COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 04.11.1991 
COM(1998)583fm 
98/0295 (ACC) 
Proposal for a 
COUNCIL DECISION 
on the application of principles of a framework agreement on project finance 
in the field of officially supported export credits 
(presented by the Commission) 

EXPLANATORY MEMORANDUM 
1. The Community is party to the Arrangement on guidelines for officially 
supported export credits (hereinafter referred to as the "Arrangement") 
concluded within the framework of the OECD in February 1978 with the aim 
of regulating government intervention in the area of export credit and 
establishing fair competition between exporters1. 
2. The Arrangement covers official support for transactions where the repayment 
risk is on the buyer and where this buyer typically has a number of other 
economic activities. Presently it is also applicable for so-called project finance 
transactions. There is no generally accepted and precise definition of project 
finance, but in OECD discussions reference has been made to "A financing of 
a particular economic unit in which a lender is satisfied to consider the cash 
flows and earnings of that economic unit as the source of funds from which a 
loan will be repaid and to the assets of the economic unit as collateral for the 
loan". Since the economic unit is a legally and economically independent 
project company cash flow from the project must be sufficient during the 
entire credit period to cover both operating cost and debt service of 
outside funds. 
3. In recent years export credit agencies have reported that it is increasingly 
difficult to accommodate such project finance transactions within the terms of 
the Arrangement and that special rules should to be considered which would 
permit more flexibility for finance of these transactions in order to match the 
projected cash flow. 
4. The absence of special rules for project finance in areas where flexibility is 
needed means that export credit agencies may be exposed to additional default 
risks on such transactions which they will seek to offset by requesting 
additional security, the cost of which will have to be shared among exporters 
and promoters of the project. The result could also be cancellation of 
interesting projects where securities are not available. 
5. In 1996 the OECD Export Credit Group began discussions on the technical 
issues associated with introducing more flexibility in the Arrangement for 
project finance transactions. These technical discussions were concluded in 
November 1997. Official negotiations in the OECD Participants group began 
in March 1998. The Commission based its contributions to those negotiations 
on the negotiating directive which was formally approved by Council on 
7 May 1998 and the opinion of an ad-hoc Article 113 Committee. On 
11 May 1998 Participants reached agreement on rules for limited flexibility for 
project finance transactions. 
See Council Decision of 14 December 1992 extending the Decision of 4 April 1978 on 
the application of certain guidelines in the Held of officially supported export credits, 
OJL 44, 22.2.1993, p. I. 
6. The agreement provides for flexibility in the timing of the first repayment of 
principal, the profile of repayment over the duration of the loan and the 
maximum credit term. Export credit agencies will be able to choose one of two 
options if the cash flow of a project finance transaction warrants flexibility. 
The first option permits flexibility on all three aspects provided that the 
resulting average life of the loan does not exceed 5.25 years. The average life 
of the loan is the time it takes to repay half the principal of a loan. The second 
option provides for flexibility within an average life of 7.25 but limits the 
maximum credit term to 14 years and specifies that the first repayment of 
principal must be within two years of the starting-point of credit. The two 
options apply equally to projects in all countries except for an agreed list 
of high-income OECD countries^ Korea is excluded from this list until 
31 March 2002. This is in view of the special economic conditions it is facing. 
For these countries only option one is possible and only if the export credit 
agency is a minority partner in the financing of the project with other financing 
institutions and has pari passu status. This restriction was agreed largely 
because these countries have well established financial markets to provide the 
flexibility needed for project finance transactions. 
7. The new rules for project finance transactions should enter into force on 
1 September 1998. As from 1 April 1999 all export credit transactions, 
including project finance transactions will be subject to minimum sovereign 
risk premium rates as agreed by Participants on 20 June 1997. During the 
period between the entry into force and 1 April 1999 export credit agencies 
will adjust premium in their national systems to arrive at premium pricing for 
project finance that reflect the longer average term of the credit. 
8. There will be no surcharge to the Commercial Interest Reference Rate for 
project finance transactions where the credit term is 12 years or less. This is 
consistent with the current Arrangement guidelines. There will be a small 
surcharge where the credit period is between 12 and 14 years. This surcharge 
largely reflects the market. 
9. The guidelines for flexibility will operate during a trial period of 2-3 years, 
after which, Participants will review the experience gained and will decide 
whether the flexible arrangements should continue and whether the flexibility 
should be modified or enhanced. The agreement includes provisions for 
transparency which protect legitimate commercial confidentiality but provide 
adequate information on which to assess the application of the new rules. If, at 
the end of the trial period, the flexibility is made permanent, the Arrangement 
will be amended to incorporate the special rules for project finance 
transactions. During the trial period the agreement on flexibility will 
complement but not amend the Arrangement which will continue to apply to 
all officially supported export credits except where flexibility is permitted for 
project finance transactions. 
