Market cheers OECD local content rule changes

Changes to the rules on local content within ECA-backed export financing is just one of the amendments to the OECD Arrangement the market has been calling for. April's increase in the local content percentage rule looks set to give the export finance community the fillip it needs
Jonathan Bell
Jonathan Bell
Editor in Chief, TXF
23/04/2021

The decision taken by the OECD in late April to change the rules on local content percentages in export credit agency (ECA)-backed export credit transactions has been warmly welcomed by the export finance community. 

Under this change to part of the OECD Common Arrangements for Export Credits (the Arrangement), the OECD is raising the limit on the amount of local content in a project that may be covered by ECAs. The portion of the so-called export contract value (ECV) – all products and services produced outside the buyer’s country – allowed for local costs has up until now been limited to 30% of the ECV. But, from the end of April 2021 the OECD has declared this will rise to 40% of the ECV if the buyer is located in a high-income country (category 1), and 50% of the ECV in the case of low-to-medium income nations (category 2).

Commenting on this development, Henri d’Ambrieres, Principal at HDA Conseil, says: “Exporters, importers and banks have been waiting for this for a long time! Through increased covered local costs, export credits will promote a more sustainable development. They will better support the delivery of local goods and services, and hence local employment.”

“Exporters, importers and banks have been waiting for this for a long time! Through increased covered local costs, export credits will promote a more sustainable development. They will better support the delivery of local goods and services, and hence local employment."

Henri d’Ambrieres, Principal at HDA Conseil

This change is just one of the amendments to the Arrangement that many in the export finance community have been hoping for and pushing for some time. Many believe that it will be particularly helpful with projects and infrastructure deals where construction services and the like can easily be sourced locally. It could also increase the pipeline of ECA-backed deals in emerging markets where increased employment and the transfer of skills are very much in demand. The change also reflects the reality of today’s complex global value chains and the multinational sourcing in large infrastructure projects. 

“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.

In a statement, Sweden's export credit agency EKN said: "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."

Steven Gray, head of export finance – West Africa at UK Export Finance says: "The update of local content rules is welcome and recognises the localisation requirements we see in many developing markets and helps close the funding gap on projects that invariably have high local content costs such as roads." 

Helping with crowding-in

Craig Weitz, principal – export finance, Nedbank, states: “The difficulty is often in financing the commercial tranche of a project, which is often comprised as the portion of the project content that is not eligible for ECA cover. My hope is that by increasing the local content percentage the amount of commercial funding that might be required for certain projects will decrease. But also I think the change in local content ruling will help crowd in and develop local skills on the African continent through sub-contracting a greater part of an ECA-backed project to local companies.”

Lori Helmers, executive director at JP Morgan, states: “This is a very positive development in this space. It will benefit large infrastructure projects where local content could be increased by local sub-contractor partners who are engaged in these projects. So it is a huge benefit for borrowers as well as the host country.” 

Dario Liguti, chief large corporate underwriting officer at Italian ECA Sace, says: “We have been very supportive of this change because we have seen a general shift over the years in terms of importing countries wanting to have a larger say in supporting their economic developments. So it is understandable that this has been on the cards for some time now.

“The fact that the OECD has now decided to move on and accept this change is a recognition of how exports and trade flows have changed over the last few years. You have a bigger role for local counterparts – on one side it is by design from governments, but in addition now many companies have global spread and have subsidiaries in places where they have a lot of business and they want those subsidiaries to be beneficiaries of exports from the exporting country. 

“From that perspective, the new ruling helps. At times in the past local content stipulations have been above the OECD limit, so this new ceiling will help in closing transactions especially in the more difficult countries, and in an easier way. So it should help us increase our role in these transactions.” 

A much bigger range of products and services is certainly now available locally in many emerging markets, so local content rules have needed changing for some time. And in some countries, South Africa – for example, localisation requirements tied to certain import contracts have grown dramatically. However, there is some concern that in such markets localisation requirements/demands may actually have outgrown local capacity. Nevertheless, the changes to local content provision also helps to balance competition between OECD-based exporters/ECAs and those from non-OECD markets, and this is also welcomed by many. 

