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DE RUEHFR #1118/01 1650846
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FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 3417
RHEHAAA/WHITE HOUSE WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUCPDOC/DEPARTMENT OF COMMERCE WASHDC
INFO RUEHSS/OECD POSTS COLLECTIVE
RUEHBR/AMEMBASSY BRASILIA 2033
RUEHBJ/AMEMBASSY BEIJING 1717
RUEHDS/AMEMBASSY ADDIS ABABA 0808
RUEHJA/AMEMBASSY JAKARTA 0663
RUEHSA/AMEMBASSY PRETORIA 1540
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UNCLAS PARIS 001118 
 
FROM USOECD 
 
STATE FOR EEB/IFD/ODF - WILLIAMS AND WEBSTER 
STATE FOR E - DHUTCHINGS 
TREASURY FOR TVARDEK, DRYSDALE AND EPSTEIN 
USDOC FOR RJDONOVAN AND AHAAKENSEN 
STATE PASS EXIM BANK FOR GALDIZ AND AJENSEN 
BRUSSELS ALSO FOR USEU - DMULLANEY 
WHITE HOUSE FOR USTR 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: BEXP EFIN ETRD EINV EXIM EAIR ECON OECD KCOR CH IN
BR, ET, ID 
 
SUBJECT: OECD/Export Credits: Plenary Covers Tied Aid Project, 
Renewable/Nuclear Power, Aircraft Finance, Environment 
 
Ref: A) Paris 0076 
 
¶1. (SBU) Summary: The OECD's Working Party on Export Credits and 
Credit Guarantees (ECG) and the Participants to the Export Credit 
Arrangement (Participants) held their semi-annual plenary sessions 
and Aircraft Sector Understanding (ASU) meetings in Paris on April 
21-25, 2008.  The U.S. obtained support from Participants to block a 
proposed Korean tied-aid project in Indonesia.  The U.S. proposed 
modifications in renewable and nuclear power finance to reduce 
minimum interest rates and rationalize repayment and term schedules. 
 The Participants pressed the IMF and World Bank on their outreach 
to non-member countries to promote the Participants' Principles and 
Guidelines to Promote Sustainable Lending Practices Agreement and 
negotiated several minor modifications to it.  Participants reviewed 
survey results on environmental practices and discouraged adoption 
of an environmental peer review process.  ASU Participants 
negotiated with Brazil over credit underwriting standards for 
state-owned enterprises (SOEs) and progress payment finance.  End 
Summary. 
 
Background 
---------- 
 
¶2. (U) Although the Export Credit Arrangement (the Arrangement) is 
not an official Act of the Organization for Economic Cooperation and 
Development (OECD), the OECD has served as the Secretariat for the 
Participants since the Arrangement's inception in 1978. The 
Arrangement sets the most favorable terms that export credit 
agencies (ECAs) may provide to their exporters, thus ensuring a 
"level playing field" for exporters and avoiding export financing 
subsidies, except in cases where provided as genuine aid for 
commercially non-viable projects (35% or greater grant element). 
End Background. 
 
U.S. Defeats Korean Tied Aid to Indonesia 
----------------------------------------- 
 
¶3. (SBU) The U.S. led a successful effort in the OECD against a 
Korean tied aid project to Indonesia that would fund Government of 
Indonesia wi-fi connectivity.  The Koreans claimed it as aid and the 
U.S. delegation countered that the project was commercially viable 
and financing terms should be limited to commercial terms in the 
Arrangement.  Both the Koreans and the U.S. presented their 
respective cases and underlying assumptions to the Participants in 
the consultative group.  The U.S. analysis showed that, for an 
additional $7 million investment on top of the $65 million project 
cost, the GOI (or a private telecom provider) could add at least ten 
times the scheduled number of users, generating more than $1 billion 
in license fees or profits over a ten year period.  Korea argued 
that the $7 million additional investment was outside the scope of 
its project and the additional users should not be assumed when 
determining commercial viability.  The U.S. argued that under 
Participants' agreed "Ex Ante Guidance for Tied Aid" that specifies 
how the analysis of tied aid projects should be conducted, the scope 
of a project is required to be expanded to fully utilize the capital 
investment.  Therefore, it would be inappropriate not to include the 
extra investment cost, potential additional users, and the resulting 
incremental revenues in determining commercial viability. 
Participants voted as follows: the EU abstained, Japan voted with 
the Koreans, and all other delegations voted with the U.S. position, 
giving our position the consensus. Comment: Japan's vote to allow 
tied aid for this project may signal a fundamental change in its 
position for Tied Aid Consultation cases and make it more difficult 
for the U.S. to win them.  End Comment. 
 
¶4. (SBU) The Korean delegation did not inform the group how they 
intend to proceed.  Ex-Im Bank reports a U.S. firm is now interested 
in bidding on the project.  Comment: Once Korea informs the 
Indonesians that the U.S. successfully opposed their concessional 
 
financing on this $65 million deal (a $20 million benefit to the 
GOI), there could be negative ramifications for U.S. companies from 
the GOI on future procurement opportunities.  End Comment. 
 
