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CCC Facility Guarantee Program Regulations
BACKGROUND
CCC provides export credit guarantees for export sales of U.S. agricultural commodities under the Export Credit Guarantee (GSM-102) program and the Intermediate Export Credit Guarantee (GSM-103) program. The programs are authorized by section 202 of the Agricultural Trade Act of 1978 as amended (1978 Act). Section 1542(a) of the 1990 Act provides that CCC make available, for fiscal years 1996 through 2002, not less than $1 billion in direct credits or export credit guarantees for agricultural exports to emerging markets available under the 1978 Act. A portion of such credit guarantees must, in accordance with section 1542(b) of the 1990 Act, be made available for the export of goods and services for agricultural facilities. Guarantees are to be made available if the Secretary of Agriculture determines that such guarantees will primarily promote the export of United States agricultural commodities and products thereof. Specifically, eligible projects must provide for (1) the establishment or improvement of agricultural facilities in emerging markets, or (2) for the provision of goods or services in emerging markets, by U.S. persons to improve handling, marketing, processing, storage, or distribution of imported agricultural commodities or products in such markets. The phrase "establishment or improvement of facilities" allows for varied types of projects ranging from the sale of equipment (e.g., refrigeration, processing, transportation) and other goods needed to alleviate impediments to increasing export sales of U.S. agricultural commodities, to providing services, such as equipment installation, testing, and training to facilitate achievement of the same purposes.
Section 1542(b) further requires CCC to give priority to projects that (1) encourage the privatization of the agricultural sector in emerging markets, (2) benefit private farms or cooperatives in emerging markets, and (3) are supported by nongovernmental persons who agree to assume a relatively larger share of the costs.
Section 1542(f) of the 1990 Act defines "emerging market" as any country that the Secretary of Agriculture determines (1) is taking steps towards a market-oriented economy through food, agriculture, or rural business sectors of the economy of the country and (2) has the potential to provide a viable and significant market for United States agricultural commodities or their products.
CCC published an FGP interim rule on March 1, 1993, (58 FR 11786) in response to the 1990 Act. The 1990 Act required CCC to develop an export credit guarantee program for facilities in countries that were determined by the President to be emerging democracies. However, the FGP was not made operational before the authority expired on September 31, 1995. Congress changed the targeting of the FGP in the 1996 Act to countries determined by the Secretary of Agriculture to be emerging markets. The interim rule was deleted effective November 18, 1994 when CCC revised 7 CFR 1493 and issued a final rule on the GSM-102 and GSM-103 programs.
C. Summary of Comments - 1993 Interim Rule
The Commodity Credit Corporation (CCC) received eleven comments from eight different sources in response to the Facility Guarantee Program (FGP) Interim Rule published March 1, 1993 in the Federal Register. The commenters included three equipment manufacturers, three animal health product manufacturers, the Office of the Inspector General, and a market research firm which submitted three separate responses.
Three comments were project proposals that did not comment on the regulatory aspects of the rule.
Three comments addressed the definition of "acceptable substitute." This definition was required by law in the 1990 Farm Act to be included in the FGP rule. The commenters believed that CCC misinterpreted the intent of the law and requested that CCC change the definition of acceptable substitute. This recommendation now is unnecessary. The term acceptable substitute was deleted from the 1996 Farm Act. Accordingly, CCC has dropped the definition from the rule under consideration.
One commenter suggested that CCC explain in the preamble of the regulation how CCC arrived at defining "close geographical location of countries" to be 1,000 miles from the target country. The law states that CCC may not provide credit guarantees to projects that may primarily benefit countries in close geographical location to the target country. CCC believes this definition does not improve the program and has dropped this definition from the interim rule. The objective of the FGP is to primarily benefit U.S. agricultural exports. In meeting this objective, no country, except the U.S., without regard to geographic proximity to the targeted emerging market, may primarily benefit from a FGP project.