Anne Crepin, deputy head of export credit, at the French public development bank SFIL, also comments positively on the change to local content provision: “This is very good news for all the export finance community, exporters and borrowers. It takes into account a significant evolution of international projects with borrower countries’ willingness and growing capacity to have a larger implication in projects developed in their home country. It will allow export credit to bring a more comprehensive support. It is an important first step in restoring level playing field with non-OECD or untied facilities, we hope it will be followed by other steps in this direction.”

The background

The OECD Arrangement is a ‘gentlemen's agreement’ amongst its participants: Australia, Canada, the countries of the European Union, Japan, New Zealand, Norway, South Korea, Switzerland, Turkey, the UK and the US. The Arrangement first came into existence in 1978, building on the export credit ‘Consensus’ agreed among a smaller number of OECD countries in 1976. Since then, it has been regularly developed and updated to reflect participants’ needs and market developments. 

The main purpose of the Arrangement is to provide a framework for the orderly use of officially supported export credits by fostering a level playing field in order to encourage competition among exporters based on quality and prices of goods and services exported rather than on the most favourable officially supported export credits. 

To this end, the Arrangement places limitations on the financing terms and conditions (repayment terms, minimum premium rate, minimum interest rates) to be applied when providing officially supported export credits as well as on the use of tied aid by the participants. The Arrangement contains various transparency provisions among participant to ensure that these limitations are effectively applied. 

The Arrangement applies to all officially supported export credits with a repayment term of two years or more. 

Published in TXF www.txfnews.com

More BUlletin Publications

What's on the horizon for 2023?

28/02/2023

What's on the horizon for 2023?

The pick of key issues to look out for in 2023 – from macro trends, potentially choppy seas for smaller ECAs,  possibilities for using Islamic finance in the renewable energy transition, China&...

Digitalisation as a business leadership imperative

25/11/2022

Digitalisation as a business leadership imperative

Technology-driven trade and client interaction are nothing new. But increasing investment in digitalisation of fundamental business processes and decision making is driving a new way of looking at trade finance and risk underwriting. Authors highlight successes and challen...

Mobilising Africa's Potential

06/09/2022

Mobilising Africa's Potential

Despite the challenges there are many positive opportunities emerging for Africa today

Curated by the BU Sub-Saharan Africa Working Group, authors for this special edition of the BUlletin explore areas of growth and the role of different sources of international finance tapping this

Ripples and After-effects

22/07/2022

Ripples and After-effects

exploring the multiple secondary impacts of both the pandemic and the war in Ukraine

from sovereign risk in Africa, to energy security, political violence and the private CPRI market

Shocks and Short Circuits: The Rewiring of Global Trade

07/04/2022

Shocks and short-circuits: The re-wiring of global trade

The bright shoots of economic growth are under threat once again
Assailed by commodity supply shocks and political instability exacerbated by the war in Ukraine
Contributors this month look at the complex impacts on trade and investment across developed and...

Diverging Risk

14/01/2022

Some predict that 2022 may finally bring us beyond the thrall of the COVID-19 pandemic

But the events of past two years have brought significant divergence of risk across economic and geographic boundaries

Authors this month look at how this is playing out in a range of cases

New Foundations

29/09/2021

If the global economy is truly on the road to recovery how can we build the surest path to sustainable growth in our new net-zero world?

New foundations in tech, data, and cooperative frameworks may help guide us into the next phase

Illuminating Climate

22/07/2021

Now widely recognised as an economic as well as environmental imperative
The momentum to tackle climate change is building
Changing perspectives, policy, products and processes across the export credit industry

In search of claims

30/04/2021

Where is the avalanche of claims and insolvencies expected to emerge from COVID-19?
The picture so far is uneven across geographies, sectors and business lines
And for the future? Well, it depends...

