Examination of witnesses (Questions 80
- 99)
TUESDAY 1 FEBRUARY 2000
THE RT
HON RICHARD
CABORN, MR
VIVIAN BROWN
and MR JOHN
R WEISS
80. You do not agree with it?
(Mr Caborn) I am saying that we are doing our Mission
Statement at the moment in which we are taking on board very much
what this Committee has said and, indeed, the other nearly 300
contributions that have been made to that. We are now going through
that Mission Statement and the Secretary of State said as part
of that review when we get into this we have got to look at a
proactive way in development issues. That is one area as well
as SMEs and all the other ones. That is what we will do and address
within the Mission Statement. There are many views that have been
given and we will take all of those into consideration. I am not
saying that we are going to accept them all.
81. I think we have successfully demolished
the independent review's study.
(Mr Caborn) I think you have, Chairman.
82. I hope that we can see in your Mission Statement
that you do and will work effectively for your own purposes with
the Department for International Development. Can I ask you on
that, does ECGD currently take advice from DFID on the developmental
value of projects proposed in developing countries?
(Mr Caborn) I think that is very clear in the written
statement we have given to you.
83. The answer is yes.
(Mr Caborn) The answer is very close co-operation.
84. Can I move on to the question of overseas
investment insurance. We are concerned with this because we are
wishing to encourage foreign direct investment. Foreign direct
investment depends, I think, from this country anyway, crucially
on ECGD involvement and indeed backing. What efforts are being
made by ECGD to extend its overseas investment insurance business?
Why is it that none of the £100 million of cover offered
to highly indebted poor countries for productive expenditure projects
has been taken up? Why has none of it been taken up?
(Mr Brown) Perhaps I can respond to that. I think
it goes back to the point I was making about our having to maintain
a reactive role where there is a commercially viable project.
What we are providing is insurance cover to UK investors who want,
as you have quite rightly said, to invest in the heavily indebted
poorer countries but in order for them to want to access our investment
insurance they have to decide that they have got a commercially
viable project that they are prepared to support. The risks that
we are covering, as I think you understand, in the overseas investment
insurance scheme are not the commercial ones but a group of political
ones which does require that you have a UK investor who is prepared
to take those commercial risks. It is still relatively early days
in the life of this particular project. The scheme was announced
two years ago, which may seem a long time, but the period in which
a number of these investment ideas come forward can take a fair
amount of time and we are certainly hopeful that projects will
come forward. However, can I quote examples of overseas investment
insurance which I think would very much meet the objectives you
are concerned about. We have provided investment insurance for
a very large fertilizer plant in Bangladesh which has been very
significant in terms of reducing their own requirement for importing
fertilizers and even putting them into a situation where they
can begin to export. We have been supporting various investments
in power projects in India, an investment for the construction
of a lime kiln and opening the limestone quarry in Jamaica. The
Minister referred to the Thames Water project in Izmit in Turkey
which we have supported, together with a Thames Water project
in Jakarta. Many of the projects which we have been supporting
under the overseas investment insurance scheme are contributing
very substantially to the development of the countries where we
are providing that insurance cover. The scheme as a whole is building
up quite substantially, it is now running at about £700 million
of insurance that we are offering each year which is a very substantial
growth over the recent years. We would be very happy to do more
business in the HIPC markets but we do need to have UK investors
who can identify commercial projects which they want our cover
for.
85. Do you go out and make the companies likely
to invest, your current clients perhaps, have a look at HIPC countries
in the light of the insurance that you offer?
(Mr Caborn) I will answer that question. At the moment
with the Mission Statement we have got the answer to that is no,
we do not. We would like now, as a new Government, for that to
be much more proactive. This is the area that Stephen Byers, the
Secretary of State, has to look at in the new Mission Statement.
It is something that we are addressing. The point that has been
made by Mr Brown underscores the need to revisit this area. There
are some very good projects and they are very laudable. In terms
of the investment area then I think it has got to be revisited.
86. In my experience in most countries that
are very poor there are nonetheless investments which can be made
which are actually very safe for investors and, therefore, capable
of attracting insurance from ECGD. It would be a great step forward
if we get to that position.
