recently, a number of government-supported or “official” Export Credit Agencies

(ECAs) and Export-Import Banks (EXIM Banks) located in Asia have expressed the
need for some kind of new “regional” ECA and/or EXIM bank which could fill perceived
market gaps, and ensure that Asian exporters are able to compete on a more level
playing field (see Annex A for an illustrative list of Asian ECAs and EXIM Banks). As
explained later in this paper, “gaps” are strictly those in respect of the provision of
medium to long term (MLT) export credit support to Asian exporters and investors;1 and
“leveling playing field” refers to the ability of these exporters and investors to compete
internationally solely on the basis of price and quality of their goods/services, by
neutralizing any competitive disadvantages relating to the price and quality of the
associated export credit.2

Increasingly Asian economies depend on their official ECAs and EXIM Banks to help
exporters become internationally competitive, particularly in the area of capital goods
exports and for South-South trade. However, there are two perceived challenges for
these official institutions to be internationally competitive, particularly vis-à-vis their
official and/or private-sector counterparts in OECD countries: (i) the credit quality of
their insurance or guarantees (a so-called “credit gap”); and (ii) their ability to mobilize in
a cost effective manner the hard currency funds necessary to provide MLT export
finance support (a so-called “funding gap”).

The credit gap and funding gap issues have drawn increasing attention, as evidenced
by the number of representations made to ADB by a wide variety of private- and public-
sector stakeholders. For example, during 2003, two major international banks
independently approached ADB offering to help address some of the challenges they
perceive exist in the short-term and MLT export credit and export finance market. One
proposal argued in favour of establishing a new regional ECA, while another outlined
the need for a regional EXIM Bank. ADB was also approached by other banks to
discuss the need to address perceived market gaps in this area.

1
Some gaps may exist in the provision on non-MLT export credit in Asia (e.g., short-term credit insurance, bonding,
working capital, etc.). However, any such gaps that may exist are perceived as temporary, rather than structural, and
are not addressed in this paper.
2
Article 1.(b) of the OECD’s “Arrangement on Officially Supported Export Credits” (the so-called “OECD
Arrangement”) describes a level playing field as “competition among exporters based on quality and price of goods
and services exported rather than on the most favourable officially supported financial terms and conditions.”

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Further, ADB was approached by the possible sponsors of the Asia Risk Exchange
(ARX), a proposed multilateral initiative to facilitate the exchange of selected insurance
risks within the region. This led to ADB working on a draft business plan for the Asian
Political Risk Insurance Company (APRI), which looked at possible market gaps for
political risk insurance (PRI) in project finance and short term trade credit in Asia.

In developing this Concept Paper, International Financial Consulting Ltd. consulted with
a number of major public- and private-sector stakeholders and “thought leaders” active
in the region. This included direct discussions, feedback on drafts of the Paper. All
parties contributed helpful and thoughtful views regarding the perceived credit and
funding gaps, as well as the means to best address these gaps.3

The Paper is divided into four sections. Section I provides a brief contextual overview of
export credit, including the major international ECA models and the main ECA market
segments. Section II focuses on the particular dynamics, challenges, and gaps of the
Asian market, including issues relating to the credit quality of ECA cover and EXIM
Bank funding cost. Section III reviews and analyzes the proposals in the context of the
Asian market challenges and gaps identified in the previous section. Finally, Section IV
presents conclusions and recommendations for the possible role of ADB in supporting
the proposals and/or helping address the identified Asian market challenges and gaps.

3
A survey on the MLT export credit and export financing challenges faced by Asian ECAs and EXIM Banks has also
been developed (see Annex C), which could assist with consultations with these entities in the event the ADB
proceeds with the recommendations and next steps set out in Section IV.

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SECTION I: OVERVIEW OF EXPORT CREDIT

Before reviewing the main types of ECA models and market segments, it is important to
clarify a few basic concepts.

A. What is Export Credit?

The term “export credit” describes a range of facilities or schemes, and can mean
different things in different contexts. Strictly speaking, export credit refers to (i) credit
extended by exporters to importers (i.e., supplier credit), or (ii) MLT loans made by
banks (or EXIM Banks), used to finance projects and capital goods exports (i.e., buyer
credit). It includes credit extended both during the period before goods are shipped or
projects completed (often referred to as the pre-shipment period or pre-credit period)
and the period after delivery or acceptance of the goods or completion of the project
(often referred to as the post-shipment period or credit period). Export credit is the main
type of facility offered by an ECA.4

B. What is an ECA?

The traditional role of an ECA is to support and encourage exports and outward
investment by insuring international trade and investment transactions. While no two
ECAs are identical, they do share some common characteristics and mandates.

At the very basic level, the common function of an ECA is to take or provide cover to
exporters, banks, or investors for political and commercial risks causing loss over a
short, medium, or long term.

For export credit transactions, political risks are the risk of non-payment on an export
contract or project due to action or failure by an importer’s host government. Such
action may include intervention to prevent the transfer of payments, cancellation of a
license or acts of war or civil war. Commercial risks arise primarily as a result of non-
payment by a private buyer, commercial bank or a public buyer, due to default,
insolvency or bankruptcy, or failure or willingness to take delivery of the goods (i.e.
repudiation).

For foreign direct investments, ECAs (through investment insurance or PRI) can also
cover political risks associated with expropriation, confiscation and nationalization
without compensation, inability to convert and transfer profits and dividends, and the
effects of war and civil war.

Most ECA export credit support is provided via insurance or guarantees, and there is
little practical difference between these instruments. ECA guarantees are more similar
4
Stephens, Malcolm. The Changing Role of Export Credit Agencies, International Monetary Fund, 1999.

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to insurance than typical financial guarantees. Typically, an insurance or guarantee

policy embraces commercial and political causes of loss against specified risks or
classes of risk and is therefore conditional. While insurance usually covers less than
100% of the risk, guarantees are usually for 100% of the risk.

C. What is an EXIM Bank?

EXIM Banks support and encourage trade and outward investment by providing loans
directly. The essential difference between an "ECA" and "EXIM Bank" is that ECAs take
risks using another institution’s (normally a bank’s) balance sheet, while EXIM Banks
take risks using their own balance sheet, with actual loans and liabilities.

Also, some EXIM Banks provide ECA-type export credit insurance and guarantees in
addition to direct financing facilities. Annex A provides an illustrative list of Asian ECAs
and EXIM Banks.

D. Main Models

Virtually every developed country and most developing countries have an official ECA
and/or EXIM Bank.5 Each has been tailored to its own particular national circumstances.

The first ECA, Export Credit Guarantee Department (ECGD) of the UK, was established
in 1919. By the 1970s, most major OECD countries had an ECA and, during the past
25 years or so, developing countries too have been actively establishing ECAs as an
important tool for export development.

TIMELINE OF ECA PROLIFERATION

1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

UK Netherlands US Canada Japan Hong Kong Australia Egypt Nigeria New Zealand
Germany Norway Mexico Austria Finland Denmark Jamaica Colombia Pakistan
Switzerland France Belgium Korea Turkey Romania Africa
Sweden Italy India Taiwan China Thailand Yugoslavia
Israel Portugal Indonesia Philippines Macedonia
South Africa Spain Malaysia Vietnam
Sri Lanka Hungary
Bosnia
Slovenia
Slovakia
Bulgaria
Czech Republic
Poland
Singapore
Brazil

However, there is no single or perfect model or status or organization or, for that matter,
structure for government involvement in an official export credit scheme. Nor is there a
typical ECA and/or EXIM Bank.

