The Export Guarantee and Insurance Corporation, better known under its acronym EGAP, belongs among institutions supporting the export in the Czech Republic. It is a paradox that it had been established practically in the same time trade sections of our embassies abroad were being dismantled - and this had its significant influence on our exports in following years. We speak on role and importance of the support for our exporters with the best suitable man, and it is the Managing Director of EGAP, Mr. Pavol Parizek.
In the first place, I would like to mention that we are a state-owned insurance company. We operate on similar principles as in all developed countries and we are de facto an extended arm of the state within the framework of the export support. Our mission is protection of exporters and banks financing the export from commercial or political risks which may lead to origination of irrecoverable receivables. EGAP is unique and does not compete with any other insurance company on the Czech market. It was established in 1992 on the basis of a decision of the then Federal Government and, besides the credit insurance with state support, it introduced on the Czech market also commercial credit insurance. The word commercial is used in the sense that this insurance has no connection to the state budget and is based exclusively on market relations. On the other hand, there is a close connection with activities of the state insurance company. Whether the client takes advantage of state or commercial insurance is depending on structure of his exports and buyers. The state cannot give its support to all export transactions. Conditions for it are given by relevant Czech laws and also by regulations of the European Union and the OECD. Compliance with these regulations is meticulously observed.
Basically, it applies that receivables having a short-term character which are understood as short-term supplier credits with maturity of up to 2 years are insured commercially. It is so both for domestic and export receivables which have to be extended to a buyer in the state with functioning market economy, i.e. the commercially insurable state. Among such states logically belong all EU countries where the substantial part of the Czech export is directed. In order to comply with the European Union rules requiring transparent separation of commercial activities from the insurance with state support, we have outsourced the commercial insurance into a subsidiary - Commercial Credit Insurance Company EGAP last year. Now this company insures all short-term receivables in the form of export and domestic supplier credits. I would like to add, the subsidiary does it very successfully. Despite of the intense competition in the Czech Republic in this area, it has approximately 50 per cent of the market. It is because people working there have extensive experience with this segment of the insurance market, they have been working in the underwriting of risks for a number of years and they know how to communicate with clients etc. I see as positive the fact that the client can negotiate and administer the commercial insurance on-line via a secure internet connection at on-line 24 hours a day, 365 days a year.
You are right. In 1929 the first commercial credit insurance company was founded and an act had been passed in 1933 establishing the special state fund which enabled the insurance of export credits against political risks. This system had been in operation quite successfully until the Second World War. So there are historical predecessors. In the socialist era, there was nothing similar in our country with the exception of a substitute of the commercial insurance offered by the Czech State Insurance Company. However it was in rather distant relation to our activities of the present times. After 1989 it ceased to be functional.
It can happen practically anytime. The commercial risk means that the buyer goes bankrupt or becomes incapable of paying his obligations or is unwilling to pay his obligations. The political risks are not related to the transaction itself but to the macro-economic or political situation in the country of the export's destination which have character of force majeure from the aspect of an individual foreign buyer. Among them fall, for example, administrative or legal measures of the country of the buyer or a third country, civil disorder but also natural disasters, wars and such. The insurance is concluded with the exporter or with his financing bank. Selection of the insurance product depends on the way of the financing of the export contract. There are risks which the private market will not insure because they are too high for it. EGAP is here for just such cases; it can, after a thorough analysis, cover such risks and it enables the Czech exporters to export without fears of the non-payment also to those markets which are interesting from the business point of view but do not show marks of a standard market economy. This is essence of the state support.
You can find in our offer not only the insurance of export supplier and buyer credits; this is usual service of similar export agencies in the developed countries but also the investment insurance and insurance of credits for the financing of the investment in foreign countries and the insurance of so-called domestic risk, i.e. the risk on the Czech exporter's part that he fulfils the signed contract or that he will have sufficient funds for the repayment of the extended credit, say, the pre-export credit for the financing of the production for the export. This category also includes the insurance of the credit for the prospection of the foreign markets, of inability to fulfil the export contract or the insurance of banking guarantees for contractual obligations of the exporter. Spectrum of insurance prospects is thus very wide and thanks to it, we are able to cover in practice all requirements of the client and, moreover, to accept the risk of exporter's proper performance and assist significantly in his access to financial funds. For banks, our insurance is a very good way of collateral for loans or guarantees because our insurance conditions are in full compliance with new rules of capital adequacy of banks "Basel II.". The banks are not obligated to create provisions and reserves for credits and guarantees insured with EGAP and it makes these credits and guarantees cheaper for the exporters.
