Establishing an Export Credit Agency in Mongolia

The dynamic way to achieve increased foreign economic success

 

I. Reasons for establishing an ECA

Export success in the non-mining sector needs support in areas like market development, risk management, access to trade finance, claims and collections. Scientific research, in particular done by the World Trade Organisation WTO prove that the existence of an Export Credit Agency backed by state support and private credit insurance foster the export performance of a national economy, improve the integration into global trade and increases economic growth and national wealth. More than one hundred countries in the world have established export credit agencies or are in the process of doing so. The main reasons for ECA establishment are:

• Improved access for national exporters to global trade markets;
• Shifting financial risks from exporter’s balance sheet to an ECA or financing bank;
• Making trade finance available for exporters which would otherwise have no or limited access to bank credit;
• Strengthening and further developing international competitiveness of national exporters.

II. Analyzing the real needs of Mongolia

The establishment of an ECA should begin with a deep analysis of the real needs of Mongolia’s export industry. Products and services rendered by an ECA must perfectly fit to the needs of the exporting companies. This sounds simple and clear but is not so easy to achieve and of essential importance for the success of the ECA to be established. Misconceptions in the design phase are difficult and expensive to correct later. Exporters should therefore be involved in the design process of the ECA from the very beginning. Such a holistic approach helps to avoid mistakes and to speed up the realization of the project.

III. Taylor-made solution instead of copy and paste

We attach highest importance to the development of a real Mongolian solution. Our experience is based on own ECA and private credit insurance management experience and ECA development projects in various countries, e.g. Russia, Ukraine, Qatar and others. A universally valid blueprint for the build-up of a successful ECA does not exist. Copying one country’s model and imposing it on another country has been tried repeatedly but always failed. The concept therefore must be exclusively focused on the reality in Mongolia and the needs of Mongolian exporters.

IV. Setting the frame: Taking the basic decisions first

Every Export Credit Agency in the world differs from all others. A few basic principles must, however, be clearly and decisively defined before the real work within the project can start. The various models for ECAs range from more or less autonomous branches of Government Ministries (UK, Japan) through state owned Export Import Banks with ECA function (USA, Canada) and publicly owned legal corporations (China, India, Italy, Russia) up to private companies or banks acting on behalf of the State (Austria, France, Germany). Without strong state support no ECA can successfully implement its tasks. Some (not all) questions to be considered and answered in the initial phase of the ECA establishment are the following:

• Who acts as insurer: The State itself or a private legal corporation?
• What is the legal framework for the ECA activities? Is this framework wholly or partially already existing and which amendments or new regulations are still needed?
• How much capital is injected into the ECA and by whom?
• Does the State offer Re-Insurance or a Sovereign Guarantee for the ECA activities carried out by a private corporation?
• Regulatory requirements and state supervision, taxation and avoidance of unfair economic competition;
• Principle of non-subsidisation;
• Medium term perspective for achieving self-sustainability.

V. Concentration on the most needed products

Every ECA’s cover product will offer protection against commercial and political non-payment risks in foreign trade. It makes very much sense to apply a modular construction principle for all products to be designed consecutively in order to clearly establish a consistent family of cover products. Other risks like exchange rate risks and transportation risks usually are not covered by ECAs, but by private insurance companies (transportation risks), or by bank hedging transactions or not coverable at all.

Supplier Credit Insurance is the most important product which needs to be developed at first. This product basically appears in different but very similar forms for “single transaction cover”, “multiple deliveries cover” and “whole turnover cover” and needs to be designed for short term supplier credits (up to one or two years of credit) and medium or long term supplier credits (up to 5 / 10 years of credit). The product will be designed in a way which makes it attractive for banks to finance the export transaction(s) based on the assignment of covered export receivables and potential future claims indemnification rights. Most likely the whole turnover cover for short term supplier credit will be the first product to be developed. The other supplier credit products can easily be made step by step thereafter.

The second large product family will be the buyers’ credit cover. In this form of cover four parties are involved: The exporter and importer, the bank lending directly to the foreign buyer and the ECA covering the buyers’ credits. This product is slightly more complicated than the supplier credit product but can be designed in a similar way applying the modular construction principle. Usually some additional cover products go hand in hand with the buyers’ credit cover, like e.g. pre-shipment risk cover and bond-cover for specific guarantees connected to medium-/long term export transactions. Since such deals currently will be very extraordinary for Mongolian exports the transactions can be insured on an individual case basis and the products can be developed at a later stage.

