Financing and guarantees for foreign transactions

The Federal Government helps German firms in all sectors and banks to do business internationally and finance these deals.

Bilateral Investment Treaties

By concluding bilateral investment treaties with developing and emerging economies, the Federal Government creates a stable environment for German foreign direct investment. The treaties furnish investors with comprehensive legal protection for their investments under international law and make it easier for SMEs in particular to develop foreign markets. Also, they provide the legal protection that forms the basic precondition for the assumption of federal guarantees for German foreign direct investment in order to provide coverage against political risks.

Under the Lisbon Treaty, competence for foreign direct investment (including for offering protection for this foreign direct investment) was transferred to the European Union in 2009. This means that the European Commission has the right to negotiate treaties for investment protection for the EU and its 27 Member States. Over time, these are to replace the bilateral treaties concluded by individual Member States.

Financial support

The instruments of AKA Bank, KfW-IPEX and DEG - Deutsche Investitions- und Entwicklungsgesellschaft m.b.H. are available to finance exports, investments and projects abroad.

AKA Bank offers comprehensive support around the financing of export deals and the administrative processing of international transactions in connection with trade financing. KfW IPEX offers global project and export financing services, including structured financing for large-scale projects. Both offer financing with or without government hedging against risks (Hermes coverage).

DEG supports private-sector investment in developing countries and emerging economies. Companies receive tailored financing solutions drawing on funding programmes, as well as individual consultancy. From its first day, this subsidiary of KfW has concerned itself primarily with supporting German SMEs. Through its cooperation with development financing institutes such as EDFI (European Development Finance Institutions), DEG is able to draw on a wide range of experience and offer efficient financing and consultancy solutions. The Federal Ministry for Economic Affairs and Climate Action has one seat on the DEG supervisory board.

For investments in developing countries or emerging economies, there are also various support services offered by the Federal Ministry for Economic Cooperation and Development. To learn more about the range of financing instruments, supportive measures, consultancy services and cooperation opportunities for business, please consult the relevant leaflet.

Apart from AKA bank, the German Investment and Development Company (DEG) and the Federal Ministry for Economic Cooperation and Development, other national and international organisations such as the European Development Fund, the World Bank, the United Nations, the regional development banks etc. also launch calls for projects involving investments in developing countries. Germany companies can act as contractors for these. For information about these calls for projects, please consult the above organisations’ websites or that of Germany Trade and Invest GbmH.

Background

For decades, federal federal export credit guarantees (Hermes insurance policies) have served as an important instrument in Germany’s policy to promote foreign trade and investment. They protect exporters and banks against the risks of payment defaults caused by economic or political circumstances. Coverage is available along the entire value chain – from the manufacturing process to delivery, up to receipt of the last instalment.

When an export credit guarantee is issued, a major portion of the risk of payment default is assumed by the Federal Republic of Germany. Companies receiving this cover pay a premium (fee) commensurate with the risk. If damage is suffered, the Federation pays compensation for that as far as the risk is covered.

Export credit guarantees play a key role in risk mitigation and financing. The Federation’s excellent creditworthiness translates into a much lower risk. This in turn then allows for much better financing conditions. In many cases, federal export credit guarantees are a prerequisite for the banks to provide financing for a business deal.

In principle, the federal export credit guarantees are available to all exporting companies and banks providing export financing, as long as they are based in Germany. This applies regardless of the company’s size or the size of the business transaction to be covered. Whether or not an export credit guarantee can be granted depends on whether the transaction is considered worthy of support and whether the risk level is acceptable.

A delivery or service provision will be considered worthy of support if it meets criteria including the safeguarding or creation of jobs in Germany and the development of new sales markets. Business transactions made by small and medium-sized enterprises are considered particularly worthy of support.

For the risk level to be acceptable, there has to be a realistic prospect of seeing the relevant export project through without damage.

Export credit guarantees supplement the insurance coverage available from private-sector credit insurers. They can be used where the private sector fails to offer (sufficient) coverage. As a result, federal export credit guarantees are mainly used to provide insurance for exports of goods and services to emerging markets and developing countries.

