OECD/Export Credits: Debt Sustainability Agreement Adopted;

UNCLAS PARIS 000076

SIPDIS

FROM USOECD

STATE FOR EEB/IFD/ODF - WILLIAMS AND WEBSTER
STATE FOR E
STATE FOR OES/ENV
TREASURY FOR TVARDEK, DRYSDALE AND EPSTEIN
USDOC FOR RJDONOVAN
STATE PASS EXIM BANK FOR GALDIZ
BRUSSELS ALSO FOR USEU - DMULLANEY

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: BEXP EFIN ETRD EINV EXIM EAIR ECON SENV OECD KCOR
CH, IN, BR, IS, SF, SI

SUBJECT: OECD/Export Credits: Debt Sustainability Agreement Adopted;
Local Cost Financing Increased

Ref: A) 2007 Paris 2096; B) 2007 Paris 2162; C) 2007 Paris 2364


1. (SBU) Summary: The Members of the Organization for Economic
Cooperation and Development's (OECD) 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 November 5-9, 2007. The ECG Members negotiated a set of
Principles and Guidelines to Promote Sustainable Lending Practices
based on the IMF and World Bank Debt Sustainability Framework
Initiative with non-member country (NMC) representatives from China,
Brazil and South Africa in attendance. The Members adopted, ad
referendum, the final draft of the sustainable lending principles on
January 4, 2008. In addition, the ECG approved a survey on
environmental practices, and finalized a survey on measures to
combat bribery. In their meetings, the Participants agreed to
increase the amount of local costs export credit agencies (ECAs) can
finance from 15 percent to 30 percent. The ECG and Participants met
jointly with Civil Society Organizations to brief them on the full
range of issues being discussed in the ECG and Participants. ECA
Watch, an NGO, staged a pre-organized walk-out (45 minutes after the
scheduled ending of the meeting). The Participants to the new
Aircraft Sector Understanding (ASU) approved in July 2007 (Ref. B)
agreed to further clarifications. End Summary.

Background
--------------


2. (U) Although the Export Credit Arrangement is not an official Act
of the 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 may be provided by
ECAs to their exporters, thus ensuring a "level playing field" for
exporters and avoiding export financing subsidies, except in cases
where provided as genuine aid (35 percent or greater grant element).



3. (U) The OECD Council originally adopted the Recommendation on
Common Approaches on the Environment and Officially Supported Export
Credits in December 2003. The ECG agreed on June 2007 to update
environmental standards on the Common Approaches for projects
receiving official export credit agency (ECA) support (Refs. A and
C) partly in response to the International Finance Corporation's
(IFC's) development of new performance standards. End Background.

Debt Sustainability Addressed by ECG
--------------


4. (SBU) At the request of several of the ECG Members and the World
Bank and IMF, the ECG decided to expand its policy of not supporting
unproductive expenditures to all World Bank/International
Development Association-Only ("IDA-only") countries. The ECG put
forward a proposal for the Members to adopt a set of "Principles and
Guidelines to Promote Sustainable Lending Practices in the Provision
of Official Export Credits to Low Income Countries (LICs)" based on
the World Bank and IMF Debt Sustainability Framework Initiative.
Representatives from the World Bank and IMF discussed the merits of
the proposal and the difficulties with implementation as written.
After exchanging views, the ECG Members revised the proposal several
times to reflect various concerns. Several Participants (Germany,
Denmark, Austria, Spain and Japan) reserved the right to make
comments on the final document up to November 30, 2007. After
incorporating comments into the final draft on December 13, the
Chairman declared the final version approved on January 4, 2008.


5. (SBU) The debt sustainability guidelines and principles are meant
to mirror Participants' existing agreements with the World Bank and

IMF regarding lending to LICs. The Statement of Debt Sustainability
Principles is as follows (begin statement):


A. The financial environment for low-income countries has changed
significantly over the past few years. Thanks to increased official
financing flows, successive rounds of debt relief, favorable
commodity markets and the impact of financial globalization,
external financing opportunities - including non-concessional
official export credits - for low-income countries (LICs) have both
expanded and diversified. While this is welcome, history shows that
borrowing booms can end up hindering development if resources are
not well used.