5
According to Article 5.(a) of the OECD Arrangement, the term “official support” comprises: (i) export credit
guarantee or insurance (pure cover); (ii) official financing support in the form of direct credit/financing and refinancing
or interest rate support; and (iii) any combination of (i) and (ii).

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Some countries provide export credit support via government departments, some via
public corporations and some via private companies. Some countries have both ECAs
and EXIM Banks. Some provide working capital facilities to exporters where the
commercial banks are unwilling or unable to do so because of either capacity or cost.
Some only offer export credit and some only investment insurance but most (at least of
the larger agencies) do both. Some primarily underwrite political risks and some write
primarily commercial risks, but most now cover both categories.

While no two official schemes are alike, they all support and encourage exports and
investment by providing insurance, guarantees, loans, or some combination of these
products. Four of the most common international models for described below. These
models range from virtual entities managed remotely by third parties, to full-service
multi-line institutions offering insurance, guarantees, and direct loans. From a product
perspective, it is worth noting that while all models give rise to the provision of export
insurance and/or guarantee instruments, only Model 3 (State-Owned/Independent
Agencies) gives rise to direct lending activities.

Model 1: Private Company Acting as Agent

This is the model which applies in France, Germany, the Netherlands, and until recently,
in South Africa. Typically, the government has an exclusive arrangement with a private
company (e.g., COFACE in France, Euler-Hermes in Germany, Atradius (former
Gerling-NCM) in the Netherlands) which issues MLT insurance policies as agent for the
government. When acting as agent for the government, all risks are taken by the
government. Most of the key decisions are taken by the government but it usually is the
responsibility of the private company to make recommendations and to provide not only
services for the issue of policies but also for the initial analysis of the risks involved.

Model 2: Government Department/Facility

Within the OECD countries, the United Kingdom and Switzerland operate their ECAs as
government departments. In the UK, the Export Credit Guarantee Department is a
separate Department funded through budgetary allocations responsible to the Secretary
of State for Trade and Industry. In Switzerland, Export Risk Guarantees is part of the
Secretariat for Economic Co-operation. In the case of New Zealand, the Export Credit
Office comes under the authority of Treasury.

Model 3: State-Owned/Independent Agencies

The most common form of delivery for export credit facilities is via an autonomous
institution, which is owned by the government. However, there are many different
versions of this institutional arrangement, and many different product line variations.
Some agencies provide only insurance (e.g. SACE in Italy and NEXI in Japan) while
others provide only lending (e.g. JBIC in Japan). Many more are full-service institutions,
combining both insurance, guarantees and lending under one roof (e.g. EDC, US
Eximbank, and Phil EXIM). Meanwhile, only in the US and Germany is export credit
and investment insurance support in separate institutions (i.e. US Eximbank and OPIC;
Hermes and PWC).

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Of note, this is the dominant model for official schemes in Asia, including stand-alone
insurers, stand-alone lenders, and “full service” institutions (see Annex A for an
illustrative list of these institutions in Asia). Also, the historical trend for these
institutions in Asia is for different types of agencies to report to different government
ministries. Typically, EXIM Banks report to their countries’ Finance Ministries, while
ECAs report to Trade Ministries.

Model 4: Virtual ECA

A relatively new model, developed in New Zealand which re-entered the export credit
market after having privatized its national ECA in the 1980s, is the “virtual” ECA. The
Government recognized that it no longer had any underwriting expertise and, therefore,
it outsourced this function to an agent. The Danish ECA undertakes the risk analysis
and makes recommendations to the Government of New Zealand, while the
Government’s role is to provide risk capital and take the risk.

E. ECA Market Segments

The market in which ECAs operate is made up of different segments, of which the three
major categories are: (i) short-term export credit; (ii) MLT export credit (which comprises
both MLT insurance/guarantees and well as direct financing); and (iii) investment
insurance. Working capital facilities and bonding facilities are also provided by certain
ECAs. Each of these categories is reviewed below.

i. Short-Term Business
Short-term business is the traditional product of export credit insurance. This is not
surprising since at least 90% of world trade is conducted on the basis of cash or short-
term credit. While there is no universally accepted definition for short-term business, in
practice most short-term credit business involves not more than six months/180 days’
post-shipment credit.

Normally, both political and commercial risks are covered. The basic insurance will
apply to risks which can arise after shipment/delivery of the goods and services, but
most insurers also will consider providing cover against risks which can arise in the
period between signing of contracts and shipment/delivery. The traditional product has
been a framework or umbrella policy which will cover all or an agreed part of the exports
of the insured party over an agreed period (normally one year). Individual transactions
are handled under separate credit limits on individual buyers which can either be set by
the insurer or agreed by policyholders under arrangements for discretion given by the
insurer.

It is in this short-term area that the activities of the private sector have grown most
substantially, and where there is now very significant capacity within the private
reinsurance market.

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ii. Medium and Long-Term Business

Within the ECA community, the conventional definition of medium-term business is
insurance or financing transactions having a credit period of between one and five
years; for long-term business, the traditional period is more than five years.6 These
export transactions typically involve capital goods (e.g., aircraft, rolling stock, machinery
and equipment, etc.) or projects (e.g., telecoms networks, port developments, highways,
gas pipelines, power plants, etc.).

MLT business is now clearly the mainstream of official scheme activity in OECD
countries and, more and more, in larger emerging economies with strong industrial
bases. Unlike short-term business, which has proven increasingly attractive to private-
sector insurers, MLT business still remains largely the domain of ECAs and EXIM
Banks, and is growing in importance.

This is because commercial banks are not comfortable with MLT credit risks in
emerging markets and therefore seek to mitigate their risks. Since the Asian financial
crisis in the late 1990s, banks are more careful taking on MLT export finance assets
notwithstanding ECA cover. The impending Basle II regulations may exacerbate this
trend. For example, banks are often willing to fund a MLT export loan, but may be
prepared to assume only a portion of the underlying credit risk. Similarly, a bank may
find some/all of the credit risk acceptable, but needs to mitigate the transaction’s
political risk. This lack of comfort extends to Asian regional and local banks, which have
little experience in MLT export finance because of their limited ability to participate in
OECD ECA transactions in the past.

In most OECD countries, the emphasis for MLT export credit support has increasingly
been on providing insurance and guarantees (rather than on direct lending). (This is
mainly because banks are readily able to fund themselves for long terms in hard
currencies.) This increasing focus on insurance and guarantees is noteworthy, as it
highlights another crucial motivation of private-sector players in supporting export
transactions: the underlying credit quality of the insurer. Credit quality of the
guarantor/insurer dictates how much capital the insured bank must allocate against the
insurance policy. This, in turn, affects the overall cost competitiveness of the export
credit transaction. For example, under typical capital adequacy guidelines for banks in
OECD countries an export credit guarantee issued by a AAA-rated, OECD-based ECA
would carry a zero-risk weighting for capital allocation purposes.

Government involvement in MLT business has traditionally taken two forms – credit risk
and official financing support, as discussed below. Both forms of government support
are covered by the OECD Arrangement on Officially Supported Export Credits and are

6
The OECD Arrangement specifies maximum repayment terms for official support depending on country Category
and industry sector.