One commenter requested that CCC provide 100 percent guarantee coverage on principal and interest for letters of credit extended by a foreign bank. CCC disagrees. If CCC provides 100 percent coverage on principal and interest it loses the risk sharing mechanism inherent in CCC's export credit programs. Risk sharing is necessary because CCC does not have the resources required to perform project specific financial and risk analysis. Therefore, to keep CCC's default rate at acceptable levels, risk sharing is essential. CCC believes that risk sharing in the FGP results in more efficient use of its limited resources.
One commenter requested CCC provide a statement in the regulations to include grain/food processing equipment as eligible projects under the FGP. The commenter indicated that the interim rule was unclear on this point. CCC disagrees. The regulations provide that the FGP may guarantee credit extended for sales of equipment and services that improve handling, processing, storage or distribution of imported agricultural commodities. This program purpose clearly addresses sales of grain/food processing equipment.
One commenter also suggested that CCC qualify Russian banks other than those qualified to participate under the U.S. Export Import Bank (Eximbank) programs. CCC reviews foreign banks against an established set of eligibility criteria. These criteria may include financial and economic factors similar to those reviewed by Eximbank. CCC qualifies all foreign banks expressing a desire to participate in our programs if they meet these criteria.
One commenter recommended that CCC reach out to the food processing industries and agribusiness sector in target countries to promote the use of the program. The commenter pointed out that linking agricultural equipment sales to commodity sales may benefit the U.S. equipment manufacturers and agricultural export industries. CCC agrees and will endeavor to promote the FGP to these sectors in targeted emerging markets.
One commenter suggested that CCC adopt a competitive bidding process for projects to ensure the most cost effective bidder on a project receives the guarantee. CCC disagrees. This suggestion indicates a fundamental misunderstanding of the program. CCC does not plan to solicit FGP applications for specific types of projects. FGP applicants will propose projects and CCC will determine if such projects meet the criteria of the program.
One commenter suggested that project requirements (the
information requested by CCC to determine if a FGP guarantee will
be approved) be published in the regulation and not the program
announcement. CCC agrees and has included such requirements in
the regulation
(7 CFR Part 1493.240 and 1493.250).
One commenter suggested that CCC explain why the application fee is $200 in the preamble of the interim rule. CCC agrees. Simply, the $200 application fee serves as a disincentive to the submission of speculative applications, and a means to defray a portion of CCC's administrative costs.
One commenter requested the FGP application include detailed financial information on the buyer. The commenter also specifically recommended the application require plans for servicing the guaranteed loan through field inspections, obtaining periodic financial statements, a description of any liens against the buyer, information concerning litigation against and defaults by the buyer, and the use of consultants in preparing the application. The commenter suggested further that the application require a description of planned insurance coverage (i.e. life, hazard, flood) and the names of foreign regulatory agencies that would require permits, licenses, or other clearances that would impact the facility. CCC disagrees. The commenter's concern appears to be in regard to assessing buyer or project risk. Assessing the ability of the buyer to successfully manage a facility or whether the facility will succeed financially is the role of the foreign bank. CCC's guarantee covers the risk of default of the foreign bank on the repayment obligation to the exporter or their U.S. bank assignee.
Two commenters referred to the application requirements concerning evidence of primary benefits to U.S. agricultural exports. One commenter recommended that the application requirements concerning primary benefit not overburden the applicant. The commenter recommended that CCC streamline paperwork requirements and reduce project approval lead time. The second commenter recommended that the interim rule require applicants to provide evidence of how a project proposal will benefit U.S. agricultural exports. CCC believes that the overall goal of the FGP is to promote U.S. agricultural exports. Sufficient information must be required from applicants in order for CCC to fully evaluate project proposals and the effects projects will have on U.S. agricultural exports. CCC has made many improvements in the interim rule to streamline the application process in comparison to the process outlined by the 1993 interim rule. However, CCC remains open to recommendations that specifically address how CCC may streamline the application review procedures and reduce project proposal lead time.
One commenter suggested that CCC request information from the applicant regarding the procurement funding or guarantees from sources outside of CCC. CCC agrees and has included this recommendation in the regulation (1493.240(a)(22)).
