current Helsinki arrangement, The

Multinational Business Review, Spring 1994 by Beenhakker, Arie, Unger, Michael L

INTRODUCTION

The latest International Arrangement on Officially Supported Export Credits, also known as the "Helsinki Arrangement" or "Helsinki Package," went into effect on February 15, 1992, for the twenty-two industrialized nations which are members of the Organization for Economic Cooperation and Development (OECD). The participating nations in the Arrangement are: Australia, Austria, Canada, Finland, Japan, New Zealand, Norway, Sweden, Switzerland, The United States, and the twelve European Community (EC) countries. The Helsinki Arrangement contains an important set of measures to strengthen the rules on export and aid credits. Export credit refers to: either deferred payment terms, loans, or other financial facilities provided to foreign buyers of goods and services; or financing made available to domestic suppliers to generate goods and services for export (OECD). The Development Assistance Committee (DAC) of the OECD refers to tied aid as loans and grants which are either, in effect, tied to the procurement of goods and services from the donor country, or which are subject to procurement modalities implying limited geographic procurement eligibility.

Tied aid credit or tied aid financing refers to loans, grants, or associated financing packages involving a grant element greater than zero, that is tied to procurement of goods and services from the donor country. Though the primary purpose of tied aid credit may be to assist a developing economy, tied aid financing also has a commercial motivation in that it seeks to artificially promote the donor country's exports (Grundmann 1978). The tying of aid may adversely affect optimal, global trade patterns, because procurement is linked to a donor country rather than the best possible source (Haq 1988). To counteract the tendency for less than optimal trade patterns the members of the OECD Group on Export Credits and Guarantees arrived at a "gentlemen's agreement" in 1976. In this agreement, all "associated financing" packages with a combined grant element of 15 percent or more were subject to prior notification among the nations participating in the gentlemen's agreement (McKinlay 1978). An associated financing package or mixed credit is the combination of both aid credits or grants with officially (government) supported export credits or regular commercial credits. The result of an associated financing package is the promotion of the donor country's exports through subsidizing the financing of the transaction(s).

The thought behind the minimum grant element of the gentlemen's agreement was that tied aid credits, with a low grant element are more likely to be extended to improve commercial competitiveness. In other words, such aid credits are likely to be "competition motivated." On the other hand, it was felt that tied aid credits with a large grant element are more likely to be "aid motivated" (Toye 1986). Over the years, the percentage of grant element agreed upon by the participants of the International Arrangement on Officially Supported Export Credits has increased in an attempt to further separate as much as possible tied aid credits from commercial export credits (U.S. Government 1989). The expectations of this attempt are yet to be met. Studies by J. Ball, Eximbank, C.J. Jepma, E.H. Preeg, D. Keller, A. Maizels and K.M. Nissanke, R.S. May and N.C. Dobson, and A.J. Yeats have indicated that practices of tied aid credits and mixed credits have increased between 1976 and 1991. This result, together with the strengthening of the rules on export credits and tied aid credits during the same time span, must mean that significant cheating has taken place. To counteract this trend, the Helsinki Arrangement of February 15, 1992, was founded on two important goals; to ensure that global competition for commercially viable projects is based on price, quality, and service rather than on subsidized financing methods, and to ensure that tied aid credits will go to projects that are developmentally sound but are not financially or commercially viable. Unfortunately, the concept of financial or commercial viability has not been precisely defined under this Arrangement. One may not expect more than a marginal decline in tied aid practices or in associated financing methods unless this concept has been much more precisely defined. The primary purposes of this paper are twofold: to introduce a precise interpretation of financial or commercial viability, and to provide specificity for the rules of the Helsinki Arrangement.

EXPORT AND TIED AID CREDITS

In 1978 the participants of the Arrangement increased the grant element in tied, officially supported financing from 15 percent to 20 percent, and this percentage was increased again to 25 percent in 1985. The 1985 Arrangement also considerably strengthened the provisions for prior notification and consultation among the governments of the participating nations. Subsequent hard negotiations led to an agreement known as the "Wallen Package" in January, 1987. The Wallen Package introduced a change in the formula for calculating the grant element making it more closely reflect market rates of interest. From thereon, the result of this formula has been called 'concessionality level" rather than "grant element" in order to reflect the change in the formula. Furthermore, the Wallen Package increased the minimum permissible concessionality level of tied aid credits from 25 to 35 percent for all countries except the least developed nations (LLDC's), where the level became 50 percent. The Wallen Package hoped to achieve an increase in aid credits to the LLDC's, as well as an increase in commercial export credits to the richer and intermediate developing countries. This result was not achieved and hence, towards the end of 1989, a new round of negotiations started. These negotiations led to agreement regarding the following principle: "OECD members export credit and tied aid policies would be complementary: those for export credits should be based on open competition and the free play of market forces; those for tied aid credits should provide needed external resources to countries, sectors or projects with little or no access to market financing, ensure the best value for money, minimize trade distortion and contribute to the effective developmental use of these resources" (DAC's Working Party on the Financial Aspects of Development Assistance, OECD, Paris, May, 1991). This principle means that the allocation of aid funds should meet the criterion of additionality. That is, aid funds should be additional to commercially financed flows if trade distortion is to be minimized. The criterion of additionality became the basis for adopting the concept of commercial/financial viability in the Helsinki Arrangement. That is, in the absence of aid, worthwhile projects that are not commercially viable will not receive external financing; these are the projects towards which official aid should be directed if official aid is to become truly "additional." The Helsinki Arrangement applies the concept of commercial/financial viability only to the middle income developing nations. These countries have a rapidly increasing need for investments in power generation, telecommunications, transportation, medical facilities, and other infrastructural components. This need encompasses very attractive export transactions for the competing industrialized nations.