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    • DRAFT July 30, 2003 INTERNATIONAL RULES GOVERNING EXPORT CREDIT FINANCING: TOO STRONG, TOO WEAK OR JUST RIGHT? A Report Prepared for the International Financial Flows and Environment Project World Resources Institute Peter C. Evans† July 30, 2003 † Contact: MIT Center for International Studies, tel. (617) 492-7755; email:
    • DRAFT July 30, 2003 CONTENTS I. Introduction...............................................................................................….1 II. The Regime Governing Official Trade Finance ………..................... 5 III. Special Sector Agreement on Renewables: Prospects and Problems ......... 10 Rationale for Limiting Repayment Terms Nuclear Power Sector Agreement Few Exceptions The Subsidy Cost Associated with Special Terms The Problem of Negotiating “Renewables Only” Provisions IV. Environmental Implications of Helsinki Tied Aid Disciplines ................... 18 Reforming Tied-aid Rules Ex Ante Guidance Implications of Helsinki Environmental Control Technologies Energy Projects V. Gaps in the Regime: Untied Aid Loophole? ..…….............................…… 26 Untied-aid and Environmental Considerations Severnaya and Port Dickson Power Projects U.S. Proposal to Regulate Untied Aid VI. Targeting Environmental Technology Financial Assistance ............…… 32 Japan’s Green Aid Plan Denmark’s Mixed Credit Program United States: Sticks but Few Carrots Appendix I: Aggregate Data ……………..………......……..........…...............40 Appendix II: Sector and Project Data ………….....…........……................... 43 Appendix II: Biographical Sketch of Author ….....…........……................... 52 ii
    • DRAFT July 30, 2003 I. Introduction The international trade finance disciplines are typically judged from a national welfare perspective. The rules are valued by participants for their ability to contain damaging subsidy races, harden credit terms that conform more closely to market terms, reduce subsidy burdens on national treasuries, and clarify the distinction between commercial trade credits and aid credits intended to serve developmental goals. The environment has been a tertiary matter, if considered at all, when specific provisions are negotiated. However, there are a number of ways in which trade finance rules can impinge on environmental outcomes. One way is through rules on credit tenor. If different sectors are permitted different financing terms, the effect may be to bias technology investment choices by reducing financing costs for one set of technologies over another. Limitations on subsidies that states can offer can have a similar effect. If subsidy prohibitions are written too strictly, they can prevent countries from providing targeted subsidies that could facilitate the diffusion of cleaner and more efficient technologies. Creditor countries have struggled to develop rules that constrain the negative aspect of export subsidization through bilateral programs, while preserving its positive potential. Beginning in the 1970s, countries of the European Union, Japan and the United States undertook an effort to develop international rules on export credits and foreign aid. The result was establishment of the Arrangement on Guidelines for Officially Supported Export Credits (commonly known as the Arrangement). Formalized in 1978, the Arrangement is coordinated through the Trade Directorate at the Organization for Economic Cooperation and Development (OECD). The Arrangement has emerged as the primary body of international rules that govern export credit practices and supplants, in many respects, the World Trade Organization (WTO) in this area. This paper brings environmental considerations to the forefront. It seeks to contribute to the growing attention that is now being focused on the environmental implications of international trade finance rules. The paper has several objectives. First, it seeks to describe the rationale and evolution of export credit rules with special focus on limitations on repayment periods (tenor rules) and procurement conditions (tied aid). Second, it assesses the environmental consequences of the rules by examining trends, such as the $41.5 billion in concessional financing that OECD countries have directed to the energy sector between 1988 and 2001. Third, it explores what gaps exist in the current rules and what this means for environmental sustainability objectives. Finally, it explores the opportunities for targeted assistance for environmental technologies within the framework of existing rules. This examination leads to the following general observation: over the past two decades the rules governing export credits and aid have tightened significantly. The overriding goal of the rules is to establish freer and fairer trade by controlling 1
    • DRAFT July 30, 2003 government financial intervention in trade competition. The rules achieve this result by constraining the terms and condition on which countries can offer export financing. When viewed from an environmental perspective, some rules can have the appearance of being too strict. The rules constrain the way countries can use export financing to encourage higher investment in environmental control equipment, renewable energy, and other environmental beneficial exports bound for developing countries. However, this view overlooks the positive contribution the constraints make. The rules force buyers to face the full financial cost of power generation, pipelines, petrochemical complexes, and other investments that are inherently commercial. By constraining export subsidization, the rules help to curb overinvestment in these activities. This has positive environmental implications. The tension between trade competition, financing flexibility, and subsidy control is not widely appreciated, but must be a part of any meaningful trade finance reform agenda. The analysis presented in this paper yields four specific observations and recommendations (see Table 1). Observation 1: Tenor rules vary by sector. For example, nuclear power projects can receive longer repayment terms than conventional and renewable energy technologies. More flexible financing terms could improve the economic calculus for renewables. Lengthening the repayment terms from the present 10-12 year terms to a 15-year term would serve to lower the cost of renewable energy by lowering the annual debt payment amount, thereby making renewable energy technologies more cost competitive with conventional energy sources. However, there are drawbacks to making such a change. Lengthening repayment terms beyond market terms involves subsidy costs. These costs must be recognized and budgeted for. In addition, lengthening terms to 15 years would require changing the terms of the Arrangement. There are several reasons why this would be difficult and even unnecessary. First, there are significant methodological problems associated with creating exceptions for renewables and not other public priorities. Second, there are competitive considerations. Not all countries have competitive renewable energy technology manufacturing industries. It is not unreasonable that these countries would object to rule changes that would only benefit competitors. Finally, providing longer terms is not the only way to provide support for renewables or other environment friendly technologies. There are ways for governments to provide targeted support that conforms to Arrangement rules. Recommendation: No change in terms is warranted. Observation 2: The Helsinki Package is a collection of rules introduced in 1992 to govern tied aid. The environmental implications of these rules are positive. The rules have virtually eliminated commercially driven tied aid offers for fossil fuel power plants. Data on tied aid offers shows a dramatic decline in the number of commercially motivated tied aid offers on behalf of coal, oil and natural gas power plants. They also show a relative, although not absolute, increase in concessional funds flowing toward renewable energy investments. One constraint imposed by the rules is on the level of support that donors 2
    • DRAFT July 30, 2003 Table 1. Observations and Recommendations Issue Area Observation Recommendation Tenor rules Tenor rules vary by sector, offering more No change favorable financing terms for nuclear than conventional and renewable technologies Tied aid rules Eliminated subsidies commercially viable fossil No change plants Untied aid Unregulated permitting countries to subsidize Apply Helsinki commercial viability commercially viable fossil fuel technologies rules to untied aid Domestic policies Export promotion policies vary. Some states United States should more actively toward export are not taking full advantage of the utilize new policy to grant mixed subsidies opportunities permitted to offer below market credits through combined USAID and financing for environmentally beneficial standard Ex-Im Bank financing for projects environmentally beneficial projects can provide for pollution control technologies. Environmental values receive no special consideration. In the course of implementing the rules, countries confronted this issue and came to the conclusion that key principles, including appropriate pricing and polluter pays, should guide project appraisals. These principles are logical and sound. In short, lack of special consideration does not appear to be of sufficient concern to justify major rule changes. Relaxing the disciplines may do more harm than good. Recommendation: No change in tied aid rules is warranted. Observation 3. The regime governing official trade finance is an incomplete regime. Gaps remain in the rules, one of the most significant of which concerns untied aid. Untied aid projects are not subject to commercial viability tests that have been highly successful in routing subsidized financing to commercially viable projects. This includes large-scale fossil fuel power plants, hydroelectric power plants, and pipeline projects. The application of Helsinki rules devised for tied aid, particularly country eligibility and commercial viability tests, could have positive environmental consequences. Such an application would help to constrain countries from subsidizing commercially viable projects. It could also help to free up and redirect funds toward projects that are more deserving of special assistance. Recommendation: Helsinki-type tied aid rules should be applied to untied aid directed to lower and middle income countries. Observation 4. The existing body of trade finance rules does not constrain all forms of financial assistance. Countries may still offer below-market export financing to projects that meet the rules and support environmental goals. One example of this is the 3
    • DRAFT July 30, 2003 Japanese Green Aid Plan, which has been operating since 1992 with the aim of improving environmental conditions in China and elsewhere in Asia. Another example is the Danish Mixed Credits program, which provides export subsidies for wind turbines and other technologies that have environmental benefits. Not all countries take full advantage of the opportunities permitted by the rules. The United States stands out as a country that offers little below-marketing financial assistance to support environmentally beneficial capital goods exports. This reflects domestic policy priorities more than it signals a problem with international rules. Recommendation: Countries not taking full advantage of the existing opportunities offered by trade finance rules should do so. The United States in particular should more actively utilize the new policy to provide mixed credits by combining grants from the US Agency for International Development and standard export credits from the US Export Import Bank. Mixed credits that fully conform to existing international rules can be used to support projects whose benefits are not fully captured through financial analysis due to the existence of externalities, including environmentally friendly and social sector projects. The following sections of this paper examine each of these observations and recommendations in greater detail. The rules that govern international trade finance are complex. Therefore, before turning to this discussion, the next section provides a brief overview of rules that regulate government-backed trade and places them in their institutional context. 4
    • DRAFT July 30, 2003 II. The Regime Governing Official Trade Finance An elaborate set of international rules governs export financing provided by governments. The rules have evolved through cooperation among the world’s leading industrial countries, which are major creditors as well as major exporters of capital goods. The rules set boundaries on the terms and conditions on which these countries can offer official financing. This includes financing for the development of conventional fossil fuel as well as renewable energy technologies in developing countries. The rules regulate the level of subsidies those countries can offer for a given purpose (trade promotion or developmental assistance) and the procurement conditions (tied or untied) on which it is offered (see Table 2). The primary purpose of the rules is to ensure that governments provide financing in ways that minimize trade distortions and safeguard the quality of aid allocations. An important goal in this area has been to draw a line between commercially motivated credits and Official Development Assistance (ODA). This has required the development and enforcement of rules that set guidelines on the terms and conditions of credits offered by ECAs and those designated as ODA. Table 2. Dimensions of Official Trade Finance Institution ECA ECA + ODA ODA Non-ODA (mixed credits) Procurement Policy Tieda Tied Tied Untied Tied Moderate Substantial Subsidy level >0 100% Helsinki Rules Trade finance rules OECD Arrangementb OECD DACc WTO/ SCM Agreementd no rules(e) Purpose Trade Promotion Development Note: ECA = Export Credit Agency; ODA = Official Development Assistance; Non-ODA refers to bilateral financial transfers such as Japan's Green Aid Plan and the United State's support for Isreal, which are not reported as ODA. a. Domestic content requirements vary from country to country, ranging from 50 to 80 percent. b. OECD Arrangement on Guidelines for Officially Supported Export Credits established in 1978. c. OECD Development Assistance Committee established in 1960. d. World Trade Organization Agreement on Subsidies and Countervailing Measures established in 1979. e. The blank areas indicate areas where trade finance rules have not been developed because they are generally considered to be free from problematic trade distortions. 5
    • DRAFT July 30, 2003 In practice, the line between ODA and financing offered by ECAs has not been easy to draw. Because capital goods exports are an important source of job creation and economic growth, there are strong economic and political incentives for governments to sweeten export credits to improve their export competitiveness. One way that countries do this is by offering borrowers direct loans, guarantees or insurance at below-market rates. Another way is through tying practices in which aid is provided on the condition that goods and services are procured from the donor country. Governments are also on the look out for ways to stretch scarce aid funds. Combining export credits with aid funds to create “mixed credits” is one way this can be accomplished. These credits carry softer terms than standard export credits but harder terms than foreign aid. The institutional arrangements governing trade finance are complex. As indicated in Table 2, the three most important forums are the OECD based Participants to the Arrangement on Guidelines for Officially Supported Export Credit, the World Trade Organization and the OECD Development Assistance Committee (DAC).1 These forums have different mandates, membership and legal underpinnings (see Box 1). In some areas their activities overlap, as is the case for elements of the Arrangement and the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM). In some instances, the reach of these forums is incomplete and does not fully cover all the ways that governments can provide concessional export financing. This is true for untied aid as well as highly concessional tied aid, both of which face limited controls.2 The Participants to the Arrangement has emerged as the most important Box 1. Institutions Governing Official Trade Finance OECD Export Credit Arrangement The OECD Export Credit Arrangement was formally established in 1978 and now comprises most OECD countries. As of October 2002, the members of the OECD Arrangement included: Australia, Canada, the Czech Republic, the 15 members of the European Community (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom), Japan, South Korea, New Zealand, Norway, Switzerland and the United States. The nonmember OECD countries are Hungary, Iceland, Mexico, Poland, the Slovak Republic and Turkey. The Arrangement sets terms and conditions on government-supplied export financing in order to prevent economically costly and politically damaging export credit races between countries. The goal of the agreement is “to encourage competition among exporters from the OECD-exporting countries based on quality and price of goods and services rather than on the most favourable officially supported terms.”1 It is the primary international forum for setting and enforcing rules on export credits and mixed credits. 1 A fourth forum is the International Union of Credit and Investment Insurers (Berne Union) made up of 51 official and private export credit insurers. The group contributes to coordination between ECAs but plays a minor role in the regulation of medium and long-term export credits. 2 It is also true for agriculture and military goods, which remain unregulated by any international forum. 6
