Export Credits and the OECD: Achievements and challenges

Pekka Karkovirta
This talk will look at the achievements and challenges of export credits in the Organization for Economic Cooperation and Development (OECD). The focus points will be export credit rules, recent developments, export credits in relation to the financial crisis, and challenges for the future.

There are many important areas of export financing. Critical sectors include aircraft, ships, oil and gas, power plants, and telecommunications. Official export credits support $60 billion of medium- and long-term export credit annually. There is a high potential for subsidies in this area if left unregulated. Export credits create a level playing field for exporters, rather than basing exports on who is providing the best credit terms and conditions.

Janet West
The rules for export credits within the OECD date back to the 1950s: discussions were held among the few principal providers of export credit. The OECD set up a Working Party on Export Credits in the 1960s. After 3-4 years, rules were set down for export credit providers in order to prevent a credit race and level the playing field. In 1978, further discussions resulted in the Arrangement on Officially Supported Export Credits.

The Arrangement was, and still, is a Gentleman's agreement, meaning it is not an OECD legal instrument. It is an agreement between the principal providers of official export credit, almost all of whom are located in OECD countries, and sets out rules related to the financing of export transactions with repayment periods of two years or more. It is soft law outside the European Community (EC) because the member states of the EC have taken this agreement into law. The Arrangement works by peer pressure, exchange of information and transparency; some of the core values of the OECD. The disciplines have been refined, strengthened, and widened over the years while attempting to reflect market conditions.

The Arrangement is recognized under the WTO Agreement on Subsidies and Countervailing Measures as a non-prohibited subsidy. This means that if an export credit is provided in compliance with the interest rate provisions of the Arrangement, it will not be considered a subsidy under WTO rules. Recently, there have been a number of challenges in the WTO in relation to export credits, and as a result the Arrangement has been refined and made open, more inclusive, and available to non-OECD member countries.

The top level OECD committee is the OECD Council, made up of the Ambassadors of all OECD countries. The final decisions on many matters are made at the Council level. Below that level are level-one committees like the Trade Committee, which set up the "Working Party on Export Credits" in 1963.

The separate committee responsible for negotiating the financing terms and conditions of the Arrangement is known as the Participants to the Arrangement. There are a number of negotiations which are currently underway among the "Participants to the Arrangement" on issues such as the export financing terms and conditions for nuclear power plants, for renewable energy and water projects, and others. There are also technical export credit sub-committees that deal with specialized rules in relation to e.g. aircraft, nuclear power plants, tied aid: they provide advice to keep policymakers informed when negotiating the rules.

Pekka Karkovirta
We are currently in Tokyo for a series of meetings related to environmental issues. One of these meetings focuses on environmental issues of non-OECD economies like China, Russia, Israel and others. These meetings aim to ensure that these economies take similar environmental considerations into account, as do OECD economies, when providing export financing. It is important to make sure that non-member economies understand what disciplines govern exports among the OECD economies.

Janet West
The "Working Party on Export Credits and Credit Guarantees" and the Environment Practitioners are where principals and guidelines for such issues as good governance are considered. These issues include anti-bribery measures, environmental reviews and sustainable lending. These are extremely important aspects for export credit agencies and governments when providing official support, e.g. in the context of reputational risk. The "Participants to the Arrangement" negotiate the financial terms and conditions of official support when governments decide, through their export credit agencies, to provide direct loans, guarantees and insurance.

With regard to anti-bribery measures, the OECD Working Group on Bribery has prime responsibility in relation to the OECD Anti-Bribery Convention. This Convention mentions that governments providing loans, guarantees and insurance in support of export sales should also take into account measures that will deter and detect bribery in an export transaction. For that purpose, the work was assigned to the Working Party on Export Credits; such work began in 1997 and in 2006, following various informal agreements, the OECD Council adopted an OECD Recommendation on export credits and anti-bribery measures. An OECD Recommendation is an OECD legal instrument which conveys Member governments' political willingness to implement its provisions.

