Nigeria can get $5bn trade credit cove, more benefits as member of ATI —Otieno
George Otieno is the Chief Executive Officer of African Trade Insurance (ATI) Agency, based in Kenya. He was recently in Nigeria on a working visit in an effort to convince the Nigerian government to become a member of the ATI. ATI provides political risk and trade credit risk insurance products with the objective of reducing, business risk and cost of doing business in Africa. Excerpts:
What is ATI’s value proposition for Nigeria to join and why ATI?
Because of the relationship that we have with the international market, first of all ATI is rated A by Standard and Poors. We have the highest rating compared to any insurance company in Africa. Apart from financial institutions, may be AFDB is rated higher at about triple A. So what it means is that if we cover for instance a government risk for a government that is borrowing, we can wrap up the risk. At the international market, that government will be able to borrow at lower risk because the lenders will look at the risk in a much better position. They will know that you are wrapped by an A-rated institution. So, if the country does not pay for instance, they will be able to come to ATI and we will make them good. It is a way of reducing cost of borrowing for Nigeria as a country.
So, it requires not only for the Executive arm of government to sign on to this noble idea, the legislature have to also deliberate and give the final nod on the document. We hope they do this as quickly as possible. But it is important they understand the value for Nigeria which is mainly, reduction in the cost of borrowing. It is a savings mechanism and so affects the cost of delivering infrastructure.
It will equally attract investors to do business in Nigeria because their investments are covered. We cover risks like exploration, nationalisation, contract facilitation among others.
Most investors are afraid that in Africa of invest today; tomorrow the government will nationalise your investment. So, they will like to have insurance cover. That is for political risks aspects. For payment aspect, like we do in sovereign risks, we also guarantee that. Even to lenders, most foreign lenders for instance the commercial banks, feel that governments in Africa will not pay or may delay payment, but if you have insurance cover with an A-rated institution like ATI, they can easily lend at a lower rate because we substitute our rate. So for Nigeria, it is not rated but our A rating will kind of convert the country’s risks.
Was Nigeria a member of ATI before 2017? Can we say Nigeria re-joins ATI?
No Nigeria actually was never a member of ATI before now. The right word would have been ‘Nigeria finally joins’. We have been in discussion with Nigeria for almost nine years, to get them on board,. Thank God they have finally agreed to join.
What do you think took Nigeria so long to join?
I think it is a question more of bureaucracy rather than not being interested to join. It was bureaucracy because obviously, we have been talking to different ministers of finance. There have been changes of ministers. We have to talk to every new minister for them to take their time to be able to appreciate what we do. But each time they are close to agreeing and the changes comes, we have to start afresh. When Olusegun Aganga was the minister, we spoke to him, Ngozi came, and we spoke to her too.
What role did the current minister play in this?
Well, I will like to give kudos to the Commissioner for insurance, Alhaji Mohammed Kari who took that matter up with the current minister. It is during her tenure that this is coming to reality. So, I give kudos to both Kemi Adeosun and Alhaji Kari.
The minister said it will open doors for more investments into the country.
From your experience of what happened in other countries that were there, can you estimate the percentage of investment that membership of ATI will attract to Nigeria?
I think in terms of investment, what you said is quite true. ATI was formed 15 years ago, initially, it was seven countries from East and South Africa. We moved to 10 countries about five years ago and recently two, three years ago we got another four new countries. So Nigeria joined, we now have 15 countries as our members. But what ATI has done over the last 15 years is that we have supported investment and trade close to $25 billion in those member-countries. In the average every year we support like $2 billion worth of trade and investment in those countries. This can be estimated to be about 2 to 2.5 per cent of the GDP of this country.
Nigeria being one of the biggest and fast growing economies in Africa, we believe that we should be able to do much more here because even at the moment, we get another request from investors who want to invest here. We believe they have need for insurance to cover their risks. If it is trade, for instance internationally, for banks, commercial banks to be able to trade in the market, they always want a cover their risks. We play in so many sectors: infrastructure and trade. For instance we recently had talks with an airline that want to secure a loan from African Development Bank. We have to cover that loan. We have covered big risks like we did in Kenya where we covered a renewable energy investment which was worth more than $700million. All these investments would not have happened without ATI’s type of cover. We also re-insure most of the risks and we have very good relationship with international market to be able to syndicate most of these risks.
