As Sweden launches a new, streamlined untied mixed credit scheme for project financing, Norway is closing down its troubled scheme. [...] Projects worth hundreds of millions of [Norwegian] crowns have piled up at the Norwegian aid agency, Norad. It is uncertain whether they will ever be implemented.
[...] The Norwegian mixed credit system is untied, but Norway (unlike Sweden) has a tied guarantee system. This means that the Norwegian guarantee institute GIEK only can issue guarantees for Norwegian suppliers. [Especially for] a firm in a developing country, it is difficult – if not impossible – to obtain a guarantee for the contract. Such a guarantee is a pre-condition for finalising a mixed credit financing package, which consists of both an aid-financed grant and a commercial bank loan.
[Although] the Norwegian government has now decided to close the mixed credit scheme down [it] has already committed to fulfilling all obligations related to the scheme obtained by the end of 2008. Only two projects have been implemented. Norad has 16 projects in the pipeline for untied mixed credit financing. The contract value of these projects is NOK 634 million; 13 of them are in Viet Nam.
Two Vietnamese water supply projects, Hoi An (USD 6 million) and Song Cong (USD 4.8 million), illustrate the problems. Following an international tender, suppliers from China and Viet Nam won the contracts, but neither Norad, Eksportfinans (which facilitates the financing package), the local counterpart nor the suppliers have been able to obtain a guarantee for the projects. The global financial crisis has compounded the difficulty of securing a guarantee and the projects have now been postponed.
[...] In a letter to the Foreign Ministry, Norad states that it favours a solution where GIEK can provide an untied guarantee for the remaining projects in the mixed credit scheme. [...] Norad says the easiest way to do this is for the Ministry of Trade and Industry to allow GIEK – as an exception – to issue untied guarantees for the remaining projects in the mixed credit scheme.
[...] Norad writes further in its letter that if Norway cannot solve the guarantee issue for the projects Hoi An and Song Cong, the Ministry of Finance in Vietnam must do so or the projects must be cancelled. In Hoi An, the first part of the supplies, which were financed locally, has already been delivered.
It is unclear what legal obligations Norway will have, but Norad writes that it is likely Norway will not be tied to its obligations if it is not possible to raise financing.
Source: Development Today [subscription site], 03 Feb 2009