The fact that there are enormous opportunities from the booming rate of construction and infrastructure development in Africa is a well-known fact. What is less understood are the challenges many companies face in reaping these benefits. For contractors and suppliers, for instance, trying to tap into these prospects can be quite a daunting task.
“Once companies understand the challenges, they can then find the solution, which often requires a certain change in mindset away from a culture of secrecy to one where financial information is shared openly. If embraced, this way of doing business could lead to increasing the credibility of companies, which would ultimately create more competitive markets in Africa,” notes Jef Vincent, ATI’s Chief Underwriting Officer.
Two Kenyan steel producers, who benefited from ATI’s trade credit risk insurance cover, recently experienced some of these challenges. At the time, these two companies needed supplies in order to be able to meet growing demand from their clients. After they sourced the right supplier, they faced an obstacle that is all too common for many African companies – obtaining goods or services from international suppliers on credit.
For African companies that wish to grow, increasing output while maintaining quality standards requires access to the best materials. International companieswith little experience supplying to African companiesusually insist on cash-on–delivery terms as credit terms are not offered – as credit terms are difficult to obtain because of a lack of access to viable financial information on many companies.
In this case, the two steel producers benefited from a bit of luck. Their supplier was a U.K. based company that happens to be the largest steel producer in Europe. This company contacted the African Trade Insurance Agency (ATI) when they realized that many of their prospective African clients were unable to obtain supplies from them on credit terms. The company saw this as an obstacle to growth. With ATI insurance covering both transactions valued at $7 million, ATI verified the credit rating on the local steel companies allowing the supplier to push through the sale. As a result, this supplier now has plans to cover all their buyers in the region withATI’s products, protecting themselves against payment default risks.
While the two Kenyan steel makers benefited from this arrangement, luck is not really a long term strategy for any company interested in growing.
ATI has been preaching to local companies for a decade the importance of being proactive. Companies that have this type of protection are able to buy from any supplier almost anywhere in the worldbecause the supplier has the assurance of payment. Companies that are insured also tend to have more cash on hand to reinvest in their business, they automatically increase their creditworthiness and, to a large extent, their credibility.
The other aspect to consider is that banks are able to accept ATI insurance as a form of credit enhancement, thereby allowing them to extend more facilities without requiring additional tangible security.Why? It’s simple – banks and other international companies know that they have already gone through the due diligence necessary to enter into a partnership.
“One of the key blocks to opening up our markets is the culture of secrecy that prevents companies from sharing financial information – the very thing that could help them in the long run. The world is increasingly moving towards a system of transparency that isbased on credit worthiness. This is the reality that the African private sector should also adopt if it hopes to compete successfully with the world,” adds Mr. Vincent.
In 2012, ATI covered credit transactions valued at over $800 million ranging from policies that protect against payment default on a single buyer to reinsurance support of European Export Credit Agencies protecting their companies’ exports to Africa as well as a company’s entire list of buyers. In 2013, added growth in this area of business is expected given the steady demand that ATI is currently experiencing from its markets.