    • DRAFT July 30, 2003 WTO Agreement on Subsidies and Countervailing Measures Measures to regulate export subsidies were adopted during the Uruguay Round of trade negotiations completed in 1979. These prohibitions were established in the Agreement on Subsidies and Countervailing Measures (ASCM), also known as the WTO Subsidy Code. This agreement defined a subsidy as a financial contribution from a government that confers a material benefit to the borrower. Export credits were addressed in the illustrative list of export subsidies found in Annex I to the agreement. Item (j) holds that export credit guarantees and insurance programs provided by governments should not be at premium rates inadequate to cover long-term operating costs and losses. This has been interpreted to mean that programs must break even, although it is unclear as to over what time frame this must be achieved. Item (k) prohibits governments from offering export credits at rates below their cost of funds in a way that achieves a material advantage in export credit terms. However, the drafters recognized that these provisions were not sufficiently detailed to be operational. The ASCM therefore deferred through item (k) of the illustrative list to the rules for official export credits established under the OECD Arrangement. That had the effect of creating a “safe harbor” from WTO rules. As long as export credits are in conformity with OECD interest rate provisions, they cannot be challenged as a prohibited export subsidy. Development Assistance Committee The Development Assistance Committee was established in 1961 to identify ways in which the common aid effort of OECD countries could be better coordinated.2 In the early years, the DAC focused on improving and harmonizing the financial terms of aid, taking into consideration the impact on developing countries’ debt and burden sharing among donor countries. Later, the group focused on improving burden sharing among donors and improving the quality of aid. As part of this effort, the DAC has concentrated on encouraging transparency, statistical reporting and the progressive untying of aid to improve effectiveness and reduce the potential for trade distortions. 1. Organization for Economic Co-operation and Development (OECD), Arrangement on Guidelines for Officially Supported Export Credits (OECD: Paris, 2002), p. 7 available at URL /M00035551.pdf. 2. World Trade Organization, Agreement on Subsidies and Countervailing Measures (WTO, Geneva, 2003) available at URL english/docs_e/legal_e/final_e.htm. 3. For a comprehensive history of the DAC see Helmut Fuhrer, “The Story of Development Assistance: A History of the Development Assistance Committee and the Development Co-operation Directorate in Dates, Names and Figures,” Organization for Economic Cooperation and Development, OECD/GD/(94)67, Paris, 1994. forum for regulating the terms and conditions of official export financing. Effects of Export Financing Regulation on Environmental Sustainability There are two ways in which the regime governing official export financing comes to bear on environmental sustainability goals. One way is through the positive effect of controlling subsidies. As noted above, the primary aim of international cooperation has been to remove trade distortions and to create a more level playing 7
    • DRAFT July 30, 2003 field for exporters that lack access to subsidized export financing.3 The progressive strengthening of trade finance rules over the past three decades has reduced the availability of unwarranted export subsidies.4 Below-market export financing can create environmental costs by stimulating excessive investment in fossil fuel power plants, nuclear power plants, oil and gas pipelines, and industrial manufacturing facilities such as steel making plants and equipment. Export credit disciplines negotiated through the OECD and WTO have helped to remove these artificial stimulants by requiring that their full financing costs be paid, although not necessarily their full environmental cost.5 The environmental benefit of controlling export credit subsidization is often overlooked but is nonetheless a valuable side benefit of international trade finance disciplines. The other way trade financing regulation may impinge on environmental sustainability is through the potentially negative effect of restriction of the government’s flexibility to use official financial instruments to achieve beneficial goals. The market regularly under-invests in activities with positive external benefits. Activities in another country may generate sufficient benefit to the United States and other OECD countries to merit the provision of targeted subsidies. Trade finance rules constrain how export subsidies can be targeted. This includes financial interventions on behalf of technology exports with significant environmental benefits. As sovereign actors, governments may choose to ignore the existing rules. However, derogations carry risks. The export finance regime has proven to be robust, but is unlikely to withstand repeated defections. An alternative is to attempt to negotiate common rules that would create special flexibility for renewable energy and other exports with environmental benefits. However, there are significant problems associated with designing rules that only apply to a limited class of environmental projects. One is the methodological problem associated with defining what technologies should be considered environmentally beneficial.6 Another problem arises from the political realities of negotiating international agreements. There is a wide 3 The United States has historically allocated few subsidies to support its manufacturing exports. It has taken a leading role within the OECD to bar these practices and ensure that US manufacturers are not placed at a competitive disadvantage in international markets. This posture does not extend to agriculture or military exports where the US engages in export subsidization. In these latter cases, the US has not supported strong international trade finance disciplines and in some cases has blocked their development. 4 Provide indication of subsidy reduction benefits. 5 Environmental policy and review procedures vary significantly among ECAs. Since 1995 there has been an effort to negotiate common environmental guidelines through the OECD Export Credit Group. The negotiations have so far failed to require ECAs to fully account for the environmental impacts of large, long-term finance. For a discussion of these issues, see Tomas Carbonell and Roland Stephen, “Unseen Agents and Global Standards: Export Credit, Institutional Design and the Environment,” Department of Political Science and Public Administration, North Carolina State University, February 14, 2003. 6 From an environmental standpoint, subsidies that encourage investment in a supercritical coal-fired power plant with higher combustion efficiency than a conventional pulverized coal-fired power plant may avoid more carbon dioxide than an equivalent subsidy to wind turbines. If this is true, should the rules permit subsidies to supercritical coal-fired technology on environmental grounds? 8
    • DRAFT July 30, 2003 variety of activities that governments would like to subsidize. In exchange for agreeing to flexibility on export financing for renewables, some governments may seek exceptions for their own pet exports, which may not be environmentally benign. In short, there is a tension between retaining the integrity of trade finance disciplines, which generate environmental side benefits through subsidy control, and the desire to create exceptions within the disciplines that will permit governments to use trade finance as an instrument to support investment in cleaner and more efficient technologies. The following sections take up these issues in greater detail. The next section begins by examining the prospect and problems of extending the repayment period of export financing rules to support renewable energy. 9
    • DRAFT July 30, 2003 III. Special Sector Agreement on Renewables: Prospects and Problems One of the most significant constraints on the expansion of renewable energy is the high up-front per kilowatt capital costs when compared to conventional technologies. The cost comparison becomes more favorable over time when fuel costs are considered, but that point is often far into the life of the project. In developing countries, this cost factor is a critical– if not the critical– factor when making technology choices. Given budget constraints and economic development priorities, developing countries normally choose the least financially costly technology option. Domestic institutional arrangements and regulatory regimes that allow conventional technologies to escape accounting for their full environmental and social costs tend to further bias these technology choices. More flexible financing terms could improve the economic calculus for renewables. Lengthening the repayment terms from the present 10-12 year terms to a 15-year term would serve to lower the cost of renewable energy by lowering the annual debt payment amount, thereby making renewable energy technologies more cost competitive with conventional energy sources. However, there are drawbacks. Lengthening repayment terms beyond market terms involves subsidy costs. These costs must be recognized and budgeted for. In addition, lengthening terms to 15 years would require changing the terms of the Arrangement. While this is technically possible, there are several reasons why it could be difficult and not the best option for encouraging the shift to a more sustainable energy path. Rationale for Limiting Repayment Terms Governments long ago discovered that manipulating repayment terms could be used as a tool against competitors to win orders for national exporters. The term of repayment was one of the first areas where competitive subsidization broke out between ECAs. The first attempt to set rules on tenor took place through the auspices of the Berne Union in 1961.7 These efforts were not successful. Pledges made by the leading ECAs to restrict any general lengthening of repayment terms beyond five years were quickly broken as countries offered longer and longer repayment terms through the 1960s and into the 1970s. The inability of the Berne Union to serve as an effective break on competition was an important reason why negotiations on the more trade sensitive medium and long-term credits eventually shifted to the OECD.8 Trade finance disciplines negotiated through the OECD contain several special sector agreements that have been negotiated as side agreements to the main Arrangement document. They include special agreements on nuclear power, aircraft and ships. These side agreements were not an effort to provide special treatment to certain sectors. Rather, they reflected cases that presented particular difficulties for 7 “Export credits: the five year breach” The Economist, June 17, 1961, p. 1254. 8 Background on the failure of the Berne Union negotiations can be found in United Nations, Export Credits and Development Financing, vol. 1 and 2, Department of Economic and Social Affairs, United Nations, New York, 1967. 10
    • DRAFT July 30, 2003 countries. As a result, the difference in tenor rules between sectors is the result of political compromise as much as the outgrowth of economic logic. From the beginning, countries were divided on the approach to regulating credit terms. The US and Canada (and usually Japan) preferred a term of repayment that matched the useful life of a project, while the European agencies preferred to keep terms as short as possible. One explanation for these preferences is that they reflect the difference between a lender’s approach and an insurer’s approach.9 The programs of the US, Canada and Japan have traditionally been oriented toward loans, whereas European countries have traditionally been oriented toward guarantee of commercial bank credits coupled with interest rate subsidization schemes. However, the differences also reflect fundamental differences in financial systems. The US historically has had deep bond markets, which have made it possible for the government to offer repayment terms over 20 years. European financial markets, by contrast, have been more limited, constraining the terms that European governments could offer when the core Arrangement terms were negotiated. Participants to the Arrangement eventually negotiated rules to govern repayment terms. However, because of differences in bargaining strength and interests across countries and sectors, the rules are not entirely consistent. As some have observed, the differences in rules create a situation where nuclear power is permitted 15-year repayment terms, whereas renewable technologies such as wind can receive at maximum 12-year repayment terms (unless they are financed on project finance terms, in which case the repayment term can be extended to 14 years.) Some have called for the establishment of a separate sector agreement that would offer better terms for renewable energy projects.10 A review of the negotiations leading up to the special sector agreement on nuclear power illustrates the combination of political and economic factors surrounding the bargaining over tenor rules. Nuclear Power Sector Agreement Nuclear orders have dwindled in the past decade.11 They were, however, very big business in the 1970s and early 1980s. In 1982 it was estimated that US companies had the opportunity to compete for between 19.6 to 34.5 gigawatts of nuclear power generating capacity or worth from $13 to 20 billion between 1982 and 1990.12 These 9 John L. Moore, Jr. "Export Credit Arrangements," in Seymour J. Rubin and Gary Clyde Hufbauer, eds., Emerging Standards of International Trade and Investment: Multinational Codes and Corporate Conduct (Rowman & Allanheld Publishers: New York, 1983), p. 142. 10 Crescencia Maurer, “The Transition from Fossil to Renewable Energy Systems: What Role for Export Credit Agencies?” report prepared for the German Advisory Council on Global Change, July 9, 2002, p. 25. 11 Between 1990 and 2001 nuclear energy transactions made up only 4 percent of the energy related transactions financed by US Ex-Im Bank or approximately $1.2 billion in loans and guarantees. 12 This number of contracts never materialized, but these expectations were an important element of the priority that the US and other governments attached to the trade and the need to control competitive 11
    • DRAFT July 30, 2003 orders were expected to be heavily dependent on official financing. Bilateral financing support was the only source of financing available to exporters and buyers since the World Bank and other multilateral sources declined to participate in these sales. International constraints on export credit subsidization were limited during the 1970s and early 1980s. What little constraint existed was based on a 1975 “standstill” agreement between major suppliers that attempted to freeze the financial terms offered by competing export credit agencies. However, this standstill agreement had major flaws. It specified that there be a minimum cash down payment of 10 percent and a maximum repayment of 15 years, but left a major loophole by setting no minimum interest rate. As interest rates rose to historic highs in the late 1970s, the cost of nuclear export financing subsidies mounted. The US Treasury estimated that the high cost involved in constructing and commissioning nuclear power plants meant that every percentage point below market terms was costing export credit agencies as much as $200 million over the life of the loan.13 The mounting costs eventually brought the major exporters together to work out a more comprehensive agreement. The driving impetus for an accord for the Europeans was the desire to prevent the US Ex-Im Bank from offering terms longer than 15 years and, if possible, to shorten the US repayment terms to 12 or 10 years. The US, in turn, sought to raise the minimum interest rate from 7.6 percent to a rate closer to market levels (at the time, US long-term treasury notes were 13.6 percent, whereas French Treasury bonds were about 15.8 percent). The US began by proposing a system based on market rates and maximum repayment terms of 20 to 25 years. The US based this proposal on the experience in the US market in which nuclear power plants were financed by utility bond issues that carried a maturity of up to 30 years. The US also noted that these repayment terms were well within the 40-year estimated project life of nuclear plants. European countries rejected this proposal, largely because their access to long-term capital was more limited (typically 10 years on European financial markets), and they believed that demand for nuclear contracts would shrink without the credit subsidies. The US countered that if all members of the Arrangement were not prepared to link interest rates to the cost of money to government (using the CIRR rates as a proxy), the US would not agree to terms of less than 15 years, as was possible under the standstill of 1975.14 A new agreement was eventually reached in 1984. The final understanding was a compromise between the two contending positions. The United States agreed not to extend term beyond 15 years while the other producers agreed to apply more market- export subsidization. See Lisa B. Barry, “International Trade Issues of the U.S. Nuclear Power Industry,” Office of the U.S. Trade Representative, August 1982. 13 “OECD Sector Understanding on Export Credits for Nuclear Power Plants,” Treasury News, United States Department of the Treasury, Washington, D.C., August 1, 1984. 14 Organization for Economic Cooperation and Development, Trade Directorate, “Participants views on an agreement on terms for export credits for nuclear power plants,” TD/CONSENSUS/83.55, OECD, Paris, November 22, 1983. 12
