As far back as 1976, OECD countries began co-ordinating their policies on export credits. Two years later, the Arrangement on Guidelines for Officially Supported Export Credits came into being; this Arrangement was accepted directly by the Participants and developed in the framework of the OECD. Today, this Arrangement still ensures the operation of an orderly credit market and seeks to prevent countries from competing to offer the most favourable financing terms for exports.
The main purpose of the Arrangement on Guidelines for Officially Supported Export Credits is to provide the institutional framework for an orderly market for officially supported export credits. The Arrangement, therefore, seeks to prevent an export credit race in which exporters compete on the basis of which are granted the favourable financing terms or "subsidy" from their respective governments; instead it seeks to encourage competition on the basis of which exporter provides the highest quality and the best service at a competitive price.
Official support can take the form of direct credits/financing, refinancing, interest rate support, aid financing (credits and grants), export credit insurance and guarantees.
The Arrangement, developed under the auspices of the OECD, came into being in April 1978 following agreement among its Participants. The Arrangement is a "Gentlemen's Agreement" among its Participants. Although it is not an OECD Act, it is incorporated, via a Council Decision, into European Community law. The Arrangement receives the administrative support of the OECD Secretariat.
The Participants to the Arrangement are: Australia, Canada, the European Community (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom), Japan, Korea (Republic of), New Zealand, Norway, Switzerland and the United States. The Arrangement is an area of Community Competence under Article 113 of the Treaty of Rome and the European Commission represents Member States in negotiations. The Czech Republic, Hungary and Poland are observers.
The Arrangement applies to all official support for exports of goods and/or services, or to financial leases, which have repayment terms of two years or more. This is regardless of whether the official support for export credits is given by means of direct credit/financing, refinancing, interest rate support, guarantee or insurance. The Arrangement also applies to official support in the form of tied aid.
Special Guidelines apply to certain sectors, e.g. ships, nuclear power plant, aircraft and project finance transactions (the latter for a trial period).
The Arrangement does not apply to military equipment and agriculture products; negotiations on an Understanding on Export Credits for the latter are continuing.
The Arrangement places limitations on the terms and conditions of export credits that benefit from official support. The major disciplines are:
The minimum cash down-payment by the starting point of credit required for each transaction is 15% of the export contract value.
The maximum repayment terms are 5 years (8 1/2 after prior notification) for Category 1 countries, and 10 years for Category 2 countries (except that the maximum repayment term for conventional power plant is 12 years).
Countries are classified under two Categories , based on World Bank threshold: those that are graduated by the IBRD are in Category 1; Category 2 consists of all other countries.
The agreement on minimum risk premium rates ( the Knaepen Package ) was incorporated into the Arrangement text in 1998 and came into force in April 1999. The minimum rate for a transaction is determined by: (1) the country risk category; (2) the time at risk; (3) the quality of ECA cover [i.e., direct loan, guarantee or insurance]; and (4) the percentage of ECA cover.
Minimum interest rates for official financing support (direct credits/financing, refinancing or interest rate support) by the Participants are Commercial Interest Reference Rates (CIRRs); CIRRs have been established for 13 currencies, the majority of which are based on either the 5-year Government bond yields or on 3, 5 and 7 year bond yields, according to the length of the repayment period. The Arrangement provides for a choice for Participants to select the basis for their own CIRR. CIRRs are adjusted monthly and are intended to reflect commercial rates. To view the current CIRRs, click here.
The Arrangement addresses the circumstances in which official support in the form of trade-related tied and partially untied aid (referred to in the Arrangement as "tied aid") may be given and/or mixed with officially supported export credits.
Tied aid is aid which is tied to the purchase of goods and/or services from the donor country; such aid can assist both donor and recipient countries by enabling the financing of capital infrastructure projects to the benefit of the recipient country, and by promoting exports of the donor country.
The Arrangement sets minimum concessionality levels for transactions which incorporate tied aid credits and grants: 50% concessionality level for the poorest "Least Developed Countries" (LLDCs) as classified by the UN, and 35% concessionality level for all other developing countries.
Tied aid is prohibited for countries which are not eligible for 17-20 year loans from the World bank and for "commercially viable" projects (excepting for LLDCs), i.e. projects that generate cash flow sufficient to cover the operating costs and to service the capital employed.
Special terms related to contracts concerning any new sea-going ship or any conversion of a ship are set out in Annex I of the Arrangement.
Annex II of the Arrangement sets out special terms for export credits for nuclear power plant. These include a maximum repayment term of 15 years, and the application of Special Commercial Interest Reference Rates (SCIRRs).
Annex III of the Arrangement sets out special terms for:
New large aircraft and engines for such aircraft.
All new aircraft except large aircraft.
Used aircraft, spare engines, spare parts, maintenance and service contracts.
The Project Finance Understanding , applicable from 1 September 1998 for an initial trial period of three years (subsequently extended to four years), sets out the special guidelines which may apply to transactions undertaken on a project finance basis; the Description and Criteria for project finance transactions are set out in the Understanding. The disciplines of the Arrangement continue to apply to transactions which do not conform to the Criteria set out in the Understanding.