Economic policy objectives

The OECD member states have agreed in their Consensus to comply with certain requirements for government-supported guarantees and the financing of export business deals so as to avoid distortions of competition caused by the various government schemes for export financing and export credit insurance. Within the EU, additional harmonised rules apply. These are binding on all EU member states. An important task for the Federal Ministry for Economic Affairs and Climate Action is to help develop the international rulebooks to bring them in line with current developments. This is to ensure that exporters compete on price and quality rather than on the amount of government support they receive.

In 2023, the European Union agreed on new rules on export financing with members of the OECD. These notably include longer maximum credit terms, more flexible repayment profiles and a widening of the scope of the Climate Change Sector Understanding agreement. The modernisation of the OECD Consensus creates important incentives for the export of technologies that are particularly climate-friendly and relevant for the green transition.

Export credit guarantees granted by the federation in 2022

In 2022, the Federal Government provided export credit guarantees for exports worth €20.2 billion. Most of these exports of goods and services were destined for emerging economies and developing countries. In fact, this was true of 82.8% of the volume of newly issued export credit guarantees.

Once again, the export credit guarantee scheme resulted in a profit for the federation in 2022, generating €413 million.

Export credit guarantees – responsibilities and management

Euler Hermes AG has been commissioned by the Federal Government to implement the export credit guarantees funding instrument. The overall coverage policy and the decision as to which applications for export credit guarantees are to be approved lies with the Interministerial Committee for Export Credit Guarantees. Decisions are taken by consensus. In addition to the Federal Ministry for Economic Affairs and Climate Action as the lead ministry, the Federal Ministry of Finance, the Federal Foreign Office and the Federal Ministry for Economic Cooperation and Development are also represented in the Committee.

Compliance with environmental and social standards and observance of human rights

The Federal Government has made compliance with environmental and social standards and observance of human rights important criteria for the decision as to which exports are to be given export credit guarantees. No coverage is provided for export deals that contravene internationally agreed environmental, social or human rights standards.
For projects and transactions within the scope of the OECD Common Approaches (Recommendation of the Council on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence), environmental, social and human rights aspects are set criteria in the assessment process.

If there are indications that a project might have a significant negative environmental or social impact or that it might violate human rights, it will be subject to an environmental, social and human rights assessment even where it does not fall within the scope of the Common Approach.

Export credit guarantees and their contribution to climate action

The Federal Government is very much looking into the question of how the guarantee instruments designed to promote foreign trade and investment can make an additional contribution to the targets of the Paris Climate Agreement. In 2020, the Federal Government expanded coverage for exports in the field of renewable energies and introduced more favourable financing opportunities for such exports. Also, the Federal Government has decided that it will no longer provide coverage for exports that have a strong negative effect on the climate.

Both measures are part of the Climate Strategy that will enter into force in Q4 of 2023. The Climate Strategy is to support German exporters in the transition towards a low-carbon economy by providing a reliable framework that offers them and their foreign customers a reliable basis to plan on. The Strategy wants to ensure a level playing field in the area of export credit guarantees and prevent German companies from having to suffer competitive disadvantages.

Federal investment guarantees protect investments by German companies against political risks in developing, emerging and former transition countries. In this way, investment guarantees help safeguard projects undertaken in a difficult environment. Where projects abroad are in jeopardy, the Federal Government can intervene at the diplomatic level to protect these project. This also benefits small and medium-sized enterprises.

Coverage can be provided for the following types of investments:

• Equity investment
  
  
• Capital provided to branch offices or permanent establishments (endowment capital)
  
  
• Equity-like loans from a shareholder or a bank
  
  
• Other asset-related rights, e.g. from service contracts in the commodities sector or from certificates of indebtedness)

A guarantee offers protection from the following risks:

• Nationalisation, expropriation or equivalent measures
  
  
• War, armed conflict, revolution and unrest or terrorist acts relating to such events
  
  
• Breach of legally binding commitments by state or state-controlled bodies
  
  
• Payment moratoriums or restrictions on conversion or transfers
  
  

Strong increase in guarantees issued for small and medium-sized enterprises and first-time applicants