    • DRAFT July 30, 2003 based interest rates with certain exceptions for low interest rate countries such as Japan. A special CIRR rate was devised for countries providing credits over 12 years.15 Few Exceptions Whenever rules on tenor and other aspects of official trade finance have been established, pressures to make adjustments and exceptions have soon followed. Participants have mostly resisted these pressures. One example stems from the rapidly changing events in 1989, which brought the eventual collapse of the Soviet Empire. As events unfolded, Western governments searched for a means to provide greater economic and political support to Soviet satellite states in Eastern Europe. At the G-7 meeting in Paris, France in July 1989, the United States led an initiative that brought together a group of 24 nations to support economic and political reform. By November 24, a week after the Berlin Wall fell on November 9, 1989, these countries had pledged upwards of $8 billion in financial commitments to support economic reform and restructuring in Poland and Hungary. These commitments included grants, loans, technical assistance, debt forgiveness, export credits, and other forms of assistance. Throughout this period, calls were made to relax terms of the Arrangement by extending repayment terms and for other measures to make export credit terms less burdensome for Poland and Hungary.16 These proposals were eventually rejected. Aid funds were increased, but participants decided against making an exception in Arrangement terms for export credits that would apply to only two countries, despite the political pressure to do so. The following year, this position was reinforced at the summit held in Houston when G-7 leaders issued a joint communiqué that called on countries to avoid trade distortions in financial flows to Central and Eastern Europe.17 Project finance is one of the few areas where Arrangement Participants agreed to make adjustments in existing rules. The advent of privatization and market liberalization in the 1980s caused an increasing number of projects in the developing world to seek financing on the basis of the project’s expected cash flow, rather than on the balance sheet of the corporate sponsors or through sovereign guarantees of the host country. “Project financing” is the term used to describe the financing of a major new project or large project expansion in which the lenders place primary reliance on the revenues of the new project for repayment and use the assets and contracts of the 15 The minimum interest rate was based on a Special Commercial Interest Reference Rate (SCIRR), which added a markup to reflect the longer than standard repayment terms for countries with low interest rates. These conditions required that countries add 75 basis points to the CIRR for the currency of the transaction, except for Japanese yen. The maximum CIRR term was to be applied for countries with more than one CIRR rate. 16 Daniel L. Bond, “Trade or Aid? Official Export Credit Agencies and the Economic Development of Eastern Europe and the Soviet Union,” Public Policy Paper 4, Institute for East-West Security Studies, New York, 1991. 17 G-7 Houston Economic Declaration, “Export Credits,” Houston Economic Summit, July 10, 1990. 13
    • DRAFT July 30, 2003 project as security. The Arrangement rules presented difficulties for these projects by not recognizing the early cash flow difficulties associated with these projects. There were two schools of thought regarding ways in which additional flexibility could be introduced when Participants took up negotiations on project finance in 1996. Some countries preferred a sector-based approach that would take into account the wide variation in project financing characteristics found in different industries. Others preferred a less complicated approach that would cut across all sectors. Another consideration was how properly to ring-fence exceptions so that the exceptions would only be made for transactions that supported genuine project finance cases. Participants were unable to develop a sufficiently tight, single definition of a project finance transaction to address this concern. Instead, a general description was devised coupled with a list of essential and illustrative criteria. These criteria eventually grew to eight items. In the end, special flexibilities for project finance transactions were adopted by consensus in 1998 on a trial basis.18 The final agreement adopted a cross-sector approach, which included options for extending the maximum repayment period to 14 years. Consensus was achieved because the rules were perceived to be technologically neutral by applying to all capital goods financed with export credits. They also did not appear to benefit one country unfairly over another. The Subsidy Cost Associated with Special Terms There is a cost whenever governments offer financing that is beyond commercial market terms. These costs may be direct when governments issue loans or indirect when governments issue guarantees. These costs increase with market risk. As a result, the level of subsidies that are needed to cover these costs will be larger for less credit-worthy countries. They will also be higher the longer the repayment term on loans is extended. Put another way, the value of government loans and guarantees increases with the underlying risks of the project and the maturity of the loan being guaranteed. Over the past 20 years the method for estimating these subsidy costs has been refined and improved.19 Measures such as the U.S. Credit Reform Act of 1990 represent an effort by governments to more accurately measure the cost of interest subsidies and defaults in credit programs.20 This legislation and other measures like it 18 The trial period was recently extended to the end of 2003. The anticipation is that they will be made permanent but Participants are still debating exactly how this will be done. 19 Ashoka Mody and Dilip Patro, “Methods of Loan Guarantee Valuation and Accounting,” Cofinancing and Financial Advisory Services, Project Finance Group, CFS Discussion Paper Series, No. 116, World Bank, Washington, DC, November 1995. 20 According to the 1992 Credit Reform Act the subsidy cost of a loan guarantee is “the present value of cash flows from estimated payments by the government (for defaults and delinquencies, interest rate subsidies, and other payments) minus estimated payments to the government (for loan origination and other fees, penalties, and recoveries).” See General Accounting Office, “U.S. Needs Better Method for Estimating Cost of Foreign Loans and Guarantees,” GAO/NSIAD/GGD-95-31, Washington, DC, 1994. 14
    • DRAFT July 30, 2003 Table 3. Subsidy Budget Impact of Extending Tenor to 15 Years Repayment Hypothetical Subsidy Subsidy Country Risk Type Terms (yrs) Authorization Cost(a) Percent Mexico Sovereign 7 $10,000,000 $430,000 4.3% Mexico Sovereign 10 $10,000,000 $931,000 9.3% Mexico Sovereign 15 $10,000,000 $1,052,000 10.5% Mexico Private 7 $10,000,000 $704,000 7.0% Mexico Private 10 $10,000,000 $1,373,000 13.7% Mexico Private 15 $10,000,000 $1,557,000 15.6% Note: The results are based on the risk levels for Mexico in 2001. Grace Period Assumptions: 7 yrs: 1 yr. disbursement; 10 yrs: 2 yr. disbursement; 15 yrs: 3 yr. disbursement. (a) Subsidy cost is calculated based on a formula using the Interagency Country Risk Assessment System (ICRAS). The ICRAS, established to comply with the Credit Reform Act of 1990, is used to 'score' loans, i.e., to determine the amount (or 'default subsidy') that must be set aside against estimates of the contingent liability associated with a loan or guarantee. Source: US Export-Import Bank. have improved transparency of government subsidy allocations and the ability to compare alternative uses of scarce government resources. Applying these techniques can provide a measure of the subsidy cost associated with extending repayment terms for renewable energy projects. Table 4 illustrates the shift in subsidy cost associated with a hypothetical $10 million renewable energy project in Mexico authorized in 2001. Two different types of projects are shown. The first considers the shift for a sovereign transaction that carries a repayment guarantee from the government of the borrowing country. The second considers the shift for a private sector project that lacks a sovereign guarantee. Because the sovereign transaction is considered more secure, the subsidy cost is somewhat less than that of the private transaction. However, in both cases, the cost of extending repayment terms from 7 to 15 years is significant. In the case of the sovereign transaction, the subsidy cost increases from $430 thousand to $1.05 million. In the case of the private sector transaction, the subsidy cost increases from $704 thousand to $1.56 million. Mexico is considered a relatively good credit risk among emerging markets. The same project undertaken in a less credit-worthy country such as Brazil, Egypt or India would have a higher subsidy impact. What the figures illustrate is that extending repayment terms is not free. It is simply another way to channel subsidies. This raises important policy questions. Although extending term may be more politically palatable in certain contexts, is it the most efficient way to make renewables cost-competitive with conventional energy sources? More significantly, what are the implications for the existing body of rules that have been established to control subsidized government credit? What are the prospects and consequences of changing the Arrangement? 15
    • DRAFT July 30, 2003 The Problem of Negotiating “Renewables Only” Provisions The Arrangement is the result of cooperation between the United States, the European Community, and other major exporting countries. The disciplines work because Participants mutually agree to adhere to its provisions.21 There are several reasons why it would be difficult to obtain a mutually acceptable agreement on more favorable terms for renewables. Given the alternatives available to provide targeted subsidies that conform to the existing rules, such an agreement is probably unnecessary. First, there are significant methodological problems associated with creating exceptions for renewables and not other public priorities. Export subsidies are recognized as an important and even crucial tool for states to achieve legitimate policies to serve their constituents and national interests.22 However, there is a wide range of values that are underserved by market forces alone that may justify special financial treatment. The desire to support political independence in Eastern Europe discussed above is one example. Other examples include public support for health care, poverty alleviation, narcotics interdiction, and counter-terrorism. Some countries consider energy security a vital national interest that warrants subsidies to secure dependable energy supplies.23 Receiving longer repayment terms or other special financing terms could advance all of these values. There is no clear reason why renewable energy should receive special treatment over any of these other values. These are normative issues on which countries are bound to differ. One solution is to grant special treatment to all of these values. However, the disciplines would then lose their force, which from an environmental perspective may not be desirable, since the positive consequences of subsidy control could be undermined. A second methodological problem arises from limiting special treatment to a small class of renewable energy technologies. If the end goal is environmental improvement, then other technology options may be of equal or greater value. The same level of subsidization provided to supercritical coal-fired power plant technology that is more efficient than conventional coal-fired power plant technology, but more expensive, may yield higher environmental benefits (measured in avoided CO2 or other 21 Arrangement rules are subject to infractions but they tend to be relatively limited and resolved in a reasonable amount of time through face-to-face consultation between Participants. A complete list of infractions and how they were resolved is not publicly available. A discussion of certain cases can be found in reports published on an annual basis since the late 1970s by the US Export-Import Bank. See Export Import Bank of the United States, Report to the U.S. Congress on Export Credit Competition and the Export-Import Bank of the United States, Washington DC, various years. 22 John H. Jackson, The World Trading System: Law and Policy of International Economic Relations, second edition (Cambridge, MA: The MIT Press: 2000), pp. 293-303. 23 Few countries have attempted to use financing as an approach to reduce external resource dependency as Japan. See Terutomo Ozawa, Multilateralism, Japanese Style: The Political Economy of Outward Dependency (Princeton, NJ: Princeton University Press, 1979), pp. 137-145; Terutomo Ozawa, “Japan’s new resource diplomacy: government-backed group investment,” Journal of World Trade Law, vol. 14, no. 1 (Jan/Feb. 1980), pp. 3-13. 16
    • DRAFT July 30, 2003 missions) than the same level of subsidization of wind turbines. The question is: if the end goal is to improve environmental outcomes, on what grounds should special treatment be restricted to a certain group of technologies? Should not special treatment be available to any technology that achieves the environmental performance goal? In other words, why should changes in rules be based on technology rather than outcomes? Another problem arises from competitive considerations. Not all countries have competitive renewable energy technology manufacturing industries. It is not unreasonable for countries that lack such industries to object to changes in rules that would only benefit competitors. These countries may accept rule changes in exchange for some type of compensation. In exchange for flexibility on renewable terms, these governments may seek exceptions for their own pet exports. The problem here is that the industries that they seek to benefit may not be environmentally benign. Therefore, not only may it be difficult to obtain agreement on special treatment for environmental technologies, the horse trading required to obtain such provisions may leave the environment worse off when all is said and done. Finally, providing longer terms is not the only way to provide support to renewables. There are ways that governments can provide targeted support that conform to Arrangement rules. As the following sections of this report discuss in greater detail, the rules permit countries to target subsidies through mixed credits. These rules are tightly constrained to prevent countries from subsidizing exports that can be financed on commercial terms. However, the rules leave room for countries to offer targeted subsidies to support renewable energy and other environmentally and socially beneficial projects. Peer review procedures among Participants have ensured that these rules work reasonably well. The existing rules do provide opportunities for governments to offer targeted financial support for environmentally related capital goods exports. Within certain defined parameters, governments can provide mixed credits and highly concessional tied aid to support such investment. There are, however, major differences between countries in how actively these opportunities are being pursued. Members of the European community and Japan actively take advantage of these opportunities, while the United States does not. This is a self-imposed constraint, which points to the need for change in US mixed credit policy rather than in the overarching body of international trade finance rules. 17