One commenter recommended that the application include the names of attorneys, accountants and other parties engaged in preparing the application. CCC disagrees. Applications submitted under all CCC export programs are required to be signed by a principal of the company applying for a guarantee. CCC believes this is sufficient in addressing any concerns regarding the veracity of the information contained in the application.
One commenter suggested CCC expand the definition of a "U.S. person" so that CCC may determine if the applicant fulfills this criteria without seeking additional information. CCC believes that program qualifications respond to the commenter's concern. CCC qualifies applicants following a review of documents such as the articles of incorporation, partnership or registration of proprietorship that may permit CCC to determine if an applicant is a legally registered U.S. business entity.
D. The FGP Addresses a Market Failure
The FGP is designed to address a specific market failure. Many emerging markets lack sufficient infrastructure to support expansion of agricultural commodity imports. The demand for capital financing in emerging markets is significant. Agri-business projects must compete with other infrastructure development for the limited capital available. The market failure that arises is that private sector financial institutions may be unwilling to provide credit to agri-business projects, at a reasonable cost. This market failure may be more pervasive for small and medium size enterprises than for larger companies. The availability of CCC's guarantee under the FGP provides an opportunity for U.S. private sector financial institutions to provide credit to a foreign bank that will, in-turn, finance infrastructure projects at a reasonable cost. Such credit extension is unlikely to occur without the benefit of CCC's credit guarantee.
The market failure that FGP addresses, particularly for small and medium size enterprises, is viewed as normally being below the threshold level for multi-lateral and the regional development banks to consider extending financing or guarantees.
E. Exporter and Project Eligibility
CCC will make export credit guarantees available in the form
of facility payment guarantees.
Section 1542(b) of the 1990 Act provides that an exporter must be
a "U.S. person" to be eligible for a facility payment
guarantee. Under this interim rule, exporters must also furnish
certain information and certifications to CCC in order to be
eligible to receive payment guarantees.
Eligible projects must establish or improve agriculture-related facilities in an emerging market. For CCC to approve a facility payment guarantee such projects must primarily promote the export of U.S. agricultural commodities or products. For CCC to make such a determination, the exporter must convince CCC that the issuance of a facility payment guarantee will cause exports of U.S. agricultural commodities or products to the emerging market to increase:
The FGP will be administered by the Office of the General Sales Manager (GSM), Foreign Agricultural Service, U.S. Department of Agriculture, on behalf of CCC. Initially, CCC will consider projects of limited size in a limited number of emerging markets. The effectiveness of the program will be assessed in view of the comments received on the interim rule and after a number of facility payment guarantees have been issued. The GSM will periodically issue program announcements inviting submissions by exporters of applications for facility payment guarantees. These program announcements will identify emerging markets, indicate maximum guarantee coverage, and provide other pertinent information.
CCC will review applications and provide to the exporter a preliminary commitment letter if an application meets the standards of the regulations and appears to represent the best use of CCC's resources. CCC may also request additional information to clarify or supplement an application. CCC may reject applications that do not appear to meet program objectives or for other sufficient reasons.
Upon receiving a letter of preliminary commitment from CCC, the exporter has six months to submit a final application. Such final application must contain information confirming, updating, and supplementing information previously provided. If CCC approves the final application, it will issue a letter of final commitment requiring the exporter to pay an exposure fee before a facility payment guarantee is issued. CCC will issue a facility payment guarantee when the amount of the exposure fee has been paid in full.
G. Credit Terms and Risk Coverage
The terms of CCC's coverage will be set forth in each facility payment guarantee. These will conform to pertinent rules of the Organization for Economic Cooperation and Development (OECD) Arrangement on Guidelines for Officially Supported Export Credits (Arrangement). Copies of the OECD Arrangement and classification of country categories are available from: The Director, Office of Trade Finance, Department of Treasury, Room 4448, 1500 Pennsylvania Avenue, N.W., Washington D.C. 20220. The OECD Arrangement sets out the most favorable terms allowable for government credits and guarantees. For example, pursuant to the Arrangement, the exporter must oblige the importer to comply with CCC's initial payment requirement (§ 1493.230(c)). This requires the importer to pay the exporter at least 15 percent of the net contract value. The net contract value is equal to the contract value minus (a) the value of goods that are not U.S. goods; and (b) the cost of services that are not U.S. services (except those services the exporter requests CCC to determine are vital to the success of the project and approved to be included in the net contract value (§ 1493.260(b)(1))).
