Credit: Original article can be found here
“The OECD announcement billed the deal as a modernisation package that will allow Participants to offer greater support for green projects whilst also expanding the use of export credits in the context of an evolving world economy and an increasingly competitive landscape.”
The OECD announcement¹ billed the deal as a modernisation package that will allow Participants to offer greater support for green projects whilst also expanding the use of export credits in the context of an evolving world economy and an increasingly competitive landscape.
Crucially, Participants agreed in principle to the expansion of the scope of green or climate friendly projects eligible under the Climate Change Sector Understanding (the “CCSU”).
Background to the Arrangement
The OECD Arrangement first came into effect in 1978, building upon the export credit “Consensus” agreed among a smaller number of participants in 1976. The current Participants are Australia, Canada, the European Union, Japan, Korea, New Zealand, Norway, Switzerland, Türkiye, the United Kingdom, and the United States.
The goal of the Arrangement is to avoid a “race to the bottom” of financing terms for export credit transactions, which would directly or indirectly unfairly promote the exports of one Participant over those of another. Self-described as a “gentleman’s agreement”,² the Arrangement aims to maintain a level playing field and to avoid anti-competitive or subsidy-like transactions. To this end, it imposes restrictions on the financing terms and conditions for Officially Supported Export Credits.³ These include:
- limitations on repayment terms, frequency of repayments, minimum premium rates and minimum interest rates;
- requirements in relation to down payments;
- maximum official support and local costs; and
- determination of the ‘starting point of credit’ off which certain terms of the financing are hooked.
Past revisions and the Sector Understandings
Since 1978, the Arrangement has been regularly modified and updated to reflect the Participants’ needs and to adapt to global economic and financial changes. Much of this evolution has been achieved through sector-specific rules detailed in the sectoral annexes of the Arrangement (the “Sector Understandings”). There are currently five Sector Understandings that cover export credits in the area of (i) ships, (ii) nuclear power plants, (iii) civil aircraft, (iv) renewable energy, climate change mitigation and adaptation, and water projects (the CCSU), and (v) rail infrastructure.
The calls for reform
For many, the updates announced this month are long overdue. A 2019 Business at OECD paper went as far as stating that the Arrangement was “no longer fit for purpose”⁴. Common criticisms highlight a lack of flexibility that impacts the ability of ECAs party to the Arrangement:
- to support transactions that promote global sustainability goals (the CCSU was last updated in 2014);
- to compete with countries not signed up to the Arrangement, such as China and India; and
- to support projects in developing markets, for example where the down payment requirement makes Arrangement-ECA support unaffordable.