(Mr Caborn) In the context of what I said a little
earlier, what we are trying to do in writing down debt and their
getting access to markets which we are trying to raise through
the EU and WTO, these are areas that could actually give further
assurance to investors that sustainability is the order of the
day and governments are actually supporting that.
Mr Worthington
87. We have been talking about this. The Chancellor
has recently extended the number of poor countries for which ECGD
cover will only be given for productive expenditure from 41 to
63. What have been the consequences for ECGD of that? Has it meant
cancelling any deals which were on the table? Do you see scope
for expanding this to the list of all low income countries?
(Mr Caborn) First of all, that is obviously something
I cannot answer at this point. It is something that I have not
thought through. In terms of the consequence for the 63 countries,
that has been a write down of £1.9 billion.
(Mr Brown) There are two separate things here. First
of all in relation to the HIPC countries there is the amount of
debt which we have already written down and the Chancellor's statement
made just before Christmas about 100 per cent write down for those
debts. The further announcement which he made on 11 or 13 January
was in relation to new business. What he did was to extend the
existing arrangement that he had for a two year period following
his statement in October 1997 that in the new business in HIPC
markets we would limit ourselves to productive expenditure and
he extended that to the IDA only countries and therefore to a
further 22 countries making a total of 63. We have a number of
projects which we have been discussing in the HIPC markets under
the original productive expenditure scheme announced in October
1997 in a number of HIPC markets including Vietnam and Bolivia.
None of those projects has yet come to fruition but we are certainly
hoping that they will do so. In terms of the impact on our business,
I think it is interesting to look at the different split that
exists between our support for countries, the projects in countries,
according to their own levels of income. In the lower income countries
our support for such projects has always been predominantly for
civil projects, a certain amount for aerospace, for support and
development of airlines, almost nothing in the defence area.
(Mr Weiss) It might be worth adding that operationally
there is an impact as well. For projects in these countries to
gain ECGD support we have a consultation process with other departments
and in particular with DFID so that we do agree that a project
meets the productive expenditure criteria.
88. Are you expanding the criteria to all low
income countries beyond the 63?
(Mr Caborn) That has not been considered at this stage
to the best of my knowledge. Obviously you have raised the question
and we will look at it.
Chairman
89. Minister, would you agree that there is
a strong demand from investors for improved access to investment
insurance? Which sectors does this pressure arise from? How does
ECGD's activity in investment insurance compare to that of other
ECAs, Export Credit Agencies?
(Mr Caborn) I do not know whether my official would
like to answer the second part of that question. The whole question
of investment is something that as you probably know, Chairman,
we have wanted to have discussed at the international level, particularly
through the WTO. This is one of the items that we wanted to put
on to that agenda. We think it is an unsatisfactory arrangement
particularly when Third World countries are trying positively
to encourage inward investment. What we believe is there ought
to have been clear ground rules for that to take place but, unfortunately,
we were not able to take that part of the agenda forward. We hope
that will be taken forward in the comprehensive round of the WTO.
(Mr Brown) Perhaps I can answer that. The situation
is pretty different between different ECAs. Some ECAs, like ourselves,
operate both export credit insurance and overseas investment insurance.
Some have separate agencies, for example in America there is US
Exim which provides export credit support, OPIC, the overseas
private investment corporation, which provides investment insurance.
Most other OECD developed countries with Export Credit Agencies
are providing investment insurance along similar lines. There
is also, of course, multilateral investment insurance provided
through MIGA, one of the three World Bank groupings.
90. Have you got any idea of what kind of sectors
you are getting pressure to provide investment insurance for?
(Mr Brown) If you look at the total amount of our
book and the largest component within that, that is water projects
but that is particularly because of very large investments by
Thames Water in the two cases which I have mentioned. I would
hope that the interest is fairly widely spread and is also in
revenue generating projects as well as in infrastructure projects.
I have mentioned the fertilizer plant. Although slightly different,
we have recently entered into a debt sales agreement in Mozambique
which will be reinvigorating their sugar industry. There is a
range of different investment insurance schemes that we are ready
to look at. We have got plenty of cover. We are very ready to
support projects which come forward to us provided we are satisfied
with the political risks which are essentially around expropriation
and contracts and so on.