B. Although debt relief has significantly reduced debt ratios in
many LICs, many other economic circumstances remain largely
unchanged and these countries face real challenges in terms of
budgetary, project, and debt management capacities. Most outlays
related to the Millennium Development Goals (MDG) do not, by nature,
generate sufficient cash flow to the government in the near term to
service official non-concessional debt. Accordingly, Members of the
ECG acknowledge that concessional lending generally remains the most
appropriate source of external finance for most LICs.


C. Bearing the above in mind, ECG Members agree that the provision
of official export credits to public and publicly guaranteed buyers
in LICs should reflect Sustainable Lending practices (i.e., lending
that supports a borrowing country's economic and social progress
without endangering its financial future and long-term development
prospects). In consequence, such lending should generate net
positive economic returns, foster sustainable development by
avoiding unproductive expenditures, preserve debt sustainability and
support good governance and transparency.


D. In order to promote coherent government policies as donors and as
shareholders of international financial institutions and to ensure
that official export credits to LICs are consistent with Sustainable
Lending practices, ECG Members agree to apply the following
principles to obtain reasonable assurances that their commercial
lending decisions are not likely to contribute to debt distress in
the future in relation to any official export credit with a
repayment term of one year or more:

a. ECG Members will observe any applicable minimum concessionality
requirements of LICs to the IMF and to International Development
Association (IDA); these requirements are intended to help reduce
debt distress risks. Countries subject to the concessionality
policy of IDA include all IDA-only countries which are receiving
grants from IDA, i.e. countries that are at moderate or high risk of
debt distress according to IMF/World Bank Debt Sustainability
Analysis (DSA),in addition to IDA-only countries which have
benefited from the Multilateral Debt Relief Initiative.
Concessionality requirements are a standard feature of IMF-supported
programs and apply to all sectors of activity.

- A consolidated list of countries that are currently subject to
concessionality requirements from the IMF and/or IDA will be made
available to Members. This list is subject to change, and will be
updated regularly.

- As a result, Members will provide support for non-concessional
credits only in as far as this will allow borrowers (to continue) to
meet the relevant concessionality restrictions requirements. To help
with this process, the IMF and the World Bank have established
dedicated mailboxes to channel inquiries on their concessionality
requirements by ECG members, and quick responses would be expected.

b. For those IDA-only countries without concessionality requirements
to the IMF and to IDA, ECG Members agree that the provision of
official export credits should take into account the results of the
most recent IMF/World Bank country-specific debt sustainability
analyses (DSAs) conducted within the joint Debt Sustainability
Framework.

c. Good governance is a key ingredient of sustainable development
while transparency reduces the risks of misuse of public resources.
ECG Members will seek assurances from government authorities in the
buyer country for any transaction involving a public or publicly
guaranteed buyer in a IDA-Only country or a country with an IMF
concessionality requirement with a credit value exceeding SDR five
million and a repayment term of two years or more that the
project/expenditure is in line with the country's borrowing and
development plans (e.g. consistent with its Poverty Reduction
Strategy Paper [PSRP] and/or the budget) following the procedures
set forth by the national legislation (e.g. Parliament approval,
where required). In line with previous principles, ECG Members also
will refrain from providing support for unproductive expenditures.
In terms of transparency, ECG Members will continue to:

- provide data on transactions supported to IDA-Only countries for
review on an annual basis, in order to assess ECG Members' success
towards ensuring that official export credits to low-income
countries are consistent with the aims of the Debt Sustainability
Framework for these countries, and

- via the OECD Secretariat, such data will be shared with the IMF
and World Bank staffs on an ongoing basis.


E. ECG Members stress that the Principles will bring their full
benefits only if all creditors act in broad harmony together. In
this regard, ECG Members invite non-OECD Members to adopt these
principles and to participate in further discussions and the ongoing
review of experience in their application. In addition, ECG Members
agree to share and discuss information amongst themselves, the World
Bank and the IMF and any non-OECD Member who applies the principles
on their implementation and any problems raised by possible
non-adherence to them. ECG Members call on the IMF and the World
Bank to pursue their own outreach efforts to non-OECD Members and
private creditors to ensure that their lending practices are
consistent with debt sustainability. (End Statement)


6. (SBU) During the meetings, several of the Participants,
especially Germany, called for NMC support prior to the ECG adopting
any agreement on debt sustainability. The NMCs in attendance
actively participated in the discussion. While voicing support,
NMCs made no commitments to the debt sustainability principles. The
guidelines specifically call for the ECG through the Secretariat and
the IMF/World Bank to reach out to NMCs to encourage their ECA
acceptance of debt sustainability. The ECG secretariat plans
meetings in February with several NMCs to ask for their acceptance
of debt sustainability.