Navigating the Brave New World of Trade

23/03/2021

With the wounds of the pandemic still under triage, a rebound in trade could the best hope for governments and businesses alike.
But trade is under immense pressure from myriad directions.
How can we maintain supply of finance, in the face of growing demand and irregular patterns of risk?

January 2020 BUlletin

09/01/2020

Exploring the macro forces impacting trade, 2019 H1 Industry Data Snapshot + Analysis of the Economic Outlook for 2020

September 2019 BUlletin

17/09/2019

This edition of the BUlletin juxtaposes themes of change and disorder with the celebration of a number of institutional anniversaries, symbolic of endurance.

• The new dynamics of 'trade in flux' • 100 years of UKEF • ICIEC on Partnerships for Development • Sector Spotlight: Shipping (GIEK) and Pharma (SE...

July 2019 BUlletin

31/07/2019

Export Credit and Investment Insurance, Today and Tomorrow

We can see the seeds of the future in digitalisation, automation, applications of block-chain, or machine learning. But what will it mean in practice?

May 2019 BUlletin

23/05/2019

Is international financing on target?

This edition of the BUlletin addresses the evolving role of various international financial institutions in generating sufficient risk capital for development projects and in particular investment in critical infrastructure and renewable energy.

Also featuring review of Bern...

2019 Spring Periodical

10/04/2019

Spring Periodical with 2018 Year end statistics and commentary, plus results of the 2019 'State of the Industry Survey', conducted jointly with ICISA.

Berne Union Members covered a record USD 2.48 trillion of new business in 2018. At the same time, claims remained elevated at over USD 6 billion, for the forth consecutive year....

August 2018 BUlletin

30/08/2018

Innovations in trade technology, e-commerce and insuretech | Rethinking local currency | LMA's new buyer credit facility 

Contributors this month explore diverse themes of innovation, from the foundations of trade in the form of smart ledgers through to new approaches to supporting e-commerce exports and the potential...

July 2018 BUlletin

17/07/2018

IWG | 2H 2018 Risk Outlook | Trade Wars | Regulation and more...

Contributors to the July BUlletin explore the development of a new era in export credit, through the lens of proceedings at the IWG; trade wars; sustainability and export finance regulation

April 2018 BUlletin

26/04/2018

Themes for this month focus on:

Linking Trade and Economic Growth / Collaborative approaches to Sustainable Development /Wind Financing / Digital Innovation / Venezuela / 

March 2018 Bulletin

21/03/2018

By all accounts 2017 was an excellent year for Berne Union members

who once again made a tremendous positive impact on global cross-border trade and investment - providing a record USD 2.35 trillion in cover for cross-border trade and investment and now supporting 14% of total worldwide exports.

September 2017 BUlletin

01/10/2017

"small business to big infrastructure – local currency to global economic policy"

Themes for September span the full scale of international finance in a bumper edition, with a selection of 12 articles from Berne Union members and industry experts, painting a telling picture of the relative pressures and priorities in ...

August 2017 BUlletin

03/09/2017

"New Horizons: Changing Markets, Evolving Approaches"

This month’s contributors examine three economies seemingly at turning points – Argentina, Iran and the Côte d’Ivoire – considering in each case the forces actively influencing the trade environment and the approach of the financial ...

July 2017 BUlletin

23/07/2017

"10 years of SERV, SMEs and Africa"

Commentators this month focus on support for small businesses, local contractors and risk in Africa - including energy sector and analysis of the Mozambique debt crisis. Detailed BU Data Snapshot on Africa and a member survey on approaches to SMEs set the scene...

May 2017 BUlletin

11/05/2017

"Claims, Pricing and Regulation"

The first edition of the BUlletin kicks off with a 'State of the Industry' review from Berne Union Secretary General, Vinco David, where he considers three factors which could disrupt the status quo for the export credit and investment insurance industry...