The OECD Regulatory Framework and the benefits of international cooperation between the ECAs
The OECD Regulatory Framework on Export Credits has ensured fair competition for several decades and it is often quoted as an example of successful international cooperation. The current challenge is the attempt to replicate the model on a much larger and more global scale, as well as the prospect to render it more suitable for an enhanced operational environment.
The OECD Consensus: Genesis and major achievements
The OECD arrangement on Officially Supported Export Credits, also known as ‘Consensus’, has recently celebrated 38 years since its establishment in April 1978. Originally undersigned between twenty participating countries, it now involves the 28 Members of the European Union plus Australia, Canada, Japan, Korea, New Zealand, Norway, Switzerland and the United States. More recently Brazil became a participant to the Aircraft Sector Understanding.
Back in the 1970’s, the arrangement was conceived – and subsequently implemented – with the ambitious goal of providing for an overarching framework for officially supported export credits and ensuring a level playing field to exporters. To this aim, the Consensus not only envisages specific terms and conditions by which official support is provided by ECAs, but also encompasses ad hoc consultation and information-sharing mechanisms among its participants. Its overall building process, including ongoing negotiations initiated by members’ proposals, is actually based on transparency and peer pressure and its disciplines have since the beginning found recognition under the WTO framework.
Despite its nature as a non-binding agreement or a gentlemen’s agreement, the Consensus has been translated into EU Law[1] and has experienced throughout its history a remarkable success in terms of adherence of its participants, as well as a certain adaptability to reflect changes in the financial and industrial markets, the globalisation of international trade and the different challenges set by a fast-changing business environment. Over the years, as the ECA activities gradually shifted towards commercial counterparties besides the traditional sovereign risk insurance, the general arrangement has evolved as to include a common framework for the pricing of private buyer risk based on the obligor’s creditworthiness (the MalzkuhnDrysdale Package) as well as a specific pricing methodology for transactions in high income OECD countries, aimed at avoiding crowding out of the private market. Contextually, in sectors with specific technical and financial characteristics, the applicable disciplines have been set out in separate sections – the so-called sector understandings – which are annexed to the Arrangement and currently apply to ships, nuclear power plants, civil aircraft, renewable energy/climate change mitigation and adaptation/water projects, rail infrastructure and coal-fired electricity generation projects. Such sector understandings reflect the need of certain industries for specific financial disciplines to meet their construction and financing requirements, market and relevant financing practices. Furthermore, as in the case of the sector understanding on renewable energy, climate change mitigation, adaptation and water projects and the most recent sector understanding on coal-fired electricity generation projects[2], the arrangement has also become a policy instrument to reach ambitious and important goals such as the climate change objectives, in line with the unprecedented efforts undertaken by major governments worldwide with respect to environmental issues.
OECD regulation on policy issues
Besides the terms and conditions set by the Arrangement, defining the most favourable financial package offered by ECAs, the OECD – through the Working Party on Export Credits (ECG) – also provides a forum for discussing and coordinating export credits policies relating to good governance, such as environmental and social due diligence, antibribery measures, and sustainable lending.
The potential impact of ECA backed projects on the environment has been on the OECD agenda since 1998, which eventually led to the Council Recommendation on Common Approaches. The recommendation identifies the environmental and social risks that ECAs have to address when underwriting new business, as well as defines sensitive areas where a due diligence has to be carried out even for small-sized transactions – usually outside the scope of the recommendation. The current text (approved in April 2016) encompasses several enhancements, including the screening of any severe project-related human rights impacts and the requirement of complementary standards for social issues (an area where World Bank standards, currently under review, are deemed as insufficient), further to a commitment to report CO2 emissions from all supported projects in the power sector; such improvements are also indicative of the consideration paid by the ECAs and their guardian Authorities to any potential effect triggered by supported projects in the respective country of destination.
Always on the policy end, the keystone to OECD efforts in fighting international bribery is the OECD Anti-Bribery Convention and the Recommendation on Bribery and Officially Supported Export Credits. The recommendation encompasses specific provisions to prevent, detect and investigate bribery of foreign public officials in export credit transactions, including reporting to law enforcement authorities. A peer review process ensures a coordinated approach on the implementation of the recommendations as well as the construction of a body of experience.
In addition to the above, the ECG members have also adhered to a set of principles and guidelines to promote sustainable lending practices, aimed at ensuring a consistent approach vis a vis new indebtedness of low income countries.