The key provisions of the OECD Recommendation on export credits and anti-bribery measures include a requirement that those who are applying for export credit official support should provide a no-bribery undertaking. Also, verification of whether the exporter/applicant is listed on the publicly available debarment lists of major financial institutions (e.g. World Bank Group) is necessary. The final key provision is that exporters/applicants are required to provide, upon demand, details about the amounts and purpose of commissions/fees paid. Many export contracts include agent commissions that have been identified as an area where there might hidden payments, potentially unrelated to the actual export contract.

Pekka Karkovirta
Bribery exists everywhere in the world, making anti-bribery measures very important. Exporters should try to compete rather than relying on bribes. Exporters do make declarations stating that they have not engaged in any bribes when engaging in an export transaction. It is important to undertake any and all anti-bribery measures as much as possible.

Okada Kohei
Japan is also keen on eradicating the problem of bribery. At first, there were concerns that researching this issue might lead to red tape for customers, but customers have been very cooperative and things are going very smoothly.

Janet West
The work does not stop when an agreement is reached. Monitoring and reviewing follow the agreement to ascertain how the agreement is being implemented by member countries who are signatories to the Anti-Bribery Convention of the OECD and the Recommendation. There are reporting provisions in the Recommendation for the Secretariat to monitor and review during implementation: the results are available on the OECD website. The implementation of the Recommendation has been successful in the light of the results of these follow-up reviews. These reviews are looked at by civil society organizations including NGOs, business banks and trade unions.

Pekka Karkovirta
Moving on to environmental issues relating to export credits, there have been various agreements on these issues since 1998. The OECD Recommendation on the "Environment and Export Credits" was adopted by the OECD Council in 2003; a review took place in 2006 and a Revised Recommendation was adopted in 2007. All ten World Bank safeguard policies and all eight of the International Finance Corporation (IFC) performance standards were brought on board in the Revised Recommendation. With all these standards, there is no need to articulate new ones in the field of export credit financing. Thus, we are making a comparison between the environmental protections that we support and international standards. International commercial banks have their own system that is very similar to the IFC performance standards. Disclosure provisions for environmental impact information on Category-A projects, meaning those projects with large environmental impacts, are another enhancement that has been made which requires disclosure of environmental impact to the public 30 days before a final commitment from the export credit agency.

Sustainable lending to low-income countries and export credits is a new area where advances have been seen. The objective here is to support the World Bank and International Monetary Fund debt sustainability framework for low income countries by enhancing cooperation between OECD countries and international financial institutions (IFI). The agreement seeks to ensure that the provision of official export credits to public and publicly guaranteed buyers in low-income countries should reflect sustainable lending practices.

In February 2008, the OECD members of the Working Party on Export Credits agreed to apply principles and guidelines to obtain reasonable assurances that their commercial lending decisions were not likely to contribute to future debt distress in relation to any official export credit with a repayment term of one year or more. Also, the Agreement on Sustainable Lending builds upon the 2000 Agreement on Unproductive Expenditure and export credits that members implemented to support the World Bank HIPC Debt Initiative to encouraging official support for exports that contributed to the economic development of HIPCs (heavily indebted poor countries).

Janet West
The IFIs are particularly concerned that member countries with official support programs do not cause further debt rescheduling by irresponsible lending. Not many countries provide official support to the HIPCs for instance, but it is a demonstration of the work and collaboration going on between IFIs and the OECD. The OECD publishes all this information on its website.

Pekka Karkovirta
The OECD membership and Brazil have had great success in negotiating an understanding on the rules for export credit financing for civil aircraft. The Aircraft Sector Understanding is another Gentleman's agreement and is an Annex to the Arrangement on Officially Supported Export Credits. Brazil took part in the negotiations and signed onto the agreement.