CCC will initially offer facility payment guarantee coverage
of 95 percent of the facility base value. This value is the
amount of the net contract value that remains after deducting the
amount paid in accordance with the initial payment requirement,
and the value of any discounts or allowances
(§ 1493.260(b)(2)). CCC will also cover interest on a variable
rate basis. The method of determining the variable interest rate
coverage will be indicated in program announcements and in each
payment guarantee. The interim rule also provides that the
maximum interest rate, when determined by CCC, will not exceed
the average investment rate of the most recent Treasury 52-week
bill auction in effect at that time.
H. Guidelines for U.S. Content
CCC used certain guidelines relating to the inclusion and valuation of goods that are not U.S. goods, services that are not U.S. services, and imported components of U.S. goods in sales transactions covered under this program. The most important of these guidelines are summarized below:
1. FGP payment guarantees are derived only from that portion of an exporter's sales contract that represents (a) U.S. goods, (b) U.S. services, and (c) any services that are not U.S. services that CCC determines are vital to the success of the project and are approved by CCC for coverage. This derived value is called net contract value (§ 1493.260(b)(1)). Any other goods or services included in the exporter's contract (e.g., foreign goods that are not components of U.S. goods, goods not exported from the U.S., and foreign services not approved by CCC) cannot be included in net contract value.
2. U.S. goods may include imported components that are assembled, processed or manufactured into goods within, and exported from, the U.S. Services that are not U.S. services (e.g., foreign flag freight (e.g., ocean, air), and related insurance, ship discharge operations, inland transportation) provided by persons who are not citizens or legal residents of the U.S. may receive guarantee coverage only if approved by CCC. Most likely CCC will approve such services if they are determined to be vital to the success of the project.
3. In addition to the above requirements, CCC will issue a facility payment guarantee only if the value of covered imported components, combined with the cost of covered services that are not U.S. services, meet the 50 percent minimum U.S. content test (§1493.260(d)). This means that those components and services must represent less than 50 percent of the net contract value. The 50 percent determination is made on an aggregate or cumulative basis as exports of goods and services occur, not item by item. For example, more than 50 percent of the value of a single piece of equipment may be comprised of imported components so long as the total value of covered imported components and cost of services that are not U.S. services remain less than 50 percent of net contract value for all goods and services.
To make the above 50 percent determination, imported components are valued at their declared customs value or, in the absence of specific information regarding declared customs value, the fair wholesale market value of the components in the U.S. at the time they are acquired by the exporter. The costs of services that are not U.S. services are the actual amounts paid by the exporter for the services in an arms-length transaction, or, in the absence of such a transaction, the fair market value of the services at the time the services were provided.
4. Imported raw materials (such as iron, steel, nuts, and
bolts) which are processed, assembled or manufactured in the U.S.
are automatically included in CCC's coverage and are not counted
as imported components for the purpose of the 50 percent minimum
U.S. content test
(§ 1493.260(d)). CCC will rely on commercial practice and
communication with participants to resolve issues that may arise
regarding raw materials.
I. CCC's Payment Guarantee Mechanism and Claims Procedure
CCC guarantees the exporter, or the exporter's assignee, against defaults by a foreign bank under its irrevocable letter of credit or related obligation. In the event of such a default, the exporter or the exporter's assignee must notify CCC within a ten day period, and may file a claim with CCC within six months. CCC will pay the guaranteed amount of the claim plus eligible interest if all required claims documentation has been received, including an instrument subrogating to CCC the rights of the exporter and, if applicable, the exporter's assignee, to the amount of payment in default. Recoveries made by CCC pursuant to the subrogated rights, or from any source whatsoever, are shared between CCC and the exporter or exporter's assignee on a pro rata basis determined by their respective interests in such recoveries. In the event that monies are recovered by the exporter or the exporter's assignee from any source whatsoever, these must be paid to CCC which will include them in pro rata sharing. The Appendix to § 1493.320 contains an example of pro rata sharing of recoveries.
