Innovative structure for Tanzanian project to “kick off” surety in Africa’s credit insurance market
Broking firm Marsh is providing what it calls a “sophisticated” surety structure for the construction of a Tanzanian railway line, which it says could be attractive to banks and contractors on other African projects.
Marsh collaborated with the African Trade Insurance Agency (ATI) on the US$95mn unfunded bank surety solution, which is being provided to Turkish construction company Yapi Merkezi.
It guarantees Yapi Merkezi’s contractual performance-related obligations and the repayment of advance payments for the construction of a new high-speed electric railway in Tanzania.
The solution is backed by a consortium of reinsurers: TrustRe (lead reinsurer), BarentsRe, AfricaRe and ZepRe.
The structure works as follows: Yapi Merkezi, which was awarded the contract by the Tanzanian state-run railway firm Tanzania Railways Corporation, was obligated to use local Tanzanian banks to comply with project requirements. As this was not an option immediately available to the contractor, the Tanzanian government initially accepted Turkish bank guarantees as an interim solution.
Meanwhile, Marsh – which has a long-standing relationship with Yapi – together with ATI as the risk sharer, arranged what they refer to as an “innovative syndication structure”, which enabled two local Tanzanian banks, CRDB Bank and NMB Bank, to issue guarantees to replace the Turkish bank guarantees.
“What we’ve done has allowed two domestic banks to issue guarantees with pretty big limits – certainly much bigger than they would have been able to do otherwise – and we’ve backed those guarantees up with insurance,” explains John Lentaigne, chief underwriting officer at ATI. “If Yapi defaults and there’s a call on the guarantees, the local banks would pay, but they would have recourse through ATI.”
Crucially, the structure has also allowed Yapi to free up its domestic Turkish banking lines, releasing its overall risk limit and ultimately enabling the company to take on more project risk in Africa.
Bringing surety to Africa
Both ATI and Marsh agree that with this solution, contractors working in Africa now have a new way of getting local banks to offer guarantees for their projects. “Having guarantors involved is critical for contractors to be able to do big ticket projects,” says Lentaigne.
Although surety solutions are well-established in more advanced markets, such as the US (where they originated during the Great Depression in the 1930s) and Europe, they have been less present in Africa. But this may be set to change.
According to Manuel Lopez, who set up and runs Marsh’s global surety bank syndication desk, the solution is both applicable and scalable, and “something that will work in other countries”.
Lopez tells GTR that the feedback from African banks about adopting the solution has been positive. “Local and regional banks have limited risk appetite, and that’s what we think is a big opportunity: to fill this gap with sophisticated insurance solutions,” he says.
Lentaigne agrees that this is something ATI can help to develop further. “We think there is appetite for it: this will kick things off.”
Nevertheless, the complexities of local regulatory environments mean that the solution is not one that can simply be duplicated across different countries.
“It’s not a copy and paste solution, especially when it comes to the guarantee markets,” says Lopez. “Everybody is initially suspicious of these solutions, and it takes some time to make them comfortable.” The solution in Tanzania was three months in the making.
To be able to qualify for such solutions, projects need to be of strategic importance to the host country. In Tanzania, the first phase of the 300km railway line from Dar Es Salaam to Morogoro will replace a century-old track and have the capacity to transport 17 million tonnes of cargo each year. It is expected to be completed by the end of 2020.take me back