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Better Infrastructure, Bigger Sales: The Facility Guarantee Program
By Mark Rasmussen
You wouldn’t expect to
sell much frozen food to a nation that lacks proper refrigerated
storage. Nor would you begin to ship tons of grain to a country
that doesn’t have proper port or rail facilities.
Recognizing the linkage between foreign infrastructure and U.S. agricultural exports, the Foreign Agicultural Service (FAS), under the Commodity Credit Corporation (CCC), recently launched the Facility Guarantee Program (FGP), a unique addition to conventional agricultural export programs.
The FGP’s primary objective is to enhance facilities in emerging overseas markets that process, handle, store or transport agricultural products imported from the United States. To achieve this, the FGP provides credit guarantees, financial devices that eliminate most of the risk of non-payment by foreign banks, to facilitate sales of manufactured goods and services.
While the credit guarantees protect U.S. exporters and their banks against foreign bank defaults, the manufactured goods and services are used to enhance agribusiness-related facilities that will primarily use U.S. agricultural exports.
Although other
government and multi-national programs finance export sales of
manufactured goods and services, the FGP is aimed initially at
financing moderate-sized agricultural projects--including small
businesses that may be overlooked by other export credit agencies
that predominately support projects unrelated to agriculture.
The FGP can assist importers in acquiring needed manufactured goods and services by supporting commercial sales transactions to countries where, because of perceived risk of default in the financial market, access to normal commercial lines of credit is limited.
Supporting Sales of Manufactured Goods and Services
In certain parts of the world, problems in the handling, storage, processing or distribution of agricultural products and commodities can pose almost insurmountable obstacles for exporters until capital investments are put in place.
Consider just one example-- refurbishing and expanding a cold storage warehouse. Not only would replacing outdated refrigeration equipment better preserve U.S. frozen foods so that they remain safe and appealing to consumers; but with added storage capacity, importers could warehouse more products to reach customers.
Or, imagine the consequences of improved and expanded grain handling and storage at a discharge port. New conveyers, ship unloaders, training and a host of other start-up services would increase ship discharge efficiency and reduce vessel demurrage costs. Result: more U.S. grain pouring into a growing market at a lower cost.
Coverage Against Foreign Bank Defaults
The FGP credit guarantee helps control one uncertainty--the risk of default on the repayment of a foreign bank obligation.
FGP terms are specific: Credit may be covered by the CCC only when payment is financed under a dollar-denominated irrevocable letter of credit issued in favor of an exporter by a foreign bank that has CCC approval to participate under the program.
The guarantee covers 95 percent of principal (excluding the initial payment) and most of the interest on credit extended by a U.S. bank to a foreign bank.
In the event of a default by a foreign bank, a claim must be filed with CCC. The exporter (or the exporter’s assignee) will receive payment after CCC determines the claim documents are in good order. After a claim is paid, CCC assumes responsibility for collecting all overdue amounts from the foreign bank.
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The author is an Agricultural Marketing Specialist with FAS.
Tel.: (202) 720-1537; Fax:(202) 720-0938; E-mail: Mrasmussen@fas.usd.gov.
Getting Started: FAS does not plan to solicit FGP applications or bids on specific projects. Rather, applicants will propose projects that will be evaluated on the basis of program criteria published in FGP regulations (7 CFR 1493) and program announcements. The FGP does not require U.S. ownership in an infrastructure project.
Initially, FAS will consider projects that improve existing facilities with guarantee coverage of up to $10 million.
Exporter Eligibility: Exporters
can qualify to participate under the FGP if the exporter (1) is a
citizen or legal resident of the United States or is a business
organized under the laws of the United States, (2) has an
established place of business in the United States, (3) has a
registered agent for service of process in the United States, and
(4) is not currently suspended or debarred, or owned or
controlled by a person who is s
uspended or debarred, from contracting
with, or participating in programs administered by, a U.S.
government agency. Exporters are required to submit information
to qualify when they submit a project proposal to CCC.
Target Countries
FGP projects must primarily benefit U.S. agricultural exports. Partly for this reason, FAS has targeted countries where many U.S. agricultural exports maintain a significant share of the market in bulk, semi-processed, or high-value products (see box). One category of emerging markets in particular appears most likely to benefit from the FGP: nations where U.S. exports have a transportation cost-advantage over competing suppliers.
Developing a Project Proposal:
Applications for credit guarantees must demontrate how the proposed project will primarily benefit U.S. agricultural exports. Agricultural trade offices located overseas haveup-to-date information regarding market trends that may be helpful to applicants. Required application information is outlined at the following website: www.fas.usda.gov/excredits/fgp.html
The Initial Payment: The buyer is required to provide the exporter an initial payment for the goods and services to be exported. The initial payment must represent at least 15 percent of the value of goods and services exported.
Foreign Bank Limits
Foreign banks eligible to participate under the FGP may be subject to credit limits established by FAS. Early in the process of formulating an FGP proposal, exporters should verify that an eligible foreign bank is prepared to issue a letter of credit, and to obtain financing from the exporter’s bank.
Repayment Terms: CCC may issue guarantees for credit periods up to 8 years in most countries. The debt must be serviced in semi-annual installments on principal and interest.
Coverage of Foreign
Content: The FGP may cover U.S. manufactured goods that
contain foreign content and may also cover certain foreign
services so long as the value of U.S. content represents more
than 50 percent of the export sale. Foreign services will only
receive coverage where the applicant can demonstrate that such
services are vital to the sale.
Fees
A $200 non-refundable application fee is payable at the time the proposal is submitted to CCC. The exporter must also pay an exposure fee after CCC has approved the project. CCC will not issue a credit guarantee until the exporter pays the fee in full. Exposure fees are risk-based and may vary by foreign bank, target country and repayment term. Applicants are advised to contact FAS to determine the latest exposure fee rates.
Contacts
For further information regarding the Facility Guarantee Program, contact:
Joyce Y. Estep
Tel.: (202) 720-0581
Program Planning, Development and Evaluation
Tel: (202) 720-4221
Fax: (202) 690-0251
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