TOR – Feasibility Study on the Establishment of a African Credit Rating Agency (ACRA) by the African Union

Terms of Reference for Procurement of Services

Programme Title: Support to African Union Member States in the Area of Credit Rating Agencies

Contract Title: Feasibility Study on the Establishment of a African Credit Rating Agency (ACRA) by the African Union.

1. General Background Information

This study is part of a programme developed and being executed by Africa Peer Review Mechanism (the “APRM”) following a request from the African Union (AU) that an intervention be established to support African Union member states in the area of credit rating agencies. The aim of the study is to undertake an assessment of economic, financial, legal, political and institutional feasibility of establishing an African Credit Rating Agency. Accordingly, therefore, the study thus seeks to determine the legitimacy of the need for such as agency, its unique propositions, structure, legal frameworks, marketing strategy, capitalisation, and a complete technical analysis of key limitations and success factors. The study shall offer conclusions pertinent for determining the feasibility and viability of establishing an African Credit Rating Agency (the “ACRA).

The request for the Study was conceived by the 3rd African Union Specialized Technical Committee on Finance, Monetary Affairs, Economic Planning and Integration in March 2019 as part of the process of developing a policy framework for support to Member States in the area of International Credit Rating Agencies (the “ICRAs”) pursuant of the AU Assembly Decision (the “AUAD”) Assembly/AU/Dec. 631 (XXVII) and the APRM 2016 – 2020 Strategic Plan (the “APRMSP”) on APRM support to Member States in the field of rating agencies.

The policy framework is a guide for establishing and implementing mechanisms for the APRM-coordinated support to African Union (the “AU”) Member States and it seeks to ensure that the methods applied in creditworthiness assessments of African countries are consistently applied and with scientific integrity. The framework further seeks to enhance Member States’ capacity and responding to recommendations from international credit rating agencies. In this regard, therefore, the framework shall, through an APRM-Coordinated programme, support Member States to: (i) prepare for credit rating assessments, (ii) facilitate a systematic credit rating assessment exercise and, (iii) manage the post-rating appeals and implementation of recommendations.

Specifically, the following is a summary of the programme objectives;

1. To sensitize various sectors of Member States on the implications of the sovereign credit ratings on both domestic rated institutions and instruments.
2. To support Member States in undertaking periodic financial, political, economic and social impact analysis.
3. To prepare liaison team for Member States to make available reliable data for use by CRAs to avoid assumption-based estimations that prejudice Member States assessment.
4. To support Member States’ analysis and evaluation of the ratings produced by CRA’s and their impact through generating independent opinions.
5. To facilitate the articulation and establishment of the architecture for managing and regulating CRAs through existing institutions.
6. To establish a network of experts and practitioners for improved sharing of best practices in international sovereign credit ratings.
7. Harmonization of the regulation of the credit rating industry on the continent.
8. To provide technical support to African governments in the implementation of admissible rating recommendations.
9. To provide technical support to Member States in establishment of a regulatory environment to license and supervise CRAs operating within that Member State’s jurisdiction

2. Project Relevant Background

2.1         A historical trend analysis of the dominant three International CRAs

Sovereign Credit Ratings (the “SCRs”) are useful in predicting a country’s economic distress and inform financial markets to correctly apportion sovereign credit risk. SCRs are thus a measure of a country’s economic strength and plays an important role in supporting greater public sector financial transparency as sovereigns seek to improve their credit ratings to reduce borrowing costs and ultimately external debt. Globally, the SCR industry is dominated by only three CRAs – Standard & Poor’s (the “S&P”), Moody’s – which are based in the United States and Fitch which have dual-headquarters in London and New York City. As at 2016, according to the United States’ (the “U.S.”) Securities and Exchange Commission (the “SEC”) report (2016), the dominant three CRAs held a collective 95 percent markets share, equally split between S&P and Moody’s with 40 percent each and Fitch with 15 percent.

S&P is the oldest of the three CRAs, its operations commenced in 1860 when Henry Varnum Poor published his book ‘History of Railroads and Canals in the United States’ in which he introduced a statistical approach of measuring the likelihood of any given company to pay back its debts. In correspondence, another firm, Standard Statistics Bureau was also formed in 1906, which published credit ratings for sovereign debt, corporate bonds and municipal bonds. Standard Statistics merged with Henry Varnum Poor to form Standard and Poor’s Corporation in 1941, which was later acquired by The McGraw-Hill Group of Governments, central banks, national investment promotion authorities and relevant regulatory bodies in 1966. Standard and Poor’s widened its business portfolio into creating indexes such as the S&P 500, a well-known stock market index 2 used for investment analysis or economic indicator and is currently followed by most analysts (Ahern & Painter 2016).