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referred to in the WTO Agreement on Subsidies and Countervailing Measures (SCM

Agreement).7

Credit Risk Support

The first form of support is in taking the commercial and/or political risks, usually
through the provision of insurance or guarantees. As mentioned above, the distinction
between commercial and political risks is important and it is not uncommon for lenders
involved in export credit transactions to seek separate or additional PRI cover. Such
PRI cover may facilitate the lender’s credit committee approval of a transaction in an
emerging market, or may serve as a risk mitigant when country risk limits are scarce.

The most common form of MLT credit in use today is buyer credit. As Figure 1 below
shows, this involves not only a contract between an exporter and a buyer, but also a
loan agreement with a borrower in the buying country. In most cases, a commercial
bank in the exporter’s country provides the loan and the export credit facility then either
takes the form of an insurance policy or guarantee given to the bank. Where an EXIM
Bank lends directly, this is equivalent to a buyer credit.8

Figure 1: Buyer Credit

COUNTRY A COUNTRY B

Supply Contract
Exporter Importer
Goods & Services
Qualifying Certificates

Loan Drawings

ECA
t
en
em
re

t
Ag

di
re
ts
an
In

C
en
su

Lo
Pr

ym
ra
em

nc

pa
e

Re
ium

Bank

In most cases, banks play a crucial facilitative and risk-sharing role in the delivery of
export credit. As such, it is important to note the rapidly changing competitive
landscape for the banking community. The increasing globalization of financial markets
has resulted in fewer, larger banks with a desire to rationalize their service delivery
model to ensure optimal deployment of scarce shareholder capital.

This gives rise to two crucial and inter-related implications for how many banks
(particularly large banks with international networks) tend to pursue export credit
business. First, driven by a desire to deploy capital as cheaply as possible, banks
prefer export credit insurance/guarantees which are zero-risk weighted (e.g., from AAA-
rated, OECD-based ECAs). Second, since ECA-guaranteed loan assets tend to be low-
margin, long dated and capital intensive, banks seek creative ways of removing such

7
Annex 1 of the Illustrative List of the WTO SCM Agreement as items j and k. Item j refers to: “…premium rates
which are inadequate to cover the long-term operating costs and losses of the programs…..” Item k refers to: “interest
rates provisions of the [OECD Arrangement] shall not be considered an export subsidy prohibited by this Agreement.”
8
It should be noted that some larger firms have specialized captive financing entities which provide buyer credits.

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assets from their balance sheets via such mechanisms as off-balance sheet
securitization vehicles and instruments.

Official Financing Support

The second form of government support is what is referred to as “official financing
support”. This is in the form of direct loans, refinancing or interest make-up schemes
(IMUs). Most official schemes in OECD countries provide IMUs, since there are
generally lenders willing and able to provide funding for the underlying export credit
transaction. However, some exceptions include Canada, U.S., Japan, Korea, and
Australia, which offer direct loans, Direct loans from EXIM Banks are much more
prevalent in newly industrialized, emerging and developing countries, since Asian banks
have far less capacity to fund transactions, especially for large amounts, in hard
currencies or for long tenors.

Of particular importance to official financing support is the underlying cost of funding for
the EXIM Bank providing the loan. Virtually all such schemes are funded by the
national government, either directly or by way of guarantee of third-party funding.

As such, the credit quality of the EXIM Bank’s government will have a direct impact on
the EXIM Bank’s ability to fund the loans that it makes to offshore buyers on a
competitive and attractive basis. For OECD-based lenders, this has not been a
significant issue since most of their respective government’s have AAA or near-AAA
credit ratings. However, governments in emerging or developing countries have lower
credit ratings, which directly impacts on the funding cost of their EXIM Banks. This
funding cost differential between developed and developing country EXIM Banks is a
potentially significant competitive issue.

iii. Investment Insurance

Investment insurance is another major market segment for most ECAs.9 Traditionally
this insurance only covered foreign direct investment in the form of equity investments
and shareholder loans against loss due to political risks. Since commercial risks were
not covered, investment insurance became known as political risk insurance, or PRI by
some. This, however, is distinct from and should not be confused with the political risk
business underwritten as part of export credit insurance, which traditionally had the
greatest share of political risk activity. In recent years, investment insurance has been
provided to cover bank loans, as well as equity, and tenors have been extended in
excess of 12 years.10

iv. Working Capital

Very few OECD official schemes are still involved in this market segment. Working
capital is the financing required by an exporter to start or to continue to operate and to
produce goods and services to be exported. A few ECAs are involved in the provision
9
Because this cover is not trade related, there should be no risk of distorting the playing field for exports, and thus
this cover is not regulated by the OECD Arrangement.
10
The Berne Union has a committee which deals with overseas investment insurance, with a large number of official
ECAs as members including OPIC, and NEXI, plus AIG and other private sector PRI providers along with MIGA from
the World Bank Group.

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of working capital (referred to as “pre-shipment finance”), offering guarantee facilities to

banks or loans directly to exporters. In some developing countries, banks are not able
to provide working capital to companies due either to a lack of capacity, or because of
the cost of funding or bad debt provisioning. As a result, some ECAs provide working
capital loans at what could be seen as subsidized rates. However, this is a difficult and
high-risk area, especially if the exporter fails to perform its contractual duties and, as a
result, is not paid by the importer.11

v. Bonding and Guarantees

Most ECAs can provide cover to commercial banks that issue guarantees to buyers on
behalf of exporters. The instruments can be in the form of tender, advance payment,
bid, performance or retention bonds. A performance bond, for example, is a guarantee
of the bank that the exporter will meet the terms of its contract with the buyer. A
wrongful call on the bond will result in a claim paid by the ECA, if the call can be shown
to be unfair for political reasons. Since the bank is taking the credit risk of the ECA that
provides the cover (and not the exporter), the overall cost and value of the
bonding/letter of guarantee instrument will be influenced by the credit rating of the ECA.

11
The ECA’s risk is somewhat mitigated by the fact that that an export contract exists with a buyer for which (in most
cases) the ECA itself has provided credit insurance cover.

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SECTION II: ASIAN MARKET DYNAMICS, CHALLENGES, AND GAPS

Having set out the international landscape of export credit models, market segments,
and particularly how these relate to credit risk and funding risk issues for ECAs, it is now
helpful to shift the focus to the Asian regional context. This section first examines the
importance of internationally competitive export credit and MLT financing support for
newly industrialized, emerging and developing countries in Asia. Then, we highlight the
key competitive challenges faced by existing Asian ECAs and EXIM Banks with respect
to their funding costs and the relative quality of their export credit guarantees and
insurance. From these competitive challenges, we then define the specific gaps that
may currently exist in the availability of internationally competitive export credit and
export finance support and consider whether such gaps are structural or temporary.

There are three basic directions or dimensions of trade and investment patterns
relevant to the competitiveness of Asian economies. These are generally referred to as
North-South, South-North and South-South. Within each of these three trade and
investment directions/dimension, exporters and investors are supported by countless
private, public, and multilateral financial intermediary and risk management
mechanisms provided by ECAs, EXIM Banks, IFIs, capital markets, commercial banks,
and insurance companies.

Certainly, it is beyond the scope of this paper to address all of these dimensions and all
of these mechanisms. Rather, the focus is on those market developments, challenges,
and gaps most relevant to Asian exporters, ECAs, and EXIM Banks in the context of the
MLT segment. While some gaps may exist in the other main ECA market segments
described earlier (i.e., short term insurance, investment insurance, bonds, and working
capital), any such gaps are viewed as temporary, not structural, and thus less important
and pressing than perceived MLT gaps for Asian exporters and investors.