Proposal to Increase Financing of Local Costs Approved
-------------- --------------


7. (SBU) The Canadian delegation reintroduced a proposal to increase
local cost support by an additional 15 percent, which would enable
ECAs to finance 85 percent of the export value of the contract plus
up to 30 percent for local costs. Many of the ECAs from smaller
members have been pressing for more liberal local cost rules and
this proposal had been tabled since the April Plenary Meeting. The
U.S. delegation noted that increasing support for capital goods that
would otherwise have been U.S.-sourced remains a very sensitive
issue since it raises budgetary costs while reducing the amount of
exports financed. The OECD's Business and Industry Advisory

Committee (BIAC),voiced its support for a liberalization of the
OECD local cost rules. AFL-CIO representative Owen Hernstadt
responded, warning Participants of negative impacts the change would
have on their own domestic economies from reduced exports. The
proposal was widely supported by the all of Participants.


8. (SBU) Several Participants stated that there is a growing
financing gap between OECD and non-OECD countries, with non-OECD
countries offering longer terms, lower rates, and not applying any
anti-bribery, environmental or debt sustainability standards.
Non-OECD ECAs were mentioned as applying the minimum WTO
anti-subsidy standards and as not providing any caps on financing
local costs in support of their exports. The U.S. delegation
proposed adopting the proposal on a 3-year trial basis, with
additional reporting on the nature of local costs exceeding 15
percent, which was accepted. A separate survey will be conducted on
the treatment of Value Added Taxes and local duties as local costs.
Comment: Ex-Im Bank receives few requests to finance local costs
beyond 15 percent. However, organized labor considerations may not
permit Ex-Im Bank to increase its capacity to finance local costs
beyond 15 percent, creating a possible future competitive
disadvantage for U.S. exporters. End Comment.

ECG Participants Consult with ECA Watch
--------------


9. (SBU) The Participants and ECG held a consultative meeting with
the OECD's Business and Industry Advisory Committee (BIAC),Trade
Union Advisory Committee (TUAC),and 10 NGOs (mainly environment
focused) under the umbrella name ECA Watch. ECA Watch had issued a
series of letters to the ECG prior to the meeting expressing the
views that: the ECG's environmental policy lacks coherence, the ECAs
ignore environmental concerns in project selection, the ECG lacks a
peer review system for environmentally sensitive projects, the ECG
Members are inconsistent in their adherence to environmental and
anti-bribery and corruption policies, and the Participants are also
non-compliant with WTO trade subsidy requirements that ECAs operate
at least on a break-even basis. The Secretariat addressed each of
these issues in letters prior to the meeting.


10. (SBU) During the meeting, ECA Watch members spent less time
pursuing their written complaints and focused on individual Members'
projects they find objectionable, specifically the Ilisu Dam
hydroelectric project in Turkey and the Sakhalin II oil and gas
project in Russia. Members tried to keep the discussion to more
general environmental concerns but the Austrian delegation
specifically addressed the logic behind the approval of the Ilisu
Dam project. The discussion was unusually open and engaged. After
the meeting had run over by one hour, ECA Watch walked out in
protest over a stated lack of willingness of the Members to include
ECA Watch member input in their lending decisions. A "letter of
regret" from ECA Watch was delivered to the ECG 40 minutes after the
meeting ended, making the walk-out appear particularly staged.


11. (SBU) The ECG Chairman drew four conclusions from the meeting.
The Secretariat will look at peer review mechanisms similar to other
OECD committees for ECA projects with significant environmental
concerns. ECG Members should deepen bilateral contacts with NGOs in
capitals. The ECG's environmental practitioners can engage NGOs at
a technical level to build a body of experience in implementing the
OECD Recommendation on the environment and export credits. ECG
members should continue dialogues with ECA Watch members at the
national and OECD levels.