J. Example: Typical Transaction
A typical transaction eligible for coverage under a facility payment guarantee could be as follows: CCC issues a program announcement inviting U.S. persons to apply for facility payment guarantees in connection with eligible projects in a specified emerging market. The program announcement states that the terms of coverage will be 95 percent of the facility base value (§1493.260(b)(2)). An exporter responds by submitting an application for the export sale of goods and services to an importer in the emerging market. The goods and services have a contract value of $2.2 million, of which $200,000 represents goods that are not U.S. goods which are not further processed, assembled, or manufactured into U.S. goods and services that are not U.S. services for which no CCC coverage is sought. Those goods and services are subtracted from the contract value to provide the net contract value of $2.0 million (§ 1493.260(b)(1)). The exporter does not expect any discounts and allowances to be provided.
The combined value or cost of covered imported components contained in U.S. goods and services that are not U.S. services for which CCC coverage is requested is $650,000. This represents 32.5 percent of the net contract value. Because this is less than 50 percent, the sale meets the U.S. content test (§ 1493.260(d)). The exporter indicates that the importer, in order to comply with the initial payment requirement (15 percent of the net contract value), will pay the exporter $300,000.
The net contract value ($2 million) minus the initial payment
requirement ($300,000), minus discounts and allowances (zero),
equals the facility base value ($1,700,000) to which CCC's rate
of coverage applies. The payment guarantee would thus show a
guaranteed value of 95 percent of $1,700,000, or $1,615,000 as
shown below. The facility payment guarantee would also indicate
how eligible interest would be covered on a variable rate basis,
consistent with relevant program announcements.
EXAMPLE
(1) Contract Value: $ 2,200,000
- (a) minus: Goods and services that
are not U.S. goods and services and
are not approved for coverage by
CCC $ 200,000
(2) Equals: Net Contract Value: $ 2,000,000
(a) minus: Initial Payment
(15% of net contract value) $ 300,000
- (b) minus: Discounts and Allowances $ 0
(3) equals: Facility Base Value: $ 1,700,000
(4) Guaranteed Value
(95 percent of $1,700,000): $ 1,615,000
Exporters should recognize that the maximum liability for a claim
(§ 1493.310(b)), under certain circumstances, may turn out to be
less than $1,615,000. Under § 1493.310(b), CCC's liability is
limited to the lesser of: (1) the guaranteed value as provided in
the facility payment guarantee, plus eligible interest, or (2)
the guaranteed percentage of a value called the exported value
indicated in the evidence of export report(s), plus eligible
interest. The exported value is the net contract value of the
goods or services exported minus (a) the initial payment and (b)
the dollar amount of any discounts and allowances (§
1493.280(a)(7)). Thus, if for any reason, the exported value
decreases, the dollar amount of coverage would decrease. For
example, the exported value would be less if fewer goods and
services are exported; if the value of goods and services
exported decreases from the value originally reported to CCC; if
discounts or allowances, not foreseen at the time of application,
are provided; or if payments by the importer exceed the initial
payment requirement.
List of Subjects in CFR Part 1493
Administrative practice and procedures, Agriculture, Agricultural commodities, Banks, Banking, Business and industry, Credit, Exports, Finance, Foreign banks, Guaranteed loans, Reporting and recordkeeping requirements.
Accordingly, part 1493 of title 7 is amended as follow:
1. The Authority citation for 1493 continues to read as follow:
Authority: 7 U.S.C. 5602, 5622, 5661, 5662, 5663, 5664, 5676, 15 U.S.C. 714b(d), 714c(f).
2. By adding a new subpart C to read as follows:
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