The Organization for Economic Co-operation and Development (the OECD) has announced that changes have been agreed to the Arrangement on Officially Supported Export Credits (the Arrangement) that will be applicable from 20 April 2021 (the Amendment) and will appear in the new version of the Arrangement that is due for publication in July 2021 (the last version issued was January 2020).
A key change to the financial terms and conditions for export credit under the Arrangement will be to the amount of local content that is eligible for official support
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Previous Position
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Amended Position
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Article 10 (Down Payment, Maximum Official Support and Local Costs) of the Arrangement:
d. The Participants may provide official support for local costs, provided that:
Official support provided for local costs shall not exceed 30% of the export contract value.
It shall not be provided on terms more favourable/less restrictive than those agreed for the related exports.
Where official support for local costs exceeds 15% of the export contract value, such official support shall be subject to prior notification, pursuant to Article 46, specifying the nature of the local costs being supported.
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Pursuant to the Amendment, the 30% of export contract value threshold for local costs support has increased to:
40% of export contract value in high-income OECD countries (Category 1); and
50% of export contract value in all other countries (Category 2).
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*ECV (as defined in the Arrangement): the total amount to be paid by or on behalf of the purchaser for the goods and/or services exported (excluding local costs, which are themselves defined in the terms of the Arrangement as being expenditure for goods and service in the buyer's country that are necessary either for executing the exporter's contract or for completing the project of which the exporter's contract forms a part (these exclude commission payable to the exporter's agent in the buying country).
Given the ever-evolving global trade and financing landscape, the Amendment is a positive, welcome development that fits in with current market practicalities, namely:
- localisation of manufacturing and provision of services (including as may be required pursuant to tender requirements by a host government); and
- varying construction and labour costs across countries.
It will be particularly helpful on those projects and infrastructure transactions where construction services can be sourced locally.
Following the announcement of OECD, some of the export credit agencies, including Credendo – the official Belgian export credit agency, have announced the changes in their official website. Credendo assesses that this two-tier system will provide increased flexibility in the support of locally sourced goods and services.
Background Detail:
The Arrangement on Officially Supported Export Credits (described on the OECD website as a “gentleman’s agreement”1) first came into effect in 1978. The Arrangement is voluntary and does not have the force of law. By setting limitations on applicable financing terms and conditions, the Arrangement aims to provide (i) a framework for the orderly use of officially supported export credits and (ii) a level playing field for official support, in order to encourage competition among exporters based on quality and price of goods and services exported rather than the terms and conditions of that export credit agency’s support. The Arrangement achieves these goals by placing limitations on applicable financing terms and conditions.
The current participants of the Arrangement are: Australia, Canada, the European Union, Japan, Korea, New Zealand, Norway, Switzerland, Turkey and the United States, however, other OECD members and non-members may be invited to become participants to the Arrangement. The Arrangement applies to all official support provided by or on behalf of a government for export of goods and/or services2, including financial leases, which have a repayment term of two years or more.
Pham Hai Yen
Reference:
https://www.oecd.org/trade/topics/export-credits/
https://www.credendo.com/news/credendo-increases-its-support-local-costs-export-contracts-50?utm_source=Credendo%27s+database&utm_campaign=8e95226aa2-EMAIL_CAMPAIGN_2019_04_26_06_40_COPY_01&utm_medium=email&utm_term=0_ec9840e1eb-8e95226aa2-71142069