Moody’s was founded by John Moody in 1909 who produced a rating manual with basic statistical analysis and general information about bonds and stocks of various industries. In 1914, Moody transformed into Moody’s Investors Service which also expanded its business into providing credit ratings for nearly all the US government bond markets at that time. By the 1970, Moody’s Investors Service became a full -scale rating agency that was now rating all US government bonds, commercial paper and bank deposits. In 1975, the Moody’s was recognized as a Nationally Recognized Statistical Rating Organisation (the “NRSRO”) by the SEC together with S&P and Fitch. Fitch was established by John Knowles Fitch as a publishing company providing financial statistics to be used in the investment industry in the form of two books; The Fitch Stock and Bond Manual and The Fitch Bond Book in 1913. In 1924, Fitch introduced a credit rating scale of AAA to D rating system that has become the basis for ratings throughout the industry. In 1990, Fitch merged with a London rating agency – IBCA Ltd, a subsidiary of Fimalac, a French holding company which controlled credit rating business in France. Between 2004 and 2010, Fitch also acquired its small competitors; Thomson Financial Bank Watch, Duff & Phelps Credit Ratings Company and Algorithmics as a growth and expansion strategy.

2.2         Credit rating services in Africa

Across the globe, SCRs has become one of the most topical subjects amongst political leaders, economists, investors and ordinary citizens (Hanusch & Vaaler 2013). The underlying assumption to financial market participants is that, the change in a country’s SCR has a direct impact on the overall economy and the wellbeing of all its citizens. In Africa, South Africa was the first African country to receive a sovereign rating in 1994 of BB grade from Fitch and S&P, followed by Tunisia in 1995 assigned a Baa3 grade by Moody’s, Mauritius and Egypt in 1996 were assigned Baa1 and Ba2 by Moody’s respectively. Morocco (BBB-) and Senegal (B+) requested a sovereign rating in 1999 and 2000 respectively, followed by Botswana (A) in 2001, Gambia (B-) and Lesotho (B+) in 2002. By the end of 2003, fourteen African countries had been assigned a SCR including Ghana, Cameroon, Cape Verde, Malawi and Mozambique with support from the United Nations Development Programme (the “UNDP”) initiative (United Nations 2015). As at September 2019, 32 African sovereign states had been assigned a credit rating by either (or all) of the three international CRAs.

3. Scope of activities of the Feasibility Study

The activities and outputs covered by the Terms of Reference provides the concerned decision-makers in the African Union a basis for assessing:

1. Policy options on the establishment of the agency;
2. Investments required to establish the agency and offer the service;
3. Respective roles of the various government, public and private institutions in establishing, regulating and utilising the services of the agency;
4. The legitimacy of the market needs for establishing such an institution;
5. The unique propositions that the agency will leverage;
6. Ownership and management structure a complete technical research analysis of key limitations and success factors.
7. Legal frameworks and regulatory considerations for coherence with African Union instruments;
8. Proposal of a distinctive and comprehensive business model; and,
9. Capitalisation options and financial feasibility of the business model of the agency.

The study and assessments completed under the contract will be synthesised into key findings and recommendations that will; i) facilitate policy and investment decisions regarding the most optimal arrangements and formulation for supporting Member States in the area of credit ratings, ii) be incorporated into a Road Map for the development of a Policy Framework on Support to Member States on Credit rating Agencies. The Road Map is one of the key outputs of the APRM Framework for the support to Member States under which this consultancy has been envisaged.

4. Scope of Contractual Services 4.1 Description of the Assignment

The contract will consist of the following three main aspects.

Output 1: A comprehensive assessment of the business needs of African States in the Area of Credit Rating

The study will assess Member States’ needs of alternative credit rating services, considering the size of financial markets, investment flow, and support infrastructure in their national economies. This needs assessment is essential to the feasibility/pre-feasibility study in order to inform the design of the proposal for a potential agency and to determine the key elements of the environment within which such an agency would operate. The study sample should consist of governments, central banks, national investment promotion authorities, pension funds, key investment firms and relevant regulatory bodies who could be potential clients of the CRA. The study should consider a sample of 10 governments, 5 central banks, 5 national investment promotion authorities and 5 national regulatory bodies, equally representative of all five African Union regions. The sampled governments, central banks, national investment promotion authorities and relevant regulatory bodies covered by the study should meet the following minimum requirements:

1. Be a member of the African Union;
2. Express interest in exploring the possibility of establishing an ACRA
3. Be a country (or from a country) that has received a rating from an ICRA in the last 5 to 10 years.

