OECD/Export Credits: Plenary Covers Tied Aid Project,

UNCLAS PARIS 001118 FROM USOECD STATE FOR EEB/IFD/ODF - WILLIAMS AND WEBSTER STATE FOR E - DHUTCHINGS TREASURY FOR TVARDEK, DRYSDALE AND EPSTEIN USDOC FOR RJDONOVAN AND AHAAKENSEN STATE PASS EXIM BANK FOR GALDIZ AND AJENSEN BRUSSELS ALSO FOR USEU - DMULLANEY WHITE HOUSE FOR USTR SENSITIVE SIPDIS E.O. 12958: N/A TAGS: BEXP EFIN ETRD EINV EXIM EAIR ECON OECD KCOR CH IN BR, ET, ID SUBJECT: OECD/Export Credits: Plenary Covers Tied Aid Project, Renewable/Nuclear Power, Aircraft Finance, Environment Ref: A) Paris 0076 ¶1. (SBU) Summary: The OECD's Working Party on Export Credits and Credit Guarantees (ECG) and the Participants to the Export Credit Arrangement (Participants) held their semi-annual plenary sessions and Aircraft Sector Understanding (ASU) meetings in Paris on April 21-25, 2008. The U.S. obtained support from Participants to block a proposed Korean tied-aid project in Indonesia. The U.S. proposed modifications in renewable and nuclear power finance to reduce minimum interest rates and rationalize repayment and term schedules. The Participants pressed the IMF and World Bank on their outreach to non-member countries to promote the Participants' Principles and Guidelines to Promote Sustainable Lending Practices Agreement and negotiated several minor modifications to it. Participants reviewed survey results on environmental practices and discouraged adoption of an environmental peer review process. ASU Participants negotiated with Brazil over credit underwriting standards for state-owned enterprises (SOEs) and progress payment finance. End Summary. Background -------------- ¶2. (U) Although the Export Credit Arrangement (the Arrangement) is not an official Act of the Organization for Economic Cooperation and Development (OECD),the OECD has served as the Secretariat for the Participants since the Arrangement's inception in 1978. The Arrangement sets the most favorable terms that export credit agencies (ECAs) may provide to their exporters, thus ensuring a "level playing field" for exporters and avoiding export financing subsidies, except in cases where provided as genuine aid for commercially non-viable projects (35% or greater grant element). End Background. U.S. Defeats Korean Tied Aid to Indonesia -------------- ¶3. (SBU) The U.S. led a successful effort in the OECD against a Korean tied aid project to Indonesia that would fund Government of Indonesia wi-fi connectivity. The Koreans claimed it as aid and the U.S. delegation countered that the project was commercially viable and financing terms should be limited to commercial terms in the Arrangement. Both the Koreans and the U.S. presented their respective cases and underlying assumptions to the Participants in the consultative group. The U.S. analysis showed that, for an additional $7 million investment on top of the $65 million project cost, the GOI (or a private telecom provider) could add at least ten times the scheduled number of users, generating more than $1 billion in license fees or profits over a ten year period. Korea argued that the $7 million additional investment was outside the scope of its project and the additional users should not be assumed when determining commercial viability. The U.S. argued that under Participants' agreed "Ex Ante Guidance for Tied Aid" that specifies how the analysis of tied aid projects should be conducted, the scope of a project is required to be expanded to fully utilize the capital investment. Therefore, it would be inappropriate not to include the extra investment cost, potential additional users, and the resulting incremental revenues in determining commercial viability. Participants voted as follows: the EU abstained, Japan voted with the Koreans, and all other delegations voted with the U.S. position, giving our position the consensus. Comment: Japan's vote to allow tied aid for this project may signal a fundamental change in its position for Tied Aid Consultation cases and make it more difficult for the U.S. to win them. End Comment. ¶4. (SBU) The Korean delegation did not inform the group how they intend to proceed. Ex-Im Bank reports a U.S. firm is now interested in bidding on the project. Comment: Once Korea informs the Indonesians that the U.S. successfully opposed their concessional financing on this $65 million deal (a $20 million benefit to the GOI),there could be negative ramifications for U.S. companies from the GOI on future procurement opportunities. End Comment. U.S. Proposes Revising Nuclear and Renewable Power Finance -------------- -------------- ¶5. (SBU) The U.S. made a proposal to modify terms under the nuclear and renewable power sectors of the Arrangement in an effort to streamline and rationalize outdated portions of Annex II and Annex IV of the Arrangement and to create parity in minimum interest rates charged to finance nuclear power plant construction. The U.S. proposed