In 2022, the Federation provided investment guarantees for projects worth €2.3 billion (2021: €2.6 billion). Despite a small decrease in the volume of new coverage, the number of applications approved was considerably higher at 43 than in the preceding year (2021: 30). In 2022, 47% of the applications approved were filed by small and medium-sized enterprises – the highest share since 1995. This shows that effective coverage against political risks has become much more important for companies and especially small and medium-sized enterprises that venture onto new foreign markets. Moreover, 52% of the guarantee holders took out an investment guarantee for the first time. This is considerably higher than even the large share of first-time guarantee holders in 2021 (40%).

The high level of interest in hedging against political risk also manifests itself in a large increase in applications for guarantees. It has become apparent that German companies are continuing to invest considerable sums in developing countries and emerging economies and that these investment decisions are often contingent on the availability of investment guarantees protecting them against the political risks that are being felt across the globe.

Prerequisites for an investment guarantee to be issued

Investment guarantees can only be issued for projects deemed worthy of support. The project must have a positive impact on Germany and on the development of the country where the investment is made. Furthermore, the investment must not pose problems in terms of its environmental, social and human rights impact. German companies are explicitly called upon to comply with the OECD Guidelines for Multinational Enterprises and to live up to their human-rights related due-diligence responsibilities as set out in the German National Action Plan on the Implementation of the UN Guiding Principles and Business and Human Rights.

For the federation to be able to issue an investment guarantee, the investment must also be subject to sufficient legal protection in the country where it is made. This is normally deemed to be the case if there is an investment promotion and protection treaty in place between Germany and the relevant country. Applications are approved or rejected by an Interministerial Committee chaired by the Federal Ministry for Economic Affairs and Climate Action and involving business experts from the private sector.

Investment guarantees can only be issued for new investments. This means that the application for an investment guarantee must be made before the investment is made.

Guarantees for untied financial loans form an integral part of the Federal Government’s raw materials strategy. They provide cover for loans from financial institutions based in Germany (and, upon certain conditions, also from foreign banks) for raw materials projects, protecting against the risk of default on repayments for commercial or political reasons. By doing so, they make an important contribution to ensuring that the Federal Republic of Germany is supplied with the raw materials that it needs. Untied financial loans are not tied to German supplies or services, but are rather project-based.

Projects are deemed worthy of funding if they are economically viable and serve the interests of the Federal Republic of Germany in a special way or make a contribution to the economic development of the recipient country. This notably applies to projects that involve supply contracts ensuring the Federal Republic of Germany’s supply of mineral and energy resources required by its business sector. In addition to being worthy of funding, the project must also be acceptable in terms of the risks assumed by the federation if it issues the guarantee for the untied financial loan.

Euler Hermes AG has been commissioned by the Federal Government to implement the untied financial loan guarantees scheme. The decision as whether a guarantee for an untied loan can be issued is taken by the Interministerial Committee for Untied Financial Loans.

Demand for raw materials required for forward-looking and key-enabling technologies such as electric mobility and renewable energies remains at a high level. Securing sufficient quantities of raw materials under long-term purchase agreements continues to be important for companies. This applies to metals such as rare earths, cobalt and lithium as well as for traditional industrial commodities such as copper.

In 2020, the scope of applications for guarantees for untied financial loans was expanded to include corporate financing. Unlike with a traditional untied financial loan, a corporate untied financial loan guarantee can be issued without this being tied to a particular investment project. The requirement for a long-term purchase agreement serving to secure the raw materials’ supply of German purchasers, however, remains.

In 2022, the Federal Government declared nine projects in the raw materials sector worthy of funding. The federation also issued three guarantees. Over the past five years, the federation deemed a total of 26 projects in 15 countries across the globe and involving 9 different raw materials worthy of funding. The highest total amount insured, composed of the guarantees issued in earlier years and still at risk amounted to €8.7 billion at the end of 2022 (including interest coverage), divided up into twelve guarantees. Of this, €7.2 billion was issued for raw materials projects (nine guarantees) and €1.5 billion for transition projects (two guarantees).