U.S. Proposes Revising Nuclear and Renewable Power Finance 
------------------------- -------------------------------- 
 
¶5. (SBU) The U.S. made a proposal to modify terms under the nuclear 
and renewable power sectors of the Arrangement in an effort to 
streamline and rationalize outdated portions of Annex II and Annex 
IV of the Arrangement and to create parity in minimum interest rates 
charged to finance nuclear power plant construction.  The U.S. 
proposed simplifying repayment rules so that principal, interest, 
capitalized interest, and local costs would be repaid on the same 
amortization schedule.  We also proposed reducing the special 
commercial interest reference rate (CIRR) for nuclear and renewable 
power 15 year loans for all lenders from 75 basis points to 20 basis 
points above the CIRR.  In addition, the U.S. proposed lengthening 
standard loan terms from 6 months to 2 years for nuclear reloads. 
Note: The EU expressed interest in further discussing the U.S. 
proposals and to possibly start negotiating a broader power sector 
understanding under the Arrangement to better define terms for all 
types of power generation systems. End Note. 
 
ECG addresses Debt Sustainability Outreach 
------------------------------------------ 
 
¶6. (U) In January 2008, Participants approved expansion of their 
policy of not supporting unproductive expenditures to all World 
Bank/International Development Association-Only ("IDA-only") 
countries by adopting the "Principles and Guidelines to Promote 
Sustainable Lending Practices in the Provision of Official Export 
Credits to Low Income Countries (LICs)" (the "Principles"), based on 
the World Bank and IMF Debt Sustainability Framework initiative 
(Ref. A). 
 
¶7. (SBU) The Principles are meant to mirror all IMF and World Bank 
member countries' existing agreements with the World Bank and IMF 
regarding lending to LICs.  ECG members acknowledged that they 
cannot impose the Principles on non-member countries.  ECG members 
pressed the IMF representative to the ECG, Angelique Guergil, on IMF 
and World Bank outreach efforts to non-ECG member countries to 
implement debt sustainability practices in their LIC lending 
programs.  Guergil responded that the IMF has reached out to the 
most important emerging lenders and received a mixed response. 
Middle Eastern lending nations showed strong interest in debt 
sustainability, China was receptive but non-committal, and India 
showed no interest in applying debt sustainability principles.  The 
U.S. commented that the ECG should focus on the IMF and World Bank 
leading outreach as "partners" with the ECG.  The E.U. commented on 
the need to engage with high-level Chinese interlocutors, possibly 
approaching the Chinese on debt sustainability at a high-level event 
such as the G-20.  The ECG unanimously approved involving the IMF 
and World Bank in future outreach efforts. 
 
Debt Sustainability Principles Modified 
--------------------------------------- 
 
¶8. (SBU) The ECG modified some minor points of the Principles 
agreement.  ECG Members agreed that any loan applications remaining 
uncommitted as of January 4, 2008 (the date of final agreement) are 
subject to the Principles.  Members also defined "public buyer" for 
purposes of the Principles as "Public buyers comprise the central, 
regional and local governments and public enterprises whose debt 
obligations would be assumed by the government in the case of 
default.  In order to determine the status of a buyer in a country 
that is only subject to IMF concessionality requirements, Members 
may take recourse to the list of public institutions defined 
case-by-case in the context of IMF-supported programs for 
 
concessionality.  For buyers in other LICs, Members are encouraged 
to consult with the World Bank and IMF in order to determine their 
status." 
 
Environment Survey Results - Members Compliant 
----------------------- ---------------------- 
 
¶9. (SBU) In June 2007, the OECD Council adopted a Revised Council 
Recommendation on Common Approaches on the Environment and 
Officially Supported Export Credits on enhanced measures for 
reviewing the potential environmental impact of projects supported 
with official export credits. ECG Members completed a survey on 
environmental policies and practices and the Secretariat issued a 
report.  Members reported broad compliance with procedures for 
environmental project review.  Member responses are available on the 
OECD website. 
 
Environmental Peer Review Discouraged 
------------------------------------- 
 
¶10. (SBU) In November 2007, ECG members met with ECA Watch NGOs to 
discuss NGO concerns regarding ECA environmental practices (Ref. A). 
The Members asked the Secretariat to analyze peer review mechanisms 
similar to other OECD committees for ECA projects with significant 
environmental concerns.  The Secretariat reported wide variation in 
peer review practices within the OECD and recommended choosing 
between no peer review, a light peer review process or an extensive 
peer review process involving outside parties.  None of the Members 
felt an extensive peer review process was needed or desirable.  The 
U.S., the Netherlands, and Japan supported a light peer review 
process.  Germany, Austria, Finland, and Korea supported no new peer 
review process.  Other Members remained silent on the issue.  The 
U.S. suggested that other members adopt the Ex-Im Bank policy of 
disclosing internal environmental analyses on sensitive projects. 
 
