A talk with Karel Pleva, Chairman of the Board and Chief Executive Officer, Export Guarantee and Insurance Corporation (EGAP)
The environment of EGAP is obviously in many respects different. It is a state owned company and its goals and its operational principles are defined a bit differently then in private companies. In this sense, it was a change. On the other hand, it was not such a great leap. I know the industry sectors in which the main clients of the EGAP operate, namely the energy and the heavy engineering industries, very well since my days in consulting. I have been involved in both industries for over twenty years, and not only in the Czech Republic. I have had clients in the United States, in the Middle East and in many European countries. I have also devoted a portion of my time in consulting to transforming a number of financial institutions, which gave me a good insight into the inner workings of an insurance company. But indeed, there was one other important change, and not only for me. Right at the time when I joined EGAP, impacts of the economic crisis significantly changed the environment, in which EGAP operates.
The combination of a 50% growth in demand for EGAP’s insurance and a dramatically stronger competitive environment, in which Czech exporters operate, required shorter response time to insurance requests and therefore meant an unprecedented pressure on EGAP. All of a sudden, it was necessary to analyze and structure a 50% greater insurance volume in a much shorter time. That gave me no extra time for familiarizing myself with the situation. Besides, there was no need to. I have a strong support from my colleagues, a team of about a hundred highly skilled professionals, as well as from the state authorities, our shareholders. Thus, together we are adjusting EGAP to the new customer needs.
EGAP has its playing field defined quite strictly and transparently, just like the similar state export insurance companies in other countries. It insures risks related to the export of Czech goods, services and investments to developing countries, outside of the EU. These are for example the risks that the foreign customers will not repay their export loans, while for investments there may be risks of expropriation by a foreign government without compensation, or risks of an artificial foreign exchange barriers to profit repatriation. What is common to all the risks we insure is the fact, that they are uninsurable by private credit insurance companies, for two reasons. One is the geographical location of the risks – in the developing countries, the risk of failure to pay for political, economic or even legal environment reasons is significantly higher than in developed countries. The other is the size and duration of our risk exposure – we usually cover large and long-term credits aimed at financing large scale export and investment projects, such as power generating equipment and plants, heavy engineering technology, equipment for production of construction materials, but also infrastructure projects, etc.
The composition of our clients portfolio has not changed much since the very beginning of our activities eighteen years ago. Our clients are primarily banks, providing export financing, then obviously the exporters, and in recent years also Czech companies doing investments abroad. For us, the primary impact of the crisis was an increase in demand for our service. A bit unexpectedly and paradoxically perhaps, we have insured a record volume of export credits, bank guarantees and investments in the amount of 62 billion crowns last year. We believe that the primary reason for the increase was the fact that competition has temporarily backed-off from many difficult eastern markets and our exporters, who have noticeably increased their reputation on those markets in recent years, have utilized this opportunity.
You are partly right, but this is where we are fulfilling our role of an insurance company. Not only have we reached an insurance volume at a record high, but we pay out record sums of insurance payouts at the same time. We have paid out a billion crowns to banks which set up performance guarantees on behalf of a Czech supplier of equipment for two Pakistani power plants, which had not been finished on time. A further billion covers Cuban debts for recent exports of power equipment. On top of this, we have registered large insurance losses in Ukraine, where the banking system has partly collapsed. As an insurance company, we are able to manage all of it. What needs to be said, however, that the money we are paying out come from the accumulated insurance premiums, not from the state subsidies. Nonetheless, we still have to always think about how to ensure our financial stability for the coming years.
Not significantly. Last year, we have temporarily offered coverage on a completely exceptional level of ninety-nine percent, and in some cases even of one hundred percent, which would be unsustainable in the long term. Therefore, we have modified the level of insurance coverage slightly. The current coverage of 95 percent against commercial risks is, however, still distinctively above standard in the European context. So, the state support of export in the Czech Republic definitely gives our exporters a competitive advantage in the world markets. With some types of insurance, primarily bank guarantees, we will have to more carefully consider the conditions, under which we will provide them. However, we are not preparing any dramatic changes at present. We have a wide product portfolio, and thus we must only balance our capacity with the needs of our exporters so that we can effectively enhance their competitiveness.
EGAP is a growing financial institution. As a financial institution, we are regulated by financial supervision authorities and mandated to keep a portion (currently 8%) of the insured volume in so called insurance and reserve funds. And since we are growing, we need more of these funds to comply with these regulatory requirements. The funds can come from only two sources, from settled insurance premiums, or from the government contribution. Historically, most of these funds come from the insurance operations, but when the growth is fast, as it has been for the last two years, the Government, as a 100% shareholder, needs to participate in strengthening the insurance funds. And to answer your question – yes, if the growth in demand for our services continues, we would have to ask our shareholders for more funds. And so far, the growth in demand for export credit insurance is growing even faster than last year. Which is what we all want because it means, that the state-supported part of Czech exports and investments to non-EU countries continues to grow rapidly. The growth of exports also provides an excellent return on the Government’s subsidy of our funds. Every crown, deposited into our insurance funds, generates over 1,6 crowns in tax income for the state budget within two years. Or we could look at it from a different angle. The 5,7 billion of cumulative state subsidy of EGAP’s funds helped, over the years, to enable over 400 billion crowns in exports. Every single crown of a state subsidy therefore generated more than 70 crowns of exports. It might be hard to find any other state subsidy with such an impact.
Currently, the policy of state support for Czech exports enjoys a broad support across the political spectrum. It has also proved to be one of the key and most successful anti-crisis measures. Without additional subsidies, our capacity would be reduced to roughly 30 billion crowns of insured volume annually, while with sufficient funds, we expect that the volume we could support will, in the next few years, exceed 50 or 60 billion crowns annually. I don’t think it is necessary to emphasize any further the fact, that export is the most important engine of Czech economy. The state, with EGAP as its tool, plays an important role in that engine.
By Pavlína Holancová