    • DRAFT July 30, 2003 IV. Environmental Implications of Helsinki Tied Aid Disciplines The portion of the OECD Export Credit Arrangement that governs tied aid is known as the Helsinki Package. It refers to a collection of rules that was designed to control the use of aid funds for commercial gain. Participants to the Arrangement had become increasingly concerned about tied aid practices. When the debt crisis depressed orders of high value added goods and services in developing country markets in the 1980s, many OECD countries responded by increasing their offers for tied aid credits to sustain (or gain) market share. The United States led the effort to control these practices and establish clearer distinctions between trade motivated export credits and developmentally motivated aid credits.24 The rules were eventually adopted by consensus and went into effect in 1992. While environmental considerations played almost no role in the establishment of the rules, Helsinki has had beneficial environmental consequences. Although the rules accord no special treatment for pollution control technology, they have reduced subsidies to coal-fired power plants and other conventional energy technologies by controlling tied aid allocations to commercially viable projects. Reforming Tied Aid Rules The Helsinki rules on tied aid have several parts (see Table 4). First, the rules regulate what countries remain eligible for tied concessional financing. The rules prohibit most tied aid credits in higher income countries, while allowing continued flows to middle income and low-income developing countries.25 Second, the rules establish minimum levels of concessionality, which are intended to prevent countries from providing just enough aid subsidies to tip the price of project in the favor of their national exporters. Finally, the rules establish hoop tests that are designed to ensure that aid subsidies do not flow to projects that could otherwise be financed on commercial terms. This tends to be of greatest concern in middle income countries that have the best long-term sales prospects. Prior to Helsinki, aid funds were flowing to projects for no apparent reason other than to help the donor country’s firms establish market presence. To avoid this abuse of aid, the rules permit new tied aid credits to be extended to middle income countries under two conditions: 24 For a history of the problem and the negotiations leading up to the Helsinki Package see John E. Ray, Managing Official Export Credits: The Quest for a Global Regime (Institute for International Economics, Washington DC 1995). 25 Higher income countries are defined as countries with a Gross National Income per capita sufficient to make them ineligible for 17-year loans from the World Bank for at least two consecutive years. This figure was $2,465 in 1990 and $2,995 in 2000. In Latin America, this bars Argentina, Brazil, Mexico, and Venezuela from most tied aid but allows it in Colombia, Dominican Republic and El Salvador. In Asia, Hong Kong, Korea, Malaysia, Singapore, and Taiwan are largely barred, but China, India, Indonesia, Philippines, Sri Lanka, Thailand and Vietnam are eligible. In Africa, Botswana and Gabon are barred, but Algeria, Angola, Egypt, Ghana, Morocco, Namibia, Nigeria, South Africa and Tunisia are permitted. In the Middle East, Bahrain, Israel, and Saudi Arabia are barred, but Jordan, Turkey and Yemen are eligible. Russia and most countries in Eastern Europe are largely barred from tied aid; however, Azerbaijan, Tajikistan, and other countries in the Caspian region are eligible. 18
    • DRAFT July 30, 2003 1) The project lacks the capacity with appropriate pricing based on market principles to generate cash flow sufficient to cover its operating costs and debt flow. Such a project would be considered commercially non viable (CNV). 2) The project is financially viable, but commercial or ECA financing is not available. If a project meets one of these criteria, it can be funded with aid funds, provided that the aid has a minimum concessionality level of 35 percent. Helsinki also permits tied aid credits to public or private projects in lower income countries for either commercially viable or commercially non viable projects as long as the donor offers a minimum concessionality level of 50 percent. Governments use cash flow analysis (CFA) to determine financial viability within the credit periods permitted by the Arrangement. Financial viability is interpreted strictly in terms of a project’s debt service capacity. The question is whether the cash flow is sufficient to repay borrowed funds and cover interest charges using the Arrangement’s credit rates and terms as the reference point. Traditional cost/benefit analysis operates at a marginal level, measuring the economic impact of a Table 4. OECD Arrangement Rules for Tied Aid Financing (Helsinki Package)† Minimum Level of Country Economic Level Type of Project Tied Aid Eligibility Concessionality OECD/ Countries in Transition All projects Prohibited _ Commercially viable Eligible 80% Higher Income* Commercially non viable Eligible 80% Commercially viable** Eligible 80% Middle Income (LDC's) Commercially non viable Eligible 35% Low Income (LLDC's) All projects*** Eligible 50% †Public and private projects in excess of SDR 2 Million. * Countries with a per capita GNP exceeding $2,465 in 1990; exceeding $2,995 in 2000. ** A special exception is made in the rare case that ECA or market financing is not available for a commercially viable project. This is case, donors may provide tied aid with a minimum concessionality level of 35 percent. ** Given the difficulty that the world's poorest countries face in securing commercial financing no matter how attractive the project, Helsinki rules exempt these countries from financial viability tests. All tied aid offers must, however, have a minimum concessionality level of 50%. 19
    • DRAFT July 30, 2003 project proposal as the difference between net economic benefits comparing cases where the project goes forward (“with”) and cases where it does not (“without”). In contrast, the Helsinki process takes a time-slice approach of the “smallest complete productive entity.” Ex Ante Guidance The guidelines that were developed to implement the rules are as important as the rules themselves. A process was established to resolve disputed cases and other challenges created by the new rules. This took place through the Tied Aid Consultations Group, which met in Paris under the auspices of the OECD Participants to the Arrangement on Export Credits. Between 1992 and March 2002, a total of 128 cases were challenged by one or more Participant. The largest number of disputes occurred over energy projects, which made up 43 percent of the cases brought before the group.26 Over time, the number of challenges decreased as countries gained experience with the rules and definitional and methodological issues were resolved. The experience was codified on the basis of the soft case law that developed and was published as Ex Ante Guidance for Tied Aid by the OECD in 1996.27 Appropriate Pricing One of the most controversial issues that arose during the early implementation of Helsinki concerned the interpretation of “appropriate pricing based on market principles.” The choice of project input prices has the potential to shift a project from being considered financially non-viable to being financially viable if “appropriate prices” are applied. Participants differed on whether shadow (i.e. willingness to pay) prices should be used in the analysis in the place of actual local prices where the latter were considered to be significantly distorted.28 Eventually they came to the view that evaluations based on local prices would only perpetuate economic inefficiencies. Ex Ante guidance leaves it to the country sponsoring the project whether or not to adjust local prices.29 It also left open the right for others to challenge these assessments, which they have. 26 US Export Import Bank, Report to the U.S. Congress on Export Credit Competition and The Export- Import Bank of the United States, Washington DC, July 2002, p. 70. 27 Organization for Economic Co-operation and Development, Ex Ante Guidance for Tied Aid, OECD/DG(96)180, 1996. A significant drawback of this publication is that it provides almost no context or back ground for understanding how and why Participants chose this final set of guidelines. 28 This was less of a problem for projects that involve internationally traded commodities, where the international trade prices at the border provided a clear benchmark. However, it proved more challenging with respect to internally traded goods such as domestic coal. If no adjustment is made to account for the presence of subsidies in domestic coal fuel input prices, then a project may be declared financially non-viable when “correct” pricing would have made it financially viable. 29 Ex Ante Guidance for Tied Aid, p. 20. 20
    • DRAFT July 30, 2003 Project Definition Another difficulty countries faced was determining what constituted a project. Like pricing, it was controversial because it could influence whether a project was considered to be financially viable or not. Eventually the Participants agreed to define a project as: The smallest complete productive entity, physically and technically integrated, that fully utilizes the proposed investment and captures all the financial benefits that can be attributed to the investment. This definition was designed to prevent equipment that may not have produced revenue itself (such as pollution control equipment) from being considered commercially non-viable. The definition required that the financial test be made with reference to the larger productive entity to which the project was connected (e.g. the paper and pulp mill, power plant, etc.) and not the retrofit itself. This could be a distinct division of the enterprise undertaking the investment and not necessarily the complete legal or accounting unit. Polluter Pays Principle Countries came to the consensus that environmental projects should not be treated on an exceptional basis. In working through several cases, Participants decided it was best to embrace the widely held “polluter pays principle.” This principle holds that environmental costs should, to the greatest degree possible, be incorporated in the actual cost of production. The polluter pays principle holds that governments should not subsidize the installation of environmental equipment by industrial polluters, since such subsidies would be inconsistent with efforts to ensure that industrial polluters fully account for environmental costs. Countries agreed to apply this principle when considering tied aid offers not only for new industrial plants, but also for environmental retrofits to existing facilities. Implications of Helsinki From an environmental standpoint, the Helsinki rules have had the greatest impact in two areas. One concerns the constraints that have been placed on how countries can offer concessional financing for environmental control technologies. The other is how the rules have influenced the flow of subsidies to energy projects. By reducing tied aid offers to middle income countries, the rules have significantly reduced the volume of concessional financing that once flowed to fossil fuel power plants. Each of these consequences is addressed in turn. 21
    • DRAFT July 30, 2003 Environmental Control Technologies The applicability of tied aid rules to environmental control technologies became an issue shortly after the Helsinki rules were adopted. The debate began in response to two tied aid credits brought before the Consultation Group in 1992. One was a Spanish tied aid credit for decontamination equipment for a copper smelter in Chile. The other was for an Austrian tied-aid credit for steel dedusting equipment in Indonesia. Both Spain and Austria argued that their projects were environmental in nature with no revenue generating ability. Austria held to the view that tied aid should be universally permitted for environmental projects in developing countries. The US and Canada strongly supported the application of the “polluter pays principle” and strongly opposed treating environmental projects as exceptions to the Helsinki rules. Both countries pointed to the significant problems associated with defining “environmental” and expressed the fear that any project that improved on existing conditions could claim an exemption which could significantly reduce the effectiveness of stronger tied aid rules. In subsequent discussions, the Spanish and Austrian projects were deemed to be commercially viable and therefore ineligible for tied aid. Through the consultation process it was revealed that the copper smelter was owned by ENAMI, Chile’s second largest exporter. It was a well-capitalized, profitable state-owned company. The majority of the participants found these facts sufficient to deem the smelter commercially viable and therefore ineligible for tied aid financing. Austria’s proposed tied aid credit proposal was less clear-cut. The Indonesian steel company, Krakatau, was a public enterprise, which did not publish financial statements. As a steel company, its financial profitability could not be taken for granted. Austria’s prepared financial analysis of the project assumed “world prices” for natural gas and steel and indicated a significant loss for the company’s accounts. However, the US argued that there should be a strong presumption of commercial viability for the steel mill, given that gas supplies in Indonesia were plentiful and cheaply priced for the domestic market, and that domestic steel producers likely benefited from high priced steel imports given relatively high transportation costs. This view eventually prevailed in the Consultation Group, and this project was also found to be commercially viable. This meant that Austria would have to raise the minimum concessionality level to 80 percent instead of 35 percent or abandon its tied aid offer. The issue of appropriate pricing arose in the context of a German tied aid offer for sulfur scrubbers in 1994.30 This project proposed retrofitting three units of the highly polluting Yatagan power plant (3 x 210 MW), which burned locally mined lignite, a soft poor quality coal. The total cost of the FGD retrofit was estimated to be $120 million with approximately 20 percent to be covered by a tied aid credit from Kreditanstalt fur Wiederaufbau (KfW). The United States challenged the project, arguing that it was financially viable and therefore not eligible for tied aid. The 30 This case is described by Anthony Owen, “The Body of Experience Gained under the Helsinki Disciplines,” unpublished paper presented at MITI- Sponsored OECD Seminar, Tokyo, February 13, 1998. 22
    • DRAFT July 30, 2003 feasibility study presented by Germany was based on domestic electricity prices, which were extremely low in Turkey (roughly 83% of long run marginal costs), making it difficult for the power plant to repay the cost of the FGD units. Participants rejected these assumptions in favor of a project evaluation based on theoretical “market” prices, which eliminated the implicit domestic electricity subsidies.31 After this adjustment was made, the project was found to be financially viable. The US stance in this case was motivated by a desire to establish clear criteria for evaluating projects. It was also motivated to protect US commercial interests in this and other potential cases. As one US official put it: “we didn’t want aid money freed up by telecoms and power to wash into sulfur scrubbers and wipe out US producers.”32 The result of these and other cases is that the environment essentially receives no special consideration under Helsinki. This raises the question as to whether the rules may be too strict. Should there be a mechanism whereby tied aid can be used to reduce the cost of the investment even if the “smallest productive unit” happens to be commercially viable? Has the desire to control export subsidies and protect national commercial interest gone too far? Ex Ante Guidance for Tied Aid makes some reference to the need for a flexible approach when environmental considerations are at stake.33 However, there has been no ground swell among Participants to ease the financial tests projects must pass to be eligible for subsidized tied aid financing on environmental grounds. Energy Projects The Helsinki rules also had a major impact on energy projects. Participants concluded that the smallest complete productive entity project definition should be made with reference to whether or not the project was connected to an integrated power grid. This had the effect of rendering the vast majority of power projects linked to transmission systems commercially viable and therefore ineligible for tied aid financing. Donors could escape these strictures if they provided financing with a concessionality level over 80 percent, but this presented an expensive proposition that most donors could not afford.34 Table 5 presents an illustrative break-down of what types of energy projects are commercially viable and which are considered commercially non viable. In general, fossil fuel power plants, large stand-alone hydropower plants, and large-scale wind farms are considered commercially viable. On 31 A consensus emerged that the correct price for the analysis should be the long run marginal cost of power generation, estimated from World Bank data on the Turkish electricity sector. 32 Personnel communication with US trade official, June 10, 1998. 33 Page 15 of Ex Ante Guidance states: “The Participants recognize that some add-on investments to projects with external environmental effects require special attention under the adopted definition (i.e. the smallest complete productive entity), and that inflexible application of the polluter pays principle may create difficulties and may consequently lead to the rejection of projects… In cases where the cash flow of the project, including the add-on investment, is marginally positive, notifiers may reinforce the claim for special attention of their project by providing full and transparent information on the external environmental effects of the add-on investment.” 34 Given the high capital cost of energy projects, an 80 percent concessionality level represents a hit to the aid budgets that most donors cannot reasonably justify. 23