A. MLT Support for Asian Economies

Asian countries are becoming evermore highly integrated into intra-regional, inter-
regional, and inter-continental trade and investment networks. For example, many
Asian firms serve as critical links in global supply chains, particularly in sectors such as
information technology. At the same time, the rapid industrialization of a number of
economies, particularly following the Asian crisis of the late 1990s, has renewed
demand for a broad array of infrastructure projects and other highly capital-intensive
activities, such as port developments, transit systems, and telecoms networks.

Notably, the export of manufactured goods is quickly supplanting more traditional

developing-country export staples such as food, agricultural raw materials, natural
resources and fuel. Export of manufactured goods as a percentage of total developing
country exports grew from 54% in 1990 to 66% in 1999. The figure below shows the

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rapid growth in exports of machinery and transport equipment during the 1990s in major
Asian countries.

Figure 2: Exports of Machinery and Transportation Equipment

Exports of Machinery and Transport Equipment in million US$ (SITC 7)
70,000.00

60,000.00 1 Malaysia
2 China
50,000.00 3 Thailand

40,000.00 4 Philippines
5 Brazil
30,000.00
6 Russia

20,000.00 7 Indonesia
8 Turkey
10,000.00 9 Argentina

0.00 10 South Africa

1990 1995 1996 1997 1998 1999

Source: Unctad

As these sectors continue to grow in importance, the demand for MLT export credit and
export finance grows as well. In some cases, the mere availability of MLT support may
make the difference between an export opportunity being won or lost. In other cases,
particularly for South-South and South-North trade, the all-in cost of the export credit
may be a key factor in the overall competitiveness of the Asian exporter or investor.
Any market circumstance which may limit the availability or impair the cost-effectiveness
MLT support will likely have a negative impact on the economic growth prospects for the
region in the near term and on the international business competitiveness and
attractiveness of the region in the long term.

B. Competitive Challenges

Asian exporters face a number of competitive challenges relating to the cost and
availability of MLT export credit. For example, for buyers or projects that do not have
access to hard currency cash flows, local currency financing is crucial, but is either
unavailable or of insufficient tenor or size. Further, buyer credit in hard currency may
not be available, either due to transfer/convertibility risks or the funding capabilities of
Asian financial institutions. Where such funding is available, foreign exchange
fluctuation risk and other economic factors may render such financing prohibitively
expensive over the term of the financing.

Even if a Asian or international bank is willing and able to consider funding an export
transaction, attempting to cover commercial and political risks associated with the buyer
by way of insurance or guarantees is highly problematic. In some cases, there is no
ECA presence in the exporter’s market (many emerging market ECAs are involved only
in short-term supplier credit transactions). If an ECA is present, adequate cover may
not be achievable. Even if cover is achievable, its cost may render the underlying
transaction uneconomic for the banker, the exporter, or both parties. As a result, rather
than an exporter’s goods and services competing internationally on the basis of quality

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and price, the playing field is tilted against the exporter from the outset on the basis of
an inferior export credit package.

The competitive challenges for MLT export credit are perhaps best understood from the
perspective of the main public- and private-sector providers of such support:

¾ Asian EXIM Banks face two distinct challenges in providing MLT support. First,
since their government owners/funders have relatively weaker credit ratings, their
cost of funding is higher than EXIM Banks and other MLT lenders in OECD and
other developed markets. Second, they have more limited potential to risk-share or
co-finance export transactions with other lenders or insurers, since there are fewer
of these financial intermediaries available and less overall risk capacity in the Asian
region.

¾ Asian ECAs face a credit challenge similar to EXIM Banks. The relatively weaker
credit ratings of their government owners/funders extends to the credit quality of the
ECA itself and, ultimately, to the guarantee and/or insurance cover they issue.
Since the credit quality of Asian ECA cover is not as strong as the credit quality of
similar cover from OECD-based ECAs, this impacts the lending bank as insured
party. Also, some Asian ECAs pay their claims in local currency, whereas most
export loans continue to be denominated in hard currencies (i.e., U.S. dollars, Euro,
Yen), which results in foreign exchange exposure for the insured party. As a result,
many of these ECAs tend to focus more on short-term credit insurance business,
provided directly to Asian exporters, instead of MLT business, which is in favor of
foreign banks and offshore buyers.

¾ Asian commercial banks face a number of barriers when asked to provide a buyer
credit to support an exporter or buyer client. Compared to their counterparts in
OECD countries, their weaker credit standing translates into relatively high funding
costs. In many developing Asian countries, the relatively illiquid and unsophisticated
nature of capital markets makes it difficult for Asian banks to fund for large amounts
or long tenors. Moreover, access to hard currency funding or hedging instruments
may be limited. In addition to funding constraints, there is a tendency for OECD-
based ECAs and exporters to deal with international banks, particularly those with
representation in their home countries.

¾ Finally, international banks face challenges working with all of the above entities in
support of MLT transactions. Regarding ECA-related activity, these banks are used
to booking AAA-rated, zero-risk weighted loan assets for transactions guaranteed by
OECD ECAs. These have a low cost to the bank if kept on the balance sheet and
may be transferable (e.g., by way of securitization, secondary market transactions,
etc.) off the balance sheet if necessary. Since ECA cover from most Asian ECAs
would result in the bank holding a more costly and risky loan asset, this is a
relatively much less attractive use of the bank’s limited balance sheet capacity.
Moreover, the weaker credit quality of the loan asset makes it more difficult to
transfer off the bank’s balance sheet if/when necessary.

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These above-noted factors make it challenging for Asian ECAs and EXIM Banks to
provide competitively priced MLT export credit through loans, guarantees and
insurance. This places Asian exporters at a disadvantage vis-à-vis their OECD
counterparts.

C. Gap Definition

Prior to assessing the existence of gaps, it is important to be clear on what constitutes a

“gap”. A market gap is, by definition, the unmet demand for a given product or service.
However, the concept of a market gap is not straightforward. For example, it is crucial
to take account of the difference between (a) the existence of a gap (i.e., lack of
availability from existing sources of supply) and (b) the unwillingness or inability of firms
to pay the price sought by suppliers.

In fact, there are perhaps three characteristics of gaps in the supply of a given product
or service:
(i) supply does not exist at all;
(ii) supply does exist but is exceeded by demand; or
(iii) supply may exist but at a price that firms are unwilling to pay.

For the purposes of this Paper, relevant “gaps” are strictly those in respect of the
provision of MLT export credit support to Asian exporters and investors. As such, the
gap analysis excludes from consideration any competitive advantages or disadvantages
in such areas as cost of labour, transportation, etc.

Based on the above gap definition and characteristics, the competitive challenges
described in Part B point to the existence of a credit gap and a funding gap, which: (i)
impact the availability of internationally competitive MLT export credit and export finance
support for Asian exporters in newly industrialized, emerging and developing countries,
and (ii) could result in these exporters losing out on export opportunities to better
supported competitors in OECD markets.

In addition to the credit gap and funding gap, there is another gap which has risen
largely due to the timing discrepancy in the development of official schemes in Asian
versus OECD countries. This has created an “experience gap”, which can result in a
non-level playing field in such areas as underwriting quality, training, governance, and
information.

These gaps create different competitive issues, and affects different market players. At
the same time, these gaps have related causes and influences. Each is considered in
turn below.

i. Credit Gap
The credit gap primarily impacts the activities of Asian ECAs and their financial
intermediaries (i.e., international and Asian banks). This gap arises due to the relatively

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weaker credit standing of Asian ECAs compared to their OECD-based counterparts.

