Eastern and Southern African Trade and Development Bank - Non-Honoring of Financial Obligations – Regional Development Bank
On June 29, 2020, MIGA issued a guarantee for approximately EUR 359 million to cover Standard Chartered Bank, MUFG, SMBC, Citibank, and other financial institutions yet to be identified (the Lenders) for their non-shareholder loan investments in the Eastern and Southern African Trade and Development Bank (“TDB”), formerly known as PTA Bank. The guarantee was issued for a period of 10 years against the risk of non-honoring of financial obligations by a regional development bank (“NHFO-RDB”).
TDB is a regional development bank operating in the Tripartite Free Trade Area (“TFTA”) comprising the Common Market for Eastern and Southern Africa (“COMESA”), the East African Community ("EAC") and the Southern African Development Community ("SADC"), providing trade and project finance solutions to private and public borrowers. TDB aims to foster economic integration in the region through support of trade, infrastructure development, and private sector growth. TDB also supports national development agencies by co-financing their projects.
Under this project, the Lenders will extend a loan facility denominated in Euros to TDB to support the growth and diversification of TDB’s trade finance portfolio (the “Project”). The facility includes EUR 50 million specifically earmarked for on-lending toward COVID-19 response activities.
The Project has been classified as FI-2 according to the MIGA Policy on Environmental and Social Sustainability.
The Project is categorized as FI-2 according to MIGA’s Policy on Environmental and Social Sustainability (2013) because the use of proceeds is targeted to trade finance (“TF”) products, which are expected to have potentially limited adverse E&S risks and impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures. Also, the proceeds of the MIGA-guaranteed loan will not be used for project finance or any high-risk activities that involve (a) involuntary resettlement; (b) potential adverse impacts on Indigenous Peoples; (c) significant adverse risks to or impacts on the environment, community health and safety, biodiversity, cultural heritage; or (d) significant occupational health and safety risks.
TDB conducts two major types of lending activities: (1) trade finance loans and other non-lending products such as Letters of Credit (“LCs”), which generally have maturities of less than a year to a maximum of 36 months; and (2) project and infrastructure finance loans with maturities from three to a maximum of 15 years. As of the end of December 2019, TF represented approximately 60% of the TDB portfolio and project and infrastructure finance the remaining 40%. TDB further indicated that, based on pipeline and corporate strategies, TF is likely to remain at approximately 60-70% of the portfolio, depending on the circumstances and opportunities present from year-to-year.
As the MIGA-guaranteed loan will target TF, MIGA analyzed the TF portfolio of TDB for types of transactions, tenor, size, industry sectors, and exposure to MIGA’s Exclusion List. Approximately 62% of TF exposure is to sovereigns, while the remaining 38% is to corporates, small and medium enterprises (“SMEs”), and Financial Institutions (“FIs”) (“non-sovereign”). The average loan size is US$130 million, the median loan size is approximately US$30 million, and all tenors are less than 3 years.
Sovereign exposure is comprised of 3 products: FI line of credit (60%); commodity finance (37%); and asset financing and leasing (3%). Most sovereign exposure is through import LCs. Non-sovereign exposure is primarily FI line of credit (37%), export finance (29%) and structured trade and commodity financing (15%). Approximately 92% of non-sovereign exposure is import and export LCs, and the remaining 8% is working capital loans, guarantees and discounting and forfaiting. In terms of sector exposure, oil and gas comprises 50% (about 60% of sovereign exposure and 30% of non-sovereign), agricultural products (i.e. grain and wheat) and inputs (e.g. fertilizer) comprise 35% (about 40% of sovereign and 30% of non-sovereign) and banking and financial services comprises 10% (25% of non-sovereign exposure). All oil and gas exposures are LCs for import (bulk transportation) of petrochemical products.
Approximately 51% of TDB’s TF portfolio is through partnerships with regional and local FIs in borrower countries (i.e. the FI line of credit). In addition to reviewing the underlying transactions, TDB has an extensive vetting process for their partner FIs, which includes review of credit risk analysis, corporate governance, anti-money laundering, and environment and sustainability policies and procedures. Following the vetting process, TDB establishes limits for individual FIs for various TF products, such as LC confirmation and discounting; forfaiting, guarantees and trade loans. Depending on the outcome of the review, as a condition of the facility, TDB may also require the FI to undertake capacity improvements, such as engaging new staff with required skills and experience, improved credit analysis and monitoring. TDB also plans to start offering technical assistance to its clients through the TDB Academy.
TDB uses an Exclusion List that is largely consistent with MIGA’s, and only has some exposure to Production or trade in tobacco. TDB also does not have exposure to palm oil. There is one indirect exposure to coal of US$16 million. There are no upstream oil and gas exposures in the TF portfolio; however, there are a small number of upstream oil and gas exposures in the project and infrastructure finance portfolio. As a condition of the MIGA guarantee, TDB will issue internal guidance to formalize its position on coal and coal-related projects, and the proceeds from the MIGA-guaranteed facility will not be used for coal or coal-related projects.
Given the risk in the TF portfolio, the applicable E&S requirements for the TF portfolio are the MIGA Exclusion List, applicable national environmental and social laws and regulations, and MIGA Performance Standards, as applicable. TDB will cap exposure to Exclusion List activity Production or trade in tobacco and will ensure that the MIGA-guaranteed facility is not used for such activity.