Local Cost VAT Survey Finalized 
------------------------------- 
 
¶11. (SBU) As part of the Participants' agreement to increase the 
amount of local costs ECAs can finance from 15% to 30% (ref. A), the 
U.S. requested that a separate survey be conducted on the treatment 
of Value Added Taxes (VATs) and local duties as local costs.  The 
Participants rejected a U.S. proposed comprehensive survey format as 
too detailed and cumbersome.  The group approved a revised format 
with results to be submitted to the Secretariat by May 31. 
 
ASU - Brazil Raises Prickly Issues 
---------------------------------- 
 
¶12. (SBU) The Participants to the Aircraft Sector Understanding 
(ASU) met in Paris at the OECD for their second substantive 
discussions following agreement to the revised ASU in July 2007. 
During the meeting, the Participants to the ASU (Australia, Brazil, 
Canada, European Community, Japan, Korea, New Zealand, Norway, 
Switzerland and the United States) reviewed the first six months of 
operation of the new ASU.  Reporting data showed between $1.2 and 
$3.6 billion of Category II and III aircraft were financed over the 
six months.  Participants suggested that the financed amount 
reporting data ranges needed to be narrowed to carry any 
significance. 
 
Brazil Challenges Airline Credit Standards 
------------------------------------------ 
 
¶13. (SBU) Brazil challenged a proposed Canadian senior unsecured 
credit rating of B+ on Ethiopian Airlines (EA) for the purchase of 
Bombardier Category II mid-sized aircraft.  ASU Participants 
discussed Brazil's challenge at length.  Brazil insists that EA be 
rated no better than the GOE sovereign credit rating (a lowest 
 
possible OECD country category 7), thereby downgrading EA from 
Canada's proposed B+ to a CCC or lower.  EA currently has Boeing 
aircraft financed with Ex-Im Bank.  Ex-Im Bank rates EA BB-, one 
grade higher than Canada proposes.  The lower credit rating would 
cost EA millions of dollars in additional, unnecessary financing 
costs for the aircraft purchase. 
 
¶14. (SBU) Ex-Im Bank's credit rating of EA is based on EA's history 
of profitable operations, strong balance sheet, ability to maintain 
hard currency accounts overseas, independent management and perfect 
payment history with Ex-Im Bank.  The GOE does not guarantee 
aircraft loans to Ex-Im Bank, nor would they under the proposed 
Canadian financing terms.  Brazil argues that, as a wholly 
state-owned enterprise (SOE), the Ethiopian government can 
manipulate the management and destroy the balance sheet at its whim 
and that no SOE should carry an unsecured rating above the 
sovereign.  Brazil contends that past performance of an SOE is no 
guarantee of future performance and political situations in 
developing countries can change quickly and cause rapid SOE credit 
deterioration back to the sovereign level.  Independent credit 
rating agencies (such as Standard & Poor's, Fitch and Moody's) have 
previously issued public opinions and stated to Ex-Im Bank that SOEs 
can carry better unsecured debt ratings than their sovereign 
governments by meeting certain criterion specified by those rating 
agencies. 
 
¶15. (SBU) On instructions from Brasilia, the Brazil delegation did 
not compromise despite EU, Canada, and Japan support for the U.S. 
position that Brazil's rating of EA as the same as the sovereign is 
not reflective of the actual EA risk.  Under the ASU, Brazil's 
position would force an independent credit rating agency to set the 
rating.  This will cost EA several hundred thousand dollars and 
risks Ex-Im Bank's current credit rating of EA, as all Participants 
would need to use the credit agency rating. 
 
¶16. (SBU) Comment: A Brazilian victory would potentially cost all 
state-owned airlines in developing countries with higher credit 
ratings than their governments tens of millions in unnecessary 
aircraft financing expenses.  Besides Ethiopia, Kenya, Morocco, and 
Senegal are examples of countries whose airlines could be affected. 
 Ex-Im has the logical argument, but Brazil sees it as a "level 
playing field" issue.  Brazil's ECA has a higher cost of funds than 
its Canadian competitor and increasing the across-the-board cost of 
aircraft finance for developing countries makes Brazilian aircraft 
more cost competitive.  However, Brazil risks a negative reputation 
among third world aircraft buyers if EA is forced to pay 
significantly higher borrowing costs for new aircraft due to this 
action. End Comment. 
 
Brazil Objects to Canadian Down Payment Finance 
------------------------ ---------------------- 
 
¶17. (SBU) Brazil also complained about the Canadian ECA practice of 
financing deposits for buyers prior to completion of the aircraft. 
The U.S. took the position that loans secured by the partially 
completed aircraft, could finance progress payments up to 85% of the 
cost of the aircraft.  However, if the loans are unsecured, they are 
not allowed under the ASU.  ASU Participants did not come to a 
conclusion as to how to treat progress payment loans but agreed that 
official support should not be permitted for the 15% down payment. 
 
 
¶18. (U) Delegation participants cleared this cable. 
 
EGAN