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DE RUEHFR #0076/01 0141318
ZNR UUUUU ZZH
R 141318Z JAN 08
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 1690
RHEHAAA/WHITE HOUSE WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUCPDOC/DEPARTMENT OF COMMERCE WASHDC
RUEAEPA/EPA WASHDC
INFO RUEHSS/OECD POSTS COLLECTIVE
RUEHGV/USMISSION GENEVA 2804
RUEHBR/AMEMBASSY BRASILIA 2004
RUEHBJ/AMEMBASSY BEIJING 1618
RUEHNE/AMEMBASSY NEW DELHI 1168
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RUEHSA/AMEMBASSY PRETORIA 1479
RUEHLJ/AMEMBASSY LJUBLJANA 0472

UNCLAS PARIS 000076 
 
SIPDIS 
 
FROM USOECD 
 
STATE FOR EEB/IFD/ODF - WILLIAMS AND WEBSTER 
STATE FOR E 
STATE FOR OES/ENV 
TREASURY FOR TVARDEK, DRYSDALE AND EPSTEIN 
USDOC FOR RJDONOVAN 
STATE PASS EXIM BANK FOR GALDIZ 
BRUSSELS ALSO FOR USEU - DMULLANEY 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: BEXP EFIN ETRD EINV EXIM EAIR ECON SENV OECD KCOR
CH, IN, BR, IS, SF, SI 
 
SUBJECT: OECD/Export Credits: Debt Sustainability Agreement Adopted; 
Local Cost Financing Increased 
 
Ref: A) 2007 Paris 2096; B) 2007 Paris 2162; C) 2007 Paris 2364 
 
¶1. (SBU) Summary: The Members of the Organization for Economic 
Cooperation and Development's (OECD) 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 November 5-9, 2007.  The ECG Members negotiated a set of 
Principles and Guidelines to Promote Sustainable Lending Practices 
based on the IMF and World Bank Debt Sustainability Framework 
Initiative with non-member country (NMC) representatives from China, 
Brazil and South Africa in attendance.  The Members adopted, ad 
referendum, the final draft of the sustainable lending principles on 
January 4, 2008.  In addition, the ECG approved a survey on 
environmental practices, and finalized a survey on measures to 
combat bribery. In their meetings, the Participants agreed to 
increase the amount of local costs export credit agencies (ECAs) can 
finance from 15 percent to 30 percent.  The ECG and Participants met 
jointly with Civil Society Organizations to brief them on the full 
range of issues being discussed in the ECG and Participants.  ECA 
Watch, an NGO, staged a pre-organized walk-out (45 minutes after the 
scheduled ending of the meeting).  The Participants to the new 
Aircraft Sector Understanding (ASU) approved in July 2007 (Ref. B) 
agreed to further clarifications.  End Summary. 
 
Background 
---------- 
 
¶2. (U) Although the Export Credit Arrangement is not an official Act 
of the 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 may be provided by 
ECAs to their exporters, thus ensuring a "level playing field" for 
exporters and avoiding export financing subsidies, except in cases 
where provided as genuine aid (35 percent or greater grant element). 
 
 
¶3. (U) The OECD Council originally adopted the Recommendation on 
Common Approaches on the Environment and Officially Supported Export 
Credits in December 2003.  The ECG agreed on June 2007 to update 
environmental standards on the Common Approaches for projects 
receiving official export credit agency (ECA) support (Refs. A and 
C) partly in response to the International Finance Corporation's 
(IFC's) development of new performance standards.  End Background. 
 
Debt Sustainability Addressed by ECG 
------------------------------------ 
 
¶4. (SBU) At the request of several of the ECG Members and the World 
Bank and IMF, the ECG decided to expand its policy of not supporting 
unproductive expenditures to all World Bank/International 
Development Association-Only ("IDA-only") countries.  The ECG put 
forward a proposal for the Members to adopt a set of "Principles and 
Guidelines to Promote Sustainable Lending Practices in the Provision 
of Official Export Credits to Low Income Countries (LICs)" based on 
the World Bank and IMF Debt Sustainability Framework Initiative. 
Representatives from the World Bank and IMF discussed the merits of 
the proposal and the difficulties with implementation as written. 
After exchanging views, the ECG Members revised the proposal several 
times to reflect various concerns.  Several Participants (Germany, 
Denmark, Austria, Spain and Japan) reserved the right to make 
comments on the final document up to November 30, 2007.  After 
incorporating comments into the final draft on December 13, the 
Chairman declared the final version approved on January 4, 2008. 
 