10. The Commission therefore recommends that the Council adopt the 
agreement reached by Participants on flexibility in Arrangement terms for 
project finance transactions. 
Proposal for a 
COUNCIL DECISION 
on the application of principles of a framework agreement on project finance 
in the field of officially supported export credits 
THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Treaty establishing the European Community, and in particular 
Article 113(2) thereof, 
Having regard to the proposal from the Commission, 
(1) Whereas the Community is party to the Arrangement on guidelines 
for officially supported export credits (hereinafter referred to as 
the "Arrangement") concluded within the framework of the OECD; 
(2) Whereas the Arrangement is the subject of the Council Decision of 
4 April 1978, as last amended by Decision 97/530/EC2; whereas the 
Participants to the Arrangement have drawn up a new consolidated text3 which 
comprises all the amendments approved by the Participants since the revision 
incorporated by Decision 93/112/EEC4; 
(3) Whereas the Participants to the Arrangement have decided that there is a need 
to supplement the Arrangement guidelines with principles affording the 
flexibility to accommodate the special characteristics of project 
finance transactions; 
(4) Whereas the Participants to the Arrangement do not wish any flexibility to 
weaken the disciplines provided by the Arrangement guidelines which have 
been highly successful in regulating government intervention in the field of 
export credits; 
(5) Whereas the Participants to the Arrangement have agreed new principles for 
the provision of official support for project finance transactions; 
(6) Whereas the new principles for project finance transactions should operate 
during a trial period; 
(7) Whereas the Arrangement continues to apply except where the new principles 
state that flexibility is permitted for project finance transactions; 
OJL2I6, 8.8.1997, p. 77. 
This is awaiting formal adoption by Council Decision. 
OJL44.22.2.1 W3, p. 1. 
(8) Whereas the Participants to the Arrangement should decide at the end of 
this trial period whether to continue to apply the new principles for project 
finance transactions, 
HAS ADOPTED THIS DECISION: 
Article 1 
The principles contained in the framework agreement set out in the Annex shall apply 
in the Community. 
Article 2 
The principles referred to in Article 1 shall apply to project finance transactions 
during a trial period. 
Article 3 
This Decision is addressed to the Member States. 
Done at Brussels, For the Council 
The President 
ANNEX 
PRINCIPLES OF A FRAMEWORK AGREEMENT ON PROJECT FINANCE 
1. Starting Point of Credit: no change to the existing Arrangement definition 
nor flexibility in respect of interpretation. 
2. Description/Criteria: as at Appendix A (attached). 
3. Transparency/Notification Procedures: as at Appendix B (attached). 
4. Capitalisation of Interest: capitalisation of pre-commissioning interest 
subject to prior notification procedures; capitalisation of post-commissioning 
interest not permitted. 
5. Trial Period/Monitoring and Review: 
the flexibility for project finance transactions to operate during a 
Trial Period of three years; 
after two years, a review of the flexible arrangements after which the 
Participants shall consider the experience gained. The flexible 
arrangements shall be discontinued at the end of the Trial Period unless 
the Participants agree upon one of the following: 
to continue the Trial Period, with any necessary 
enhancements/modifications, or 
to cement the flexibility in the Arrangement Guidelines, with any 
necessary enhancements/modifications; 
however, if after two years, at least seven Participants agree that there 
is justification, the Trial Period shall continue for an additional 
one year; 
in the event that the Trial Period is not extended, the Participants shall 
follow the Arrangement rules for the validity of export credits; and 
the Secretariat shall monitor and regularly report on notifications and 
the use of flexibility in project finance transactions. 
First Repayment, Repayment Profile and Maximum Repayment Term: 
- On a case-by-case basis the option of; 
1. flexibility on the timing of the first repayment of principal, repayment 
profile and maximum repayment term provided that the average life of 
the loan5 supported does not exceed 5.25 years; or 
2. flexibility on the timing of the first repayment of principal, repayment 
profile and maximum repayment term provided that the average life of 
the loan supported does not exceed 7.25 years, and subject to the date 
of the first repayment of principal being within two years of the starting 
point of credit. This option shall be subject to a maximum repayment 
term of 14 years. 
- In respect of options 1 and 2, it is not expected that the Participants would 
agree to a single repayment of principal in excess of 25 per cent. 
- With regard to "High Income OECD countries" (as defined by the 
World Bank) in accordance with Article 22 of the Arrangement6, Option 1 
applies only provided that the export credit agencies are providing official 
support on the basis of co-financing with financial institutions, are a 
minority partner and have pari passu status for at least a significant 
portion of the life of the credit. 
Premium: 
- on the entering into force of this Framework Agreement, premium will be 
charged on the basis of current systems enhanced to make them consistent 
with the average weighted life concept as developed by the 
Working Group of Experts on Premia and Related Conditions. 