Environmental Survey - Member Comments
--------------

12. (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. Members discussed proposals for
changes to the ongoing survey of their environmental policies and
practices to reflect the provisions of the Recommendations with the
intention of finalizing the survey before the end of the year.
Members will be asked to complete the survey by February 2008 and a
report will be prepared for the April 2008 plenary meeting, after
which the responses will be made available on the OECD website. The
IFC reported progress on the implementation of its environmental and
social Performance Standards (which are specified in the
Recommendation).

Anti-corruption Survey Finalized
--------------


13. (SBU) In December 2006, the OECD Council adopted a
Recommendation on Bribery and Officially Supported Export Credits.
Members finalised and completed a revised Survey on their policies
and practices with regard to anti-bribery measures. Members
discussed their responses to the review and these have been made
available on the OECD website.

14. (SBU) In a related event, Brazil (which is not a member of the
OECD but is a participant in the ASU) accepted the Recommendation on
Bribery and Officially Supported Export Credits as it applies to
aircraft finance. Brazil also agreed to provide information and
participate in surveys as they apply to civil aircraft.

ASU - Further Agreements and Clarifications Reached
-------------- --------------


15. (SBU) The Participants to the Aircraft Sector Understanding
(ASU) met in Paris at the OECD for their first substantive
discussions following the implementation of 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 months
of operation of the new ASU and expressed general satisfaction with
the implementation process. The Participants also held a first
discussion on possible enlargement of participation in the ASU in
the light of the production by Russia and China of regional jets, as
well as on the first review of the ASU scheduled for 2008.


16. (SBU) The Participants also discussed a number of technical
questions relating to the interpretation of the ASU in order to
clarify some outstanding issues. They were informed of views
submitted by the Aviation Working Group requesting clarification on
a number of points in the ASU. The US and Canadian delegations
raised several points for clarification as well. The most
controversial point was Canada's request, supported by the United
States, to eliminate or report ex post borrower risk rating
reporting requirements for transactions under $10 million in order
to speed up loan approval times. The Brazilian delegation strongly
objected, citing the possibility of stringing together a series of
small transactions to the same borrower without reporting to the
other participants. A compromise of $5 million in aggregate to one
borrower on a one-year trial basis was agreed using an expedited
risk rating procedure. The US delegation proposed allowing used
Category 1 aircraft over 15 years old to be financed under the ASU
for 5-year terms, same as under the old ASU and Category 2 and 3
aircraft under the new ASU. The EC delegation stubbornly objected,
killing the proposal. Comment: Refurbished aircraft can be financed
under the new ASU for 5-year terms. Since most used aircraft over
15 years old are refurbished prior to resale, the US delegation did
not continue to press for approval. End Comment.

Tied Aid Data Demonstrate Rules' Effectiveness
-------------- --


17. (U) On tied aid flows, the Secretariat reported that
"Helsinki-type" tied aid (financing with at least a 35 percent grant
element, for non-commercially viable projects, and subject to
country limitations -- that may be tied to exports, but must be
notified) dropped 20 percent in the first half of 2007 to SDR 1.2
billion, with largest donors being Spain, the Netherlands, and
Austria. Largest recipients were China, Morocco, and Sri Lanka.
The U.S. delegation lauded the data as further evidence of the
effectiveness of the Helsinki tied aid rules, which the U.S.
considers to be one of the group's greatest accomplishments.

Untied Aid Transparency Continues
--------------


18. (U) On untied aid, the Secretariat reported that flows increased
50 percent to SDR 6.0 billion in the first half of 2007, with Japan
as the largest donor accounting for 90 percent. Largest untied aid
recipients were Iraq, Vietnam, and India. The Secretariat also
noted that the group's untied aid transparency exercise continues
through the end of 2008. Ninety-nine percent of contracts were
awarded using International Competitive Bidding procedures,
resulting in 39 percent of contracts award to recipient country
firms, 32 percent to donor country firms and 29 percent to firms
from other countries. The U.S. delegation affirmed the value of the
exercise and noted that it continues its efforts to disseminate
procurement opportunities to U.S. firms.


19. (U) This cable has been cleared by delegation participants.

EGAN