Prior to undertaking the study, the consultant(s) should begin with the preliminary specification and elaboration of the sample which will be validated by the APRM before the actual implementation of the study. The Consultant(s) shall conduct the study through a desk review, field interviews and a questionnaire that will also be validated by the APRM. The questionnaire should be translated into all four AU official languages (English, French, Arabic and Portuguese). The consultant(s)’s expense and the translation will be validated and borne by APRM prior to the study being conducted.

Deliverable 1.1: Analytical reports on the assessment of the needs of the Member States in regard to credit ratings services.

Results should be contained in analytical report presenting the conclusions drawn from both the desk review and the field level work in selected Member States. Study results should be compiled into a report whose concluding chapter should among others analyse the similarities and differences between the Africa, Latin America, Europe and Asian markets for credit ratings services. The reports will be validated by APRM.

Output 2: A feasibility study covering the following deliverables

1. Strengths, Weaknesses, Opportunities and Threats (the “SWOT”) itemising the key risk and success factors. An analysis of the relevance and effectiveness of the proposed African Credit Rating Agency in the contexts of national, regional and international political economy;
2. A market analysis of the financial markets’ trends and investment patterns in African countries, relative to other regions and internationally;
3. An assessment of the legal instruments, institutional infrastructure support already available and any other essential requirements for the proposed African CRA in Member States, at a regional and continental level;
4. Options for an institutional model for the proposed African CRA, with a clear description of the roles of all potential actors, institutions or parties that may be part of the institutional framework, which may include a single institution or consortium;
5. An analysis of the capitalisation and other investments required to establish the proposed African CRA, with options for joint public/private financing as well as a viable shareholding structure. These must be substantiated with concrete strategy and motivation centred on establishing the much-needed credibility and integrity of the credit rating services that shall be provided by the proposed institution;
6. A distinctive business model and an analysis of the pricing of rating services, financial viability of the agency a scenario and sensitivity analyses of the agency’s viability with regard to public and commercial financing, AU funding or any other proposed funding model;
7. The assessment should be mindful of the need to desist from replicating existing establishments and addressing the challenges faces by African countries in the area of credit ratings. The analysis should provide a strategy on overcoming issues of; conflict of interest, reputation, false ratings and overreliance on ICRAs.

The six subcomponents elaborated above shall form key parts of the consolidated feasibility study while being also distinct deliverables in the course of the implementation of the consultancy. The details and phasing of the deliverables are elaborated in later sections of these TORs. All deliverables will be reviewed and finalized after approval by APRM.

From a technical point of view, the prospective consultant(s) should specify in detail the methodologies they shall use for delivery of the assignment, a pre-designed methodology may be suggested or provided by APRM, as part of the documentation supporting their bid for this contract. These methodologies will need to be approved by APRM prior to the work commencement.

Deliverable 2.1: An analysis of Key Risks and Success factors of an African Credit Rating Agency:

The output of this deliverable will establish a broader perspective of the chances of success, an assessment 5 of the overall potential of the African CRA, for financial market access across African economies. Through this output, a comprehensive SWOT analysis will be conducted at the agency level considering national,

regional and international competition. The analysis will derive from a desk study, field work and interaction with a cross-section of national, regional and international actors, including member states representatives.

Deliverable 2.2: A market analysis

This should be an exploration of the credit rating market on the continent and the market trends and dynamics in the next 10 to 20 years that might either support or hinder the growth of the ACRA or render it irrelevant. The market analysis will be conducted through a market study that will build upon the preceding output by examining, in depth, the prospects for countries. This should specifically encompass the current financial markets size and depth, including the subsectors, the number of public/private/mixed governments, central banks, national investment promotion authorities and relevant regulatory bodies, and should build upon any prior analyses conducted on the subject., The deliverable should be in the form of an analysis of the Agency’s competitive advantage at national and continental level to sustain competition from other globally established CRAs.

