News Letter ww&p

NewsLetter

The Swiss Export Risk Guarantee (Schweizerische Exportrisikogarantie;“ERG”) in its current form no longer fulfils the needs of the Swiss export industry because payment defaults by private purchasers cannot be insured. Numerous privati- sations of government enterprises in importing countries in recent years have resulted in an increase in uninsurable, private purchaser risks.

The proposed new Swiss Export Risk Insurance (Schweizerische Exportrisikoversicherung; “SERV”) will remedy this problem and permit the insurance of private purchaser risks.

Background

The ERG provides coverage for payment default risks which arise through politically or economically unstable or unreliable conditions in importing countries and which

cannot be insured in the private insurance market. In contrast to other foreign export credit agencies (“ECAs”), the ERG cannot ensure private purchaser risks as they are neither covered under the category of insured credit risk in respect of governmental enterprises nor as so-called political risk. Former governmental purchasers supplied by the Swiss export industry with the assistance of the ERG – especially in so-called developing countries, emerging markets and transitional countries – are increasingly privatised.

As a result, the percentage of private purchasers, and therefore uninsured risks, has increased.

This situation motivated Parliament and the Federal Council to comprehensively amend various outdated provisions of the currently applicable Federal Law Concerning the Export Risk Guarantee of 1958 (Bundesgesetz über die Exportrisikogarantie).The draft Federal Law Concerning the Export Risk Insurance (Bundesgesetz über die Schweizerische Exportrisiko- versicherung; “SERVG”)and the message to Parliament

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of the Federal Council (Botschaft)were issued on 24 September 2004. The main feature of the revision is the introduction of insurance for private purchaser risks.

Another important feature is the organization of the SERV as a public law institution(öffentlich-rechtliche Anstalt).

Insurance of Private Purchaser Risks

The current ERG insures only the credit risk in respect of (i) entities established under public law (national or municipal governments), (ii) private enterprises which are completely or substantially owned by public law institutions or which perform public functions and (iii) government owned or privately owned banks which are accepted under the ERG. Indemnity for a payment default resulting from “exceptional governmental action”, according to the ERG Commission, can only be claimed if the not easily fulfilled criteria of “overriding action of the state”, “exceptional economic political measure” and “action which could not have been foreseen” are cumulatively fulfilled.

In practice, the distinction between political and private purchaser risk is often difficult to make, because a dominant influence by governmental institutions (for example, as shareholders) may not be apparent.

In addition, foreign private purchasers are not willing, or because of a weak banking system, not able, to provide adequate payment guarantees from their banks. Further, as a consequence of the development of a global economy, the mobility of production has been increased and therefore foreign production sites are frequently chosen for their competitive advantages.

Small and medium-sized businesses which lack such production mobility are especially dependent on the existence of governmental measures which support international competitiveness such as the SERV. In contrast to the ERG, practically all foreign ECAs, for example the private Euler-Hermes Kreditversicherungs- AGin Germany, insure private purchaser risks. The introduction of insurance for private purchaser should

Comprehensive Revision of the Swiss Export Risk Guarantee

by Dr. Jörg Witmer +41 1 265 75 40 jwitmer@wwp.ch

No. 56 March 2005

NewsLetter

The ww&p NewsLetter provides comments on new developments and significant issues of Swiss law. These comments are not intended to provide legal advice.

Before taking action or relying on the comments and the information given, addressees of this NewsLetter should seek specific advice on the matters which concern them.

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eliminate the current gap in insurance under the ERG and therefore the international competitiveness of the Swiss export industry should be supported.

A purchase order in an export business often is linked with financing which has been provided to the purchaser through a bank or another financial institution. This lender typically pays the purchase price to the Swiss exporter and acquires the exporter’s receivable from the purchaser. The receivable is acquired along with the security provided by the current ERG (or the future SERV). This means that in these situations the insurance, to the extent its terms are satisfied, covers the credit risk assumed by the lender in the same amount as the purchase price. The future possibility of insuring private purchaser risks should make the financing of export transactions more attractive for both domestic and foreign financing banks.

Structure and Organisation of the SERV Providing insurance for private purchaser risks increases the professional demands on the operations of the SERV and the cost of its operations. Acquiring information, evaluating creditworthiness and claims management will become more complex than they are now. In order to meet these increased requirements, the ERG will be reestablished as an independent public enterprise (öffentlich-rechtliche Anstalt). SERV will be supervised by a board of directors of seven to nine members elected for their professional competence.

The board of directors will be subject to personal liability in accordance with corporate law provisions and thus the increased liability required by Parliament for directors of public enterprises will be provided.

The federal administration shall not be represented in the board of directors and accordingly shall not participate directly in business decisions. To ensure that the public interest is served, the Federal Council may appoint a consulting body to the board of directors. The Federal Council can, at the request of the responsible departments of government, issue instructions in respect of extraordinary large transactions.

Conflict Between SERV’s Goals and Legal Restrictions

The foremost goal of the ERG from its inception was the creation and maintenance of jobs in Switzerland by creating the opportunity for, and facilitating ability of, Swiss exporters to compete internationally.

The transformation of the ERG into the SERV will not change this objective.

The SERV is subject to restrictions on how it achieves its goal. It is required (as was the ERG) by the anti-subsidy treaty of the World Trade Organisation, as well as by the budget policies of the federal government, to produce enough revenue to cover its costs . The constitutional principal of economic freedom treats the SERV as a subsidiary commercial activity of the state, which means that the SERV only should be available if the private insurance market does not offer corresponding coverage. Moreover, foreign policy as well as trade policy aspects must both be observed and always be taken into account. Finally, SERV must be inter- nationally competitive.

Necessity of the Comprehensive Revision The expansion of the insurance coverage to include private purchaser risk and the creation of an independent enterprise with its own legal personality for SERV made the comprehensive revision of the previous law unavoidable. Various provisions in current law concerning the transaction of insurance business are not in consonance with actual practice; these laws also are to be revised. If the law passes the remaining parliamentary hurdles, it is expected to enter into force during the second half of 2005.