OECD Companion to the Inventory of Support Measures for Fossil Fuels 2018 by OECD

Author:OECD
Language: eng
Format: epub
Tags: Environment/Taxation/Trade/Energy
ISBN: 9789264286061
Publisher: OECD Publishing
Published: 2018-02-15T16:00:00+00:00

2.1. Why measure the support component of preferential loans and loan guarantees?1

Governments play an important role in allocating financial resources and risk in the energy markets. Around the world, they provide support to investment in the production of fossil fuels or in the energy sector either through loan guarantees or direct concessional loans. In doing so, they increase access to credit or lower the cost of borrowing for the firm that would have otherwise been excluded from the credit market or penalised by higher interest rates.

When a government provides a loan guarantee for a project, it pledges to repay some or all of the outstanding amount to the lender should the borrower default. As guarantors governments pass the risk underlying such investment to taxpayers, who inevitably become de facto equity-holders in the project. In the event of a default, the government would have to pay back the loan by cutting spending or levying additional taxes to finance this expenditure; debt financing is another way to pay back losses in the short run, but issuing additional debt simply means pushing repayment into the future.

Direct government lending for energy projects is an alternative and widely used form of credit support with costs and benefits comparable to loan guarantees. As for loan guarantees, direct government loans provide support to investors through better contractual terms than those that would have been obtained on private markets, including through favourable interest rates, or repayment conditions. Recipients may, for instance, be granted the right to spread payments over a longer period of time or defer them until the end of the loan so as to maximise their earnings before covering the debt payments. Delaying the start of the repayment period can lower the likelihood of default as it pushes repayment further into the future. However, longer loan maturity can lead to a severer default because it increases total indebtedness and exposes the project to a longer period of uncertainty during which adverse events could occur (CBO, 2004[15]).

Government credit support, therefore, can result in a cost to the government that should enter into the evaluation of government support policies to fossil fuels. The potential subsidy cost of the loan guarantee or direct loans should be expressed in a way that can be compared with other support measures that have been included in the OECD Inventory of government support to fossil fuels.

Subsidised government financing support may take the form of a loan provided at non-market terms and conditions (e.g. with a below-market interest rates or with a tenor which is not available in the private market), a loan guarantee with a below-market credit risk premium, or simply even provision of a loan or loan guarantee that would not otherwise have been offered by a private entity. Such loans and guarantees may also be provided by official sources at costs which are commensurate with purely private financing (i.e. with no measurable support element).

In order to quantify the cost to the government of extending a credit or credit guarantee, one needs

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