What are Export Credit Agencies (ECA)

ECAs are agencies initially designed to promote the industry of the home country and assist domestic companies in exporting their products to foreign markets. Over time, ECAs have expanded the financial services they provide to corporations and bankers to include state-backed direct loans, insurance or guarantee of payments. As a result, they have become viable alternatives to equity financing as well as major players in project financing particularly in emerging markets that are considered commercially or politically too risky. ECA financing is currently worth an estimated 400 billion USD around the world.

Previously, The Consensus of 1976 – an agreement entered into by some OECD countries –loosely governed the ECA industry. The Arrangement on Guidelines for Officially Supported Export Credit of 1978 (The Arrangement) built on the initial agreement and harmonized ECA engagement in goods and services across all sectors with the exception of agriculture goods and military equipment. It outlined rules related to repayment term, frequency of payments and nature of repayment. Most countries with ECAs are party to The Arrangement.

ECAs have various advantages including provision of longer-term loans and competitive interest rates compared to those available in the debt market. ECAs, unlike commercial banks, primarily aim to recover their operating and financial costs rather than seeking a market return on their services. The participation of an ECA in a deal whether in the form of a guarantee or direct loan also has a signaling effect on other lenders, thereby lowering risk perception and improving the bankability of a project. With the increasing number of ECAs entering the market, competition is likely to lead to even better conditions for borrowers.

Examples of  ECA's operating in the Tanzanian market include the following:

  • Export Development Canada (EDC)
  • Export-Import Bank of China (CEXIM)
  • China Export & Credit Insurance Corporation (SINOSURE)
  • Export-Import Bank of the US (Ex-Im Bank)
  • Japan Bank for International Cooperation (JBIC), Nippon Export and Investment Insurance (NEXI)
  • Australia's Export Finance and Insurance Corporation (EFIC)
  • South Africa's Export Credit Insurance Corporation (ECIC)
  • US' Overseas Private Investment Corporation (OPIC)

Other types of organizations providing similar financial services to corporations include Multilateral Development Banks, Multilateral Financial Institutions and Bilateral Development Agencies such as:

  • African Development Bank (AfDB)
  • Islamic Development Bank (IsDB)
  • Multilateral Investment Guarantee Agency (MIGA)
  • UK's Department for International Development (DFID)

ECAs in Tanzania

In the wake of the financial crisis, traditional lenders in the Tanzanian markets tightened their grip on project funding. The demand for alternative financing instruments along with investment opportunities in the burgeoning oil and gas, power, mining and infrastructure sectors continues to attract ECAs. ECAs now play an important role in Tanzania's banking market.

ECAs have been engaging in project finance in Tanzania by directly lending to borrowers. They provide much needed capital for corporations who face financing restrictions, sometimes as a result of operating in 'high risk' emerging markets. As a result, they bring foreign direct investment to the country which would otherwise have been channeled elsewhere. ECAs also issue guarantees on loans thereby encouraging investment banks to lend and in certain instances, to lend at much lower interest rates and for longer terms. In Tanzania, ECAs have been involved in several sectors including infrastructure, aircraft and power.

While ECAs may be seen as crowding in local banks, they actually create opportunities by vetting (and guaranteeing) borrowers, thereby insulating lenders from high-risk projects. ECAs thus provide much need know-how on risk management gained from their engagement in emerging market, which could benefit local and international commercial banks in better identifying future investment opportunities in Tanzania.

ECAs are also relevant because they operate in ways that reflect the roles and agenda of sponsoring governments within the geopolitical context. For instance, the increased involvement of SINOSURE in financing development projects signals the Chinese government's interest in pursuing closer relations with Tanzania in the economic realm in general.

Getting involved

Based on the current lending landscape, ECAs are expected to be major players in project finance across the world. Considering the wealth of opportunities offered by ECAs, borrowers and lenders will benefit from engaging with ECAs. Through its work in Tanzania and Africa in general, Clyde & Co Tanzania has worked with a variety of ECAs in structuring deals in various sectors. As a result, we are well placed to provide contacts for ECAs to potential borrowers and lenders in the Tanzanian market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.