Mahíd 2000, a structural engineering subsidiary of Vegyépszer Group went bankrupt early this month, just two weeks after its parent company Vegyépszer Hungária filed chapter 13 bankruptcy. Their management explained both bankruptcies with the collapse of their Libyan mega-project, a €300 million (HUF 80 billion) infrastructure investment in Az-Zawiya. The news was somewhat shocking as Vegyépszer had been the number one Hungarian highway contractor in the early 2000s with annual income amounting to hundreds of billions of forints.
What happened? Did they not have an insurance policy for their foreign investments? Or were there other, unpublicized problems on top of the Libyan ones? - BBJ asked Hungary’s state owned foreign trade insurance company MEHIB about Vegyépszer. “It is a business secret whether or not a client has an active insurance policy with us for a specific purpose”, Csaba Simon, managing director of MEHIB told the BBJ. “On the other hand, it is not worth inquiring at other transnational insurance companies because Vegyépszer has certainly not filed a policy for political risk management at any of them,” Simon added.
A 1994 law grants a government guarantee for MEHIB’s insurance products targeted at Hungarian firms which invest or trade in “non-marketable” (i.e. high-risk) regions. This fact gives MEHIB such an advantage in the insurance market that insurance companies such as Hermes or Coface have not even attempted to set up political risk management branches in Hungary.
According to a source familiar with Vegyépszer’s Libyan deal, the company does have a policy with MEHIB. The real question is what conditions they filed it with – and in what installments the Libyan government was supposed to pay for the development. “Tripoli’s advance payment of HUF 1.5 billion has allegedly landed on Vegyépszer’s account at Eximbank already,” a source claimed. “The only problem is that Eximbank refuses to pay it to Vegyépszer as the company, due to the current political situation in North Africa, is unable to provide written proof of the partial completion of its infrastructural development project in Libya.”
Political risk management is an extremely costly service. “Even transnational insurance companies demand high insurance fees, but in the case of monopolistic companies like MEHIB, the insurance fee may add up to one-third of the value of a given company’s total investment. “Export insurance is based on a risk insurance principle: one-time danger is devolved to a longer period of time and to the other clients of the insurance company,” György Orosz, sales manager of MEHIB told the BBJ. Investment insurance, however, differs from export insurance in that the degree of risk is practically impossible to estimate.
In marketable regions, the insurance fee is usually not much higher than that of factoring. In the case of political risk, however, factoring no longer serves as a benchmark; insurance companies can demand as much as companies are able to pay. For this reason Hungarian companies involved in Libyan investments such as UVATERV and Er-Petro have chosen a different solution in order to devolve their operational risk. Peter Csontos, managing director of geo-hydrological consulting company Er-Petro told BBJ that they had signed a contract with a factoring company well embedded in North Africa which collects payments from their clients in that region. “Civil war in Libya has been blocking the payments coming from our clients, but we hope that after the normalization of the situation, business conditions will be restored as well. We could not expect more than that from a political risk management policy either.”
The Libyan operations of UVATERV date back to the mid-1980s. At that time, the only way to trade with foreign companies or provide services to foreign countries was through Tesco Consulting. “UVATERV continued to maintain its mutually advantageous relationships with Tesco in the 1990s as well. For example, the two companies competed jointly for the planning and building of the subway in Tripoli, and eventually won the tender,” László Pados, managing director of Tesco Consulting said.
The 18-million-dollar enterprise won in 1990 was, however, not fully paid by the Libyan state. “We had to wait 15 years for the full payment of the sum. Throughout the whole period Tesco kept its office open in Tripoli, not letting the credit lapse”, Pados quotes this as a positive example of risk management. UVATERV also won a 11-million-dollar tender for the Benghazi subway system in 2007. “In that case, only the last installment of CHF 1 million ($1.1 million) has not been paid by the Libyans because of the civil war”, he said.
One lesson of the UVATERV story for Vegyépszer is that large foreign trading companies can potentially provide help in risk management. The other lesson is that the political turmoil in Libya does not automatically mean the loss of credit; the payment for the infrastructural development in Az-Zawiya may still arrive – supposing Vegyépszer lives to see it.
This article was originally published in the June 17, 2011 issue of the Budapest Business Journal.