CELEX: 51998PC0583
Language: en
Date: 1998-11-04
Title: 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

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 thefieldof officially supported export credits
                       (presented by the Commission)
 ---pagebreak---  ---pagebreak---                      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.
 ---pagebreak--- 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 thefinancingof the project with other financing
    institutions and has pari passu status. This restriction was agreed largely
    because these countries have well establishedfinancialmarkets to provide the
    flexibility needed for projectfinancetransactions.
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
    projectfinancethat 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
    projectfinancetransactions.
10. The Commission therefore recommends that the Council adopt the
    agreement reached by Participants on flexibility in Arrangement terms for
    project finance transactions.
 ---pagebreak---                                           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.
 ---pagebreak--- (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
 ---pagebreak---                                                                              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.
 ---pagebreak---  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.
 ---pagebreak--- 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.
 ---pagebreak---                  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.
 ---pagebreak--- Illustrative Criteria
     Hard currency revenues; in the case of local currency revenues, additional
     securities may be required.
                                       10
 ---pagebreak---              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
 ---pagebreak---  ---pagebreak---                                                                    ISSN 0254-1475
                                                            COM(98) 583 final
                                              DOCUMENTS
EN                                                             11 02   09   10
                                    Catalogue number : CB-CO-98-587-EN-C
                                                             ISBN 92-78-39927-2
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