The background of the Understanding lies in Brazil and Canada accusing each other of providing illegal subsidies for the financing of domestically produced aircraft. After the case spent 6-7 years in the WTO without satisfactory results, negotiations for an export credit agreement on financial terms and conditions for financing civil aircraft were started in the OECD in 2004 and were concluded in July 2007. The resulting Understanding provides the framework for how to finance civil aircraft for export.

The Understanding is a complete set of disciplines with necessary definitions, including a robust risk assessment of buyers and borrowers in the world. A risk-pricing system was put into place that was bifurcated by aircraft category. The Understanding was rounded off by efficient consultation and dispute-resolution procedures and provisions to include more players when appropriate.

Janet West
This Understanding is groundbreaking because it is the first export credit negotiation that included a non-OECD country, i.e. Brazil. Brazil fully participated in the negotiation of the agreement and signed up to implement its provision. The implementation is going smoothly with regular meetings to sort out issues, as these arise, between members and Brazil. The pricing mechanism for regional aircraft is currently under review.

Pekka Karkovirta
The current financial crisis is a very acute phenomenon that has possible impacts in the export credit field. The demand for official support in export credit has yet to be evaluated, but it seems to be increasing drastically. The unwillingness of commercial banks to finance exports in the latter part of 2008 due to the funding and liquidity crises was the direct cause of this increased demand. However, many countries are headed toward recession, investments have been postponed and transactions that were in the planning stages are no longer advancing.

Janet West
There have crisis instances in the past where governments have had to step in to effect change in a rapid fashion: in the 1990s, to mitigate the risks of old nuclear reactors extended repayment terms along with tied-aid financing were permitted for a range of different projects related to nuclear power plant safety. This shows how the OECD is able to provide a forum in response to a situation that requires rapid action.

The Asian Financial Crisis was another situation where a conference forum was quickly set up and an announcement was made by OECD member governments that credit lines would be kept open for trade finance. Electronic exchange of information facilitates these quick actions, and ad hoc agreements can be arranged for special situations.

Pekka Karkovirta
While measures that have been undertaken in the past helped to ease the effects of economic downturns, the current financial crisis is unprecedented. To deal with it, the OECD negotiating forums can be adapted or softened depending on the type of crisis and what is needed. Also, close contact with the market must be maintained.

Janet West
The OECD "Strategic Response to the Financial and Economic Crisis - Contributions to the Global Effort" is a note by the Secretary-General of the OECD that attempts to establish what the OECD considers it is able to deliver in this area. Touching on many issues, it stresses the need for "increased official export financing."

In November 2008, OECD and non-OECD countries responded with a public statement on export credits and the financial crisis. This was one of the first statements that came out of the OECD in response to the global financial crisis and was followed by a trade pledge about avoiding protectionism. References in the export credit statement were made to the G20 Declaration on Financial Markets and the World Economy, helping developing economies gain access to financing and ensuring a responsible risk-based approach to lending. This Statement is on the OECD website. The general view of member countries at that time was that official export credit agencies would see increased applications for their support. Several non-OECD countries also signed onto the Statement and these include Brazil, Estonia, India, Israel, Russia and Slovenia.

Pekka Karkovirta
There have been very few claims or indemnifications in the official export credit business, but by the end of last year more buyers were seen paying their debts late and requesting postponement in the short term. The medium- and long-term financing end of the spectrum has not yet seen many defaults, though defaults and delays are almost certain to come this year.

Janet West
Much has been said about trade finance and the potential for business conducted by export credit agencies to increase in the future. Global trade finance was around $1 trillion in 2007, with $900 billion of that for credits of up to six months (short-term trade finance). Official medium- to long-term export credit support has been around $50-$60 billion per annum in recent years; given global economic conditions, this number may increase in the coming year.

Pekka Karkovirta
This is troublesome because the increased business is coming with greater risks. A balance needs to be struck between underwriting standards and increasing volume of business. As a consequence of the OECD's financial crisis statement on export credits, and other recent developments, more emerging countries are receiving extended repayment periods; and in terms of the maximum support, greater flexibility is being offered by agencies to clients.

