Exchange Rate Compensation for Projects Financed from NHDP Funding18 January 2010
NDA would like to compensate exchange rate losses incurred by project hosts on account of the high Euro exchange rate, for which cost-increasing factor project hosts are not responsible, hence contributing to preventing high-budget projects from being exposed to financial threats. Hungary is the leading member state in the non-euro zone tackling this issue; we do not know of any other EU member state that is trying to soften the impact of exchange rate volatility in such a manner.
NDA developed a compensation procedure aimed at reducing exchange rate losses back in 2009. The Agency will immediately begin to apply these measures following their approval (Ministry for National Development and Economy (MNDE) Decree 2/2010 (I.8.)). Procurement costs may rise sharply independent of project hosts in the case of projects heavily relying on import procurements, which may delay the launch (or make it altogether impossible) or implementation of a given project. The aim of the compensation procedure is to ensure that projects negatively affected by exchange rate impacts are implemented according to their original content and deadline. This is generally relevant in the case of healthcare and education projects, community transport investments and environmental and energy projects, within the framework of which major equipment, machinery or technology import procurements take place. With this decision, it will, among others, be possible to support the scheduled implementation of major rural transport development projects, which are a huge success in Hungary and have also been approved by the EU.
The compensation procedure developed on the grounds of the Decree issued by the Ministry (MNDE Decree 2/2010 (I.8.)) focuses on projects where the combined value of equipment, machinery, vehicle, installation or technology procurements envisaged or implemented within the framework of procurements paid for in foreign currency and supplier services directly related to procurements reaches 25% of the eligible costs of the given project, cost increases are expected to reach (or have reached) 4% of the total amount of original eligible expenditures approved and accountable which must at least reach 5 million HUF, the ratio of funding granted for the given project reaches or exceeds 80% of its total costs; decrease in technical/technological components, regrouping of costs, or the application of other instruments available during the course of implementation fails to counter-balance the exchange rate impact due to the unique characteristic of the application or project and earmarked reserves fail to cover extra costs arising due to an increase in the exchange rate.
The principle of co-funding and risk-sharing (own funds) must continue to be applied in the compensation procedure as well; moreover, project hosts must continue to do everything possible to reduce surplus costs by re-grouping funding and making savings, or finding alternative procurement sources. Compensation necessitates the amendment of the assistance contract. Once the assistance contract is approved, exchange rate reserves are allocated to the original budget, which may be subsequently used, however, only after physical and financial performance is certified. This exchange rate compensation reserve cannot be used to cover increases in project costs arising for other reasons.
The Agency will also ensure the opportunity to introduce this exchange rate risk reserve in the budget of projects in the case of calls to be announced in the future. However, project hosts are still expected to find domestic procurement opportunities and be ready to re-allocate funding and make savings within their respective budgets.