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Project Finance - Eligibility Of Costs

Eligibility of costs for Ex-Im Bank's support of limited recourse project finance ("Project Finance") transactions generally tracks the overall criteria developed and used for other Ex-Im Bank programs. However, eligibility guidelines for Project Finance cases require further explanation since the coverage requested under these cases brings into focus cost categories and eligibility issues that are only occasionally seen in other Ex-Im Bank programs.

The following explains the various Ex-Im Bank cost eligibility guidelines as they pertain to Project Finance cases. The criteria underlying these guidelines are based on assessments of whether the respective cost categories satisfy the two objectives of 1) consistency with Ex-Im Bank's policies, and 2) the flexibility required to appropriately support Project Finance cases. Ex-Im Bank's Engineering and Environment Division, with input from the Project Finance Division, determines the eligibility of the various costs associated with a specific project. Actual support determination is always subject to the receipt of proper supporting documentation (invoices, Supplier's Certificates, etc.) by Ex-Im Bank's Credit Administration Division during the disbursement stage of the transaction.

In order to determine the support available for a given transaction, the total project cost must first be broken down according to major items in a form acceptable to Ex-Im Bank. An example of an acceptable Project Cost Breakdown is provided as Attachment "A". Before Ex-Im Bank will consider an application for a final commitment, the Project Sponsors must submit a U.S. Acquisition List satisfactory to Ex-Im Bank setting forth the U.S. and eligible foreign costs of all the U.S. items of the particular project. An example of a U.S. Acquisition List is provided as Attachment "B".

There are seven major guidelines used to determine the eligibility of costs associated with various elements of Project Finance transactions:

• Foreign Content
• Reach-Back
• Related Parties
• Capital Cost
• Contingencies
• Local Cost
• Progress Payments

The guidelines and the manner in which they are applied are explained as follows:

I - Foreign Content Guidelines

Foreign Content guidelines for Project Finance transactions follow an "aggregate" approach. To be eligible for support, goods and services in a U.S. supply contract must be shipped from the United States to a foreign buyer.

Ex-Im Bank will finance either 85 percent of the net Contract Price , or 100 percent of its U.S. Content (U.S. Contract Price less Eligible Foreign Content), whichever is less. The amount eligible for Ex-Im support will be aggregated on a contract by contract

II - "Reach-Back " Guidelines

Shipments of goods and services that occurred prior to the submission of a final commitment request to Ex-Im Bank may be eligible for Ex-Im Bank financing provided the shipments occurred within one of the following allowable time frames:

1. On or after the date Ex-Im Bank issued the original Letter of Interest for the transaction;

2. On or after the date Ex-Im Bank received the initial request for Preliminary Commitment for the transaction;

3. Up to 12 months prior to the date Ex-Im Bank received the final commitment application or insurance application for the transaction. The maximum reachback period is the earliest of the three above dates.

Where required by the OECD Arrangement, repayment terms would be shortened to accommodate a long reachback.

III - Related Parties Cost Guidelines

Most Project Finance transactions contain elements of costs for services or products provided by a U.S. supplier which also has ownership in the project. Ex-Im Bank provides support for such costs as long as there is evidence that the sale in question was negotiated and administered on an "arms-length" basis. When parties to a contract are related to one another, Ex-Im Bank will presume that the contract is not arms-length.

In determining cost eligibility of a related party's contract, the sponsor or supplier may first be asked to provide evidence that the contract was negotiated on an arm's-length basis. It can usually be assumed that if the percentage of ownership between a supplier and buyer is not a controlling one, a negotiated sale may be arms-length. However, when the ownership percentage is close to or greater than 50 percent, Ex-Im Bank's Engineering and Environment Division will review each cost element of a contract to determine which can be considered arms-length for purposes of Ex-Im Bank support. Factors taken into account in the Ex-Im Bank determination include whether or not offers from other suppliers were solicited (thereby introducing competition), whether separate divisions of the company negotiated the contract on an independent basis, and whether the costs involved reflect market prices.

Fees including "development fees" charged by a sponsor having ownership in a project are not considered eligible for Ex-Im Bank support. In certain instances, however, if a cost breakdown of such a fee shows that it covers the cost of certain project related services subcontracted to a U.S. company, the Engineering and Environment Division will review the costs to determine their eligibility for inclusion in the Ex-Im Bank supported portion of the project. For example, the cost reflecting an actual invoiced amount for engineering services subcontracted to a U.S. company and undertaken within the Reach-Back period, represents an element of a fee which may be eligible for Ex-Im Bank support.

