Until about a decade ago, the image of Africa was that of a faltering and hungry continent, a dead loss for investors in general and Israeli exporters in particular. Any exports to the continent were on a prepaid cash basis before delivery of the goods. Most transactions were of defense goods with governments, many of which were waging bloody civil wars.
In the past decade, some countries have enjoyed regime stability, while governments in all of them have had to demonstrate to their hungry, long-suffering populations that times have changed and that money is being invested in infrastructures devastated by wars.
Africa is undergoing massive economic emergence. The process is being led by the entry of multinationals into African countries in cooperation with local companies and which are investing equity to build infrastructures, especially in telecommunications, healthcare, agriculture, and water. The list of the world’s fastest developing countries now includes quite a few sub-Saharan countries.
Many projects currently underway in Africa (in the professional jargon, turn key projects) were initiated by the government through international tenders for contractors to build large infrastructure projects. A key condition for winning a tender is for the developer to obtain long-term financing for the client (the federal government or a special-purpose government company with government guarantees) to pay for the project’s costs.
Israeli exporters are discovering Africa’s vast potential and want to share in it. Nonetheless, if this financing leaves the Israeli exporter (the project contractor) exposed to political or economic risk in the client country and to the need to finance the cash flow from the client, no deal is possible.
Most African countries have very low international credit ratings and some countries are not rated at all. Many countries have undergone debt forgiveness at one time or another by developed countries and World Bank-affiliated financial organizations, which seek to help Africa’s development. Therefore, in order to execute capital-rich infrastructure projects, a financing solution is needed that does not expose the contractor to credit risk.
The usual method for financing large-scale infrastructure projects is buyers credit. In this method, the lender bank, such as Bank Hapoalim (TASE: POLI), directly finances the client that ordered the project or a party on its behalf as the borrower, usually through the Ministry of Finance of the client country or with guarantees from it. The bank’s main collateral is credit insurance - insurance provided to the bank by Ashra - The Israel Foreign Trade Risks Insurance Corporation Ltd. (owned by the Israeli government) or by foreign credit insurance companies. The financing will be provided to the bank in tranches against the exporter’s project milestones, in which the credit provided will be paid to the exporter for the exports made.
Bank Hapoalim works both with Ashra and the international credit insurance market. Ashra policies and individual policies are made out to Bank Hapoalim and cover (insurance coverage) non-payment for any reason at a rate of 90% (for commercial risk) to 95% (for political risk) of the borrower’s debt, including both the principal and interest.
Therefore, even though the client has obtained long-term credit, the deal is a cash transaction for the exporter and a credit transaction with good insurance risk for the bank. In effect, buyers insurance is a win-win situation for the exporter, the client, and the lender bank.
Financial closing with buyers credit is a long process, which usually occurs in parallel with the signing of the commercial agreement. Both of these agreements must fit each other regarding the financial commitments, and they must be acceptable to the insurance companies providing the credit insurance. Sometimes, two financing agreements are drawn up and signed for a single project, one to finance the down payment, and the second to finance the exports.
Over the years, Bank Hapoalim has financed a number of projects in Africa, such as a water project by Tahal Group Ltd. in Ghana (Bank Hapoalim is the only Israeli bank that has financed projects for Israeli exporters in Ghana), an agriculture project by Tahal in Angola (Bank Hapoalim is part of a syndicate organized by a European bank).
Another financing method is Discounting of Promissory Notes or Bills of Exchange, a method that is relevant for smaller scale projects or projects in countries in which the client or the party on its behalf prefers this method over buyers credit. The method is based on credit by the suppliers that the exporter proposes to the client (after verifying the financing terms that can be offered with the bank and the insurer). The client or the party on its behalf will sign a promissory note made out in favor of the exporter or sign an “acceptance” signature on a bill of exchange drawn up by the exporter. In this case, it is better if the guarantee is signed on the promissory note (the client country’s Ministry of Finance is the debtor or guarantor for government projects).
