The Reform will extend tenors and reduce borrowers’ fees to encourage commercial bank lending into energy transition projects.
By Tom Bartlett, JP Sweny, Alexander Buckeridge-Hocking, and Samuel Burleton
The Organisation for Economic Co-operation and Development (OECD) has agreed a landmark deal to modernise the Arrangement on Officially Supported Export Credits (the OECD Arrangement), which is a welcome update for commercial banks, borrowers, and export credit agencies (ECAs) alike.
After several years of negotiation, the participants (Australia, Canada, the European Union, Japan, Korea, New Zealand, Norway, Switzerland, Turkey, the United Kingdom, and the United States) reached an agreement on 31 March 2023, to provide incentives and more favourable terms for financing energy transition projects.
In this article, we summarise the main changes to the OECD Arrangement and how they will benefit project financings and the wider energy transition.
The OECD Arrangement
The OECD Arrangement was established in the 1970s and is an “informal agreement” between participating ECAs. It sets out specific (non-binding) rules governing ECA financings, including financing terms and conditions such as repayment terms, minimum premium rates, and minimum interest rates.
The participants have agreed to expand the scope of financing terms to cater for the uncertainty in the global markets and to assist in funding “climate friendly and green projects”. Such projects comprise: environmentally sustainable energy production; CO2 capture, storage, and transportation; transmission, distribution, and storage of energy; clean hydrogen and ammonia; low emissions manufacturing; zero and low-emission transport; and clean energy minerals and ores (Green Projects).
The key reforms are:
- The maximum tenor for Green Projects will be extended from 18 to 22 years.
- The maximum tenor for all other projects will increase to 15 years. Previously, the maximum repayment terms was 8.5 — 10 years, depending on the type of project.
- The premium or fee, which borrowers pay to ECAs for providing commercial cover or insurance, will be reduced for longer repayment terms and borrowers with a higher credit risk profile. At this stage, the precise mechanics remain subject to further development.
- The participants contemplate additional flexibility for structuring repayment schedules — once again, the details are yet to be formalised.
The participants have recognised that Green Projects may need longer tenors (which commence after the starting point of credit for the relevant ECA) and reduced pricing in order to limit project costs and ensure commercial viability, for example in emerging markets where non-OECD countries (notably China) have been increasing their export finance support.
However, for the wider energy transition, some environmentalists have noted that the changes do not go far enough to curb ECA support for fossil fuel projects, as certain ECAs committed to following COP26.
The OECD Arrangement reform announcements do not include any express statements for ECAs to further limit, or in some cases eliminate, all fossil fuel financings by certain dates. Since COP26, some ECAs have amended their funding policies on fossil fuel projects citing energy security reasons. However, some commentators were hoping for a cohesive stance from the OECD to reduce fossil fuel financings; similar to the November 2021 agreement to end support for coal-fired power plants.
ECAs assist a project company borrower by providing longer tenors than conventional bank debt. Consequently, the upsides from increased tenors in turn provide for an increased debt capacity in the project that is financed. The recent OECD announcements may help projects in nascent industries (e.g., green hydrogen) become bankable for commercial banks, and emphasise the strategic importance of ECAs in de-risking and encouraging commercial bank lending into Green Projects.
The OECD Arrangement reforms are currently set out at a very high level. Greater clarity will be available when the reforms come into effect later this year, once each of the participants have completed their internal decision-making processes. Notwithstanding this, the current summary of the reform package clearly demonstrates that the participants prioritise Green Projects and that ECA cover and funding will apply to more Green Projects in the future.
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