simplifying repayment rules so that principal, interest, capitalized interest, and local costs would be repaid on the same amortization schedule. We also proposed reducing the special commercial interest reference rate (CIRR) for nuclear and renewable power 15 year loans for all lenders from 75 basis points to 20 basis points above the CIRR. In addition, the U.S. proposed lengthening standard loan terms from 6 months to 2 years for nuclear reloads. Note: The EU expressed interest in further discussing the U.S. proposals and to possibly start negotiating a broader power sector understanding under the Arrangement to better define terms for all types of power generation systems. End Note. ECG addresses Debt Sustainability Outreach -------------- ¶6. (U) In January 2008, Participants approved expansion of their policy of not supporting unproductive expenditures to all World Bank/International Development Association-Only ("IDA-only") countries by adopting the "Principles and Guidelines to Promote Sustainable Lending Practices in the Provision of Official Export Credits to Low Income Countries (LICs)" (the "Principles"),based on the World Bank and IMF Debt Sustainability Framework initiative (Ref. A). ¶7. (SBU) The Principles are meant to mirror all IMF and World Bank member countries' existing agreements with the World Bank and IMF regarding lending to LICs. ECG members acknowledged that they cannot impose the Principles on non-member countries. ECG members pressed the IMF representative to the ECG, Angelique Guergil, on IMF and World Bank outreach efforts to non-ECG member countries to implement debt sustainability practices in their LIC lending programs. Guergil responded that the IMF has reached out to the most important emerging lenders and received a mixed response. Middle Eastern lending nations showed strong interest in debt sustainability, China was receptive but non-committal, and India showed no interest in applying debt sustainability principles. The U.S. commented that the ECG should focus on the IMF and World Bank leading outreach as "partners" with the ECG. The E.U. commented on the need to engage with high-level Chinese interlocutors, possibly approaching the Chinese on debt sustainability at a high-level event such as the G-20. The ECG unanimously approved involving the IMF and World Bank in future outreach efforts. Debt Sustainability Principles Modified -------------- ¶8. (SBU) The ECG modified some minor points of the Principles agreement. ECG Members agreed that any loan applications remaining uncommitted as of January 4, 2008 (the date of final agreement) are subject to the Principles. Members also defined "public buyer" for purposes of the Principles as "Public buyers comprise the central, regional and local governments and public enterprises whose debt obligations would be assumed by the government in the case of default. In order to determine the status of a buyer in a country that is only subject to IMF concessionality requirements, Members may take recourse to the list of public institutions defined case-by-case in the context of IMF-supported programs for concessionality. For buyers in other LICs, Members are encouraged to consult with the World Bank and IMF in order to determine their status." Environment Survey Results - Members Compliant -------------- -------------- ¶9. (SBU) In June 2007, the OECD Council adopted a Revised Council Recommendation on Common Approaches on the Environment and Officially Supported Export Credits on enhanced measures for reviewing the potential environmental impact of projects supported with official export credits. ECG Members completed a survey on environmental policies and practices and the Secretariat issued a report. Members reported broad compliance with procedures for environmental project review. Member responses are available on the OECD website. Environmental Peer Review Discouraged -------------- ¶10. (SBU) In November 2007, ECG members met with ECA Watch NGOs to discuss NGO concerns regarding ECA environmental practices (Ref. A). The Members asked the Secretariat to analyze peer review mechanisms similar to other OECD committees for ECA projects with significant environmental concerns. The Secretariat reported wide variation in peer review practices within the OECD and recommended choosing between no peer review, a light peer review process or an extensive peer review process involving outside parties. None of the Members felt an extensive peer review process was needed or desirable. The U.S., the Netherlands, and Japan supported a light peer review process. Germany, Austria, Finland, and Korea supported no new peer review process. Other Members remained silent on the issue. The U.S. suggested that other members adopt the Ex-Im Bank policy of disclosing internal environmental analyses on sensitive projects. Local Cost VAT Survey Finalized -------------- ¶11. (SBU) As part of the