Janet West
The recent (January 2009) adjustments to the Arrangement on Officially Supported Export Credits are quite modest: members report that these rules under which they are currently operating are not major obstacles to business. Therefore, at present, there are no radical changes taking place to the rules of the Arrangement.

Okada Kohei
While increased business can be foreseen, the insurance business generally moves in a counter-cyclical fashion with respect to the general economic climate. In this way, the insurance business acts as a counterbalance for the real economy.

Pekka Karkovirta
Future challenges facing official export credit agencies include maintaining relevance for all export credit instruments, monitoring members' compliance to these instruments, adapting to growing interest in sustainable development issues, promoting a level playing field in export credit and trade-related aid disciplines, and increasing the inclusiveness with competitors outside the OECD.

Three sets of disciplines are to be reviewed in 2009. The review of the "Sector Understanding of Export Credits for Nuclear Power Plants" addresses the coming boom in construction of new nuclear power plants. Disciplines applicable to renewable energies and water projects are to be reviewed, including with regard to financing hydro- and wind-power projects, and the "Sector Understanding on Export Credits for Ships" will also be reviewed. Additionally, disciplines with regard to pricing of official support will be reviewed, including the possibility of rules for the commercial risk (in addition to the current rules for the country credit risk).

Okada Kohei
With regard to encouraging non-OECD countries to apply the OECD export credit rules, in May 2007, five non-member countries were designated as possible candidates for OECD accession (Chile, Estonia, Israel, Russia and Slovenia) and another five were designated as enhanced engagement targets (Brazil, China, India, Indonesia and South Africa). Engagement of non-member countries is important because developed countries are no longer the only large exporters in the world. Some progress has been seen in this regard, as witnessed by Brazil's participation in the aircraft Understanding. We have been making great efforts to encourage China to engage itself more in our meetings, in view of its weight in the world export market.

Q: Currently, Russia has very strong trade and financial policies. From the viewpoint of the OECD, how do you feel about Russian attitudes toward trade?

Janet West
Russia is one of the five accession countries designated by the OECD: it has made it known that it wishes to become an OECD member. Russia has to undertake various steps to complete the accession process. That process includes submitting an initial memorandum spelling out its approaches to OECD policies in various areas; in this connection, it is necessary to accept all the extant OECD legal instruments which include the two Recommendations on export credits (environment and anti-bribery). The fact that Russia is one of the accession countries is a very strong signal of its intention to harmonize its trade policies with OECD norms.

Pekka Karkovirta
There are also discussions over Russia becoming a member of the WTO. While the timing of that accession is a political matter, many different things will affect Russia's situation with the OECD.

Kohei OKADA
A representative from the Russian government has been quite regularly attending recent OECD export credit meetings, while another important non-member country, China, so far has been sending, in most cases, representatives from the official export credit agencies of SINOSURE and CHINA EXIMBANK.

Q: Regarding outreach activities toward China, please expand more on concrete activities that have taken place between China and the OECD. Japan is concerned about China's financing of projects in developing countries as they are starting to look like gifts.

Janet West
The enhanced engagement program of the OECD is in its second year and China is one of the five enhanced engagement countries. The objective of that program is to encourage a closer dialogue with the five countries, all of which are in the G20. There are shared views and goals, as well as some differences among them. The enhanced engagement countries were all invited to the OECD ministerial meeting in 2008. China has since 2006, accepted invitations to participate in export credit meetings and is also engaged in areas of OECD work outside export credits. The OECD encompasses multiple regions with the accession and enhanced engagement countries. The dialogue and peer review working style of the OECD is built upon a committee structure that is supported by a neutral Secretariat. The challenge is to use these comparative advantages to increase and enhance China's participation and dialogue, inter alia, in the export credit field.