Insuring against Unrest Can Ethiopia’s Membership with the African Trade Insurance Agency Mitigate Political Risks, Boost Investment?

Political volatility can impact economic performance like any other risk often associated with business operations, especially in developing countries. This has been the case for Ethiopia, where the protests in the State of Oromia have affected businesses – resulting in the government having to compensate investors upwards of ETB100 million. In order to mitigate potential risks and create a better environment for investors, Ethiopia has its eyes set on joining the African Trade Insurance Agency (ATI). EBR’s Bantayehu Demlie spoke with individuals close to the issue to learn the intricacies of the decision to join the ATI.

Since November 2015, many parts of the State of Oromia have been ravaged by public protests initially fuelled in opposition to the government’s proposed integrated master plan for Addis Ababa and Oromia’s special zone surrounding the capital. Unfortunately, clashes between police and protesters have left several people dead.
In tandem with the human toll, the protests have had economic consequences. Specifically, the government has agreed to compensate investors operating in Oromia for lost assets. According to Getahun Negash, Director of the Public Relations Directorate at the Ethiopian Investment Commission (EIC), approximately 12 foreign investors requested compensation from the government for losses they incurred. “The damage assessment is underway and the amount to be paid is expected to reach ETB100 million,” Getahun told EBR.
These investors initially filed their claims to the Office of the Prime Minister, which ordered the EIC to assess the validity of the requests in collaboration with the Ethiopian Insurance Corporation, Commercial Bank of Ethiopia and Development Bank of Ethiopia.
Getahun says their cooperation in addressing these claims has largely to do with pragmatism. “If the investors sue us before international tribunals, the litigation costs alone would be much higher than the amount we agreed to pay in compensation.”
In fact, what the country will spend in compensating the investors is likely just the tip of the iceberg compared to the amount of foreign direct investment (FDI) the country would lose as a result of real or perceived risks posed by political situations such as the Oromia protests.
At this critical juncture, Ethiopia is officially becoming a member of a continent-wide trade credit and political risk insurer: the African Trade Insurance Agency (ATI). Established in 2001 with the initiation of the Common Market for Eastern and Southern Africa (COMESA) region and with technical and financial support from the World Bank, the ATI is now a Nairobi-based pan-African institution with members from other parts of the continent also joining.
In fact, in December 2013 the Economic Community of West African States (ECOWAS) decided during its 71st Ordinary Session of the Council of Ministers that all of its member states should join the COMESA-initiated agency instead of creating its counterpart – an ECOWAS Investment Guarantee Agency – in West Africa.
Prior to ATI’s establishment, the World Bank provided technical assistance to COMESA, which conducted a study as to why the region is receiving lower levels of FDI. The study revealed that political risks were the primary reason barring investors from considering the region for investment.
Based on this finding, the seven founding states –Burundi, Kenya, Malawi, Rwanda, Tanzania, Uganda and Zambia – signed the treaty initiating the ATI on May 18, 2000. The World Bank extended grants and loans to these states to buy shares in ATI.
Ethiopia has been considering joining the ATI since it went operational in 2001, according to Zafu Eyesuswork Zafu, a prominent figure in Ethiopia’s fledgling insurance industry and currently Board Chairman of United Bank. “I have been closely following ATI’s expansion as former Chief Executive Officer of Africa Reinsurance, which is now a member of ATI,” Zafu told EBR.
The National Bank of Ethiopia (NBE) established a committee to study the pros and cons of the nation’s membership to the Agency. The committee, which also included Zafu as the then Managing Director of the United Insurance Company, released a draft of the “Report on the Study of Ethiopia’s Accession to the African Trade Insurance Agency” in April 2004.
Now, 12 years after the release of this report, Ethiopia only needs to meet the final membership requirement of signing the participation agreement, which is expected to happen in May 2016, according to Semere Tesfaye, senior expert at the UN Agencies and Regional Economic Cooperation Directorate of the Ministry of Finance and Economic Cooperation (MoFEC).
According to Semere, who was part of the accession negotiation team, Ethiopia has to fulfil three requirements to become an ATI member. “These are paying the minimum subscription fee of USD7.5 million, ratifying the treaty establishing ATI, and signing the participation agreement,” he says. “We have fulfilled the first two and are expecting the participation agreement to be signed by the Minister of MoFEC and ATI.”
