What is an ECA, and why are they so important?
ECAs are government-owned insurance companies that provide political and commercial risk cover to banks. They do so in order to help mitigate the risks associated with a project financing transaction. If the perceived benefits of the project financing (e.g. additional jobs, foreign direct investment, and economic development etc.), justify the cost of providing the political and commercial risk insurance cover, then ECAs would provide such risk cover.
If a bank wished to enter into a financing deal where they would provide funding to a domestic exporter, they would approach an ECA to provide cover on the bank debt provided to the exporter. The ECA's would then charge an insurance premium for providing the political and commercial risk cover on the debt. This premium would be paid by the domestic exporter. However, through some clever deal structuring, banks are often able to capitalize all of these insurance premiums into the upfront loan amount provided to the exporter, hence the premiums paid to the ECA do not cause a negative cash flow effect for the exporter, especially during the early phases of the project financing.
What is a DFI, and why are they so important? DFIs are large global organizations that are usually funded by a host of signatory countries. They provide development funding for projects that would benefit their signatory countries, but where commercial funding for such projects would not be available due to political or commercial reasons. DFIs played a key role in unlocking transactions that would not otherwise have been fundable through commercial means. For this reason DFIs should be considered as an important source of capital in the project financing arena.