Deliverable 2.3: An assessment of key legal frameworks and regulatory requirements:

This deliverable should assess the legal, regulatory and policy frameworks within African coutries as well as other infrastructure and establish the requirements for the Agency to enable the African Union – APRM and governments, central banks, national investment promotion authorities and relevant regulatory bodies to determine its relevance and complementarity. In addition, the study should be undertaken of regional-level CRA both formal and informal, based on the specific Terms of Reference. This will establish a benchmark for availability and assist in defining the legal framework and the competitive advantage

Deliverable 2.4: An institutional model for the delivery and management of the Agency’s services at both national and continental levels:

The consultant(s) should draw upon their own knowledge of international best practices, the institutional and legal realities and current practices in African Union countries and the findings from American, Asian, European and Russian rating agencies in recommending the institutional model. The model should be dynamic and responsive to the needs of potential client; governments, central banks, national investment promotion authorities, pension funds and relevant regulatory bodies. This output should elaborate the possibilities for and constraints within the AU system and in Member States.

Deliverable 2.5: An analysis of the investments required to establish the agency:

Based on contract deliverable 2.3, there should be an assessment of the cost of expertise or consultancy services and other pertinent cost factors including physical infrastructure, this deliverable should elaborate different investment options for establishing the institution that are available to the African Union and governments. Each option should be costed under the appropriate cost factors within the credit rating services and capital markets industry. Given the political and economic context of capital markets in Africa, a phased programme for establishing the Agency can be considered by the consultant(s), specifying the phases, the countries and/or institutions in each phase and the associated investments required.

Deliverable 2.6: An assessment of the African Union institutional needs to establish, develop and promote an African CRA.

Based on the consultant(s)’s findings and in consistency with other project deliverables, this deliverable should assess and make recommendations on the capacity building that is further needed in the African Union system and at the member states level to establish, develop business plans for and promote the ACRA.

Deliverable 2.7: A consolidated feasibility study for the establishment of the ACRA

The consultant(s) will be required to complete a consolidated feasibility study for the proposed ACRA that shall encompass all the above.

Below is an estimated activity timeline:

3.0         Feasibility Criteria

The feasibility criteria and subsequent study outcomes seeks to provide an economically, politically and scientifically credible but also verifiable qualitative and quantitative account of the potential constraints, risks and opportunities to establishing the ACRA. The account shall include, but will not be limited to; i) internal African Union corporate and operational constraints and opportunities in areas such as technical expertise, technological capacity, budget/financial needs, communication, marketing strategy and promotional capacity, the outcomes shall also present an account of the external constraints and opportunities in the political and economic environment at national and international legal and regulatory regimes. The following feasibility criteria should clearly determine a position or path to be taken by the AU, giving evidence and motivation of the im/possibilities of the conclusions made.

Market Feasibility:

This aspect of the TOR seeks the services of a professional market analyst to conduct a market feasibility analysis (market study) for the proposed development and establishment of a credit rating services provider within the African market. The analyst should provide a ‘disinterested’ third party perspective and account for establishment of the ACRA based on the African Union’s competitive position within the African market, while also determining the demand for the proposed credit rating services within the African market.

Technical Feasibility:

The assessment should quality the technical requirements relative to the resources available to the African Union to help AU policy organs determine whether the technical resources meet capacity.. This criterion should specify the characteristics and qualifications for technical experts or institutions that can convert ideas and proposals into working systems for the proposed institution. Technical feasibility should also involve an evaluation of specific hardware, software, and other technical requirements for the proposed agency.

Economic and Financial Feasibility:

This assessment should typically involve a cost/ benefits and risk/return analysis of establishing the Agency, enabling the African Union to determine the viability, costs, benefits, risks and returns associated with the proposal before financial resources are allocated. The conclusions and recommendations should have summative evaluations of a defined position of whether the AU should undertake the project of establishing the Agency or not. The conclusively defined position shall serve as an independent project assessment to either abandon the proposal or enhance its credibility to assist African Union organs to determine the positive economic benefits to Member States that the proposed agency may provide.

Legal Feasibility:

This assessment investigates whether any aspect of the proposed project conflicts with legal requirements like national laws, regulatory bodies, governing documents, data access and protection Acts, established standards and best practices. There should be a comprehensive account of all relevant laws and enactments that must be consider in undertaking this project.

Location Feasibility:

Should the AU opt to establish an organization and elect to construct an office building in a specific location, the feasibility study should reveal the AU’s ideal location for the Agency. This assessment should present a clear mode of determining where the ACRA can be located, identifying key factors that underlies the locational suitability.