What is the nature of ATI’s premium for all these insurance covers?
It depends on the cover. ATI has several covers. We do give sovereign guarantees. For instance, if it is sovereign risk where government borrows, it also depends on the class of country or category. It differs but within two per cent, four or five percent for the riskiest countries in Africa and Nigeria isn’t anyway. May be, countries like Southern Sudan for instance, will attract higher premium. So Nigeria will fall in, may be between two to three per cent rate of the amount covered.
So from your assessment, Nigeria is not a big risk country with Boko Haram and all these agitations here and there?
We do consider terrorism and other risks. But looking at Nigeria in this context, I don’t think any investment has actually been affected by Boko Haram in terms of risks materialising therefrom. What it does is that it frightens investors and prevents them from coming in as much as they should have. In terms of losses, I think most of them are un-insured. If you look at the history of Nigeria, I don’t think there have been any insured losses out of Boko Haram.
But beyond political risks, we insure trade and payment risks. In terms of governments not being able to pay back loans, I don’t think Nigeria is a big risk country compared to others.
How do you assess insurance penetration in Africa and Nigeria in particular?
I think that insurance penetration is very low in Africa. Apart from South Africa which is about 13 per cent, the rest of Africa is ranging between zero to 3 per cent. Looking at the economy of Nigeria and opportunities that abound, penetration in the country is quite low. Nigeria is supposed to be the biggest economy in Africa. When you compare South Africa with Nigeria, you discover that there is a lot to be done to bridge that gap. Nigeria’s penetration should be about 10 to 15 per cent.
One of the things investors do demand from sovereigns like Nigeria is sovereign guarantees which take a long process. How will Nigeria’s membership with ATI speed up capacity for signing up sovereign guarantee? Is your guarantee sufficient for investors to do large ticket transactions in Nigeria?
What we do is that we substitute sovereign guarantees with our insurance policies. Obviously it is true that it takes long to process sovereign guarantees. The IMF and the World Bank do not approve of governments giving sovereign guarantees anymore because it increases the debt of a country. So we keep the debt of a country if we insure risk or borrowing for government, that one will not go into the government debt. If there is a loss, we are going to pay it for the government.
On the domestic side, we also assist banks to lend more to their customers because we cover domestic credit. For a bank that does not have sufficient liquidity to lent, due to Basel two and three capital requirements, we can issue a policy which can substitute part of their capital, so they don’t have to carry above that in their books. That meaning that banks can lend more without having too much capital. For private sector we do that. For government we also do sovereign guarantee substitution.
One of the challenges we have is that banks are limited to lend certain amount due to single obligor limits, Will this guarantee assist banks to start to lend long term especially now that we are looking for funding for PPP projects, for infrastructure. By the way you are aware of infrastructure gap in Nigeria?
Yes, apart from lending long term, if they have our policy, they will be able to lend above single obligor limit. Beyond that, we normally have discussion with central banks because of certain capital ratio banks need to keep with their lenders. We have insurance that substitutes that as well as reduces it. So lenders can now use less capital to do that. Banks can therefore lend for longer periods. For energy guarantees we give as long as fifteen years. Banks are constrained by short –term funds, but when we guarantee them, they can now get long term funding from outside.
Briefly, by definition, what is Trade Insurance?
First, there is what we call project finance and trade finance. Trade finance is when banks are lending for trade purposes which are short term most of the time. The general term is trade credit. What ATI does is that we allow exporters for instance to export without putting in so much capital in the sense that the banks would be able to lend to you and we will be able to cover the non-payment risk. Otherwise, the banks may not lend to you if they are not sure how the money will be paid. So we cover the cross-border risk. That’s where the trade comes in: trade export or trade credit. We found that in Africa most banks shy away from lending especially when it has to do with trade.
They need to be sure that whoever they are lending to, would be able to pay back. What we also do is that for companies, we do corporate credit insurance. Sometimes, companies will borrow from banks, but they don’t have enough collateral. What we do is that we can bridge between that gap between what the banks require and what is being borrowed.