    • DRAFT July 30, 2003 Table 5. Ex-Anti Guidance for Tied Aid Rules Energy Sector Projects Generally Considered Commercially Viable Oil-fired power plants Gas-fired power plants Coal-fired power plants Large stand-alone hydropower plants Large-scale wind turbine farms Sulfur Scrubbers Substations in urban or high-density areas Electric power transmission lines in urban or high-density areas Projects Generally Considered Commercially Non-Viable Transmission lines to low-density, rural areas Geothermal power plants Small wind turbine farms Small solar projects Coal gasification that benefit low-income residential users District heating systems Small hydropower plants connected with irrigation Source: The list is drawn from OEDC Ex Ante Guidance for Tied Aid and interviews with Tied Aid Consultation Group members. the other hand, power projects that are small-scale and located off-grid such as geothermal, small-scale wind farms, solar projects, as well as district heating systems and coal gasification projects that benefit low-income residential users, are considered commercially non-viable. Commercially non-viable projects typically have weak revenue potential, high unit costs, and/or have a small-scale rural focus. This is often the case for power generation projects that are separate from integrated power grids away from higher density urban areas. Small-scale and/or rural applications of renewable energy have generally been found to be commercially non-viable and therefore eligible for tied aid financing, provided that the minimum concessionality level of 35 percent (50 percent for low income countries) is met. Projects related to the supply of coal gasification equipment that benefit low-income residential users generally have been found to be commercially non viable and therefore eligible for tied aid credits. This was the case for a project proposed by France that involved the supply of gas to the towns of Xi’an and Wuchan in China. The goal of this project was to supply gas to households, commercial activities, and public services such as hotels and hospitals in order to meet their day-to-day cooking and hot water needs. The second priority was to supply industrial companies. 24
    • DRAFT July 30, 2003 Figure 1. Trends in Energy Tied Aid Offers by Sector, 1988-2001 ($US thousands) 3,500,000 Helsinki Tied Aid Rules 3,000,000 2,500,000 Hydro 2,000,000 Elec Trans/Dist Renewable 1,500,000 Nuclear Fossil 1,000,000 500,000 - 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: CRS Database and author’s calculations. The number of tied aid offers has declined significantly since the Helsinki rules were adopted. During the period 1988 to 1991, tied aid constituted over 70 percent of energy related aid offers (see Appendix 1-2). This represented an average of $2.2 billion per year during these four years. By the end of the 1990s, total tied aid offers had fallen to just 14 percent. Between 1999 and 2001, tied aid offers for energy projects averaged less than $280 thousand a year. Before the rules were adopted, many of the tied aid offers were flowing to projects that were questionable from the standpoint of environmental sustainability. Figure 2 shows the trends in tied aid offers by sector between 1988 and 2001. In early years between 1988 and 1992, tied aid offers for fossil fuel power plants were over $1 billion, in some years representing nearly a half of all tied aid offers. By the end of the decade, tied aid offers in the energy sector had fallen significantly. By 2001, both tied and partially tied aid offers for fossil plants had dropped to just $15.2 million dollars or less than 10 percent of all tied aid offers. This trend was due in large part to the decline of tied aid offers for power plants. A total of 44 power plants were brought before the Consultation Group. Of these, just over half (23) were found to be commercially viable and ineligible for tied aid subsidies. Prior to Helsinki, tied aid offers for renewables were negligible, making up less than 2 percent of energy-related tied aid. This was due in part to the state of renewable 25
    • DRAFT July 30, 2003 technology; particularly, wind had not yet been realized. However, it confirms that the commercial viability of a project, rather than its effect on sustainable development or other social objectives, was the motivating factor behind donor orientation toward commercial fossil fuel projects. The total volume of tied aid offers for renewable energy remains relatively small. In 2001, donors notified a total $87 million. This number is relatively small but has grown relative to other sectors, constituting 35 percent of all tied aid offers. In addition, because of the Helsinki rules, there is a greater likelihood that these funds have been channeled to projects that would not have been able to obtain commercial financing. 26
    • DRAFT July 30, 2003 V. Gaps in the Regime: An Untied Aid Loophole? From both a trade competition perspective and a developmental perspective, untied aid has long been considered superior to tied aid. Since the late 1960s, a consensus has emerged in the development field that aid-tying can impose large costs on recipient countries.35 The absence of competitive bidding can raise project costs as well as limit appropriate technology choices for recipient countries. For these reasons, there have been ongoing efforts over the past three decades to encourage the delinking of purchasing conditions on the provision of aid. Helsinki rules are a prime illustration of how this has been accomplished. While untied aid is generally recognized as the ideal, there are a number of reasons why the ideal is often not reached. In theory, untied aid should be free of trade distortions. As long as procurement is subject to open competitive bidding, as are projects financed by the World Bank or other multilateral banks, the outcome should be based on the competitive merits of the competing firms. However, there have been lingering concerns that this is not in fact the case. Studies of untied aid and anecdotal cases over the years suggest that there are often biases in outcomes, favoring a high percentage of contracts awarded to the firms of the donor country.36 Whether these patterns are intentional or not is a matter of debate. Countries offering untied aid contend that if their firms happen to win contracts through untied aid offers, this is a consequence of superior price, after services or other factors. The officials and firms of competing countries contend that the outcomes are rigged. An alternative explanation points to the interests and strategies of recipient countries who usually manage the tender process. ODA financing is often an important source of financing for the recipient’s infrastructure development, and levels of support are certainly not harmed by awarding contracts to the donor’s firms. Even if contracts are not rigged, unspoken reciprocity (“back scratching’) may explain these outcomes. Untied Aid and Environmental Considerations Untied ODA can also be of concern from an environmental perspective. This is because untied aid is not subject to the same tests to which Helsinki subjects tied aid offers. Untied aid is not subject to the 35 percent minimum concessionality levels that tied aid must meet. More significantly, untied aid is not subject to the commercial viability tests that have been so effective in weeding out subsidized financing for projects that normally could obtain commercial financing. This presents the possibility 35 For a classic treatment of the economic costs of aid tying see Jagdish Bhagwati, “The Tying of Aid,” in Jagdish Bhagwati and Richard S. Eckaus, eds., Foreign Aid: Selected Readings (New York: Penguin Books, 1970), pp. 235-293. 36 Peter C. Evans and Kenneth A. Oye, International Competition: Conflict and Cooperation in Export Financing,” in Gary Hufbauer and Rita Rodriguez, eds., US Ex-Im Bank in the 21st Century: A New Approach?, Institute for International Economics, Special Report 14, January 2001, pp. 141-151. 27
    • DRAFT July 30, 2003 that a loophole exists through which countries can continue to funnel aid funds for commercial purposes with little true regard for the environmental consequences. The volume of energy-related untied aid offers has grown significantly since Helsinki came into effect. Once running at just over 30 percent of energy-related projects, untied aid offers grew to over 85 percent by the end of the 1990s. Most of the untied aid offers for energy have been made by Japan. A large proportion of these commitments have been for fossil fuel power plants. Since 1988 the Japan Bank for International Cooperation (JBIC) and its predecessor, the Overseas Economic Cooperation Fund (OECF), provided over $10 billion in untied loans for fossil power plant construction and rehabilitation projects (see Appendix II-6 for a complete list). The majority of these funds have gone to construct plants in China, India, Indonesia, Malaysia, Syria and Vietnam. Most of the funds have been used to provide below market financing for coal-fired power plants, but they have also been used to subsidize gas-fired and oil-fired power plants. Recently, Japan announced that new, highly concessional loan terms would be available to support projects with significant environmental benefits through JBIC. Projects funded under these terms have included large loan packages for fossil fuel power plants, including the construction of two gas-fired combined cycle power plants that received $700 million at highly concessional rates (see Table 6). The two projects illustrate the interplay that exists between trade competition, subsidies, untied aid, and environmental objectives when there are few trade finance disciplines in place. Severnaya and Port Dickson Power Projects One of these projects is the Severnaya project on the Caspian Sea shore, 40 km North of Baku-Azerbaijan.37 The project was designed to fill part of the Government of Azerbaijan’s Medium Term Public Investment Program for 1997-1999, which accorded electricity a priority sector for development. In 1998, Azerbaijan had an official installed electricity capacity of approximately 5,100MW, 84% of which is oil-fired. However, because of its obsolete facilities and the lack of adequate maintenance, actual generation capacity had fallen to nearly 4,200MW. On February 27, 1998 the Japanese government announced a special untied loan package to support the introduction of a cleaner, higher efficiency gas combined cycle power plant. The 400 megawatt plant will be built at the site of an existing 150 megawatt power plant in order to meet the increasing future power demand, especially around Baku, with due consideration to the environment.38 This plant is scheduled to be completed in 2003. 37 Japan Bank for International Cooperation, “First Power Project Applying Preferential Interest Rate for Special Environmental Projects,” Press Release, February 27, 1998, available at URL http://www.jbic. 38 According to a study commissioned for the plant, if compared with the existing plant, the new power plant will reduce air pollution as follows; [1]SOx will not be produced (the existing power plant discharges 3,309 ton per year, however, the new plant discharges 0, as a result of switching from oil to natural gas); [2]the total amount of discharged NOx will be less than half, that is, the existing plant will discharge 1,728 ton per year, however, the new plant 772 tons , because of efficiency improvements. The 28
    • DRAFT July 30, 2003 Table 6. Japan Concessional Loans for Fossil Fuel Power Plants with Environmental Benefits Loan ($US Interest Loan term/ Grant Tying Contract Completion Recipient millions) Rate Grace period Element Status Project Title Size Winner Date AZERBAIJAN $266.4 0.75* 40/10* 80 Untied Severnaya CCGT* 400 MW MHI 2004 MALAYSIA $431.0 0.75* 40/10* 81 Untied Port Dickson CCGT 750 MW MHI 2003 * This project also had a gas pipeline associated with it that received an additional $53 million in funding from JBIC. *Preferential interest rate for special environmental projects provided by JBIC. CCGT = combined-cycle gas turbine MHI = Mitsubishi Heavy Industries Sources: Creditor Reporting System, OECD, JBIC Press Releases, 1998 and 1999 and "Azerbaijan Ratifies Credit Agreement with Japan," Interfax News Agency, December 1, 1999 and "Project Round Up; Recent Power Plant Contract Awards," Modern Power Systems, June 30, 2000. The second project is the Port Dickson Power Station Rehabilitation project. This project proposed scrapping the existing aged and environmentally problematic generation plant at the Port Dickson Power Station in Negeri Sembilan State south of Kuala Lumpur, near two large refineries—one operated by Esso and the other operated by Shell. The plans called for a new plant with a total installed capacity of 750 megawatts, or three times larger than the existing units, although having the same footprint. The project proposed using gas as a fuel in place of oil to facilitate fuel mix diversification. The goal was to boost the plant’s output while reducing its environmental impact by increasing generation efficiency and reducing emissions. The total cost of the project was estimated to be US$554 million. On March 4, 1999, the Japanese government announced it would provide a $431 million loan covering 75 percent of the plant’s cost.39 The remaining 25 percent would be funded by TNB. The plant is expected to be fully commissioned by October 2004. Special loan terms were granted for both projects. These terms included an interest rate of 0.75, a repayment term of 40 years and a grace period of 10 years, commencing not when the loan was awarded but when power plants were commissioned, thereby providing an additional four years of relief. These terms yielded a grant element of 80 percent for the Severnaya plant and 81 percent for the Port Dickson plant. In relation to financial support that renewable energy technologies have received, these two loans were very large. The subsidized loan for the Port new plant is also expected to minimize CO2 emission, which is considered as one of the factors of global warming. The total amount of CO2 emission will be approximately 1 million ton per year, and this will be less than half of those emitted from the oil-fired thermal power plant of the same generation capacity, estimated to be approximately 2.4 million tons. 39 Japan Bank for International Cooperation, “Resumption of ODA Loan to Malaysia after Five Years of Interval at the Largest Scale” Press Release, March 4, 1999 available at URL english/release/oecf/1999/0304-e.php. 29
