|Box 5.1 ECAs: The Tools of Their Trade (Source: WRI, 2000)|
ECAs are bilateral organisations such as investment promotion agencies or Export Import banks that offer a variety of financing options for foreign export and investment. Most advanced industrialised countries in the OECD have ECAs that are dedicated to promoting their economic and business interests overseas. Most of their incentives are directed toward companies trying to enter or compete in emerging market economies of developing countries and economies in transition (newly independent states). ECAs use a variety of financial instruments to give their private sector clients a leg up on foreign competitors. The following are the most common instruments used by ECAs:
Export credits or loans: loans to buyers or suppliers of export goods usually of a short term nature (maturities of less than a year or two) including letters of credit and banker's acceptances. These are provided on favourable terms that are not as easily available from private commercial banks.
Import credits or loans: essentially the same as export credits, but they are provided to overseas purchasers of domestic goods and services.
Project financing: direct or indirect loans for overseas projects with the significant participation of a domestic company, including joint-ventures. These are provided on favourable terms, such as extended maturities, that are not as readily provided by private commercial banks for politically risky markets.
Guarantees: agreement by a sovereign entity (usually a government) to cover or insure a domestic investor against any losses suffered on an investments or export that results from civil unrest, expropriation of property, or nationalisation (political risk), the inability to convert local currency into hard currency (currency transfer risk), from a breach of contract by the host country government (partial risk guarantee), and back a loan provided by a commercial bank against a borrowers default (loan guarantee).
Insurance: this is very similar to guarantees, the difference being that the coverage against political, currency transfer or loan defaults are purchased as an insurance premium.
Equity: these are direct investments into a project or an equity fund that in turn invests directly in development, infrastructure or other projects in the recipient country. Essentially, this equity buys down credit risk and permits private funds to raise additional financing more easily.
The instruments most commonly used by ECAs are export and import credits (also known as trade financing), project financing and various forms of guarantees and insurance. The use of equity funds is a fairly recent phenomenon, but it is growing more common as various types of financing instruments are increasingly packaged together (equity, bonds, loans, guarantees) to assemble sufficient capital to get a project off the ground.
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