¶5. (SBU) The debt sustainability guidelines and principles are meant 
to mirror Participants' existing agreements with the World Bank and 
 
IMF regarding lending to LICs.  The Statement of Debt Sustainability 
Principles is as follows (begin statement): 
 
¶A. The financial environment for low-income countries has changed 
significantly over the past few years. Thanks to increased official 
financing flows, successive rounds of debt relief, favorable 
commodity markets and the impact of financial globalization, 
external financing opportunities - including non-concessional 
official export credits - for low-income countries (LICs) have both 
expanded and diversified. While this is welcome, history shows that 
borrowing booms can end up hindering development if resources are 
not well used. 
 
¶B. Although debt relief has significantly reduced debt ratios in 
many LICs, many other economic circumstances remain largely 
unchanged and these countries face real challenges in terms of 
budgetary, project, and debt management capacities. Most outlays 
related to the Millennium Development Goals (MDG) do not, by nature, 
generate sufficient cash flow to the government in the near term to 
service official non-concessional debt. Accordingly, Members of the 
ECG acknowledge that concessional lending generally remains the most 
appropriate source of external finance for most LICs. 
 
¶C. Bearing the above in mind, ECG Members agree that the provision 
of official export credits to public and publicly guaranteed buyers 
in LICs should reflect Sustainable Lending practices (i.e., lending 
that supports a borrowing country's economic and social progress 
without endangering its financial future and long-term development 
prospects). In consequence, such lending should generate net 
positive economic returns, foster sustainable development by 
avoiding unproductive expenditures, preserve debt sustainability and 
support good governance and transparency. 
 
¶D. In order to promote coherent government policies as donors and as 
shareholders of international financial institutions and to ensure 
that official export credits to LICs are consistent with Sustainable 
Lending practices, ECG Members agree to apply the following 
principles to obtain reasonable assurances that their commercial 
lending decisions are not likely to contribute to debt distress in 
the future in relation to any official export credit with a 
repayment term of one year or more: 
 
a. ECG Members will observe any applicable minimum concessionality 
requirements of LICs to the IMF and to International Development 
Association (IDA); these requirements are intended to help reduce 
debt distress risks.  Countries subject to the concessionality 
policy of IDA include all IDA-only countries which are receiving 
grants from IDA, i.e. countries that are at moderate or high risk of 
debt distress according to IMF/World Bank Debt Sustainability 
Analysis (DSA), in addition to IDA-only countries which have 
benefited from the Multilateral Debt Relief Initiative. 
Concessionality requirements are a standard feature of IMF-supported 
programs and apply to all sectors of activity. 
 
- A consolidated list of countries that are currently subject to 
concessionality requirements from the IMF and/or IDA will be made 
available to Members. This list is subject to change, and will be 
updated regularly. 
 
- As a result, Members will provide support for non-concessional 
credits only in as far as this will allow borrowers (to continue) to 
meet the relevant concessionality restrictions requirements. To help 
with this process, the IMF and the World Bank have established 
dedicated mailboxes to channel inquiries on their concessionality 
requirements by ECG members, and quick responses would be expected. 
 
b. For those IDA-only countries without concessionality requirements 
to the IMF and to IDA, ECG Members agree that the provision of 
official export credits should take into account the results of the 
most recent IMF/World Bank country-specific debt sustainability 
analyses (DSAs) conducted within the joint Debt Sustainability 
Framework. 
 
c. Good governance is a key ingredient of sustainable development 
while transparency reduces the risks of misuse of public resources. 
ECG Members will seek assurances from government authorities in the 
buyer country for any transaction involving a public or publicly 
guaranteed buyer in a IDA-Only country or a country with an IMF 
concessionality requirement with a credit value exceeding SDR five 
million and a repayment term of two years or more that the 
project/expenditure is in line with the country's borrowing and 
development plans (e.g. consistent with its Poverty Reduction 
Strategy Paper [PSRP] and/or the budget) following the procedures 
set forth by the national legislation (e.g. Parliament approval, 
where required). In line with previous principles, ECG Members also 
will refrain from providing support for unproductive expenditures. 
In terms of transparency, ECG Members will continue to: 
 
- provide data on transactions supported to IDA-Only countries for 
review on an annual basis, in order to assess ECG Members' success 
towards ensuring that official export credits to low-income 
countries are consistent with the aims of the Debt Sustainability 
Framework for these countries, and 
 
- via the OECD Secretariat, such data will be shared with the IMF 
and World Bank staffs on an ongoing basis. 
 