    • DRAFT July 30, 2003 Dickson power plant was equivalent to the total amount of aid (tied and untied) that all donors provided for wind farm development between 1988 and 2001. These extremely generous terms were justified by the Japanese government on environmental grounds. By switching to gas and using CCGT technology, JBIC claimed the new Severnaya plant would eliminate SO2 emissions, cut NOx emissions in half, and discharge only half the amount of CO2 that a thermal plant of the same size would produce. Similar environmental benefits have been forecast for the Port Dickson plant. Compared to the existing generation plant, JBIC claimed that this project would reduce emissions of NOx and SOx per unit of generation by almost 100%, and CO2 by approximately 50%. JBIC has included both projects on its list of “anti-global warning projects.”40 Although the projects were officially notified as being untied, the primary equipment contracts for the plants were both awarded to Mitsubishi Heavy Industries (MHI). Azerenergy, the Azerbaijan state power company, awarded the contract to Mitsui and its primary equipment supplier, MHI, in June 2000. In the case of the Port Dickson plant, Malaysia’s state-owned utility, Tenaga Nasional Berhad, awarded the contract to MHI in October 2001.41 The projects raise several policy questions about untied aid. Were the special loan terms justified on developmental grounds? Were they justified on environmental grounds? Concerning competition, were the bids awarded fairly? In other words, did the Port Dickson and Severnaya plants represent projects with valuable environmental benefits that just happened to be won by the donor’s national firms? Or alternatively, did Japan find––by dressing the projects up with environmental justifications and the appearance of untied notifications––a new way to land large contracts for its national exporters? Both projects are problematic on developmental grounds. Highly subsidized loan terms are particularly hard to justify in the case of the Port Dickson plant. Malaysia is an upper-middle-income country that is quite capable of financing large infrastructure projects on commercial terms.42 The project was also located in an industrial zone with large industrial refineries nearby that have the ability to pay the full cost of electricity. The case for special loan terms is somewhat stronger in the Azerbaijan, since this country is a low income country, with a gross national income of $745 or less. However, depending on the project’s customer base, it may have been 40 See Japan Bank for International Cooperation, “List of Anti-Global Warming Projects, (FY1998- 2001)” at URL 41 The order for the project was placed with MHI on a full turnkey basis. The project consists of 2 Mitsubishi M701F gas turbines, 1 steam turbine and 2 exhaust heat recovery boilers with a total output of 750MW, all of which are designed and manufactured by MHI “Malaysian Port Dickson 750MW CC order received,” MHI POWER, Vol. 3, January 23, 2002, available at URL power/ e_power/magazine/vol_03.html. 42 An upper-middle-income economy is classified by the World Bank as having a gross national income (GNI) per capita between $2,976 and $9,205. Information on the World Bank’s system for classifying economies is available at URL 30
    • DRAFT July 30, 2003 able to attract commercial financing. Because projects were officially notified to the OECD as untied, they did not face a commercial viability test that would have examined whether the plant could have been financed on commercial terms. There is a strong possibility that under such scrutiny, both projects would have been found to be commercially viable and therefore ineligible for subsidized rates. A more challenging question is whether the special loan terms were necessary to induce Azerbaijan and Malaysia to purchase the more efficient gas turbines. If both countries were limited to commercial financing, would they have made the same choice? They may have chosen a different technology or simply forgone the investment, keeping the older, smaller, and more polluting plants in operation. Additional information is needed to make this assessment. Suffice it to say that gas turbine technology is now a well-established technology and in many applications combined cycle technology is the least costly option. This lends weight to the possibility that untied aid dressed up with environmental rationales is being used up to support unwarranted subsidies that benefit national exporters. The US has been particularly critical of Japanese ‘untied aid,’ suggesting that it is de facto tied, explicitly citing the Severnaya power project.43 US Proposal to Regulate Untied Aid Proposals have been made to close the loophole that untied aid appears to present in trade finance rules. In 2000, the United States submitted a proposal to the OECD that called for subjecting untied aid to rules similar to those that govern tied aid as set by the Helsinki Package, including country eligibility, project eligibility, minimum concessionality, and transparency. This would bar higher income countries that are ineligible for 17 to 20 year World Bank loans from receiving untied aid. It would also mean that projects found to be commercially viable under the existing tied aid ex ante guidance, case law, and project-by-project consultation would be ineligible for untied aid financing. Tied aid eligibility rules do not apply to the LLDCs and therefore would also not apply to untied aid by this proposal.44 43 The 2002 National Export Strategy has the following to say: “Of great concern is the likelihood that Japan is using united aid credits to distort trade and circumvent the tied aid rules. While Japan’s untied aid dropped from $12 billion during the 1993-1997 to $4 billion in 2000, much of this aid appears to be de facto tied. In one well-documented case (the Severnaya gas-fired power plant in Azerbaijan), a Japanese consortium was awarded the contract after a Japanese/U.S. bid was disqualified on technical grounds based on criteria not present during the pre-qualification process and despite the bid with U.S. equipment from the world-class supplier of such equipment being 10 percent lower in price. Press reports later revealed that Japanese officials actively lobbied for the Japanese bidder even though Japan had provided untied aid. Discussion of this bidding process in the OECD later concluded that this project was de facto tied. Trade Promotion Coordinating Committee, The 2002 National Export Strategy, US Department of Commerce, Washington DC, 2002, p. 7. 44 Personnel communication with officials at US Department of Treasury, Washington, DC, March 5, 2003. 31
    • DRAFT July 30, 2003 Again, the US proposal, like many of its other initiatives in the OECD, is oriented toward eliminating competitive trade distortions created by official government financing. The motivation is not to improve the environment. However, the general application of Helsinki rules, particularly the commercial viability test, could have positive environmental implications. This would occur if these tests succeeded in weeding out subsidies being offered for commercially viable projects. The primary benefit would be in subsidy control. If Helsinki-type rules were applied to untied aid, buyers would be forced to face the full financial cost of power generation and other projects in domestic investment decisions. As has been the case for tied aid, it could also encourage donors to redirect aid toward projects whose benefits are not fully captured through financial analysis due to the existence of externalities. If this is the case, the new rules could have the benefit of reducing the flow of unnecessary subsidies and possibly free up aid funds to be applied to higher priority developmental needs, including environmental sustainability.45 45 As of this writing, the issue remains before the OECD Export Credit Participants. 32
    • DRAFT July 30, 2003 VI. Targeting Environmental Technology Financial Assistance There is significant variation in the export subsidy programs that countries have made available to support environmental technologies that conform to existing international trade finance rules. Some countries have active programs that meet the rules but still provide targeted subsidies. These programs include financial support for exporters of environmentally-related technologies. As illustrated in Table 6, the United States generally does not provide export subsidies for capital goods, offering little beyond standard export credits. Japan has the widest range of instruments available, including export credits, tied aid, and untied aid, as well as grants that are not reported as ODA. European countries fall in the middle, providing mixed credits and tied aid credits for environmentally-related capital goods exports. This section explores the programs that countries have devised to offer export assistance within the confines of the Helsinki Package and other finance disciplines. One such program is the Japanese Green Aid Plan, which has been operating since 1992 with the aim of improving environmental conditions in China and elsewhere in Asia. The other program discussed here is the Danish Mixed Credits program, which provides export subsidies for wind turbines and other technologies with environmental benefits. While both conform to international trade finance disciplines they offer different types of financing and different levels of concessionality. Also discussed below is the US stance on tied aid. The US has staked out a role as the enforcer of the Arrangement. Despite pressure from US firms and interest groups seeking favorable Table 7. Orientation of Governments Toward Financing Capital Goods Institution Export Credit ECA + ODA ODA non ODA Agency (mixed credits) Highly Procurement Policy Tied Tied Tied Untied Concessional Tied Aid United States √ √* √ √ EU-15 √ √ √ Japan √ √ √ √ Note: ECA = Export Credit Agency; ODA = Official Development Assistance. *A small piloit mixed credit program was initiated by the United States in 2002. Source: Author 33
    • DRAFT July 30, 2003 treatment for values that are underserved by the market, the US government has resisted initiating tied aid offers, lest it cause others to do the same. A consequence of taking the high ground is that the US makes little contribution toward making lower cost funds available to support investment of more environmentally beneficial technologies in the developing world. The recent establishment of the Mixed Credit Pilot Program suggests some shift in the US position, but the program would have to be larger in scope than currently being contemplated to even match the level of support that Denmark is now providing. Japan’s Green Aid Plan Japan’s Green Aid Plan is among the largest bilateral program’s offering targeted subsidies for environmentally-related capital goods. This initiative was launched in 1992 by the Ministry of Economy, Trade and Industry (METI), a government organization that concentrates on the diffusion of clean coal and industrial energy efficiency technologies.46 This diffusion is accomplished by providing funds to demonstrate and test technologies in the power, steel, cement and chemical industries. Geographically, the program has been concentrated in Asia. Approximately half of the projects supported through the program have been funded in China with the balance in the Philippines, Thailand, Malaysia, Vietnam, Indonesia, India and Pakistan. All the projects are provided on a 100 percent grant basis with no repayment obligation. As a result, the program conforms to Helsinki rules since all projects receive financing above the stipulated 80 percent grant element. The funds cover the cost of feasibility and engineering design, imported and locally procured equipment, and other project costs. In some cases, they also cover a portion of the operating costs of the project during the demonstration period. Individual projects range in value from $1.7 million to over $30 million. The total budget for all types of technologies in all targeted countries was over $900 million between 1992 and 2000 (ODA and non ODA funding). China was granted most of these funds, receiving funds for 30 out of 48 projects with a budget cost of over $350 million (see Appendix TK for a list of projects demonstrated in China). An important rationale for the program was to develop less costly technologies that would have a greater chance of wide-spread dissemination in China and elsewhere in Asia. Given the capital constraints and economic growth priorities among developing countries, which favor productive investments over environmental spending, the program’s planners realized that technologies need to be made more cost effective to achieve wide-spread dissemination. Japan's largest manufacturing and engineering companies are among the companies selected to receive grants to demonstrate their technology. These companies include Mitsubishi Heavy Industries, Kawasaki Heavy Industries, Hitachi-Babcock, Ltd., Nippon Steel Corp., Kobe Steel, 46 For a discussion of the history and motivation behind the Green Aid Plan see Peter C. Evans, “Japan’s Green Aid Plan: The Limits of State-Led Technology Transfer,” Asian Survey, vol. 39, no. 6 (November/December) 1999, pp. 825-844. 34
    • DRAFT July 30, 2003 Ishikawajima-Harima Industries, Ebara Corp., Chiyoda Chemical Engineering, and Toyo Engineering. To pay for the research, equipment and technical assistance associated with the program, METI combines funds from Japan’s ODA budget (representing approximately 20 percent of program funds) with non-ODA funds (80 percent of program funds). The non-ODA funds are paid for through two special accounts established after the oil shocks of the 1970s. The Special Account for Coal and Petroleum Alternatives is based on a tax on the import duties on crude and fuel oil. The Electric Power Resources Promotion Account derives its revenue from a tax on electricity. Under Japan’s Public Finance Law, special accounts are treated separately from the national budgeting system’s general account and enjoy greater administrative flexibility. These accounts underwrite the majority of Japan’s $4 billion annual domestic energy R&D program (research and development for nuclear energy technology, and other alternatives to oil including hydropower, geothermal, solar, wind and fuel cells). Green Aid Plan serves to divert a portion of these domestic R&D funds to international activities. The results of the Green Aid Plan are mixed. While the program has raised awareness about and expanded technical knowledge among cooperating firms and government officials it has yet to achieve more wide-spread diffusion of more inefficient industrial technologies or cleaner coal technologies. As of January 2000 (8 years into the program) there was little evidence of technology diffusion. For example, none of the simplified clean coal technologies demonstrated in China had been purchased by a Chinese enterprise outside the Green Aid Plan program. A detailed analysis of the program reached the following conclusion: The cooperative nature of feasibility studies led to technology modifications that reduced costs and simplified operation, but Chinese enterprise staff and local government officials still felt that costs were too high and the equipment was too complex. Even with the relationships fostered between Japanese government and industrial organizations and Chinese planning organizations and research institutes, the program administrators still did not fully consider the broader economic and operational interests of potential technology adopters. At the end of the 1990s, the program’s large commitment of financial, technical, and human resources still had not lead to the program’s goal of technology diffusion.47 Japanese government officials maintain that it is necessary to take a long-term view that conditions favorable to the adoption of clean coal and other more environmentally friendly technologies will eventually emerge in time. Officials hold the view that diffusion cannot be achieved until demonstration projects can be set up and they are 47 Stephanie B. Ohshita, Japan’s Cleaner Coal Technology Transfer to China: The Implementation of MITI’s Green Aid Plan, Doctoral Dissertation, Department of Civil and Environmental Engineering, Stanford University, November 2002, p. 289. 35
    • DRAFT July 30, 2003 committed to allocating the resources necessary to making this possible. In their view, the next phase of the Green Aid Plan will need to focus on demonstrating the commercial viability of clean coal and other technologies and encourage the Chinese government to provide enterprises greater incentives to adopt these technologies.48 Denmark’s Mixed Credit Program Most European governments provide financing support for environmental technologies through the application of mixed credits. These programs have a much lower concessionality level than grant programs like Japan’s Green Aid Plan, usually carrying a grant element of 35 percent compared to a grant element of 100 percent. This lower concessionality allows subsidy funds to be stretched over a larger number of projects, but provides less financial relief to buyers. The Danish government’s mixed credit program offers an example of how these programs work. The Danish program was introduced in 1993 to provide a concessional export program for Danish manufacturers that complied with the finance rules set out under the OECD Export Credit Arrangement.49 The program replaced the Danish States Loan Program as a state financial instrument in eligible countries. The program mixes both tied and united with export credits having a maturity of 8 to 15 years. The program is limited to creditworthy developing countries. To comply with Helsinki rules, the subsidy element is adjusted to reach a grant element of a least 35 percent. By the end of 2000, the over 100 projects had been awarded financing with a total contract amount of Danish Krone (DKK) 3,886 million (US $475 million). The mixed credit program involves the cooperation of a number of different parties. The buyer obtains a commercial loan from a Danish bank to finance the project. The banks provide a loan to the buyer to cover payment of the export and to cover 5 percent of the risk that the buyer may fail to pay back the loan. The remainder of the financial costs is absorbed by the Danish government through grants from Danish International Development Assistance (Danida) and export credit from Export Credit Fund (EKF), Denmark’s export credit agency. Subsidies provided by Danida serve to buy down the interest (and risk exposure fees) on loans (typically 10 years) to zero, leaving the buyer with only the obligation to repay the loan principle. Guarantees covering 95 percent of the repayment risk are issued by EKF. Repayment guarantees are sought from the buyer’s country through entities such as the People’s Construction Bank of China and Industrial Credit and Investment Corp of India. However, ultimate repayment risk is born by the Danish government. Any potential losses to EKF caused by default are covered through a reserve fund paid out of Denmark’s foreign assistance budget. 48 Stephanie B. Ohshita and Leonard Ortolano, “From Demonstration to Diffussion: The Gap in Japan’s Environmental Technology Cooperation with China,” International Journal of Technology Transfer and Commercialisation, vol. 2, no. 4, p. 360. 49 Danish International Development Assistance, Evaluation Report: Mixed Credit Programme, No. 2002/4, November 28, 2002 available at URL evalueringer/eval2002/mix_cred_programme/index.asp. 36
