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
Date: 1998-11-04
Institutions: European Commission
Subjects: OECD, State aid, export credit, financing, framework agreement

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. 

2. 

3. 

4. 

5. 

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. 

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. 

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. 

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. 

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. 

7. 

8. 

9. 

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. 

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. 

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. 

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 

for  officially 
the "Arrangement") concluded within the framework  of the OECD; 

supported  export  credits 

to  the  Arrangement  on  guidelines 
to  as 

(hereinafter 

referred 

(2)  Whereas  the  Arrangement  is  the  subject  of  the  Council  Decision  of 
the 
4 April  1978,  as 
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; 

last  amended  by  Decision  97/530/EC2;  whereas 

(3)  Whereas the Participants to the Arrangement have decided that there is a need 
to  supplement  the  Arrangement  guidelines  with  principles  affording  the 
characteristics  of  project 
flexibility 
finance transactions; 

accommodate 

special 

the 

to 

(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. 

This Decision is addressed to the Member States. 

Article 3 

Done at Brussels, 

For the Council 
The President 

ANNEX 

PRINCIPLES OF A FRAMEWORK AGREEMENT  ON PROJECT  FINANCE 

1. 

2. 

3. 

4. 

Starting Point of Credit: no change  to the existing  Arrangement  definition 
nor flexibility  in respect of interpretation. 

Description/Criteria: as at Appendix  A (attached). 

Transparency/Notification  Procedures: as at Appendix  B (attached). 

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: 

continue 

to 
enhancements/modifications,  or 

Trial 

the 

Period,  with 

any 

necessary 

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 
Working Group of Experts on Premia and Related Conditions. 

life  concept  as  developed  by 

the  average  weighted 

-  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 
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. 

to  apply  the  flexible  arrangement.  It  is  expected 

that 

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. 

10 

APPENDIX  B: NOTIFICATION  PROCEDURES 

Participants  are  required  to  prior  notify  20  calendar  days  before  issuing 
any  commitment  where  the  intention 
the 
proposed  framework. 

is  to  allow  flexibility  under 

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 
to  include  the  following 
Annex  IV  of  the  Arrangement,  supplemented 
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: 

years for a total term of 

years, the repayment period 
The construction  period  is 
years. The repayment 
is 
(variable], 
profile 
[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 

f front-ended |, 

(back-ended], 

years. 

is 

- 

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 

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