The weaker credit of the Asian ECA’s cover negatively affects the quality and the
attractiveness of the cover, as well as the overall pricing of the underlying export
transaction. This gap is most directly and negatively felt by international and
commercial banks, as it materially affects their ability (or desire) to provide funding for
the MLT export credits.

Further, it is important to note that the credit gap affects not only the commercial risk
element of the cover, but also the political risk cover provided by ECAs. As noted
earlier, it is increasingly common for banks to seek political risk cover on MLT loans for
transactions in emerging and developing Asian countries; this is especially the case for
infrastructure projects with long tenors and large exposures. However, since private-
sector supply has been constrained by the ongoing conservatism in the direct PRI
underwriting and reinsurance markets, more of the burden for such cover is falling on
the shoulders of ECAs both within and outside the region.

The ECA cover provided by a non investment grade ECA can never make the export
credit transaction investment grade: regardless of the guarantee, it will never be
stronger than the creditworthiness of the ECA's government. This is a particularly
important issue for project finance transactions, which often have tenors well in excess
of 10 years.

At best, the lesser credit quality of Asian ECA commercial and political cover will drive
up the overall cost of the export credit, since, for example, banks will have to allocate
significant capital against the Asian ECA guarantee. At worst, the bank may decline to
participate on the basis of insufficient quality of the ECA cover.

To illustrate, suppose there is a capital goods export opportunity to a sovereign

buyer/borrower in the Philippines which is being competed on by two exporters, one in
the United Kingdom and one in China (see the diagram below). Banks wishing to fund
the transaction on the basis of MLT export credit cover have two options: (i) sourcing a
guarantee from ECGD (the UK ECA) with a Aaa credit rating (implied based on Moody’s
Investors Service rating for U.K. sovereign risk), zero capital adequacy allocation, and
no country risk provisioning; or (ii) sourcing a guarantee from Sinosure (the Chinese
ECA) with a lower A3 credit rating (implied based on Moody’s Investors Service rating
for China sovereign risk), higher capital adequacy allocation, and country risk
provisioning. Even if sufficient cover is available from Sinosure, clearly the bank will
favour ECGD cover in terms of guarantee pricing and counterparty risk. As a result, the
Chinese exporter faces an uneven playing field from the outset: instead of competing
solely on the basis of price and quality of its goods/services, the exporter is
disadvantaged by the price/quality of the associated export credit.

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Figure 3: Importance of the Credit Quality of ECA to Banks

United Kingdom: Aaa China: A3

Exporter Exporter

Bank Sovereign Bank

Buyer /
Borrower

ECGD Sinosure

• Zero Risk Weighting Philippines: Ba1 • Risk Weighting

• No Country Risk • Country Risk
Provisioning Provisioning

MLT Finance
MLT Finance
May be Available
Available
but More Expensive

The credit gap described above is a structural phenomenon. The gap itself may narrow
or widen based on a host of factors, including credit ratings, capital market conditions,
economic conditions, etc. However, these fundamental conditions which create the gap
are neither temporary nor easily resolved by existing market mechanisms.

ii. Funding Gap

The funding gap primarily impacts the activities of Asian EXIM Banks and Asian banks,
and, to an extent, international banks. This gap arises primarily due to the cost or the
availability of medium to long term capital to the actual funder of the MLT export credit.

For EXIM Banks which rely on funding from their governments, and for Asian banks
which rely on funding from under-developed domestic markets or uncertain offshore
markets, the relative high cost of funds results in smaller net financing margins to the
EXIM Bank/bank or higher loan costs to the borrower, or both. Either way, as illustrated
in Figure 4 below it is much more difficult for these entities to provide competitively
priced MLT export credit.

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Figure 4: Funding Cost Differential between OECD and Asian EXIM Banks

OECD EXIM Bank Asian EXIM Bank

(AAA-rated Country) (BBB-rated Country)
Funding Sources:
Home Government
Local Capital Mkts
Int’l Capital Mkts Cost of Funds
Int’l Banks
Cost of Funds
Operating Aggregate (All-In) Operating
Margin Pricing of MLT Loan Margin

Margin for Margin for

Credit Risk Credit Risk

MLT Loan Offer Borrower MLT Loan Offer

(Lower Pricing) (Higher Pricing)

In addition to the cost, it is often difficult for Asian banks to source funding for sufficient
tenors to match the required MLT support, particularly in the case of project transactions
which can have extended repayment terms in excess of 12 years.12 Alternatively, for
international banks, aside from the credit gap issues discussed above, they may face
issues such as the ability to source host-currency funds, or adequately hedge their
exposures in accordance with their risk management requirements.

Similar to the credit gap, the funding gap exists because of both the availability and cost
of accessing longer-term capital by the lenders of the MLT export credit. The availability
is almost certainly a structural issue, since this is a circumstance beyond the control of
the lenders themselves. The cost of medium to long term capital – at least for some
lenders – could change by virtue of an improvement in a lender’s credit strength. (For
example, an improvement in a lender’s credit rating would likely reduce its cost of
borrowing in capital markets.)

iii. Experience Gap

As shown in the timeline in Section I, many OECD official schemes have decades more
experience than their Asian counterparts. This experience gap, although less tangible
than the credit and funding gaps, is no less important to the provision of Asian MLT
export credit support. The gap, while prevalent across most Asian ECAs and EXIM
Banks, will vary in degree by country and by institution. The gap is temporal, as long as
effective mechanisms are developed and implemented to increase the experience and
knowledge, and competencies of the Asian ECAs and EXIM Banks, as well as related
stakeholders (e.g., governing ministries, etc.).

12
ECAs that are not in countries participating in the OECD Arrangement could possibly exceed the 12 year
maximum tenor for project finance transactions.

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SECTION III: REVIEW OF EXISTING PROPOSALS

A. Introduction

During the past 12 months ADB has received various proposals for institutional
structures to address the market challenges and gaps identified in Section II. This
Section examines three significant proposals in order to assess objectively and
comparatively: (i) what the schemes actually do; (ii) how they relate to one another; (iii)
whether they address a defined need; and (iv) whether they should be linked,
separated, sequenced, etc. Further, this Section considers the relevance of these
proposals to the needs of the Asian region.

Prior to examining the proposals, it is important to bear in mind any potential institutional
solution to the identified gaps should take full account, and “follow the grain”, of existing
ECA schemes, private sector institutions, and market mechanisms. Further, it should
be noted that each proposal reflects, to a large degree, the interests and motivations of
its sponsor(s). An appreciation for some of these interests and motivations will help to
provide context for, and more objectively analyze, the ideas presented therein.

B. Emerging Market ECA: Proposal

This proposal outlined the need for and activities of a Multilateral Emerging Market ECA
(MEMECA).

MEMECA (or a modified virtual facility like EMEC) would generate benefits for market
players:
• For emerging market exporters, it could help level the playing field vis-à-vis
OECD-based exporters.
• For banks, its services could enhance their risk return profile for business
activities in the coverage area.
• For private risk insurers, it could create potential for more co- and re-insurance
arrangements to help the private sector diversify risks and consider taking on
new and larger risk opportunities. There is also the possibility that
MEMECA’s/EMEC’s status could provide some “umbrella” protection to private-
sector insurers, thereby further reducing the risk associated with export
transactions.

C. Export Finance Bank: Proposal

This proposal argues for the need for an Export Finance Bank (EFB).