TDB has a comprehensive Environmental and Social Management System (ESMS), February 2020 with an Environmental and Social (“E&S”) Policy that clearly articulates institutional commitments to integrating E&S sustainability across all its operations, and a clear process flow, roles and responsibilities and procedures that are linked to credit and investment cycles. The ESMS includes the IFC Performance Standards (2012) among the applicable E&S standards against which all potential investments are reviewed and evaluated. The ESMS, which applies to all TDB transactions (including TF), is reviewed annually by an independent third-party to ensure that it is adequately implemented and continues to be in line with international best practice. TDB’s ESMS is implemented by an E&S unit staffed with three people: ESMS Manager;; E&S Coordinator; Specialist. TDB also maintains a pool of qualified E&S Consultants, who can be called upon to assist in conducting E&S reviews and monitoring as appropriate. In addition, TDB is currently developing a comprehensive sustainability policy framework, which will integrate E&S, economic, development impact and climate commitments.
TDB has a Business Continuity Plan (“BCP”) in place and emergency preparedness and response plans (including fire and life safety) for its own facilities, which are consistent with the requirements of Performance Standard 1.
TDB’s ESMS, which is publicly disclosed on its website, includes a section on stakeholder engagement, which places the responsibility for engagement and disclosure on its clients. Clients are required to have proactive engagement with stakeholders and information disclosure at the community/beneficiary level. The ESMS also includes specific provisions that require clients to establish a mechanism to receive and facilitate the resolution of affected people’s concerns and grievances. TDB’s website offers a mechanism for stakeholders to provide feedback on the ESMS and implementation of the ESMS with respect to its projects; however, the ESMS does not currently include any disclosure requirements for TDB. Any grievances received through the website are sent to the head of Enterprise Risk Management within TDB, and then directed to the ESMS team, as appropriate. TDB’s Annual E&S Development Reports are not currently disclosed to the public; however, as part of the new Sustainability Framework, TDB will develop a disclosable Sustainability Report.
TDB has comprehensive Human Resource (“HR”) Policies and procedures in place, which include non-discrimination and equal opportunity, and are in line with the requirements of Performance Standard 2. HR operations are centralized in Nairobi and there is a minimum HR policy standard has been established that applies to all employees regardless of location. This minimum standard ensures that all employees are treated equitably while also ensuring that the requirements of each host country are met. TDB also has a formal whistleblowing mechanism and a non-retaliation policy in place. As a multi-lateral, TDB has a robust employee grievance mechanism in place, which includes multiple escalation levels and an independent arbitration process, if needed. There are annual compulsory HR trainings for all staff.
Based on MIGA’s review and applicable E&S requirements, an environmental and social action plan (“ESAP”) will be agreed with TDB prior to entering a MIGA guarantee and will be implemented within an agreed timeframe to ensure compliance with applicable MIGA Performance Standards. Key measures identified to address the requirements of an Environmental and Social Management System (“ESMS”) include:
- TDB to update its ESMS to include requirements and procedures for:
- Stakeholder engagement and information disclosure; and
- Public disclosure of its grievance redress procedures and grievance receipt interface.
- TDB to update its E&S requirements for the TF products to include MIGA’s E&S requirements.
- TDB to update its FI vetting process to include consideration of labor and working conditions in line with MIGA Performance Standard 2.
TDB will report periodically to MIGA on the breakdown of the TF portfolio, implementation of the ESMS and the implementation of applicable E&S requirements.
The principal development benefit of the Project is to mobilize commercial financing for TDB to expand its trade finance activities, namely providing needed capital to local banks, private enterprises, and state-owned entities in low-income (“IDA”) and fragile and conflict-affected (“FCS”) countries within the COMESA region and the wider TFTA. By supporting trade flows from, to, and within the TFTA, TDB trade financing enables imports and exports critical to economic resilience of its member countries while supporting the TFTA’s drive toward regional integration. Finally, TDB has the potential to transfer technology, expertise, and best practices in operations, governance and sustainability to its borrowers, especially member country financial institutions.
MIGA supports its clients (as defined in MIGA Policy on Environmental and Social Sustainability) in addressing environmental and social issues arising from their business activities by requiring direct investment clients to set up and administer appropriate grievance mechanisms and/or procedures to address complaints from Affected Communities. MIGA support to Financial Intermediary clients applying the Performance Standards are required to develop External Communications Mechanisms to receive and review inquiries or complaints from any interested party regarding the E&S risks and impacts of their operations as per the requirements of Performance Standards 1.
In addition, Affected Communities have unrestricted access to the Compliance Advisor/Ombudsman (CAO), the independent accountability mechanism for MIGA. The CAO is mandated to address complaints from people affected by MIGA-guaranteed business activities in a manner that is fair, objective, and constructive, with the goal of improving environmental and social project outcomes and fostering greater public accountability of MIGA.
Independent of MIGA management and reporting directly to the World Bank Group President, the CAO works to resolve complaints using a flexible, problem-solving approach through its dispute resolution arm and oversees project-level audits of MIGA’s environmental and social performance through its compliance arm.
Complaints may relate to any aspect of MIGA-guaranteed business activities that is within the mandate of the CAO. They can be made by any individual, group, community, entity, or other party affected or likely to be affected by the environmental or social impacts of a MIGA-guaranteed business activity. Complaints can be submitted to the CAO in writing to the address below:
International Finance Corporation
2121 Pennsylvania Avenue NW
Washington, DC 20433 USA
Tel: 1 202 458 1973
Fax: 1 202 522 7400