In essence, ATI will give further capacity to the banks to lend more, be able to serve as some kind of guarantee make and make projects in Nigeria a lot more bankable. So the political risk is taken away and government does not unnecessarily carry risks on their balance sheet, which is has been a concern for international agencies. And exporters can do bigger business and cover large market because we cover the risks from that side. That means you can take more risk. You know that in international market, people don’t buy things in cash, they buy on credit. We play major role when investors are afraid of expropriation, nationalization, embargo, and carriage transfer restrictions among others. We also cover terrorism and sabotage which many insurance companies do not cover.
What happens to currency risks in terms of fluctuations?
We don’t cover currency risks, but we cover currency transfer restrictions. For instance, if Nigeria becomes a member and because of some reasons, investors are not allowed to transfer currencies, that is covered, but not fluctuations and depreciation.
When do you expect to set up shop in Nigeria?
We are ready to set up shop in Nigeria anytime, from now on, but I think it also depends on how fast Nigeria can be in formalizing the protocols.
What are the protocols?
The protocols are the treaty that should be signed by the head of state and ratified in parliament. There is a participation agreement which has been signed by the minister of finance. This participation agreement is a covenant between ATI and the Nigerian government. What it means that if we pay any claim because of the action or inaction of the government, we have recourse to the government. Nigeria has to pay the capital from their own coffers or fall back to the arrangement which most countries have with the AFDB and World Bank. Under this, they can borrow at concessionary interest.
How much do countries pay to become a member of ATI?
Well it depends on the economy and the size of tickets we are likely to do in for instance in Nigeria. Whatever we insure, is also leverage to the capital. So for Nigeria we are discussing on a $50 million capital which can paid in installment. Nigeria can also borrow to pay and amortize it over the years. And in terms of catalytic effect, that $50million is nothing compared to the benefits Nigerian economy will derive. Even the catalytic effect can be almost 100 times the initial capital. What it means is that if Nigeria brings that $50 million, we should be able to insure up to 10 times the amount in our own books and be able to get financial support for another 10 to 20 times. We are talking about up to $5billion cover for Nigeria; that means about $5billion worth of investment coming into Nigeria. We are working in partnership with a lot of international organizations like KFW, a German government-owned development bank. We have others that are specialized in renewable energy.
One of the biggest headaches in doing business in Africa is the cost of energy and electricity. Which is more viable, solar or wind?
Energy is one of the most expensive commodities in Kenya and in Africa at large. Kenya has taken a good step to reduce the cost of electricity; they are going on renewable energy and we see wind and geothermal investments increasing in dollar amounts. I believe in the next couple of years, Kenya should be able to significantly reduce the cost of energy which should help them to attract more investment. I think Nigeria can explore that space too, because renewable energy, such as wind and solar are cheaper than fossil-generated electricity.
Who are your major targets?
In the markets where we are currently working, we have more products for banks. They are our major clients because they need these guarantees more. In view of political risks, we are also targeting governments. We do what we do through banks. If it is SMEs lending, we work with banks on portfolio basis rather than on individual lending. We don’t do individual guarantee to SMEs. We cover risks for AFREXIM Bank. There are other such banks in East Africa that we also cover their risks. ATI is partnering with the Lloyds of London market to provide Terrorism and Sabotage covers. Most conventional insurance companies exclude this risk from their offering.
What do you think should be done to improve penetration?
To improve this, people should be able to have disposable income to be able to buy insurance cover. The middle class has to grow in Nigeria. There should be awareness. There are also religious beliefs that have to be looked into. For instance, people believe that God will take care of everything. We should know that there are things we should be able to provide for ourselves, before God provides the rest. The issue of trust has to improve between the insurance companies and the insurers in terms of payment of claims. Trust is more important in insurance than even in banks. If you buy a car that cost so much money and you didn’t have insurance, you would have the option of putting that money in the bank. But insurance saves you from doing that, and charges you 3 per cent. I believe people are getting to know about insurance. Again, the insurance companies has to be more creative and play to the needs of the market.