ECA’s get the green light to cover more local costs

The raison d’être behind most export credit systems is, obviously, to promote the export industry of the country where the export credit facilitator is based, via credits and/or guarantees either in syndication with private banks or on their own when the private market is unwilling or unable to step in. As for local costs in the buyer’s country related to the project where the exported goods or services are used, different arguments have been used to limiting the support from export credit systems.

One argument is that it may risk being used as a means from the buyer’s country to obtain hard currency or due to national content requirements, which varies greatly between countries. As a result, the portion of the so-called export contract value (all products and services produced outside the buyer’s country) allowed for local costs has up until now been limited to 30 percent. By the end of April, however, OECD is set to raise this to 40 percent if the buyer is located in a high-income country and 50 percent in the case of low-to-medium income nations.

These changes have been mulled over for a number of years in committees in the OECD and the EU. Historically, large economies with a broad industry base have been reluctant to ease this cap for several reasons. Some feared that their domestic industry would lose business to competitors in importing countries if the buyer was free to shop locally with funds or guarantees from public agencies in the exporting country. It was argued that taxpayer money should not be used to promote growth and employment opportunities abroad.

Calls for relaxation

But today’s global and increasingly complex supply chains have triggered calls for a more relaxed view and an increase in the portion of large export projects that may be used to cover local costs through an export credit instrument.

“Large export projects today aren’t just about big machines being assembled in one country and then shipped off to another. Instead, services and components are more likely to be sourced from a host of suppliers, not just in the export and import countries, but in third countries too. Project owners and chief contractors are often multinational EPCs based in a third country,” says European Commission Policy Officer Barbro Carlqvist.

Some countries have long since acknowledged this complexity by stating – in the case of Sweden – that a transaction must “benefit Swedish interests” to be eligible for support from the official export credit system. This does not require that the goods purchased by the buyer or the borrower are manufactured in Sweden if R&D, management, marketing or other functions have sufficient Swedish ties.

“That’s how small, open economies like Sweden work and prosper, whereas large economies have traditionally favoured greater limitations on local cost support in export transactions for political reasons,” concludes Peter Tuving, Chief Credit Officer at EKN.