Engineering services undertaken directly by a sponsor may also be considered eligible when factors including competitive pricing elements and inter-company contractual controls of the service costs are evident. While certain bona fide sponsor incurred costs (such as the salaries paid for the undertaking of required project services) may be eligible for support, actual fees associated with any related party's contract are not eligible for Ex-Im Bank support.

IV - Capital Cost Guidelines

This straightforward guideline reflects the fundamental policy that Ex-Im Bank will limit its support of Project Finance transactions (as it does for all project related transactions) to only those items deemed to be "capital cost" in nature. This means that pre-development costs incurred at the project definition stage, as well as costs incurred after the project is operational, such as operations & maintenance (O& M) activities, will not be considered eligible for Ex-Im Bank financial support. Working capital costs are also considered ineligible for support. Only those capital cost items, such as equipment and services covered under an engineer, procure and construct contract (EPC), legal, financial and engineering services associated with the undertaking of the project, and items such as training and insurance during construction will be considered eligible for Ex-Im Bank support. Refer to the Sample Acquisition List, Attachment B, for examples of eligible capital cost items.

The costs of all pre-construction activity must be itemized so that Ex-Im Bank can establish whether they constitute a capital cost eligible for Ex-Im Bank support. Specific costs incurred in the project development stage may be considered eligible if Ex-Im Bank determines that a) they were incurred on an arms-length basis, b) fall within the established Reach-Back period, and c) relate to final design, construction and related activities such as acquisition of permits or finalization of financial support. Investments made by sponsors to cover preliminary studies regarding the viability or feasibility of a project, especially related to decisions of sponsor participation, are not considered capital in nature. (Usually such costs will have been incurred well before the established Reach-Back date.) Similarly, post-completion operating expenses should be met with project revenue, and will not be considered eligible for support.

V - Contingency Cost Guidelines

Generally, amounts for contingencies associated with EPC contracts or major supply contracts which do not exceed 10 percent of the total contract price, will not be questioned by Ex-Im Bank at the application stage and thus will be considered eligible. However, prior to any Ex-Im Bank disbursement, these amounts will be reviewed by the Engineering and Environment Division to ascertain whether they are technically appropriate and necessary to successfully complete the project. Also, input from the Lender's Independent Engineer will be used in the determination. Contingency related items must also be fully described and are subject to the other eligibility criteria described in this paper. In no case will disbursements be made for an unused contingency.

Only those contingencies associated with eligible project supply contracts will be considered for financial support by Ex-Im Bank. The appropriateness of the request, and the nature of the project and related project risks will always be the principal factors by which Ex-Im Bank will determine the eligibility at the application stage of a contract contingency allowance.

Ex-Im Bank considers "Owner's Contingencies" as an element of the equity portion of a project, and hence ineligible for financial support. Contingencies associated with related party contracts will be reviewed on a case-by-case basis to determine eligibility.

VI - Local Cost Guidelines

Ex-Im Bank will generally support eligible local costs to an amount of up to 30 percent of the U.S. Contract Price associated with the project. This support is in addition to the normal support of 85 percent of the U.S. Contract Price. To be eligible for Ex-Im Bank support, the local costs must represent goods and services produced and procured within the host country and must be included in the Export Certificate.

VII - Contract Progress Payment Guidelines

Progress payments (and construction "milestone payments") made under the terms of an EPC or other supply contract, are generally eligible for Ex-Im Bank support to the extent that the supplier can certify that the accrued costs for actual work performed under the contract, including expenses for any subcontracted equipment, are at least equal to the value of the respective progress payment. A certification that the value of the progress payment does not exceed the costs incurred by the supplier to date must accompany any request for a progress payment disbursement. Similarly, disbursements for initial down payments will only be made once the supplier can certify to Ex-Im Bank that actual expenses associated with the work performed are equal to the value of the requested disbursement. The Lender's Independent Engineer may be required to confirm the level of work performed. Ex-Im Bank disbursements may not serve as general working capital for the supplier.

In cases where the requested progress payments exceed 60 percent of the value of the export before it is shipped, the Engineering and Environment Division will advise the Credit Administration Division as to whether any further disbursements should be made until such time as the product is actually delivered. The Engineering and Environment Division will review the payment terms of the major project supply contracts, especially the EPC contract, and will advise the U.S. supplier if it appears that the progress payment schedule conflicts with Ex-Im Bank requirements, as described above.

Attachments

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EBD-P-03 May 2001