91. Do you look at the financial architecture
of the project which you are insuring to enable the project independently
of the Government and other agencies to actually repay your loans
with interest as a priority? For example, like having a sinking
fund established within the project to which money is put on a
regular basis to repay on a planned basis.
(Mr Brown) I thought you were asking about the overseas
investment insurance scheme where there is not a question of loans
which are being repaid. This is investment which is being made
at the investor's risk and we are covering those risks. There
is no repayment issue unless one of the political risks which
we are covering happens to be triggered, in which case we may
be facing a claim from the UK investor. It is not like export
credit where we are talking about a stream of income that we need
to be concerned about in terms of the underlying viability of
the project. That is why I said earlier that in this area we are
looking at political risks, not at commercial risks. The people
who need to look at the financial structure of the deal to be
sure that there is going to be a satisfactory rate of return on
the investment is the UK investor together with any other local
investors or foreign investors who may be involved in the project.
92. I think the answer to my question is yes,
you do look at the financial architecture as to how the investor
is to be repaid and perhaps, I hope, give advice. An example that
comes to my mind is where an investment into a sugar company in
Guyana, South America, was assured of repayment because they were
made the marketing agent for the sugar in the United Kingdom and
Europe and were given the power to deduct payments to them before
remitting the resulting money back to the company in Guyana. That
meant that the insurance of that was very much lower cost and
much easier for you to agree.
(Mr Brown) I think every single case we look at in
investment insurance, particularly the larger ones, are ones which
have very special features. You need to be quite clear that the
underlying financial structures are all right. In that sense in
terms of understanding the risks that we are taking particularly
in relation to the return of the remittances, that is something
that has to be assessed on the basis of the individual project
and we have people skilled within ECGD to do that.
Ann Clywd
93. ECGD has had a lot of notice recently in
newspapers and elsewhere. I do not know if you saw a recent Guardian
editorial which described you as the "seamy underbelly of
British foreign and development policy" and it goes on "Forget
ethical foreign policy, forget all the Department for International
Development's fine talk about sustainable development and environmental
awareness, forget the Chancellor of the Exchequer's efforts to
relieve the debts of developing countries. The Department is there",
that is ECGD, "as its Mission Statement makes clear, to promote
UK business interests by offering loans to underwrite exports
to risky countries. If that flies in the face of environmental
considerations, human rights and regional stability, so be it."
How do you feel about a description like that?
(Mr Caborn) I think it is regurgitating what Frank
Dobson said, that the Liberals are writing for Trots or words
to that effect.
Mr Robathan
94. I strongly recommend you do not read The
Guardian, that is my point of view.
(Mr Caborn) I think that is typical. That is why we
are here today, for two reasons. One is to discuss the Ilisu Dam,
and we have probably explored all of that. The second is to see
why we are revisiting as a Government the Mission Statement and
the status of ECGD. I have not seen any contributions to the consultation
document from the Editor of The Guardian or, indeed,
any correspondents of The Guardian. I will say publicly
that even though the closing date has finished I would be very
interested to see what their thoughts are about developing a new
Mission Statement and a status for ECGD. It is very unlikely that
you would get The Guardian reporting that we have
got a $100 million facility in a Bangladesh fertilization plant
that is now able to make sure that country, which is one of the
poorest countries, can develop its fertilizers for natural gas
and has become a net exporter of that and has started developing
its economy. I would not expect that from The Guardian
or, indeed, some other newspapers and television programmes. If
they want to discuss the question of the Mission Statement seriously
we are prepared to do that. We will come back to this Committee,
if you so desire, to tell you exactly why we will be changing
our Mission Statement after consultation and we will also tell
you the status of that. I think I have indicated the openness
of this Government in trying to achieve that objective.
95. As a former employee of The Guardian
I will not be drawn into a discussion of the merits or otherwise
of The Guardian. I think the pages of readers' letters
in The Guardian recently have shown there is a great
deal of discomfort about the Government's policy particularly
on arms exports. Nobody could disagree that 20-25 per cent of
ECGD cover is given to defence related sales while defence exports
account for around only three per cent of UK exports. Some people
have argued that this demonstrates that the defence sector is
getting a greater share of the cake than it should get. What is
your response to that because it seems that a large percentage
of your underwriting is directed towards arms sales?
