The decision to amend local content rules within the OECD Arrangement on Officially Supported Export Credits has been hailed as an “important step” in modernising the agreement, though industry figures have raised concerns over a lack of progress in other key areas of discussions.
The OECD revealed last week that participating members of the Arrangement – which includes countries in the EU, as well as the US, Japan, Canada and Australia – had agreed to increase the maximum local cost support on offer from their ECAs.
For export contracts in high income OECD countries (category one), maximum local cost provisions have risen from 30% of the export contract value to 40%. In all other nations (category two), the percentage of local costs a participating arrangement ECA can cover has been increased to 50%.
A high-ranking official in the export credit sector familiar with discussions on the Arrangement, tells GTR that participating members had initially struck an agreement to amend local content rules in November.
However, they say that the EU needed time to formally approve the changes as the Arrangement is legally binding in the bloc.
Gabriel Buck, managing director at boutique ECA advisory firm GKB Ventures, says the move will “change the dynamics of an ECA financing”.
Pointing to the advantages for companies that export to Africa in particular, he says that the policy change is “important for buyers in the developing markets who not only seek the low-cost benefits of ECA financing but are also keen to see greater local beneficiation”.
Buck tells GTR that exporters in Arrangement member countries in sectors with high construction or labour costs, such as those incurred in road, rail, hospital, water and power distribution projects, will benefit greatly, as will those in the extractive industries.
The move follows years of campaigning to amend the rules by industry bodies, which had long voiced concerns that the Arrangement’s local costs policies failed to reflect global market conditions.
“Current treatment of local costs does not reflect market realities and is especially problematic for large-scale turnkey projects in developing markets where localisation requirements have outgrown the OECD limit,” said a 2019 report from Business at OECD (BIAC), the International Chamber of Commerce (ICC) and the European Banking Federation.
The paper called for an “immediate” increase in the limit on local costs to 50%, and listed a host of reasons for the proposed reform.
Among its justifications, the report pointed to developments such as the localisation of manufacturing and services – including public procurement requirements and “offsets” – the need to be close to customers, increased international sourcing, resource-efficient allocation of supply packages, as well as a lack of commercial long-term lending in local currency.
Sweeping reforms ahead?
In a statement this week, BIAC welcomed the amendments and said the changes are an “important first step for a more fundamental modernisation” of the OECD Arrangement on Export Credits.
However, the group has queried the lack of progress in other key areas of reform discussions.
Created in 1978, the OECD Arrangement – or Consensus as it was previously known – sets limits on the financing terms and conditions a participating ECA can offer for officially supported export credits, as well as any tied aid support.
Countries such as the US, Australia, Canada, Japan, Korea, Norway and those in the EU are some of the main members of the framework, which is described as a “gentleman’s agreement”.
In theory, the rules should ensure that countries around the world compete on a “level playing field” and refrain from dealing a stronger hand to their domestic exporting companies when bidding for export contracts and deals internationally.
But concerns have been growing in recent years that the Arrangement’s power has been waning, and in its 2019 paper with the ICC and the EBF, BIAC labelled the agreement “no longer fit for purpose”.
The trio noted in the analysis that challenges have been posed to the Arrangement by the emergence of powerful export credit systems that are “unbound by Arrangement rules”.
China’s use of export credits has been criticised by the Export-Import Bank of the United States (US Exim), in particular, which in its most recent competitiveness report railed at the fact that China’s medium and long-term export credit activity from 2015 to 2019 was at least equal to 90% of that provided by all G7 countries combined.
“China is fundamentally changing the nature of competition. China is very aggressive, strategically focused, and, unlike the United States and many other countries, not subject to the same international rules and agreements,” the US Exim report reads.
But BIAC’s joint report points out that threats are now also posed to the Arrangement from within, with participating members’ ECAs boosting their use of alternative products that fall outside the purview of “official export credits”.
ECAs have increasingly turned to trade-related programmes such as untied financing, for instance, which doesn’t formally require a buyer to purchase a certain value of products from the ECA’s country of origin.
According to US Exim, Asian countries have shown a “dramatic increase” in untied activity, with Korea’s use of untied support rising a “whopping 1,100% from around US$425mn in 2018 to over US$5bn in 2019”.
Amid this backdrop, BIAC has pushed for around half a dozen immediate reforms to the Agreement, including the now approved increase of local content cover to 50%, as well as raising maximum repayment terms to 18 years, and the introduction of an “easy to define, transparent and predictable CIRR [commercial interest rate of reference]”.
Speaking to GTR, Frederik Lange, policy manager and principal economist at BIAC, says that the local content move is an important step, but there are “other aspects of the Arrangement we hope to see reformed”.
“While these other areas aren’t off the table, it doesn’t seem that there’s much movement currently, despite the hope of increased political pressure on the OECD Arrangement participants following the breakdown of talks at the International Working Group,” he says.
Where next for export credit rules?
The high-ranking official in the export credit sector has confirmed to GTR that negotiations for further possible changes to modernise the Arrangement rules are “ongoing”.
They say that the industry has been seeking more flexibility in repayment terms, pricing and down payment requirements, while those stakeholders particularly concerned with climate change would like to see an end to support for projects related to the fossil fuel industry.
Several European ECAs have recently launched an initiative to stop export credits for fossil fuel projects, but other countries within the Arrangement have been criticised for their continued support of oil, coal and gas deals.
The official declined to comment on whether any Arrangement members are holding up modernisation reforms.
Discussions at the OECD Arrangement on Export Credits have taken on increasing importance this year, amid the decision by a host of Western countries to suspend talks at the International Working Group on Export Credits (IWG).
For years, the IWG had sought to thrash out new rules for governing the use of export credits globally by both Arrangement and non-Arrangement members.
But, in November, a host of Western governments and the European Union said they would step away from technical negotiations as members remained divergent on key issues, such as transparency.
Ralph Lerch, head of export finance at DZ Bank, told GTR at the time that the announcement would likely see a renewed push to modernise the OECD Arrangement instead.
While any reforms to the OECD Arrangement won’t directly affect non-OECD countries, Lerch said that by increasing its relevance, it will create a “stronger position to speak with the Chinese and the other non-OECD countries”.
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