    • DRAFT July 30, 2003 Table 8. Danish ODA Grants and Mixed Credits for Wind Projects, 1994-2003 Danida Commercial Subsidy Loan ($US ($US Interest Repayment Year Country Project name MW Supplier millions) millions) Rate Period 1995 China Dabancheng Xinjiang Wind No. 2 6.0 Vestas A/S 5.3 1.7 0.75 10 yrs. 1995 China Dabancheng Xinjiang Wind Power 7.2 Bonus Energy A/S 6.1 1.9 0 10 yrs. 1995 China Dalian Hengshan Wind Power. Liaoning 5.0 NEG Micon A/S 3.8 1.2 0 10 yrs. 1995 China Donggang Wind Farm. Liaoning 5.0 NEG Micon A/S 4.1 1.3 0 10 yrs. 1995 China Nan'ao Wind Power Plant. Guangdong 4.2 Nordex A/S 4.0 1.3 0 10 yrs. 1995 China Xilin Windfarm No. 1. Inner Mongolia 5.4 NEG Micon A/S 4.7 1.5 0 10 yrs. 1996 India Perengudi Wind Farm 9.0 Vestas A/S 11.6 5.9 0 10 yrs. 1996 China Zhangbei Wind Power. Hebei 2.5 Vestas A/S 3.0 1.0 0 10 yrs. 1997 Egypt Wind Farm Project Zafarana Comp II 11.4 Vestas Int. A/S 23.1 9.3 0 10 yrs. 1997 Costa Rica Tejona Wind Farm Project 6.4 NEG Micon A/S 5.9 3.2 0 7 yrs. 1998 Costa Rica Tierras Morenas Wind Farm 24.0 NEG Micon A/S 21.9 9.2 0 10 yrs. 1999 China Jilin Tongyu Wind Farm 22.8 Nordex A/S 12.1 5.7 0 10 yrs. 2001 India 20 Century 10 MW Wind 10.0 NEG Micon A/S 3.6 2.1 0 8 yrs. 2001 China Shanwei Wind Farm. Guangdong 16.5 Vestas A/S 9.7 3.5 0 10 yrs. 2003 Philippines Ilocos Norte Wind Power Project 25.0 pending 14.5 0.5 n.a. n.a. 160.4 133.5 49.4 n.a. = not available. Source: Data provided by DANIDA officials and trade press. In 1994, changes were made to render the program more attractive in a low interest rate environment that has prevailed since the early 1990s. To this end, an upfront grant was provided, which reduces the outstanding loan amount and increases the concessionality of the project. This grant amount was adjusted to bring the subsidy to the minimum concessionality levels required by Helsinki rules. The mixed credit program is subject to procurement restrictions. Prior to 1998, the projects required 70 percent content from Danish manufacturers. Thereafter, tying requirements were reduced to 50 percent in order to comply with untying initiatives in the OECD and to grant project sponsors greater procurement flexibility. Approximately one-fifth of the mixed credits issued by the Danish government have supported wind power technologies. Table 8 provides a list of the wind power projects that have been supported through the mixed credit program from 1994 through 2003. Subsidized support for wind turbines between 1994 and the first quarter of 2003 amounted to just under $50 million. Commercial bank contributed loans worth $134 million secured by guarantees issued by EKF. These funds have supported 15 wind farms with a total installed capacity of 160.4 megawatts.50 The projects have been located in China, Costa Rica, Egypt, India and, most recently, the Philippines. Most of the successfully concluded projects have been financed on 10-year repayment terms.51 50 This is roughly one seventh of the total installed 1,150 MW capacity of the Malaysia Port Dickson and Azerbaijan Severnaya power plants financed by Japan at highly concessional rates. Total electricity output of the projects would also be less since wind turbines typically have a capacity factor of 30-50% depending on wind conditions compared to a capacity factor for CCGT plants as high as 80 percent. 51 It should be noted that a number of approved projects were subsequently cancelled. The cancelled projects include NEG Micon’s 4.2 MW wind farm in Dongfang China as well as three Vestas projects in India including Beltings wind farm (2 MW); Excel wind farm (2 MW) and Fenner wind farm (4 MW). 37
    • DRAFT July 30, 2003 The projects supported by Denmark’s mixed credit program represent a relatively small number of the total number of wind turbines that are exported from Denmark. During the 1990s, Danish wind turbine manufacturers became global leaders in the field of wind turbine technology. By 1999, they had achieved a global market share of approximately 50%—close to 65% if foreign joint ventures (associated companies) are included.52 However, it is unlikely that the mixed credit program plays any significant role in the advancement of wind turbine technology. The largest markets for wind turbines are Britain, Denmark, Germany, Spain and the United States, and it is these markets that have been driving technological innovation. The result of the mixed credit program seems to have been to reduce the financing cost of wind turbine machines to make them more affordable to buyers in middle-income developing countries. Because the program only targets credit-worthy countries, highly indebted countries are not eligible. In addition, the Danish government has not articulated a goal of providing funds to simplify or otherwise adapt the technology to conditions in developing countries. Danish companies have established joint ventures with local companies in India and in China, which may lead to the production of lower cost turbines in the future. United States: Sticks but few Carrots The United States has few programs of positive financial assistance directed at environmental technologies. At one time, the US was actively engaged in providing subsidies for capital goods exports. During the 1950s and through much of the 1960s, the US provided extensive below-market support for capital goods exports. In one instance, USAID even provided subsidized loans for two nuclear power plants in India. The US Export Import Bank also played a quasi developmental role by granting special loan terms to politically important countries.53 However, below market financing for capital goods was largely eliminated in the 1970s. The reorientation began with the New Directions policy, which refocused assistance efforts toward basic human needs and away from financing capital goods.54 The reorientation left the US without any significant means of providing export financing for capital goods on terms more favorable than offered by the US Ex-Im Bank. Attempts were made in the US during the 1990s to establish more favorable financing programs for technologies with environmental benefits, but they never gained traction. Several programs were established but were never supported with meaningful budget allocations. These programs included the U.S. Technology for International 52 Danish Wind Industry Association, “Danish Wind Energy in 1999: Danish Wind Turbine Manufacturing Sextuples in Five Years,” News 2000 available at URL: /en/news/stat1999.htm. 53 For a history of the tension between the use of the US Export Import Bank for political and developmental objectives and prudent commercial lending practices see William H. Becker and William M. McClenahan, Jr., The Market, the State, and the Export-Import Bank of the United States, 1934-2000 (New York: Cambridge University Press, 2003), pp. 77-160. 54 Vernon W. Ruttan, United States Development Assistance Policy: The Domestic Politics of Foreign Economic Aid (Baltimore, MD: The John Hopkins University Press, 1996), pp. 94-114. 38
    • DRAFT July 30, 2003 Environmental Solutions (U.S. TIES), the Committee on Renewable Energy Commerce and Trade (CORECT), and the Committee on Energy Efficiency Commerce and Trade (COEECT). Proposals were also put forward to reallocate funds from domestic to international activities. One example was the US Department of Energy’s proposal to deploy integrated gasification combined cycle (IGCC)55 technology in China. DOE proposed that $50 million be allocated to offset part of the cost and financial risk associated with demonstrating a $400 IGCC project in China. DOE argued that public sector resources were justified to facilitate the commercialization of the technology. Congress rejected this proposal.56 As noted above, one reason for the US reluctance to establish a mixed credit program to support environmental technologies or other capital goods exports arose from the role it had staked out as initiator and defender of the tied aid disciplines. The driving concern of US policy was leveling the international playing field for US companies. Therefore, the US has been more concerned with finding levers to enforce compliance than with offering carrots in the form of its own mixed credit programs. After the Helsinki rules were adopted, the US government focused on enforcing the tied aid rules through an aggressive policy of matching both actual and potential foreign tied aid offers. In 1994, Congress added this new authority to the “War Chest” – which was created in 1986 to create leverage in OECD negotiations – and added $171 million to it while renaming it the Tied Aid Capital Projects Fund. Like original War Chest funds appropriated by Congress, the purpose of the fund was to defend the tied aid disciplines.57 Environmental technologies have been among the capital goods projects that the US has matched through the Tied Aid Capital Projects Fund. These funds were drawn on to counter mixed credit financing offered by the Netherlands for three wind turbine farms in China.58 This made it possible for Zond, a US wind project developer and turbine manufacturer, to win the $15 million order.59 It was also used in Ghana to counter tied aid offers from Spain for solar lighting equipment. The matching offer made it possible for the US company Solar Outdoor Lighting to win a $5.4 million contract for solar street lighting. 55 IGCC is an advanced coal based power generating technology that has the ability to achieve better energy efficiencies than conventional pulverized coal-fired generation technology, as well as eliminate most SO2 and NOx emissions. 56 The House Appropriations Committee report state: “The Committee does not support the construction of ‘show-case’ facilities in international markets as proposed by the Administration … Providing a subsidy to one more gasification project will not make it commercial even if it makes it ‘welcome.’” U.S. House of Representatives, “US Department of the Interior and Related Agencies Appropriations Bill, 1995,” Report 103-551, June 17, 1994. 57 There have been long-standing disagreements between the US Treasury Department and the US Export Import Bank over how liberally these funds should be used to support US exporters. See Government Accounting Office, Export Promotion: Export-Import Bank and Treasury Differ in Their Approaches to Using Tied Aid, GAO-02-741 US General Accounting Office, Washington DC, June 2002. 58 Three projects: Huitengxile (Inner Mongolia); Hegnshang Wind Farm, Liaoning and the Nan-Ao Wind Farm in Guangdong 59 Zond was purchased by Enron Wind Systems and then later by General Electric after the collapse of Enron. 39
    • DRAFT July 30, 2003 The tough approach adopted by the US has been upheld as a success. The US Treasury Department is quick to point out the economic benefits of the US strategy. According to its estimates, the US initiatives to reduce tied aid succeeded in reducing tied aid offers from a high of $9.5 billion in 1991 to just $2.5 billion in 2002. In the first five years after Helsinki (1993 to 1997), cumulative tied aid offers were reduced by $50 billion. The benefit to the US economy has been estimated by Treasury to be an additional $1 billion of US exports a year by permitting US companies to compete for contracts without facing tied aid subsidies.60 One recent development suggests a potential softening in the overriding concern with subsidy control. In 2002, the Trade Promotion Coordinating Committee61 proposed a pilot program designed to permit USAID and Ex-Im Bank to undertake mixed credits. Not unlike the Danish program, the mixed credits would consist of a minimum of 35 percent grant from USAID with the balance financed on standard export credit terms by Ex-Im Bank. In line with Helsinki rules, the program projects would be restricted to developmentally sound capital projects considered to be commercially non-viable.62 In addition to certain environmental control and renewable energy technology, eligible projects could include: rural road and bridge construction, health infrastructure, waste water treatment, potable water projects, medical equipment, low-income housing, information technology, and education infrastructure. Countries eligible for the program would include middle-income countries open to USAID and Ex-Im Bank programs.63 How effective this program will be in channeling funds to worthwhile projects remains to be seen. One drawback is that the program does not represent new money. Whatever funds are provided must come from existing USAID program funds. Another problem is the level of interagency coordination that is required. USAID and Ex-Im Bank have limited experience in cooperating on projects. Even more significantly from an environmental standpoint, key countries such as China, India and Indonesia are missing from the present list of eligible countries. Despite the limitations of the proposed program, it appears to signal a shift– albeit a small one– in US export finance policy. This shift appears to be the result of confidence in the durability of the Helsinki rules and the fact that strictures against 60 The 2002 National Export Strategy, p. 7. 61 The Trade Promotion Coordinating Committee (TPCC) was created by executive order by President Bush in 1992 and legislated by Congress in 1993. The committee is headed by the Secretary of Commerce and charged with coordinating all federal agencies’ trade promotion and trade finance programs through the annual National Export Strategy. 62 Potential energy and environmental projects would be consistent with those listed in Table 5 above. 63 Eligible lower middle income countries, which require a minimum of 35 percent grant element, include: Albania, Belize, Colombia, Dominican Republic, Dominica, Egypt, El Salvador, Guatemala, Jamaica, Jordan, Kazakhstan, Macedonia, Morocco, Namibia, Paraguay, Peru, Philippines, Sri Lanka, and St. Vincent. Eligible upper middle income countries, which require a minimum of 80 percent grant element, include Botswana, Brazil, Croatia, Lebanon, Mexico, Panama, South Africa (lower middle income country but requires 80% concessionality), St. Lucia, Trinidad, and Turkey. 40
    • DRAFT July 30, 2003 commercially driven tied aid have gained widespread acceptance among OECD countries. Whatever the underlying motivation, the nascent mixed credit program suggests a move by the US to offer some carrots instead of only sticks. 41
    • DRAFT July 30, 2003 Appendix I: Aggregate Data I-1. Total Energy Related ODA by Year, 1988-2001 I-2. Total Energy Related ODA by Sector, 1988-2001 I-3. Percent Tied and Untied Energy ODA by Selected Sectors 42
    • DRAFT July 30, 2003 I-I. Total Energy Related ODA by Year, 1988 - 2001 Year Total Tied Untied Total Amount 1988 2,149,886 960,168 3,110,054 1989 1,896,168 687,754 2,583,922 1990 1,871,732 523,634 2,395,365 1991 2,861,177 1,533,425 4,394,602 1992 1,483,233 1,134,354 2,617,588 1993 1,263,565 2,007,852 3,271,417 1994 934,326 2,588,870 3,523,196 1995 1,082,707 4,166,731 5,249,438 1996 707,500 2,280,231 2,987,731 1997 574,989 3,159,588 3,734,577 1998 549,570 1,917,066 2,466,635 1999 322,281 1,766,019 2,088,299 2000 141,858 1,299,543 1,441,401 2001 218,752 1,378,121 1,596,874 16,057,743 25,403,356 41,461,099 Source: OECD, Creditor Reporting System. I- II. Total Energy Related ODA by Sector, 1988-2001 Hydro 24% $10.1 billion $16.1 billion Fossil 40% Nuclear $1 billion Elec Trans/Dist 2% 30% Renewable 4% $12.6 billion $1.6 billion Source: CRS Database and author’s calculations. 43