VI. No compromises: Administrative excellence & Digitalisation

An ECA needs for being successful a highly motivated team of experts. Skills, expertise and experience are of key importance for sound underwriting and economic success of the ECA. Corporate structure and workflows must be organised highly efficiently to keep administrative costs low and deliver best services to the customers. A reliable and transparent know-your-customer process (KYC) has to be established. Selection of well trained staff, collection of experience in cooperation with other ECAs and continuous training on the job will lead to building up professional excellence.

The technical infrastructure must be appropriate to the size of the operations, to products offered and needs of customers. The digitalisation of workflows should cover the whole process from collection of commercial information on foreign buyers, support of all aspects of products offered including policy administration, risk underwriting, premium calculation and invoicing up to claims handling and collections.

The implementation of state of the art IT technology is of same importance as the building up of an excellent team of employees.

VII. Learning from others and avoiding mistakes they have done

Export Credit Insurance is a global industry. It is important to become part of the international ECA family. ECAs are not competing with each other. Until today there is a commonly shared spirit of co-operation and support amongst ECAs.  Young ECAs with still developing business activities can not only become members of the Berne Union’s Prague Club Committee, they can in many cases also benefit from workshops, seminars, round tables etc. organised by other ECAs. Often it is also possible to arrange internal trainings for young practitioners in other well established ECAs. Such internships can help to deepen and broaden the experience and to avoid mistakes others have made before.

Our offer includes the relevant personal contacts and industry wide experience in order to find and manage such qualification opportunities.

VIII. Going global

The ECA activities are not only based on professional experience and international contacts. They are also part of a global environment of foreign trade policy regulations, bilateral or multilateral agreements and regional or global sector specific rules and regulations, issued e.g. by United Nations, WTO, IBRD, IFC, OECD, Berne Union. International standards must be applied and corporate governance and transparency have to be in line with internationally developed and commonly accepted business conditions. Areas of such rules to be obeyed are e.g.

• Avoidance of export subsidisation;
• Principles of sound underwriting;
• Compliance with rules against money laundering;
• Corruption prevention;
• Environment protection etc.

IX. Milestone based approach & Quality control

All this cannot be done in one single approach. The establishment of the Mongolian ECA should be done in a clearly designed process, following a jointly worked out and agreed time schedule with clearly marked milestones. Every portion to be developed and implemented must undergo a strict quality control. The overarching goal shall be to start with simple but useful products in a fairly short period of time and to further develop products and processes step by step.

 

X. Our team, our experience, our offer

Our team consists of experts experienced and familiar with all aspects of private and public export credit insurance. We cover the whole credit management process from the collection of information on foreign buyers to credit underwriting, risk management techniques, pricing methods, claims and collection handling etc. We are part of the international network of Export Credit Agencies and private credit insurance and re-insurance providers.  We have close relations with international insurance brokers and relevant industry associations. Our Senior Experts are at home “in two worlds”: We are closely connected with the traditional European export credit community, but we also know and are familiar with the developments in Russia and CIS countries. We have experience in ECA development projects in various countries. Our objective is to deliver real value for our customers and to support them in their ambition to strengthen the national export performance and to foster the economic growth.

The precise terms and conditions of our offer will be comprehensively defined after a first meeting and detailed conversations with the Mongolian sponsors of the project. We stand ready to discuss the size, form and timing of our involvement in the project and are looking forward to support the Establishment of the Mongolian Export Credit Agency. It is our intention to come to Ulaanbaatar soon in order to speak to all institutions interested and involved in the process of setting up the Export Credit Agency. According to our understanding and knowledge at this point in time the Institutions relevant for the ECA establishment are Ministry of Finance, Ministry of Food, Agriculture, Light Industry, National Development Agency, Central Bank, Financial Regulatory Commission, Chamber of Commerce, Banks active in Trade Finance and, maybe, some others.

Our Senior Experts are Dr. Hans Janus, former Board Member of Euler Hermes in Germany and former President of Berne Union and Andreas Steinborn, former CEO of Euler Hermes Russia, Managing Partner of DELCREDA. Other experts with comparable experience in credit insurance can join the team if needed. The CVs of Hans Janus and Andreas Steinborn are attached to this paper.