Cablegate: Oecd/Export Credits: Plenary Covers Tied Aid Project,


DE RUEHFR #1118/01 1650846
R 130846Z JUN 08





E.O. 12958: N/A

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


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

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

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

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.


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