¶E. ECG Members stress that the Principles will bring their full 
benefits only if all creditors act in broad harmony together. In 
this regard, ECG Members invite non-OECD Members to adopt these 
principles and to participate in further discussions and the ongoing 
review of experience in their application. In addition, ECG Members 
agree to share and discuss information amongst themselves, the World 
Bank and the IMF and any non-OECD Member who applies the principles 
on their implementation and any problems raised by possible 
non-adherence to them. ECG Members call on the IMF and the World 
Bank to pursue their own outreach efforts to non-OECD Members and 
private creditors to ensure that their lending practices are 
consistent with debt sustainability. (End Statement) 
 
¶6. (SBU) During the meetings, several of the Participants, 
especially Germany, called for NMC support prior to the ECG adopting 
any agreement on debt sustainability.  The NMCs in attendance 
actively participated in the discussion.  While voicing support, 
NMCs made no commitments to the debt sustainability principles.  The 
guidelines specifically call for the ECG through the Secretariat and 
the IMF/World Bank to reach out to NMCs to encourage their ECA 
acceptance of debt sustainability.  The ECG secretariat plans 
meetings in February with several NMCs to ask for their acceptance 
of debt sustainability. 
 
Proposal to Increase Financing of Local Costs Approved 
--------------------------------------------- --------- 
 
¶7. (SBU) The Canadian delegation reintroduced a proposal to increase 
local cost support by an additional 15 percent, which would enable 
ECAs to finance 85 percent of the export value of the contract plus 
up to 30 percent for local costs.  Many of the ECAs from smaller 
members have been pressing for more liberal local cost rules and 
this proposal had been tabled since the April Plenary Meeting.  The 
U.S. delegation noted that increasing support for capital goods that 
would otherwise have been U.S.-sourced remains a very sensitive 
issue since it raises budgetary costs while reducing the amount of 
exports financed.  The OECD's Business and Industry Advisory 
 
Committee (BIAC), voiced its support for a liberalization of the 
OECD local cost rules.  AFL-CIO representative Owen Hernstadt 
responded, warning Participants of negative impacts the change would 
have on their own domestic economies from reduced exports.  The 
proposal was widely supported by the all of Participants. 
 
¶8. (SBU) Several Participants stated that there is a growing 
financing gap between OECD and non-OECD countries, with non-OECD 
countries offering longer terms, lower rates, and not applying any 
anti-bribery, environmental or debt sustainability standards. 
Non-OECD ECAs were mentioned as applying the minimum WTO 
anti-subsidy standards and as not providing any caps on financing 
local costs in support of their exports.  The U.S. delegation 
proposed adopting the proposal on a 3-year trial basis, with 
additional reporting on the nature of local costs exceeding 15 
percent, which was accepted.  A separate survey will be conducted on 
the treatment of Value Added Taxes and local duties as local costs. 
Comment:  Ex-Im Bank receives few requests to finance local costs 
beyond 15 percent. However, organized labor considerations may not 
permit Ex-Im Bank to increase its capacity to finance local costs 
beyond 15 percent, creating a possible future competitive 
disadvantage for U.S. exporters.  End Comment. 
 
ECG Participants Consult with ECA Watch 
--------------------------------------- 
 
¶9. (SBU) The Participants and ECG held a consultative meeting with 
the OECD's Business and Industry Advisory Committee (BIAC), Trade 
Union Advisory Committee (TUAC), and 10 NGOs (mainly environment 
focused) under the umbrella name ECA Watch.  ECA Watch had issued a 
series of letters to the ECG prior to the meeting expressing the 
views that: the ECG's environmental policy lacks coherence, the ECAs 
ignore environmental concerns in project selection, the ECG lacks a 
peer review system for environmentally sensitive projects, the ECG 
Members are inconsistent in their adherence to environmental and 
anti-bribery and corruption policies, and the Participants are also 
non-compliant with WTO trade subsidy requirements that ECAs operate 
at least on a break-even basis. The Secretariat addressed each of 
these issues in letters prior to the meeting. 
 
¶10. (SBU) During the meeting, ECA Watch members spent less time 
pursuing their written complaints and focused on individual Members' 
projects they find objectionable, specifically the Ilisu Dam 
hydroelectric project in Turkey and the Sakhalin II oil and gas 
project in Russia.  Members tried to keep the discussion to more 
general environmental concerns but the Austrian delegation 
specifically addressed the logic behind the approval of the Ilisu 
Dam project.  The discussion was unusually open and engaged.  After 
the meeting had run over by one hour, ECA Watch walked out in 
protest over a stated lack of willingness of the Members to include 
ECA Watch member input in their lending decisions.  A "letter of 
regret" from ECA Watch was delivered to the ECG 40 minutes after the 
meeting ended, making the walk-out appear particularly staged. 
 
¶11. (SBU) The ECG Chairman drew four conclusions from the meeting. 
The Secretariat will look at peer review mechanisms similar to other 
OECD committees for ECA projects with significant environmental 
concerns.  ECG Members should deepen bilateral contacts with NGOs in 
capitals.  The ECG's environmental practitioners can engage NGOs at 
a technical level to build a body of experience in implementing the 
OECD Recommendation on the environment and export credits.  ECG 
members should continue dialogues with ECA Watch members at the 
national and OECD levels. 
 