The Parliament also passed the bill ratifying the Treaty Establishing the ATI on April 5, 2016, and the African Development Bank (AfDB) granted USD7.5 million in soft loans for the ATI subscription fee in November 2015.
In fact, it is not only countries that are eligible for ATI membership. It is open to all African states, non-African states, private corporations, and other intergovernmental organisations, such as multilateral financial institutions, regional economic communities, and export credit agencies.
These eligible entities hold shares at different levels. African states, non-African states, private corporations, and intergovernmental entities hold Class A, B, C, and D shares, respectively. Each category requires the subscription of a minimum of 75, 100, 100 and one share, respectively.
In order to keep ATI’s identity as an African institution, shares by African states must hold a minimum of 51Pct of the Agency’s capital stock at all times. Current members under this category are the aforementioned founding states, which were later joined by the Democratic Republic of Congo, Madagascar and Benin. Three additional countries – Ethiopia, Cote d’Ivoire and Zimbabwe – are expected to complete their membership during the first half of 2016. There is no non-African state ATI shareholder yet. Non-state members include the AfDB, World Bank, COMESA, PTA Bank, ZEP-RE, Africa Re, and the Italian Export Credit Agency.

Insuring Political Risk
ATI provides three product lines that insure against different categories of risks. The first one insures against government-initiated political risk; the second insures against credit risk and bonds; and the last covers political violence, terrorism and sabotage. All can be classified into two broad categories: political risk insurance (merging the first and the third), and trade credit risk insurance.
According to an Aon Risk Solutions 2014 study entitled “Political Risks in Sub-Saharan Africa: A View from the Power Sector”, political risk refers to losses caused by the actions and inactions of a government (host or export country), a third party country or supranational entity, such as the United Nations.
These include measures resulting from active government involvement, including breach of concession agreements; import or export embargoes; revocation or non-extension of licenses; currency inconvertibility or transfer risks; nationalisation of private property; and other incidents on which government may or may not have active control, such as acts of war, civil unrest, sabotage, and terrorism. Political risk insurance guarantees investors against impediments resulting from these government actions or inactions.
On the other hand, trade credit risks – also known as commercial risks – arise from non-political factors, such as when buyers or importers do not honour transaction contracts, insolvency, bankruptcy, and default. Insurance for this category also covers bonds which banks and insurance companies hold. Yet, broadly speaking political risks also fall within trade credit risks.
In 2013, ATI came up with a new package to encourage Micro and Small Enterprises (MSEs). It began insuring banks’ lending activities they can extend loans to MSEs without requiring the latter to avail collateral. The August 2015 AfDB report explains the rationale for the need to encourage MSEs: “due to concerns associated with the potential for most indirect [ATI] benefits accruing to large corporates.”
Globally, the political risk insurance (PRI) industry is composed of private firms and state-backed investment guarantee agencies. Private firms include Lloyd’s of London, American International Group (also known as AIG), Euler Hermes, XL Catlin, and Atradius. As of February 2016, private firms alone accounted for up to USD2 billion, according to Global Risk Insights.
The second category, to which ATI belongs, includes other global actors such as the World Bank’s Multilateral Investment Guarantee Agency (MIGA), and national export credit agencies (ECAs) such as the United States Overseas Private Investment Corporation. This category of PRI providers offer longer, larger, and riskier insurance policies compared with private firms. Ethiopia is already a member of MIGA.
Investors and traders targeting developing markets as well as money-lending financial institutions are the main users of PRI services.
Ethiopia’s membership to ATI comes at an opportune time. The government’s decision to compensate investors that suffered property losses due to the recent protests in the State of Oromia demonstrates how timely it is to avail institutional infrastructure such as ATI. This makes more sense if one looks it in light of that state being a favourite investment destination in the country. Oromia’s proximity to Addis Ababa, which is the nerve centre of Ethiopia’s economic, political and social activities, attracts investors. Its abundant resource base adds to that appeal.
Between August 1992 and April 2016, Ethiopia attracted foreign projects worth ETB90.6 billion, which created 278,249 and 302,006 permanent and temporary jobs, respectively, according to data from the EIC. During this period, the largest FDI proportion flow was into Oromia followed by Addis Ababa, with an amount of ETB36.5 billion and ETB 34 billion, respectively. Together, the two states received 77.8Pct of the total investment in the country in that period.