It operates basically in this way although it is not as simple. Our interest is that all transactions of the Czech exporters are successful and with a minimal risk for the exporter and for us. That is why we investigate every transaction practically under a microscope. Before we conclude an insurance contract we would like to know as much as we can about our exporter as we have to accept responsibility for his proper and quality performance and simultaneously about the foreign buyer when it is the export credit insurance. We want to know that the foreign buyer has funds to pay for the delivered goods or extended services or the buyer will have them in the time they are delivered or extended. A detailed analysis of the debtor is necessary because we insure against the risk that he will not have sufficient funds during the repayment period - which may be as long as 10 years. It is logically the big unknown for the Czech exporter and his bank ad the credit insurance with state support plays here an irreplaceable role because such long-term risks is uninsurable on the commercial basis.
It is possible only in those cases when the risk is unacceptable for the commercial insurance company. This can be a short-term export supplier credit to a buyer in a commercially uninsurable country or in case the credit has a repayment period at least 2 years after finishing deliveries. For example, deliveries for a refinery last 3 to 5 years, and the credit is being repaid for further 10 to 15 years. Such contracts are mainly financed by banks. The insurance with state support is used not only by exporters of capital goods but also by many producers of consumer goods because, as I said, we accept not only the risk of the non-payment by the buyer but also the risk that the Czech producer would not deliver in time or he would not fulfil qualitative parameters or, in an extreme case, the goods were not produced.
Any Czech company exporting goods and services.
The managing of the state funds is really based on the fact we had received a certain amount of state budget appropriations in the first years of our activities in order to create funds ands reserves prescribed by law and provisions for covering insurance claims. It is our responsibility and simultaneously our aim to manage entrusted funds with a care of a good husbandman and to be self-sustaining in this. It means to finance operation of the insurance company and to pay claims from the money we earn, i.e. from the premium written and from other revenues. We are able to do it in the long run and we have never been forced to touch the entrusted state funds while volumes of newly insured credits, investment and guarantees grew every year by tens of per cent. According to preliminary data, we insured approximately CZK 125 billion of short-term export and domestic receivables in the commercial part in 2006 and about CZK 29 billion primarily long-term credits in the state supported insurance. It means we insured circa 8 per cent of Czech exports. Demand for our services is further growing. Based on discussions with our exporters, we expect to insure credits with state support in the amount of up to CZK 34 billion in 2007.
We have not forgotten the small and medium-sized enterprises. On the contrary, we take a concentrated and continuous care of them. We are aware they often have no financial directors or risk management specialists. That is why we are looking for ways how to maximally simplify the insurance and make it more accessible to them. We have progressed in the commercial insurance so far, as I said at the beginning, that you need nothing more than a computer and internet connection. It is more complicated in the insurance with state support for objective reasons but we have good results also here, For example, we simplified and shortened in cooperation with banks in a maximum way process of the insurance of a credit for the pre-export financing and bank guarantees. We were able to harmonize procedures of risks assessment of the exporter to such degree that we can accept the rating of the bank and do not have to do our own rating. in such way, Time can be saved also by the fact that a part of our agreements with banks is an agreed wording of the insurance contract so when the bank decides to extend to a client a re-export credit or to issue a guarantee on his behalf, the insurance is a question of a couple of hours, maximum several days.
The further positive news is we have prepared the insurance of short-term export receivables to all countries without any restrictions for small companies which cannot reach for the commercially credit insurance because of their low volumes of exports to a small number of buyers so they are not fulfilling basic criteria for a economic advantage for the commercial insurance companies. Our insurance shall be at disposal of all Czech exporters with annual volumes of exports not exceeding EUR 2 million at the average market insurance premium, i.e. somewhere under 0.3 per cent of the value of the credit. We start to offer this type of the insurance immediately after finishing the notification process in the EU Brussels head office.
In cooperation with the Economic Chamber of the Czech Republic, CzechTrade agency and with the Czech Export Bank, we have established and continuously financially support a network of 13regional export managers (REM) which should bring us near in as much as possible even to the smallest companies and to show then ways of entering foreign markets with the support on state's part. An entrepreneur is able to get all necessary information on one spot. Moreover, the regional managers themselves actively search for potential recipients of the state support in their regions. It follows from response up to now, it is a meaningful project - a number of companies from among the small and medium-sized enterprises having chance to succeed in the export has been growing.