Of particular benefit would be:

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• EFB’s funding ability as an entity with strong credit standing, its “market staying”
power, and product promotion capabilities;
• offering banks and other transaction originators in the region an outlet for
securitization-type risk transfer without the cost and complexity of captive
securitization vehicles; and
• an opportunity for transaction originators and other regional market participants
to take an equity stake and governing role in EFB’s operations.

D. Other Market Proposals: APRI

ADB recently worked on a draft business plan for an entity called the Asian Political
Risk Insurance Company (APRI), which would be a subsidiary of an entity called the
Asian Risk Exchange (ARX).

According to the draft business plan, APRI could help facilitate and catalyze the flow of
additional trade and investment in Asia.

E. Comparative Analysis of the Proposals

The proposals for MEMECA/EMEC, EFB, and APRI are all intended to address various
challenges and gaps in Asian export credit activity. Ultimately, their goal is to facilitate
more trade and investment in and between Asian markets (including South-South
activity), by enabling existing market players do more business for the benefit of
exporters and importers. There is also consideration of the need to “level the playing
field” between the relative advantages enjoyed by OECD- and developed-country
exporters, financial institutions, ECAs, and EXIM Banks and the disadvantages for
similar players in newly industrialized, emerging and developing economies in respect
of MLT export credit.

However, each proposal addresses these challenges from different directions. For
example, the MEMECA/EMEC approach is designed to spur growth in long-term capital
flows to the region, primarily from North-based banks and other financiers, but also from
South-based entities. MEMECA/EMEC would do this by increasing the capacity of
AAA-rated, zero-risk-weighted credit insurance and guarantees, which may would
attract both more funding capacity from existing lenders and new capacity from new
lenders.

By comparison, the EFB proposal has, as a primary focus, the goal of reducing the
current and future amount of low-margin, long-tenor, ECA-covered MLT export credit
loan assets on the balance sheets of banks and other trade finance entities by
centralizing the funding for such transactions in EFB. This would free up banks to earn
their fees more by originating, arranging, and structuring export credit transactions,
while redeploying their balance sheet risk capital toward higher-return business
opportunities.

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Finally, the APRI proposal is focused on facilitating the exchange, diversification, and
mitigation of political risks as these relate to trade and investment transactions in Asian
markets. By pooling private, public, and multilateral risk capital and product know-how,
it expects to be able to supply more political risk coverage to lenders and investors into
more markets.

F. Gap Analysis

In addition to analyzing the proposals on a comparative basis, it is perhaps more

instructive for the purposes of this Paper to assess them in light of their potential ability
to address the structural market gaps identified in Section II (i.e., the credit gap and the
funding gap) in the provision of competitive MLT export credit for Asian exporters and
investors in newly industrialized, emerging and developing countries. The table below
presents a summary assessment.

MEMECA/EMEC EFB APRI

Credit ¾ As a primary or ¾ No significant effect ¾ APRI, as an insurer

Gap secondary guarantor could credit-enhance
could credit-enhance or reinsure Asian ECA
Asian ECA export export credit
credit guarantees, guarantees, making
making them more them somewhat more
attractive to funding attractive to funding
banks banks

Funding ¾ Guarantee of Asian ¾ EFB could directly fund ¾ APRI insurance could
Gap ECA guarantees could or refinance EXIM Banks help banks mitigate
make them more or Asian banks with country risk limits for
attractive and cost- insufficient funding export credits funded
effective to funding capacity or sources, to by them
banks by ensuring enable more competitive
AAA-rated, zero-risk funding of export credits
weighted loan assets
¾ EFB could directly fund
¾ Direct export credit
the export credit, fund
guarantees could
Asian banks, or co-
catalyze additional
finance with Asian banks,
funding capacity from
freeing up the banks’
international banks and
scarce balance sheet
other financiers
capacity
¾ EFB could purchase
existing export credit
assets from International
banks, thus freeing up
their balance sheet
capacity to potentially
fund new export credits

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SECTION IV: CONCLUSIONS AND RECOMMENDATIONS

A. Conclusions

No major structural gaps appear to exist in the areas of Asian short term credit
insurance, working capital, and bonding. As such, the conclusions and
recommendations presented below focus on the MLT export credit and export finance
gaps. Based on the analysis presented in this paper, five important conclusions can be
drawn regarding the export credit market challenges facing Asian exporters and
investors in pursuing MLT business opportunities.

First, there are two critical market gaps which challenge the ability of Asian companies
to compete on a level playing field with respect to MLT export credit packages. A credit
“gap” arises due to the relatively weaker credit standing of ECAs in newly industrialized
Asian countries as compared to their OECD-based counterparts. This gap impacts on
the quality of the Asian ECA’s cover, and (ultimately) on the price competitiveness of
the underlying MLT export credit. Further, this gap has the potential to render
uncompetitive not only the commercial risk cover provided by the ECAs, but also their
political risk cover.

There is also a funding gap issue. This gap arises due to the cost or availability of
capital to the lender of the MLT export credit. Compared to OECD countries, the funding
sources for Asian EXIM Banks and Asian commercial banks (i.e., home governments,
capital markets, etc.) are costlier and less reliable. This makes it more challenging for
Asian funders to provide competitive MLT export credits in terms of pricing, tenor, and
other dimensions.

Second, the ADB has been approached by a number of potential stakeholders to help
address the market gaps because it is seen to be a key player. Moreover, many are
looking to the ADB’s leadership to develop solutions in a way that is both balanced and
effective. The ADB plays a crucial and leading role in Asia’s socio-economic
development; in doing so, it endeavours to cooperate with and complement the
activities of local, regional, and international stakeholders. Also, it has a broad range of
credit enhancement tools, technical assistance and other resources upon which it can
draw to address specific market challenges and needs. Finally, its risk capacity and
credit standing provide stability and comfort to public- and private-sector market
participants.

Since the ADB plays such a leading role in Asia, it must bear in mind that -- whatever its
role in developing or participating in solutions -- all other stakeholders, including other
MDBs, will be closely watching. The ADB’s decision to pursue (or not pursue) a course
of action will serve as a bellwether for other potential participants.

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Third, whatever solutions are pursued, the ADB must ensure that the solutions “work
with the grain” of existing public, private, and multilateral mechanisms, institutions, and
frameworks. Ideally, any proposed solution should be a measured response to the
market gaps, and positioned in a way that does not distort market characteristics,
impede existing mechanisms, or operate in a part of the market which currently works
well or in which existing players would otherwise be willing to operate.

In this respect, it is dangerous to leap immediately to “big bang” solutions (e.g., major
new institutions) without first considering other more incremental approaches, as these
can impose unintended adverse consequences on the existing institutional landscape.

Fourth, any solution supported directly or indirectly by the ADB must respect
international guidelines dealing with export credit (i.e. the OECD Arrangement). This
means that any support the ADB provides must be within the OECD Arrangement
guidelines with respect to maximum tenors, repayment profile, minimum down-
payments, minimum interest rates, minimum premium levels, etc. The other
international agreement which must be considered is the WTO SCM Agreement, which
requires premium at least to cover long-term operating costs and losses. Adherence to
such guidelines will enhance the market acceptance and legitimacy of any solution
supported by the ADB, even though it is debatable whether a multilateral agency like
the ADB would be subject to these guidelines.

Fifth, in considering, developing, and implementing solutions, the ADB must take into
account the motivations of the sponsors/promoters of a proposed solution. This will
help ensure that solutions are designed with regard to addressing the structural gaps for
Asian exporters and investors, as opposed to the temporal or operational gaps of
market participants.