4. Methodology

As part of the technical documentation supporting their bid for this contract, prospective consultant(s) should specify the methodologies they will use for conducting the above-listed activities and achieving the outputs/deliverables, unless clearly indicated in the previous sections of this document. These methodologies would need to be approved by APRM prior to the study commencement. Since any pre-feasibility study would closely related to other work done on CRA by international development partners in African Union, the consultant(s) may for such purposes utilise information from previous studies and study’s, already carried out in the frame of this project or conducted in the country in relevant fields. These sources must be shared with the APRM for approval on the contract inception meeting.

The pre-feasibility and feasibility studies will be based on three elements: (i) desk study of available literature relevant to the deliverables; (ii) field visits for data collection with regard to the technical analyses; (iii) in depth qualitative and quantitative data collected from the field visits and literature as to the institutional support and business models that could be adopted in establishing the ACRA. The above will require a high degree of interaction with Member States and ICRAs. In addition, attention should be paid by the consultant(s), where relevant, to regionally established potential competitors.

Each output/deliverable, as elaborated above, should be the subject of specific sub -reports that will be reviewed and approved by APRM.

5. The Consultant(s) or Firm

The consultant(s) should have a demonstrated experience and legal capacity to operate in African Union states. The consultant(s) proposal should specify the nature of the association and linkages between all parties participating in and/or forming a partnership to undertake the assignment.

All experts in this respect will be evaluated and certified by APRM in their individual capacities to perform the activities specified in the bid document.

The consultant(s) should be a citizen of an African Union country or the African Diaspora or a partner of a firm with a registered office in an African Union country.

Required Expertise of Consultant(s)

5.1 Consultant(s) must have PhD in Banking and Finance with bias in sovereign debt management and public finance, or relevant advanced degree(s) with extensive relevant experience as enumerated below.

5.2 Consultant(s) must have strong experience in and understanding of the AU systems, global capital markets and sovereign debt management systems;

5.3 Consultant (s) must have extensive background in establishment of public organisations and financial firms;

5.4 Consultant(s) must have strong understanding of sovereign credit rating methodologies of leading international rating agencies;

5.5 Consultant(s) must have sufficient experience in conducting similar types of feasibility studies with governments and agencies;

5.6 Consultant(s) must have expertise in legal, political economic and financial analysis of financial institutions; and

5.7 Consultant(s) must have strong knowledge about the structure and operations of international organisations particularly the African Union or any other regional body.

6. Guidelines in the Preparation of Eligibility Requirements

The Eligibility Statement of the Consultant(s) or Consulting Firm interested to be considered for the services contemplated shall submitted to the APRM Procurement Committee the following.

6.1 Name of individual or firm, year established or of first assignment, country of registry if foreign, and type of organization whether individual, proprietorship, partnership, corporation or others.

6.2 Name of affiliate consultant(s) or firms, their year established, countries of origin, and type of organization.

6.3 Complete home office, business address, telephone number and cable address. For consultants or consulting firms of foreign registry, indicate if there is any branch office/s established in the South Africa and where established.

6.4 If present firm is the successor to or outgrowth of one or more predecessor firms, type name/s of former entity/ies and the year/s of their original establishment.

6.5 Present a brief narrative description of the consultant profile or the firm.

6.6 Indicate clearly and accurately the names of the lead experts (consultants) or principals of the Consulting Firm and key personnel. This must be accompanied by the curriculum vitae showing experience, professional affiliations and language capability of the key personnel listed.

6.7 List not more than two (2) persons who may be contacted by the APRM. Listed persons must be authorised to undertake dealings on behalf of the team of consultants or the firm on policy and contractual matters.

6.8 Indicate the number of proposed experts for the assignment by discipline. While some experts may be qualified in several disciplines, each person should be listed only once in accordance with his/her primary functions. Under this item, indicate the rate consultancy fees per experts and indicate bank references and bank address.

6.9 Indicate appropriate types of services and fields of specialization the consultant(s) or Consulting Firm is technically and financially qualified to undertake.

6.10       List projects the firm has been engaged in consulting services over the past 10 years.

7. Evaluation Criteria

The selection will be done based on the following criteria.

8. Language Requirements

Must be proficient in one or more of the African Union official Languages

African Peer Review Mechanism Continental Secretariat

230 15th Road Ranjespark Midrand, Johannesburg1687, South Africa

Closing date: 9th May 2020 at 11m RSA time.

APRM is seeking for consultants for Consultancy on Feasibility Study for the Establishment of an African Credit Rating Agency.

Applicants should submit the following;

1. Curriculum Vitae (CV);
2. Expression of Interest;

All applications should be submitted to: [email protected]