Participants' agreement to increase the amount of local costs ECAs can finance from 15% to 30% (ref. A),the U.S. requested that a separate survey be conducted on the treatment of Value Added Taxes (VATs) and local duties as local costs. The Participants rejected a U.S. proposed comprehensive survey format as too detailed and cumbersome. The group approved a revised format with results to be submitted to the Secretariat by May 31. ASU - Brazil Raises Prickly Issues -------------- ¶12. (SBU) The Participants to the Aircraft Sector Understanding (ASU) met in Paris at the OECD for their second substantive discussions following agreement to the revised ASU in July 2007. During the meeting, the Participants to the ASU (Australia, Brazil, Canada, European Community, Japan, Korea, New Zealand, Norway, Switzerland and the United States) reviewed the first six months of operation of the new ASU. Reporting data showed between $1.2 and $3.6 billion of Category II and III aircraft were financed over the six months. Participants suggested that the financed amount reporting data ranges needed to be narrowed to carry any significance. Brazil Challenges Airline Credit Standards -------------- ¶13. (SBU) Brazil challenged a proposed Canadian senior unsecured credit rating of B+ on Ethiopian Airlines (EA) for the purchase of Bombardier Category II mid-sized aircraft. ASU Participants discussed Brazil's challenge at length. Brazil insists that EA be rated no better than the GOE sovereign credit rating (a lowest possible OECD country category 7),thereby downgrading EA from Canada's proposed B+ to a CCC or lower. EA currently has Boeing aircraft financed with Ex-Im Bank. Ex-Im Bank rates EA BB-, one grade higher than Canada proposes. The lower credit rating would cost EA millions of dollars in additional, unnecessary financing costs for the aircraft purchase. ¶14. (SBU) Ex-Im Bank's credit rating of EA is based on EA's history of profitable operations, strong balance sheet, ability to maintain hard currency accounts overseas, independent management and perfect payment history with Ex-Im Bank. The GOE does not guarantee aircraft loans to Ex-Im Bank, nor would they under the proposed Canadian financing terms. Brazil argues that, as a wholly state-owned enterprise (SOE),the Ethiopian government can manipulate the management and destroy the balance sheet at its whim and that no SOE should carry an unsecured rating above the sovereign. Brazil contends that past performance of an SOE is no guarantee of future performance and political situations in developing countries can change quickly and cause rapid SOE credit deterioration back to the sovereign level. Independent credit rating agencies (such as Standard & Poor's, Fitch and Moody's) have previously issued public opinions and stated to Ex-Im Bank that SOEs can carry better unsecured debt ratings than their sovereign governments by meeting certain criterion specified by those rating agencies. ¶15. (SBU) On instructions from Brasilia, the Brazil delegation did not compromise despite EU, Canada, and Japan support for the U.S. position that Brazil's rating of EA as the same as the sovereign is not reflective of the actual EA risk. Under the ASU, Brazil's position would force an independent credit rating agency to set the rating. This will cost EA several hundred thousand dollars and risks Ex-Im Bank's current credit rating of EA, as all Participants would need to use the credit agency rating. ¶16. (SBU) Comment: A Brazilian victory would potentially cost all state-owned airlines in developing countries with higher credit ratings than their governments tens of millions in unnecessary aircraft financing expenses. Besides Ethiopia, Kenya, Morocco, and Senegal are examples of countries whose airlines could be affected. Ex-Im has the logical argument, but Brazil sees it as a "level playing field" issue. Brazil's ECA has a higher cost of funds than its Canadian competitor and increasing the across-the-board cost of aircraft finance for developing countries makes Brazilian aircraft more cost competitive. However, Brazil risks a negative reputation among third world aircraft buyers if EA is forced to pay significantly higher borrowing costs for new aircraft due to this action. End Comment. Brazil Objects to Canadian Down Payment Finance -------------- -------------- ¶17. (SBU) Brazil also complained about the Canadian ECA practice of financing deposits for buyers prior to completion of the aircraft. The U.S. took the position that loans secured by the partially completed aircraft, could finance progress payments up to 85% of the cost of the aircraft. However, if the loans are unsecured, they are not allowed under the ASU. ASU Participants did not come to a conclusion as to how to treat progress payment loans but agreed that official support should not be permitted for the 15% down payment. ¶18. (U) Delegation participants cleared this cable. EGAN