B. Recommendations

The credit and funding gaps as described in this paper are genuine issues which
ultimately impact on the ability of Asian exporters and investors to compete on a level
international playing field. However, it is important to keep in mind that each gap is
distinct, with different causes and different effects. As such, any solution for each gap
should be pursued independently of the other, but in close co-operation. That being
said, solutions could (and probably should) be pursued concurrently, as the gaps are
equally important and pressing issues for Asian trade and investment competitiveness.

Presented below are recommendations for addressing the credit gap and funding gap
issues.

i. Recommendation – Credit Gap Issue

The creation of a MEMECA-like institution is not considered to be the appropriate first

step in dealing with this gap. Such a “big bang” solution is not necessarily warranted
without first considering other more measured approaches. The credit gap issue is

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likely best addressed in an incremental manner, with a view to developing and refining
over a period of time the appropriate financial and risk management mechanisms, and
establishing a demonstrable track record of success.

Accordingly, through the revised EMEC Facility, ADB could start with bilateral support
for transactions with individual Asian ECAs. This could be done via a structured PRG or
the PCG Facility, with or without the counter guarantee or indemnity: depending on a
number of factors including ADB’s per borrower limits for private sector operations and
the value ADB sees in the existing counter guarantee arrangements between the
participating ECA and its government. In this regard, it is noteworthy that an Asian ECA
carrying the full faith and credit of its home government has recently obtained
multilateral agency cover for breach of contract risk, for the benefit of funding banks.
Also, the ADB has an existing short-term facility, the Trade Finance Facilitation
Program, which could potentially serve as a template for developing a counter-
guarantee mechanism for MLT transactions.13

Eligibility criteria for such support will need to be defined and should take into account,
inter alia, whether the Asian financial markets are considered open (e.g., is the country
a signatory to the financial service sector agreement of GATS).

In evaluating the ADB’s possible use of credit enhancement tools, it is crucially

important to ensure that the commercial banks that fund MLT export credits in the
region view any such instruments as effective and attractive. Ultimately, it is these
banks, and their credit committees, which will decide whether a particular instrument
works in this respect. As such, it is equally important to determine whether an ADB
credit enhancement mechanism should be as “primary obligor” (i.e., a direct
unconditional guarantee to the funding bank) or as “conditional security” (i.e.,
enforceable only after the funding bank exhausts all recourse against the participating
ECA and its government). There may be important considerations for the banks in
terms of capital allocation requirements, and attractiveness of the credit enhancement
mechanism from a timing and risk perspective.

Once a bilateral framework and track record has been established on a pilot basis with
one or two key regional ECAs, arrangements could be developed with a number of
regional ECAs to invite them to also participate in the EMEC Facility. After a number of
arrangements are in place, there could be consideration of the establishment of a more
formal operating structure which could seek treaty reinsurance from the private market
and from other participating ECAs in the EMEC Facility, thus creating a reinsurance
pool. Eventually, there could be a valid case to establish MEMECA-like institutional
capacity in order to formalize the multilateral arrangement and provide greater
operational/financial stability for such export credit support mechanisms to grow.

Regarding investment insurance or PRI to support foreign direct investment into or

within the Asian region, the analysis of the gaps for MLT business does not at this point

13
In practice, ADB would provide its PRG/PCG to credit enhance the Asian ECA in order to make the export credit
transaction more attractive and cost-effective to the lender.

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suggest that there are real structural market gaps for PRI. Moreover, there does not
appear to be a sufficiently compelling case to justify a new stand-alone institution as
suggested by the APRI proposal.

However, there could be value in exploring ways of generating greater market capacity
for particular “sub-risks” such as terrorism (e.g., a facility for reinsurance of terrorism
cover). As for the more traditional forms of PRI cover, given the number of existing
schemes already in place (including ADB’s PRG), any incremental support from ADB
should be in the form of reinsurance or through the use of “guarantor of record”
arrangements, which should only offered when clearly needed and justified (at least
until such time as more detailed analysis demonstrates a clearer and more compelling
market gap).

ii. Recommendation – Funding Gap Issue

The EFB proposal presents an institutional solution to the MLT challenges facing two
main constituencies: (i) Asian EXIM Banks and Asian commercial banks; and (ii)
international banks funding export credit transactions in Asia. However, a key question
is whether EFB is addressing a structural funding gap issue for each of these
constituencies.

In the case of EXIM Banks and Asian banks, EFB clearly does this: its support could
help address pressing structural gaps regarding cost of funding, availability of funding,
and risk capacity of the funder. As for international banks, the case is not as
convincing: EFB’s greatest impact appears to be in helping free up the banks’ balance
sheet capacity to pursue higher-margin business activities. This is arguably an
operational issue, rather than a structural gap, for the banks. However, new Basle II
regulations could give rise to structural gaps for the banks by making it more
challenging to hold MLT emerging market loans.

Also, as stated in the Conclusions, it is important to ensure that solutions “work with the
grain” of existing market mechanisms in a way that does not cause distortions or
unintended adverse consequences. The creation of major new institutions (so-called
“big bang” solutions) should only be considered if the alternative incremental solutions
are less attractive in terms of effectively addressing the market gaps.

For example, one alternate suggestion is for the ADB to open a “discount window” to
buy MLT export loans from banks, based on standard terms, documentation, etc. While
this could potentially address some of the capacity issues for international banks, it
does little to support Asian banks which often cannot fund the underlying export loan in
the first place. Moreover, it has negative implications for the ADB in terms of tying up its
own balance sheet capacity, or becoming effectively a “funder of last resort” for poor
quality export loans.

Another possibility is to create some form of “virtual” EFB-like model. However, this
approach would be less effective in helping international banks manage capacity issues,

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or helping Asian banks raise MLT capital. Also, to the extent that it is important for EFB
to acquire a high-quality credit rating, this is much more difficult if structured on a
“virtual” basis.

Since these incremental approaches fail to adequately address the identified gap, the
ADB should proceed to develop and refine an EFB-like institutional model to address
the funding gap issue. The main objective should be on mechanisms to address the
specific challenges facing Asian EXIM Banks and Asian banks, as this is a clear and
pressing structural gap. Mechanisms targeting the challenges of international banks
could also be considered (including, potentially, the issue of balance sheet capacity); if it
can be shown that by correcting such gaps the banks would support incremental MLT
export credits. Moreover, even if it cannot be fully demonstrated that structural gaps
exist, there could be valid and important ancillary reasons for an EFB-like entity to
acquire OECD ECA-guaranteed export credits from international banks, such as
building an initial “critical mass” of high-quality financial assets for the purposes of
obtaining a desired credit rating and/or generating a revenue stream in order to fund
operating costs.

The ADB could be a cornerstone, catalytic investor and sponsor of an EFB-like initiative,
via a private sector operation in the form of equity or subordinated debt forming tier 2
capital.

iii. Recommendation – Experience Gap Issue

To address this gap, technical assistance could help, although such assistance should
be based on a comprehensive needs analysis, supported by detailed consultations and
analysis by experts in the field of international export credit systems. This needs
analysis could then be translated into a training program, tailored to the specific needs
and circumstances of individual institutions and countries. In doing so, previous training
programs (such as APEC’s “Capacity Building Program for Trade and Investment
Insurance Practitioners”) should be carefully reviewed in order to avoid duplication.