Environmental Survey - Member Comments 
-------------------------------------- 
¶12. (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. Members discussed proposals for 
changes to the ongoing survey of their environmental policies and 
practices to reflect the provisions of the Recommendations with the 
intention of finalizing the survey before the end of the year. 
Members will be asked to complete the survey by February 2008 and a 
report will be prepared for the April 2008 plenary meeting, after 
which the responses will be made available on the OECD website. The 
IFC reported progress on the implementation of its environmental and 
social Performance Standards (which are specified in the 
Recommendation). 
 
Anti-corruption Survey Finalized 
-------------------------------- 
 
¶13. (SBU) In December 2006, the OECD Council adopted a 
Recommendation on Bribery and Officially Supported Export Credits. 
Members finalised and completed a revised Survey on their policies 
and practices with regard to anti-bribery measures. Members 
discussed their responses to the review and these have been made 
available on the OECD website. 
¶14. (SBU) In a related event, Brazil (which is not a member of the 
OECD but is a participant in the ASU) accepted the Recommendation on 
Bribery and Officially Supported Export Credits as it applies to 
aircraft finance.  Brazil also agreed to provide information and 
participate in surveys as they apply to civil aircraft. 
 
ASU - Further Agreements and Clarifications Reached 
--------------------------------------------- ------ 
 
¶15. (SBU) The Participants to the Aircraft Sector Understanding 
(ASU) met in Paris at the OECD for their first substantive 
discussions following the implementation of 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 months 
of operation of the new ASU and expressed general satisfaction with 
the implementation process.  The Participants also held a first 
discussion on possible enlargement of participation in the ASU in 
the light of the production by Russia and China of regional jets, as 
well as on the first review of the ASU scheduled for 2008. 
 
¶16. (SBU) The Participants also discussed a number of technical 
questions relating to the interpretation of the ASU in order to 
clarify some outstanding issues.  They were informed of views 
submitted by the Aviation Working Group requesting clarification on 
a number of points in the ASU.  The US and Canadian delegations 
raised several points for clarification as well.  The most 
controversial point was Canada's request, supported by the United 
States, to eliminate or report ex post borrower risk rating 
reporting requirements for transactions under $10 million in order 
to speed up loan approval times.  The Brazilian delegation strongly 
objected, citing the possibility of stringing together a series of 
small transactions to the same borrower without reporting to the 
other participants.  A compromise of $5 million in aggregate to one 
borrower on a one-year trial basis was agreed using an expedited 
risk rating procedure.  The US delegation proposed allowing used 
Category 1 aircraft over 15 years old to be financed under the ASU 
for 5-year terms, same as under the old ASU and Category 2 and 3 
aircraft under the new ASU.  The EC delegation stubbornly objected, 
killing the proposal.  Comment: Refurbished aircraft can be financed 
under the new ASU for 5-year terms.  Since most used aircraft over 
15 years old are refurbished prior to resale, the US delegation did 
not continue to press for approval.  End Comment. 
 
Tied Aid Data Demonstrate Rules' Effectiveness 
--------------------------------------------- -- 
 
¶17. (U) On tied aid flows, the Secretariat reported that 
"Helsinki-type" tied aid (financing with at least a 35 percent grant 
element, for non-commercially viable projects, and subject to 
country limitations -- that may be tied to exports, but must be 
notified) dropped 20 percent in the first half of 2007 to SDR 1.2 
billion, with largest donors being Spain, the Netherlands, and 
Austria.  Largest recipients were China, Morocco, and Sri Lanka. 
The U.S. delegation lauded the data as further evidence of the 
effectiveness of the Helsinki tied aid rules, which the U.S. 
considers to be one of the group's greatest accomplishments. 
 
Untied Aid Transparency Continues 
---------------------------------- 
 
¶18. (U) On untied aid, the Secretariat reported that flows increased 
50 percent to SDR 6.0 billion in the first half of 2007, with Japan 
as the largest donor accounting for 90 percent.  Largest untied aid 
recipients were Iraq, Vietnam, and India.  The Secretariat also 
noted that the group's untied aid transparency exercise continues 
through the end of 2008.  Ninety-nine percent of contracts were 
awarded using International Competitive Bidding procedures, 
resulting in 39 percent of contracts award to recipient country 
firms, 32 percent to donor country firms and 29 percent to firms 
from other countries.  The U.S. delegation affirmed the value of the 
exercise and noted that it continues its efforts to disseminate 
procurement opportunities to U.S. firms. 
 
¶19. (U) This cable has been cleared by delegation participants. 
 
EGAN