    • DRAFT July 30, 2003 I-3 Percent Tied and United Energy ODA by Selected Sectors (US$ thousands) Fossil (Coal, Oil and Gas) Year Tied %Tied Untied %Untied Total Energy ODA 1988 1,081,250 35% 521,584 17% 3,110,054 1989 269,405 10% 73,355 3% 2,583,922 1990 682,614 28% 62,844 3% 2,395,365 1991 1,306,153 30% 573,377 13% 4,394,602 1992 1,000,988 38% 696,441 27% 2,617,588 1993 417,052 13% 428,764 13% 3,271,417 1994 290,897 8% 1,247,167 35% 3,523,196 1995 308,026 6% 2,483,971 47% 5,249,438 1996 88,533 3% 470,955 16% 2,987,731 1997 61,016 2% 1,364,931 37% 3,734,577 1998 59,542 2% 888,645 36% 2,466,635 1999 111,152 5% 865,296 41% 2,088,299 2000 14,343 1% 538,497 37% 1,441,401 2001 15,158 1% 218,894 14% 1,596,874 Total 5,706,130 14% 10,434,722 25% 41,461,099 Hydroelectric Year Tied %Tied Untied %Untied Total Energy ODA 1988 314,777 10% 192,134 6% 3,110,054 1989 735,402 28% 318,174 12% 2,583,922 1990 335,719 14% 147,254 6% 2,395,365 1991 576,389 13% 547,624 12% 4,394,602 1992 119,072 5% 267,108 10% 2,617,588 1993 196,691 6% 502,993 15% 3,271,417 1994 321,482 9% 475,735 14% 3,523,196 1995 447,001 9% 936,347 18% 5,249,438 1996 134,529 5% 1,088,541 36% 2,987,731 1997 96,786 3% 658,397 18% 3,734,577 1998 246,620 10% 434,877 18% 2,466,635 1999 93,076 4% 145,691 7% 2,088,299 2000 27,260 2% 248,274 17% 1,441,401 2001 88,141 6% 437,288 27% 1,596,874 Total 3,732,945 9% 6,400,435 15% 41,461,099 Renewables (Wind, Geothermal, Solar, Biomass) Year Tied %Tied Untied %Untied Total Energy ODA 1988 11,540 0% 733 0% 3,110,054 1989 3,967 0% 45,211 2% 2,583,922 1990 64,218 3% 23,187 1% 2,395,365 1991 14,404 0% 2,361 0% 4,394,602 1992 71,869 3% 15,182 1% 2,617,588 1993 1,646 0% 33,454 1% 3,271,417 1994 45,742 1% 239,738 7% 3,523,196 1995 24,320 0% 27,268 1% 5,249,438 1996 144,456 5% 21,411 1% 2,987,731 1997 58,471 2% 202,672 5% 3,734,577 1998 52,912 2% 30,530 1% 2,466,635 1999 68,598 3% 86,069 4% 2,088,299 2000 13,350 1% 62,124 4% 1,441,401 2001 87,249 5% 121,074 8% 1,596,874 Total 662,742 2% 911,013 2% 41,461,099 Source: OECD, Creditor Reporting System. 44
    • DRAFT July 30, 2003 Appendix II: Sector and Project Data II-1. ODA Financed Coal Projects, 1988-2001 II-2. ODA Financed Gas Projects, 1988-2001 II-3. ODA Financed Hydro Electric Power Projects, 1988-2001 II-4. ODA Financed Wind Projects, 1988-2001 II-5. ODA Financed Solar Power Projects, 1988-2001 II-6. ODA Financed Oil Projects by Year, 1988-2001 II-7. ODA Financed Nuclear Projects by Year, 1988-2001 II-8. Japanese Concessional Loans for Fossil Fuel Power Plants, 1988-2001 II-9. Japan Green Aid Plan Projects in China 45
    • DRAFT July 30, 2003 II-1. ODA Financed Coal Projects, 1988-2001 (US$ thousands) By Donor Amount Technical Grant Donor Amount Amount Tied Untied Cooperation Element Japan 5,847,511 687,803 4,984,797 - 67 Germany 383,483 213,897 167,597 8,034 78 United Kingdom 309,300 90,451 - 225,659 100 France 128,901 128,901 - 756 79 Italy 110,001 101,089 8,912 - 83 Canada 15,812 12,455 3,357 - 95 Finland 6,503 6,503 - - 100 Netherlands 1,151 - 1,151 1,088 100 Australia 823 823 - 708 100 United States 564 - - 562 100 Denmark 242 121 121 - 100 Belgium 16 - - 16 100 6,804,309 1,242,042 5,165,936 236,822 92 By Recipient Amount Technical Grant Recipient Amount Amount Tied Untied Cooperation Element CHINA 2,781,651 489,155 2,289,433 10,112 78 INDIA 2,318,571 733,146 1,195,183 216,418 77 VIET NAM 652,631 - 652,018 612 76 INDONESIA 327,965 - 327,949 16 69 MALAYSIA 252,297 - 252,297 - 52 GHANA 129,596 - 129,596 - 61 MONGOLIA 116,517 3,076 113,441 - 81 PHILIPPINES 109,476 363 109,113 363 83 BOSNIA-HERZEGOVINA 31,398 1,940 29,458 - 80 BOLIVIA 18,133 - 18,133 6,044 81 OTHER 66,074 14,362 49,315 3,256 95 6,804,309 1,242,042 5,165,936 236,822 76 By Year Amount Technical Year Amount Amount Tied Untied Cooperation 1988 554,866 467,732 87,134 6,883 1989 12,398 12,398 - - 1990 555 433 121 312 1991 490,453 396,173 94,280 - 1992 628,228 104,518 307,822 216,778 1993 365,984 164,868 200,551 6,609 1994 586,394 56,524 353,455 2,131 1995 1,600,141 697 1,598,944 1,011 1996 227,153 21,731 205,423 - 1997 1,266,110 10,695 1,255,399 16 1998 686,310 3,669 680,331 2,467 1999 217,295 52 217,243 52 2000 8,673 116 8,481 - 2001 159,749 2,435 156,752 562 6,804,309 1,242,042 5,165,936 236,822 Source: OECD, Creditor Reporting System. 46
    • DRAFT July 30, 2003 II-2. ODA Financed Gas Projects, 1988-2001 (US$ thousands) By Donor Amount Technical Donor Amount Amount Tied Untied Cooperation Grant Element Japan 3,599,713 843,841 2,755,872 - 68 Germany 501,212 472,016 29,195 - 77 France 191,675 191,675 - - 61 Italy 93,813 89,441 4,372 7 81 United Kingdom 62,901 62,901 - - 100 Sweden 29,831 - 29,831 - 100 Belgium 16,539 16,539 - - 92 Canada 4,031 4,031 - 318 95 United States 1,329 - - 26 100 Austria 403 - - 202 100 Switzerland 171 171 - 171 100 4,501,617 1,680,615 2,819,271 724 88 By Recipient Amount Technical Recipient Amount Amount Tied Untied Cooperation Grant Element INDIA 1,426,696 1,022,409 404,287 - 61 MALAYSIA 929,704 - 929,704 - 79 VIET NAM 584,471 1,387 583,084 - 80 SYRIA 455,455 71,827 383,628 - 46 BANGLADESH 251,531 95,911 155,620 - 83 AZERBAIJAN 158,553 - 158,128 - 90 PAKISTAN 132,735 132,735 - - 53 SRI LANKA 123,906 - 123,906 - 63 THAILAND 91,585 91,585 - - 39 MOROCCO 88,571 51,275 37,296 7 86 OTHER 258,409 213,486 43,616 717 89 4,501,617 1,680,615 2,819,271 724 70 By Year Amount Technical Year Amount Amount Tied Untied Cooperation 1988 263,682 231,973 31,708 171 1989 82,632 81,942 689 - 1990 492,589 465,835 26,754 - 1991 539,875 154,593 385,282 - 1992 614,612 517,660 96,952 - 1993 256,843 89,166 167,677 22 1994 510,863 16,949 493,914 - 1995 312,572 117,736 194,835 - 1996 124,309 - 123,906 202 1997 97,894 1,713 96,182 - 1998 159,788 1,659 158,128 303 1999 545,891 1,387 544,504 - 2000 500,041 - 498,738 - 2001 26 - - 26 4,501,617 1,680,615 2,819,271 724 Source: OECD, Creditor Reporting System. 47
    • DRAFT July 30, 2003 II-3. ODA Financed Hydro Electric Power Projects, 1988-2001 (US$ thousands) By Donor Amount Technical Donor Amount Amount Tied Untied Cooperation Grant Element Japan 6,279,463 989,619 5,289,843 - 70 Germany 1,115,348 449,012 660,996 26,826 86 France 801,740 800,462 - 7,250 74 Italy 534,016 491,300 42,712 106 82 Sweden 431,298 218,224 212,587 108,928 100 United Kingdom 219,377 137,489 4,701 73,540 100 Norway 201,223 182,011 19,211 40,853 99 Canada 151,525 114,805 6,360 34,705 98 Spain 149,102 139,923 8,544 - 76 Austria 141,842 137,683 324 2,405 93 Finland 78,459 77,056 1,402 21,808 100 Denmark 21,391 607 20,781 1,016 100 Switzerland 17,070 14,511 2,559 3,530 100 Belgium 6,611 2,269 - 118 100 Netherlands 4,690 1,074 3,616 3,663 100 United States 4,065 1,500 - 338 100 Australia 2,930 2,469 461 442 100 Portugal 625 325 - 325 100 10,160,775 3,760,341 6,274,099 325,854 93 By Recipient Amount Technical Recipient Amount Amount Tied Untied Cooperation Grant Element INDIA 2,126,303 1,087,020 971,653 143,924 83 CHINA 1,347,111 268,152 1,076,116 13,103 80 INDONESIA 689,898 115,703 570,659 5,298 75 VIET NAM 660,043 97,699 562,344 3,181 81 PAKISTAN 658,806 222,072 435,882 31,890 84 THAILAND 480,460 187,191 293,165 49 78 EGYPT 452,402 165,484 286,919 90 85 IRAN 416,766 55,342 361,424 - 55 NEPAL 406,889 116,068 288,075 39,651 95 PERU 327,220 8,545 317,384 649 90 OTHER 2,594,878 1,437,066 1,110,479 88,018 89 10,160,775 3,760,341 6,274,099 325,854 81 By Year Amount Technical Year Amount Amount Tied Untied Cooperation 1988 506,911 314,777 192,134 2,839 1989 1,053,576 735,402 317,626 116,559 1990 482,973 335,719 147,078 7,822 1991 1,124,013 576,389 547,303 17,326 1992 386,180 119,072 216,170 56,762 1993 699,684 196,691 501,792 24,187 1994 797,217 321,482 454,919 27,428 1995 1,383,348 447,001 935,631 11,116 1996 1,223,070 134,529 1,086,835 29,880 1997 755,183 96,786 656,619 3,520 1998 681,497 246,620 428,358 6,310 1999 238,766 93,076 111,781 18,805 2000 275,534 27,260 244,004 651 2001 525,429 88,141 433,849 2,648 2002 27,395 27,395 - - 10,160,775 3,760,341 6,274,099 325,854 Source: OECD, Creditor Reporting System. 48
    • DRAFT July 30, 2003 II-4. ODA Financed Wind Projects, 1988-2001 (US$ thousands) By Donor Amount Technical Donor Amount Amount Tied Untied Cooperation Grant Element Germany 166,706 113,392 51,751 1,563 83 Denmark 109,104 77,949 4,084 3,685 100 Netherlands 65,223 63,503 1,090 1,258 100 Japan 49,752 - 49,752 - 51 Spain 26,272 25,494 476 - 76 United States* 6,036 5,250 - 486 72 United Kingdom 1,559 - - 1,489 100 France 859 848 - 11 100 Canada 718 85 633 - 100 Belgium 326 - - 308 100 Sweden 223 - 223 5 100 Australia 5 5 - - 100 Italy 130 130 100 Austria 38 - 100 426,952 286,655 108,009 8,806 *Includes US Ex-Im Bank defensive matching in China ($5,250) in 1996. By Recipient Amount Technical Recipient Amount Amount Tied Untied Cooperation Grant Element Egypt 117,680 96,086 - 1,015 96 India 112,738 60,958 51,780 1,921 98 China 101,256 96,501 - 475 81 Brazil 49,752 - 49,752 - 51 Costa Rica 12,358 12,335 23 - 100 Cape Verde 9,336 4,218 4,474 345 100 Morocco 6,225 5,930 - 295 97 Other 17,608 10,626 1,980 4,754 99 426,952 286,655 108,009 8,806 90 By Year Amount Technical Year Amount Amount Tied Untied Cooperation 1988 827 827 - - 1989 1,238 215 1,023 - 1990 8,167 4,084 4,084 - 1991 5,518 - 1992 205 - 205 - 1993 622 231 - 605 1994 35,630 35,260 27 352 1995 14,024 7,797 282 1,254 1996 108,125 108,008 88 2,996 1997 88,307 22,223 49,752 312 1998 30,876 29,864 50 962 1999 98,155 45,881 52,275 259 2000 3,858 1,806 5 1,402 2001 31,401 30,459 218 663 426,952 286,655 108,009 8,806 Source: Creditor Reporting System. 49
    • DRAFT July 30, 2003 II-5. ODA Financed Solar Power Projects, 1988-2001 (US$ thousands) By Donor Amount Technical Donor Amount Amount Tied Untied Cooperation Grant Element Germany 124,755 577 119,664 6,918 99 Netherlands 31,260 26,775 3,613 4,894 100 Australia 26,942 20,265 6,677 5,056 100 Spain 21,554 13,557 1,166 - 97 Italy 15,999 15,944 - 13,661 100 France 2,259 2,259 - - 95 Switzerland 1,899 139 427 545 100 Sweden 1,661 - 1,661 - 100 Norway 1,072 1,007 65 - 100 Belgium 886 - 36 3 100 Denmark 746 125 354 172 100 Canada 579 579 - - 100 United Kingdom 495 - - 458 100 Austria 446 - - 104 100 Finland 335 123 212 249 100 United States 3 - - 3 100 230,890 81,348 133,876 32,063 99 By Recipient Amount Technical Recipient Amount Amount Tied Untied Cooperation Grant Element INDIA 114,560 4 114,474 2,475 94 CHINA 18,732 18,598 - 6,378 100 PHILIPPINES 16,695 13,967 2,191 57 100 INDONESIA 16,118 10,183 4,525 5,492 100 BOLIVIA 10,470 8,273 43 2,776 97 BURKINA FASO 10,213 9,373 839 1 87 MOROCCO 6,456 577 5,190 - 100 OTHER 37,645 20,375 6,614 14,884 99 230,890 81,348 133,876 32,063 97 By Year Amount Technical Year Amount Amount Tied Untied Cooperation 1988 2,223 2,223 - - 1989 701 701 - - 1990 123 123 - 123 1991 - - - - 1992 579 579 - - 1993 705 695 - 695 1994 301 270 30 170 1995 1,337 608 457 433 1996 18,704 13,737 4,850 941 1997 19,962 11,839 6,585 3,564 1998 24,551 16,690 4,431 6,002 1999 3,341 1,060 389 2,000 2000 12,618 6,825 2,510 1,087 2001 145,744 25,998 114,624 17,048 230,890 81,348 133,876 32,063 Source: Creditor Reporting System. 50
    • DRAFT July 30, 2003 II-6. ODA Financed Oil Projects by Year, 1988-2001 (US$ thousands) Technical Year Amount Amount Tied Amount Untied Cooperation 1988 164,849 136,983 27,866 1,806 1989 147,739 140,276 7,463 1,961 1990 62,561 54,609 7,953 2,233 1991 200,363 179,347 12,028 23,295 1992 142,611 122,530 20,081 1,723 1993 75,058 48,832 7,253 1,731 1994 214,185 1,362 212,823 - 1995 785,823 172,076 613,748 - 1996 137,476 37,534 99,384 61 1997 28,821 28,817 - 1,718 1998 14,754 4,133 10,619 2 1999 13,578 952 12,626 15 2000 14,921 3,590 11,140 139 2001 16,404 124 15,940 340 2,019,145 931,164 1,058,924 35,024 II-7. ODA Financed Nuclear Projects by Year, 1988-2001 (US$ thousands) Technical Year Amount Amount Tied Amount Untied Cooperation 1988 - - - 1989 196 196 - 0 1990 785 785 - 131 1991 260 260 - 260 1992 1,824 1,824 - 89 1993 10,873 10,873 - 10,098 1994 - - - - 1995 4,332 1,570 - 795 1996 6,811 4,683 - 3,879 1997 56,704 55,371 - 2,037 1998 3,438 1,207 1,256 639 1999 336,609 341 1,460 682 2000 249,671 449 1,749 449 2001 317,542 - 1,033 315,644 989,044 77,559 5,499 334,703 Source: Creditor Reporting System. 51
    • DRAFT July 30, 2003 II-9. Japan's Green Aid Plan Projects in China Project/ Technology Facility Location Chinese Counterpart Time Period Industrial Energy Efficiency Projects 1 Coke Oven Heat Recovery System Steel plant Shichuan Province Ministry of Metallurgical Industry 1993-1995 2 Blast Furnace Heat Exchanger Steel plant Shandong Province Ministry of Metallurgical Industry 1993-1995 3 Coke Dry Quenching System Steel plant Beijing Ministry of Metallurgical Industry 1997-2000 4 Boiler Soot Blowers Power plant Tianjin Junliangcheng Ministry of Electric Power 1993-1995 5 Variable Speed Clutch Power plant Tianjin Junliangzheng Ministry of Electric Power 1993-1995 6 Oil Refinery Heat Recovery Oil refinery Shandong Province China Petrochemical Co. 1993-1995 7 Blast Furace Heat Recovery Steel plant Sichuan Province Ministry of Metallurgical Industry 1994-1995 8 Waste Heat Recovery Chemical plant Sichuan Province Ministry of Chemcial Industry 1994-1995 9 Waste Heat Recovery Steel plant Shanxi Province Ministry of Metallurgical Industry 1995-1997 10 Waste Heat Recovery Cement plant Anhui Province Bureau of Construction Material 1995-1997 11 Electric Furnace Energy Conservation Metal refining Liaoning Province n.a. 1997-2000 12 Waste Incineration Heat Recovery Municipality Heilongjian Province n.a. 1997-2001 Clean Coal Technology/ SOx Reduction 13 Simplified FGD retrofit Chemical plant Shandong Province Ministry of Chemical Industry 1993-1995 14 Simplified FGD retrofit Chemical plant Guangxi Autonomous Region Ministry of Chemical Industry 1993-1995 15 Simplified FGD retrofit Chemical plant Sichuan Province Ministry of Chemical Industry 1993-1995 16 CFB boiler Textile factory Beijing Beijing Planning Commission 1993-1995 17 CFB boiler Coal mine Shandong Province Ministry of Coal Industry 1993-1995 18 CFB boiler Coal mine Shandong Province Ministery of Coal Industry 1997-2000 19 CFB boiler (cogeneration) Power plant Liaoyuang Province State Planning Commission 1997-2000 20 Coal Briquette Production Equipment Briquette plant Shandong Province Ministry of Coal Industry 1993-1995 21 Low-water Coal Preperation Coal mine Anhui Province Ministry of Coal Industry 1994-1997 22 Low-water Coal Preperation Coal mine Shandong Province Ministry of Coal Industry 1994-1998 23 CFB boiler (low grade coal) Coal mine Zhejiang Province Ministry of Coal Industry 1997-2000 24 Coal-Water Mixture (CWM) Power plant Shandong Province State Planning Commission 1995-1998 25 Coal preparation system Coal mine Chongqing State Planning Commission 1997-2000 26 Simplified FGD retrofit Petrochemical Hunan Province State Petrochemical Industry 1998-2001 27 Coke oven gas de-Sox Iron/steel plant Henan Province State Metallurgical Bureau 1999-2002 28 Coal preparation system Coal mine Chongqing Ministry of Coal Industry 1997-2000 Large Scale FGD/ SOx Reduction 29 23. FGD retrofit (semi-dry system) Power plant Shandong Province Ministry of Electric Power 1993-2000 30 24. FGD retrofit (wet-system) Power plant Shanxi Province Ministry of Electric Power 1995-2000 FGD=flue gas desulfurization; CFB= Circulating Fluidized Bed Boiler Source: Compiled by author from Ministry of International Trade and Industry and New Energy and Industrial Technology Development Organization brochures and internal documents. 53
    • DRAFT July 30, 2003 Appendix III: Biographical Sketch of Author PETER C. EVANS specializes in international political economy, energy market liberalization and international trade. He has served as a consultant to private firms and trade associations including Cambridge Energy Research Associates, Rio Tinto, American Superconductor Corp., Science Application International Corporation, and the U.S.-ASEAN Council. He has also served as a consultant to U.S. government agencies and multilateral organizations including assignments for the U.S. Department of Energy, the U.S. Department of Commerce chaired Trade Promotion Coordinating Committee (TPCC) and the World Bank. He was a visiting scholar at the Central Research Institute for Electric Power Industry, Tokyo, Japan from 1991- 1993. His studies on international trade and trade finance include: “Market Window Institutions: Government Sponsored Enterprises in Trade Finance,” report prepared for the TPCC, May 30, 2003 (with Kenneth A. Oye); “The Financing Factor in Arms Sales: The Role of Official Export Credits and Guarantees,” SIPRI Yearbook 2003: Armaments, Disarmament and International Security (Oxford University Press: New York, 2003); Liberalizing Global Trade in Energy Services, (The AEI Press, Washington, DC, 2002); and “Meeting the International Competition: Conflict and Cooperation in Export Financing,” (with Kenneth A. Oye) in Gary Hufbauer and Rita Rodriguez, editors, U.S. Ex-Im Bank in the 21st Century: A New Approach, Institute for International Economics, Special Report 14, January 2001. Mr. Evans holds a BA from Hampshire College and Master's degree from the Massachusetts Institute of Technology where he is currently completing his Ph.D. 54