The outreach strategy
Following the globalisation of international trade and the increased competition from new players, in recent years the OECD has engaged worldwide with countries that are committed to embracing a more market based economy. The outreach program, addressed to key partners as well as regions of strategic importance (e.g. Latin America), promotes inter alia the participation in joint committees and the adherence to OECD instruments, with a mix of elements determined by mutual interest. In this respect, the success story of Brazil’s adhesion to the Aircraft Sector Understanding (ASU) in 2007 was a first precedent: even though not an OECD member and hence not bound to apply the arrangement, Brazil became a participating member to the ASU. This was a crucial milestone in the outreach efforts, particularly as Brazil is one of the main players in the aircraft sector.
Informal talks amongst participants were also launched in order to identify more flexible routes to incentivise non-participants to join the arrangement. Whereas the current procedure foresees that countries primarily need to be OECD members in order to be able to join the consensus, consideration could be given to different approaches that might detach such a prerequisite, to some extent in analogy with the Brazilian case.
Besides the OECD efforts, bilateral outreach talks between United States and China led to the establishment in 2012 of an International Working Group on Export Credits (IWG) outside the OECD context, aimed at negotiating a set of common rules with non-OECD countries – such as China, Brazil, India and Russia. Discussions have focused on specific sectors, while horizontal topics (including interest rates and risk pricing) have been considered only recently. Although the IWG works have not reached the negotiating stage yet, some progress was made in terms of mutual understanding of practices as well as detailed explanation of technical issues. Further and more substantial advancement could possibly be made with the establishment of a Secretary General or any other permanent entity relevant to the IWG that would ensure continuity to the discussion, currently managed with a rotating chair mechanism.
Enhancing the OECD Framework: Pending issues and challenges ahead
In the most recent years the OECD regulatory framework has appeared less and less able to capture the actual international trade, as nonexport related operations conducted by ECAs continue to grow. Products aimed at supporting the internationalisation of national companies, the issuance of surety bonds as well as any form of untied financing not directly linked to national procurement remain outside the scope of the OECD. In order to avoid subsidisation of certain activities, some ECAs apply specific legal frameworks to such programmes (e.g. EU State Aid regulation[3]), however the approach is not consistent amongst different players. Furthermore, even within the current scope of the OECD framework some major pending issues remain due to the existence of significant gaps in the current regulation. The lack of a minimum pricing level in the Ship Sector Understanding, a highly competitive sector, has led to a race to the bottom, which contradicts the actual spirit of the arrangement and the WTO prohibition on subsidies. Similarly, the absence of provisions on a minimum floating rate has determined uneven financial support especially during the financial crisis, triggered by the downgrade of sovereign ratings. Likewise, the lack of a common rating system (with the only exception of the ASU) weakens the pricing provisions, as even within the framework of a common minimum pricing methodology, ECAs may differ on the assignment of risk ratings, driven by their internal risk appetite framework and mandate to support their national exporters.
Also at policy level, the recommendations require a constant monitoring activity as well as periodical updates – as appropriate – in order to address specific needs emerged during the implementation and to enhance and harmonise members’ due diligence and KYC practices. The latest update of the Council Recommendation on Common Approaches has just been released, while the review of the recommendation on Bribery is currently ongoing. Potential improvements may feature an extension of the due diligence currently envisaged for exporters/applicants to all relevant counterparties involved in a transaction (i.e. including buyers/ borrowers/guarantors) as well as a wider definition of bribery in order to include business-to-business corruption in addition to bribery of foreign public officials.
A robust and consolidated export credit discipline is still important to ensure fair competition among international players. Fundamental changes in the current regulation have become necessary and will need to be carried out in the very near future. Like in the 1970’s, international regulators in all countries are now requested of an extraordinary commitment and spirit of compromise to fill in the current regulatory gaps or, alternatively, to re-draft a more ambitious, comprehensive and adequately flexible set of rules suitable to changing market conditions, that may be triggered by competition from powerful emerging economies, growing civil society interests, climate change, globalisation and financial crises.
Paola Valerio
Head of International Relations at SACE (Cassa depositi e prestiti Group)
Notes
- EU Council Decision 93/112/EEC applicable to EU Member States.
- Entering into force in January 2017.
- Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State Aid in the Form of Guarantees.