(Mr Caborn) Before Mr Brown comes in, can I just say
that ECGD is responsible for about three and a half to four per
cent of total exports of this country. That is what it actually
covers. Inside that three and a half to four per cent, some 25-30
per cent on average actually goes to arms sales. In terms of the
bigger picture, and sometimes it gets a little distorted because
of some of the editorials you have referred to and some of the
comments that are made, in the totality of exports of this nation,
which is its life blood, some three and a half to four per cent
are supported by ECGD and of that between 25-30 per cent actually
go on to defence issues.
Chairman
96. Is that by value?
(Mr Caborn) That is by value.
(Mr Brown) Could I just quote the figures. I think
it is quite instructive to look at the way in which the make-up
of our guarantees follows different patterns of income distribution
in the countries in which we are supporting them. If you look
at the low income countries, which obviously includes the HIPC
markets, we have on our books at present exposure of about £1.2
billion. 86 per cent of that is in civil projects, 13 per cent
of that is in aerospace and therefore principally for airlines,
that is civil aerospace, one per cent—one per cent I repeat—is
for defence business. If you move up from low income countries
to lower middle income countries we have on our books £6.6
billion of exposure. The position is there that civil projects
account for 69 per cent of that exposure, civil aerospace for
21 per cent, defence for ten per cent. It is only when you get
to the upper middle income countries that you begin to see the
average position to which the Minister has referred of somewhere
between 25-30 per cent for defence. At present if you look at
our total portfolio the figure is about 21 per cent but in recent
years it has been slightly higher. If you look at the split for
upper middle income countries we have £4.5 billion worth
of business on our books. 45 per cent of that, still the largest
component, is for civil business, 14 per cent is for civil aerospace
but 41 per cent is for defence equipment. It is essentially to
the upper middle income countries that we are providing guarantees
for defence business. I made the point earlier about our being
an organisation which follows the success of UK exporters. The
defence manufacturing business is a highly successful business
in the UK, it therefore follows that the demand for export credit
cover for ECGD reflects that comparative advantage which the UK
has in that sector.
Mr Worthington
97. Would it be true to say that the UK's proportion
that goes to arms sales is higher than any other country in terms
of export credit?
(Mr Brown) I do not know the figures for that, I am
not sure that is the case. We are much more open, I may say, about
the figures which we produce on the split between civil and defence
than our colleagues are.
98. Coming back to The Guardian,
can I quote the well-known non-Liberal and non-Trot, Michel Camdessus,
the outgoing Managing Director of the IMF, who suggested that
abolishing the provision of export credit for military purposes
is one of a number of steps which could be taken to promote peace
and restrain military expenditure. What is ECGD's view on that?
(Mr Caborn) I do not think they would be able to have
a view on that, that is a political question as you well know,
Mr Worthington. That would have to be a decision of government.
It would have to take that in relation to other countries who
trade internationally in this commodity and that is a political
question. This decision will not be taken by ECGD.
99. You are a politician.
(Mr Caborn) I am a politician and I am here as the
Minister for Trade today, that is why I am answering for the DTI.
If you are asking for a government view on the wider context of
should the ECGD operate in terms of the military, I think you
would have to ask the political parties about that. I am here
as a Minister for the Government today answering on behalf of
the DTI. At the moment we believe that our defence industry is
a very important part of the wealth creating base of this nation.
We believe we do it in a very transparent way and, as Mr Brown
has already said, we are as open and as transparent as any country
in terms of showing clearly where those divisions are. I think
also in terms of defence one has got to be clear that some of
the defence equipment that we are selling in terms of South Africa,
which I think has been one of the biggest just latterly, we are
also looking at in terms of equipment that would stop the drugs
equipment that actually makes sure in the patrolling of the shores.
There are also other issues of that nature that need to have defence
equipment to be supplied. It is one debate that has to go on.
I would also say that DFID in its response to our Mission Statement
and also our status is clearly not asking for the removal of support
for defence equipment as far as ECGD is concerned but it is nevertheless
a political point of view that has been raised in submissions
to the mission statement, and one that obviously will need political
answers.
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