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Collaboration with Export Credit Agencies (ECAs)
Demand for export credit in the region has grown steadily. This is partly due to the funding requirements of large capital-intensive infrastructure projects, together with the reduced appetite of commercial lenders for uncovered term financing following the financial crisis.
Export credit is typically provided by ECAs either
- directly, as a loan, with repayment terms generally from 2 to 10 years, subject to Chapter II, Paragraph 10 of the OECD Arrangement, or
- indirectly, as insurance or a guarantee provided by an ECA to support a commercial loan.
Direct export credit usually comes in the form of a buyer credit, whereby credit is provided directly to the importer or buyer to allow it to fund the purchase of exported goods or services primarily from the country in which the ECA is located.
Export credit can also be extended through a supplier credit, whereby a supplier makes a sale based on deferred payment terms, with export credit insurance protecting the supplier or its commercial bank against the buyer's failing to make payments when they become due.
Export credit is often part of a project finance package put together by a structured trade or project finance unit of a commercial bank. The mandate of most ECAs is to fill a financing gap and cover the risks that the commercial market is not willing to take.
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To assist its public sector borrowers in obtaining affordable and competitive commercial cofinancing for ADB projects, ADB has been strengthening its collaboration with ECAs. We have also explained the benefits of ECA support in our ongoing policy dialogue with DMC governments and their executing agencies. Here are the key features of this closer collaboration between ADB and ECAs.
At the earliest stages of formulating its public sector projects, ADB seeks to identify those projects that may require a significant amount of imported capital equipment and/or services that would be eligible for export credit. Information about such projects and their export credit possibilities is provided in ADB's on-line publication Commercial Cofinancing Project Briefs. By identifying these projects and export credit possibilities early, procurement packaging and the financing plan can incorporate export credit cofinancing.
When ADB sends out bid invitations, we also notify interested ECAs and provide them with summary project information. This allows ECAs with proactive marketing mandates to contact potential suppliers early, to help them develop their supplier/buyer credit finance package, or simply to provide them with indicative evidence of the ECA's support.
ADB and the borrower normally attach to the bid invitations an information memorandum based on ADB's due diligence up to that time, plus an invitation to suppliers, their banks, and ECAs to contact ADB's Office of Cofinancing Operations if they have any questions regarding the finance package requested.
From time to time, ADB contacts ECAs to determine their interest in, and pricing for, a transaction at (or before) the time invitations are sent out. However, firm quotes are not requested at this time.
Under this procedure, bid invitations for contracts eligible for export credit require the submission of two separate bids:
- a commercial/technical bid with a cash price, excluding any finance charges (to avoid any cross subsidy), and
- a financial bid, including either a supplier or a buyer credit finance package that may, at the bidder's option, include ECA cover or acceptable evidence of ECA support if the bidder is successful.
The bid invitations would normally specify that the financial bid should comply with the applicable OECD terms as a minimum requirement, as defined in Chapter II, Paragraph 20 of the OECD Arrangement.
If warranted, ADB may provide support in arranging commercial financing to fund the 15% deposit required for most supply contracts, which is normally not covered by an export credit according to Chapter II, Paragraph 7 of the OECD Arrangement.
This support, if provided, is typically in the form of a Partial Credit Guarantee (PCG) to the commercial lender. ADB's PCG support is provided under separate documentation in parallel with the ECA-supported tranche. ADB's support of the 15% deposit finance may not be offered in certain circumstances, particularly when the transaction requires additional self-financing by the borrower.
ADB-financed contracts and cofinanced contracts with ECA cover are bid separately to allow different procurement procedures. Procurement under ADB's direct loan must follow ADB's procurement guidelines which generally require international competitive bidding. However, procurement under contracts supported by export credit for ADB-assisted public sector projects will generally follow the two-bid procedure described above to ensure transparent competition among suppliers from as many countries as possible. Therefore, under ECA financing, borrowers may retain the option of requesting revised commercial/technical bids and financial bids.
ADB may act as a facilitator between the public sector borrower, the supplier, its banks, and ECAs. ADB recognizes that ECAs and their lenders continue to have different export credit programs and work under different legal systems. ADB therefore works with existing export credit documentation and does not try to impose a standardized form of documentation on the ECA-covered cofinancing.
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Traditionally, ADB and ECAs have cooperated closely to mobilize commercial cofinancing support for ADB-assisted private sector projects. The objective of this cooperation, in which ADB and ECAs use their respective credit enhancement and/or insurance products, is to achieve cost-effective financing structures that mitigate risks, suit the cash flow requirements of individual projects, and promote economic development in ADB's developing member countries.
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