Also, in assessing the various experience gaps, it should be noted that some Asian
ECAs and EXIM Banks attend the Prague Club14, which may influence their level of
experience and capability.

14
Prague Club: A group of newly formed ECAs which meet under the auspices of the Berne Union. It was set-up in
the early 1990’s to facilitate the development of the newly formed East European ECAs through funding from the
EBRD. It has grown to include members from other continents, including Asia, and is seen now to be a “mini Berne
Union” for those ECAs who have not yet met the criteria for membership into the Berne Union.

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ANNEX A: ILLUSTRATIVE LIST OF ASIAN ECAS AND EXIM BANKS

ECA EXIM Bank Full Service

Country Entity Name (Insurance) (Loans) (Ins/Gtees/Loans)
Bangladesh SBC ECGD *
China The Export-Import *
Bank of China
Sinosure *
India Export-Import Bank *
of India
Export Credit *
Guarantee Company
Indonesia Bank Ekspor *
Indonesia
ASEI *
Japan Japan Bank for *
International
Cooperation
Nippon Export and *
Investment Insurance
Korea The Export-Import *
Bank of Korea
Korea Export Credit *
Insurance
Corporation
Malaysia Export Import Bank *
of Malaysia Berhad
MECIB *
Philippines The Export-Import *
Bank of the
Philippines
Thailand The Export-Import *
Bank of Thailand

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ANNEX B: SURVEY – ASIAN ECA AND EXIM BANK

The survey presented was sent to a number of Asian ECAs and EXIMs; however, only
Phil EXIM replied. It is expected that this survey could assist with further consultations
with Asian ECAs and EXIMs in the event the ADB proceeds with the next steps outlined
in Section IV of this paper.

International Financial Consulting Ltd. is conducting a study for the Asian Development
Bank to examine the challenges faced by Asian ECAs and EXIM Banks to provide
internationally competitive export credit and export finance support. A major focus of the
study is on the challenges of supporting trade of capital goods from one Asian country
to another, particularly in light of competition from exporters and ECAs in OECD
countries and other developed markets. As part of its study, International Financial
Consulting Ltd. is conducting a survey of Asian ECAs and EXIM Banks.

Instructions for Completion

This survey should take approximately 20 minutes to complete. Please respond using
the tools below, and return to us by pressing SUBMIT at the bottom of the survey by
March 8th, 2004. All responses are confidential.

PART 1: GENERAL INFORMATION

1. Name of Institution: ________________________________________

2. Location of Institution:

Address: ________________________________________________________

City: ____________________ Country:________________________

3. Institution’s Product Offering:

Loans:

Short-Term
o Domestic
o Export
Medium/Long-Term
o Domestic
o Export

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Insurance/Guarantees:

o Short-term
o Medium/Long-term
o Investment insurance / Political risk insurance
o Other: ______________________

4. Which best describes your institution’s main area(s) of activity? (check one or more
boxes)

† supporting exports from your country

† supporting imports to your country
† supporting exports from your country to other emerging/developing regions
† supporting imports from other emerging/developing regions to your country
† supporting exports from your country to OECD countries or other developed
countries
† supporting imports from OECD countries or other developed countries to your
country
† other: ________________________________________

5. Does your institution see itself as the “official” ECA of its country?
o Yes
o No

6. Does your institution comply with the OECD Arrangement in respect of its activities?
o Yes
o No

PART II: EXPORTS

7. Approximately what is the value (in US $) of annual capital goods exports from your
country?

8. To which destinations?

o OECD
o Asian
o Other emerging markets

9. What are the main factors that influence your institution’s ability to support export
transactions?

No Influence Much Influence

Your Institution’s Credit 0 1 2 3 4 5

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Standing/Rating
Your Institution’s Cost of Funding 0 1 2 3 4 5
Your Institution’s Capitalization 0 1 2 3 4 5
Economic Conditions 0 1 2 3 4 5
(Domestic/Foreign)
Competitor Activities 0 1 2 3 4 5
Other:________________________ 0 1 2 3 4 5
___

Please elaborate:

10. Do you expect any changes in the near term in your institution’s typical coverage,
and, if so, what external and internal factors are driving these changes?

PART III: UNDERWRITING APPROACH

11. Describe your institution’s “typical coverage” for medium/long-term export

credit/finance business (e.g., 100% guarantee, 95% insurance, etc.).

12. Does your institution offer only “pure cover” (i.e. no direct lending and/or interest
make-up arrangements?
o Yes
o No

13. Aside from your institution, what sources of credit and risk management support are
available to Asian exporters or importers of capital goods? (check one or more
boxes)

† Offshore ECAs or EXIM Banks

† International capital markets
† Asian capital markets
† International banks or other financial institutions

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† Asian banks or other financial institutions

† International private credit insurers
† Asian private credit insurers
† Other: ________________________________________

14. In terms of export credit and insurance support, do you perceive that Asian
exporters/importers of capital goods enjoy a “level playing field” (i.e. internationally
competitive) compared to similar entities in OECD or other developed
countries/regions?
o Yes
o No

Please elaborate:

15. If you answered “no” above, please provide an example of an export opportunity that
was lost due to this absence of a “level playing field”? (References to customers
and transactions can be generic so as to not disclose commercially confidential
information.)

16. What are your main challenges in delivering competitively priced financial products
in support of your customers? (check one or more boxes)

† Limited access to third-party funding sources

† High cost of third-party funding
† High cost of internal funding
† Limited availability of risk-sharing partners
† Limited range of Asian capital markets instruments
† Other: ________________________________________

17. In terms of their support for medium/long-term export/import transactions, how would
you rate Asian commercial banks on the following dimensions?

Very Poor Very Good

Risk Capacity (Overall) 0 1 2 3 4 5
Risk Capacity (Per Transaction) 0 1 2 3 4 5
International Scope of Activities 0 1 2 3 4 5
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Range of Financial Products 0 1 2 3 4 5

Structuring/Arranging Expertise 0 1 2 3 4 5
Knowledge of Foreign Markets 0 1 2 3 4 5
Cost of Funding 0 1 2 3 4 5
Credit Rating/Credit Standing 0 1 2 3 4 5
Desire for Partnering/Risk Sharing 0 1 2 3 4 5

18. In terms of their support for medium/long-term export/import transactions, how would
you rate international banks on the following dimensions?

Very Poor Very Good

Risk Capacity (Overall) 0 1 2 3 4 5
Risk Capacity (Per Transaction) 0 1 2 3 4 5
International Scope of Activities 0 1 2 3 4 5
Range of Financial Products 0 1 2 3 4 5
Structuring/Arranging Expertise 0 1 2 3 4 5
Knowledge of Foreign Markets 0 1 2 3 4 5
Cost of Funding 0 1 2 3 4 5
Credit Rating/Credit Standing 0 1 2 3 4 5
Desire for Partnering/Risk Sharing 0 1 2 3 4 5

19. Do you believe your institution may be losing out on transaction opportunities with
banks or financial institutions because of an inability to provide guarantees or
insurance on a zero-risk-weighted basis? If Yes, Please explain.
o Yes
o No

PART IV: GENERAL COMMENTS

20. Please provide any additional comments you feel may be relevant to the subject of
this study:

___________________________________________________________

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21. If you would like to discuss these topics further with International Financial
Consulting Ltd, please provide the following information:

Name of Respondent: ________________________________________

Phone Number: ________________________________________

Email Address: ________________________________________

Thank you for your participation

[Submit] [Reset]

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