The exporter will convert the promissory note/bill of exchange in favor of the bank, which clears the promissory note/bill of exchange and pays the exporter the compensation, after deducting clearing fees. The main collateral is obtaining credit insurance for both the political risk and the credit risk from Ashra and/or a private foreign credit insurance company. Again, in this way, the exporter turns a credit transaction into a cash transaction removing the risk inherent in providing credit to a high-risk client/country. In other words, the sale of the notes to the bank is by the exporter irrevocably converting them in favor of the bank. With this financing method, too, the insurance policies in favor of the bank and the coverage rates are similar to those granted under the buyers credit method. This method requires the bank to first check the legal procedure for writing the notes and the debt collection process in the local law of the client country, and the applicable law of the notes.
However, the preferred method for the Israeli exporter and the one for closing the financing the fastest is a Letter of Credit, which the bank opens in the client country in favor of the Israeli exporter through Bank Hapoalim. The terms of payment in the letter of credit are deferred payments over the credit period.
A letter of credit means an irrevocable commitment by a bank in the client country (the opening bank) to pay the exporter a certain amount under certain conditions, usually upon presentation of documents testifying to the delivery of goods/meeting a milestone in favor of a certain buyer. The terms of payment in a letter of credit can either be in cash or deferred payment in days/months/years after delivery of the goods/ presentation of the documents. If the location of the bank opening the letter of credit is in a developing country, or if the opening bank is not known to the exporter and it is worried about the risk in working with it, Bank Hapoalim will check the option of confirmation of the commitment by the opening bank; i.e. that the fulfilling bank assumes the risk of the opening bank and directly assumes, with its own commitment to pay the exporter for the documents. In some cases, the bank will agree to assume the risk of the opening bank; in some cases, the bank will request external insurance of the risk against the opening bank (similar to credit insurance that the bank obtains in buyers credit and promissory notes transactions); and in other cases, the bank will obtain guarantees by a third party of the opening bank’s commitments.
The extent that the bank is willing to assume the risk against the opening bank, or, alternatively, to obtain insurance or a third party guarantee, Bank Hapoalim will deduct the deferred commitment for payment by bringing forward the payment to the exporter (after deducting interest). In this way, the exporter gets an irrevocable cash transaction, neutralizing the risk inherent in a deferred payment transaction.
Bank Hapoalim is a member of the Global Trade Finance Program of the International Finance Corporation (IFC), a arm of the World Bank that supports investments in the private sector in developing countries and issues guarantees in favor of the bank fulfilling the letter of credit. It is important to note that the bank that opens the letter of credit must also be a member of this program in order to obtain IFC guarantees. The agreement with the IFC allows Bank Hapoalim to fulfill and clear a letter a credit it receives in favor of an Israeli exporter from a bank in Liberia.
Tahal builds in Africa
One of the Israeli companies with extensive business in Africa is Kardan NV (TASE: KRNV;AEX:KARD) subsidiary Tahal Group, which provides engineering planning and supervision and construction services for water and sewage, waste treatment, landfills, gas, and agriculture projects. The company operates in 25 countries on four continents: Asia (especially in China, India, and Israel); Africa; Europe (mainly in Eastern Europe); and Latin America.
In Africa, most of Tahal’s business is concentrated in Ghana and Angola. “These countries have very strong demand, because they are lagging and suffer from poor infrastructures,” says Tahal projects manager Tomer Reshef. He says that African countries lack local companies with the ability to provide comprehensive solutions (including financing), which is where Tahal’s edge comes to bear. The company has operated in Africa for over 40 years, but, in the past decade, has focused on Ghana and Angola, where oil has been discovered.
In the case of Angola, Kardan wrote in its annual financial report that Tahal drew up the national master plan for coastal development, and that it is building an agricultural community at Quiminha, including construction of water supply and power infrastructures, residences, a logistics center, and community buildings, such as schools, a clinic, and sports center. Reshef says that the actual work is carried out by local and foreign subcontractors.
Tahal’s revenue from African projects totaled €65.9 million in 2014, 48.5% of total company revenue. Revenue from planning projects in Africa totaled €2.2 million, 1.6% of total revenue, in 2014. Israel is the source for most of the company’s planning work, and Africa is the source for most of its construction work.
Reshef says that the main obstacle to work in Africa is the very long development time. “There are no short processes in Africa,” he says. “There is also no regime stability and macroeconomic changes are always obstacles.”
The author is Head of Bank Hapoalim's Foreign Trade Business Department
Published by Globes [online], Israel business news - www.globes-online.com - on May 17, 2015
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