- as at 1 April 1999, premia shall be charged consistent with the 
Knaepen Package. 
Interest Rates: 
- for repayment terms up to and including 12 years, the normal CIRR 
regime shall apply; and 
- for repayment terms in excess of 12 years and up to 14 years, a surcharge 
of 20 basis points on the CIRR shall apply for all currencies; the level of 
the surcharge shall be reviewed at the end of the Trial Period. ^ 
The concept of the average life of the loan is based on the time it takes to retire half the 
principal of a loan. This concept is based solely on the repayment term of the loan and 
excludes the disbursement/drawdown period. 
For the purpose of this Framework Agreement on Project Finance, Korea is excluded from the 
list of "High Income OECD countries" until 31 March 2002. 
9. Implementation: 
- this Framework Agreement will enter into force on 1 September 1998; and 
- this Framework Agreement will be expressed in language consistent with 
the Arrangement and be issued as a TD/CONSENSUS document. 
APPENDIX A: DESCRIPTION AND CRITERIA 
1. Conforming to both a general description of and essential criteria for project 
finance transactions could, together with appropriate transparency procedures, be 
the means to ring-fence any flexibility in the Arrangement to accommodate 
project finance transactions. The purpose of the Essential Criteria would be to 
assist decisions on whether or not a specific case could be afforded flexibility. 
2. The approach proposed below combines a general description of project finance 
transactions together with Essential and Indicative criteria. It is suggested that, if 
Participants were to consider cases which conformed to the general description 
and met all Essential Criteria, they could then consider whether or not 
they wished to apply the flexible arrangement. It is expected that the 
Essential Criteria shall be satisfied; in the event that any individual criterion is not 
satisfied, justification should be provided. The use of this flexibility would 
require prior notification of the specific transaction to all Participants together 
with the appropriate "explanation" [refer to Appendix Bj. 
General Description 
A financing of a particular economic unit in which a lender is satisfied to consider 
the cash flows and earnings of that economic unit as the source of funds from 
which a loan will be repaid and to the assets of the economic unit as collateral for 
the loan. 
Essential Criteria 
Financing of export transactions with an independent (legally and economically) 
project company, e.g. special purpose company, in respect of "greenfield" 
investment projects generating their own revenues. 
Appropriate risk-sharing among the partners of the project, e.g. private or 
creditworthy public shareholders, exporters, creditors, off-takers, including 
adequate equity. 
Project cash flow sufficient during the entire repayment period to cover operating 
costs and debt service for outside funds. 
Priority deduction from project revenues of operating costs and debt service. 
No sovereign payment guarantee with regard to the project (not inclusive of 
government performance guarantees, e.g. off-lake arrangements). 
Asset-based securities for proceeds/assets of the project, e.g. assignments, 
pledges, proceed accounts. 
Limited or no recourse to the sponsors of the private sector shareholders/sponsors 
of the project after completion. 
Illustrative Criteria 
Hard currency revenues; in the case of local currency revenues, additional 
securities may be required. 
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APPENDIX B: NOTIFICATION PROCEDURES 
Participants are required to prior notify 20 calendar days before issuing 
any commitment where the intention is to allow flexibility under the 
proposed framework. 
This procedure would be termed "Permitted Exceptions: Prior Notification With 
Explanation*'. The notifying Participant would be expected to provide the 
information required in the Standard Form of Notification, in accordance with 
Annex IV of the Arrangement, supplemented to include the following 
additional information: 
- enhanced description of the project; 
- confirmation of conformity with general description and the essential criteria 
(including comment, if available, on the illustrative criteria); 
- a full explanation why more flexible terms is required; 
- the date of the first repayment of principal in relation to the starting point of 
credit, together with details of how this was determined at; 
- for the purpose of notification of anticipated cash flow patterns, the 
following template shall be used: 
The construction period is years, the repayment period 
is years for a total term of years. The repayment 
profile is f front-ended |, (back-ended], (variable], 
[substantially equal], [other, please describe], with per 
cent of the principal being repaid by the mid-point of the 
repayment period, and has an average life of years. 
- information on the interest rate charged and the surcharge over CIRR that 
will be applied, if option 2 is taken; 
- information on any premium surcharge; and 
- an explanation of whether pre-commissioning interest has been capitalised. 
It would be understood that, although other Participants would have the right to 
seek further information from the notifying Participant over the rationale for and 
basis of the proposed support, the notifying Participant would be free to issue a 
commitment at the end of the 20-day period. It would be expected that the 
notifying Participant would respond to any questions without delay, whilst 
recognising the constraints of commercial confidentiality. Where possible, the 
Participants will provide additional information on the cash flow of projects 
after financial closure. 
II 

ISSN 0254-1475 
COM(98) 583 final 
DOCUMENTS 
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Catalogue number : CB-CO-98-587-EN-C 
ISBN 92-78-39927-2 
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