Despite Ethiopia’s growing importance as an FDI destination in Africa, the World Bank’s investment guarantee agency says investments in Ethiopia are barely insured against political risks. It was only in 2010 that MIGA guaranteed its first investment project – called Africa Juice, a medium-sized farm and juice-processing facility.
This poor coverage is in spite of the growing demand from foreign investors seeking to invest in Ethiopia to hire PRI services. For instance, MIGA’s Michel Durr, in a 2011 piece entitled “Ethiopia: Uptick in Investor Interest”, reveals that between 2008 and 2011 alone, the Agency received 28 applications for PRI coverage from investors interested in Ethiopia. Durr contrasts this with only 33 such applications received by MIGA between 1991 (the year Ethiopia joined MIGA) and 2007.
Concurring with the above finding, experts confirm that Ethiopia’s ATI membership is timely. “[This] is something that should have happened earlier,” says Zafu.
He argues that an ATI membership will enhance FDI inflow by satisfying the needs of different investment and development actors. Firstly, foreign investors need guarantees against what he dubs “their fear of the unknown” when considering investment in developing countries like Ethiopia. “The fear is particularly immense when it comes to Africa, where there is an unfortunate tendency of sudden and violent changes of governments,” Zafu explains. “ATI will help minimise these investors’ fear and encourages them to decide to invest.”
Secondly, ATI is of interest to traders who mobilise large amounts of money, as it insures them against failure to recover monies.
Furthermore, countries and multilateral financial institutions that extend loans to Ethiopia also have an interest to see Ethiopia joining frameworks such as ATI, since it insures them against failure to recover loans.
ATI’s operations are akin to MIGA’s. Still, experts argue that Ethiopia will benefit from a more fair risk rating by ATI. “[This] is because ATI is an African institution, our own, where we are a member. ATI is closer to Ethiopia than MIGA,” argues Zafu. Insurers based outside Africa are said to charge a lot because they don’t have intimate knowledge of local risks in Africa.
Yet there is confusion for some as to the impact of Ethiopia’s ATI membership on domestic insurance operations.
In response to this, Semere emphasises that any domestic insurance company does not currently provide ATI’s services. “It is partly because they are very expensive, especially for insuring political risk. Even ATI with a capital of USD1 billion still obtains insurance and reinsurance coverage from other institutions,” he explains.
Semere adds that the confusion comes from not clearly distinguishing ATI’s services and the instruments it uses. “ATI’s services are political risk insurance and trade credit insurance. Others, such as reinsurance, are not its services. They are instruments.”
Concurring with Semere, Zafu identifies further distinctions between the services of ATI and domestic insurance companies. “Ethiopian insurance companies do not provide political risk insurance due to prohibition by national insurance law, limited [financial] capacity and know-how,” he says. “Multilateral insurers such as ATI are not purely insurance companies. They are specialised institutions that provide services that standard insurance companies do not provide.”
Ethiopian standard insurance companies provide policies for risks that can be calculated statistically. “Political risk is difficult to calculate even after it materialises. When we face cases related to political risk, we often refer to Lloyd’s through brokers,” adds Zafu.
Still, insurance companies that EBR spoke to generally hope that the debut of ATI operations within Ethiopia will benefit them, as it indirectly creates opportunities that come with increased investment in the country.
ATI’s track record, generally speaking, confirms that it encourages increased investments in its members. For example, according to the AfDB’s August 2015 Regional ATI Country Membership Programme report, ATI supported USD3.4 billion investments in its African member states in 2014 alone. The report notes ATI’s significant financial returns in recent years. In 2014, ATI collected a net profit of USD4.2 million; this was USD4.3 million the previous year. According to its report in 2014, the Agency supported investments worth of USD17 billion between its inception and 2014.
If the experiences of other African countries are any indication, the stability that ATI can provide Ethiopia during politically tumultuous times may prove fruitful. Kenya is a good example, as investments insured by the institution continued during the country’s 2008 post-election violence. ATI’s role in this context ranges from USD14.9 million in political risk reinsurance coverage to USD135,000 credit risk insurance. In the first project, ATI reinsured a local general insurance company the excess of loss from the political and civil disturbance of the time.
In the second project, ATI insured a South African carpet manufacturer that received orders from a Kenyan tourist operator, for the seller feared insolvency and protracted default of the latter given the tourism sector’s underperformance at the time. Kenya’s tourism witnessed a 35Pct decline immediately following the 2007 election, according to ATI’s records. EBR