Examination of witnesses (Questions 100
- 119)
TUESDAY 1 FEBRUARY 2000
THE RT
HON RICHARD
CABORN, MR
VIVIAN BROWN
and MR JOHN
R WEISS
Chairman
100. Camdessus is obviously arguing internationally.
He is arguing that it is not a subsidy that should be available
through any country, that arms should be made more expensive rather
than less expensive. Do you see the Government as having a view
to support Monsieur Camdessus in that view as a way of increasing
peace?
(Mr Caborn) In military expenditure we should not
be seeking to make arms sales less expensive. If it is fully quoted
you will see that it is about developing countries and nationally
we have intentions in terms of that cover, for example, with the
HIPC countries of one of what we call "productive expenditure"
and therefore defence sales would not be afforded other than if
it was for issues like I have said drugs and very specialist areas
which will take a judgment. I think the Director of the IMF was
talking there in terms of developing countries and it is something
that we made perfectly clear. I think on the write-down of debt
we have done through the IMF and the Paris Club we have made it
very clear that we are not prepared to get into financial support
for an arms race in these countries. We said it has got to be
for investment in sustainability for their countries, it is about
education, irrigation, and all the things that go with that. We
are very clear in the international arena in which we operate.
101. Were you involved in Zimbabwe purchases
at all?
(Mr Caborn) We were not to my knowledge. I will look
up my brief.
Ann Clwyd
102. Can I just make a point. When you are discussing
the defence industry and how important it is, it is very heavily
subsidised in comparison with other manufacturing industry, for
example with the Export Services Organisation. If other manufacturing
industries had the same level of support as the defence industry
has, if export credit guarantees were more widely advertised,
if they were given half a chance—
(Mr Caborn) I do not know whether that statement you
made is true. I do not know where the evidence is to say that.
If it is there, no doubt you will have the information that backs
up your argument. To the best of my knowledge, as indicated by
Mr Brown, one of the areas we are involved in is the airspace
industry where it is in between defence and civil and one of the
great success of our British aerospace industry has been the air
force. We have supported a number of projects which ECGD are doing.
One of the things I have asked just as an aside which you might
be interested in, Chairman, and your Committee might be indeed,
is what is the ECGD doing for employment, where are the majority
of companies, where is the supply chain, where are the medium
and small businesses involved in that, what assistance is given?
We will be coming out with a fuller picture of the ECGD in terms
of defence and civil aviation.
103. I can tell you, Minister, there is not
much in Wales.
(Mr Caborn) I will just check Wales.
104. DFID argued in its report that ECGD should
provide cover for military expenditure in lower and middle income
countries "only when the country operates a responsible security
strategy ... Work will be needed to define more closely the definition
of a responsible security strategy, and ECGD will need to take
advice on this from other Whitehall departments. It will not be
sufficient to rely on the arms export licensing process which
provides only a negative filter, whilst ECGD cover is effectively
a government service, which includes a subsidy, promoting arms
export."
(Mr Caborn) We are looking at that in the Mission
Statement. That is something we are factoring into it. The Secretary
of State for Development, Clare Short, has made it perfectly clear
that she believes everyone has a right to self-defence, has a
right to protect its borders and has a right to make sure civil
order is there particularly in terms of areas like drugs and areas
like that which can be extremely destructive to civil society.
Again one has to take a view of that. That is why we have taken
due attention of what DFID has said in the Mission Statement.
105. DFID has made mistakes in the past by underwriting
arms exports to countries like Iraq where I think we are still
owed something like £600 million. What is your justification
for continuing to underwrite exports of arms to Indonesia which
is an economy in some difficulty at the moment? I believe you
have underwritten Indonesia total export credit guarantees of
£1.5 billion. How do you assess risks in these instances?
(Mr Caborn) Let me say that in terms of rescheduling
as far as Indonesia is concerned we have not supported anything
other than a small contract for Reyrolle Parsons. I will stand
to be corrected. We did not support that. All we have done in
terms of this Government is in the light of the difficulties in
that country we have actually rescheduled some of the debts there
which had already been committed by previous administrations.
In terms of new facilities the answer to that is no.
106. So you are telling us that it is a good
risk?
(Mr Caborn) I am answering your question factually.
As far as this administration is concerned we have not, to the
best of my knowledge, supported any underwriting as far as defence
contract is concerned.
(Mr Brown) The last significant defence contract which
was supported by ECGD in Indonesia was in September 1996. Clearly
the political situation in Indonesia has changed very substantially,
as we have seen, in two senses with the economic issues in South
East Asia and the political issues and the move to democratic
government.
Mr Khabra
107. Is there a possibility of the Secretary
of State reconsidering his own position to integrate his own thinking
and philosophy into the philosophy and thinking of the Foreign
Office and particularly the Department for International Development
in the supply of arms to countries such as Pakistan? There is
a dichotomy between the two Departments. On one side the Ministry
of Defence and the Department of Trade and Industry is in conflict
with the Foreign Office and the Department for International Development
because this is an issue which I think is an important issue.
When the country knows that there has been a military dictatorship
and there has been a coup which has taken over power in Pakistan
but still the DTI is determined to pursue commercial interests
it overrides the greater interests of the developing countries
and the world itself.
(Mr Caborn) The position is that there has been no
change in our policy. We examine all export licence applications
to Pakistan on a case-by-case basis on national criteria and those
in the EU Code of Conduct. If there is a clearly identifiable
risk of internal repression or external aggression, the licence
will be refused. As far as the ECGD is concerned, it will only
give cover on defence equipment if it has got a licence from the
respective government department.
Mr Worthington
108. How does ECGD policy compare with other
export credit departments in other countries in terms of support
to lower, middle income developing countries? Have you done any
analysis of the support which you give for developing countries
compared with other countries?
(Mr Brown) Perhaps I could just say something about
the international environment in which we operate. Export Credit
Agencies have been in operation for some time. 20 or 30 years
ago there was a good deal of a subsidy race within that area and
that led to significant activity within the OECD, to which I have
already referred this morning, to try and harmonise the terms
on which export credit support was given. That led, first of all,
to the consensus interest rate so that the fixed interest rate
with which support is given in various currencies is now identical
between different Export Credit Agencies. Secondly, more recently,
last April, a new system was introduced which harmonised the premium
rates which would be charged by different Export Credit Agencies
that provided a floor below which Export Credit Agencies could
not go. It is still, of course, an issue for individual Export
Credit Agencies how much cover and which particular projects they
may decide to support. In those areas it is much more difficult
to make a comparison. In the terms of business with which we are
doing business we moved substantially to an area of international
harmonisation.
(Mr Caborn) If you want further information.
109. Yes.
(Mr Caborn) We will give you that.
(Mr Brown) We will be happy to give you that.
110. It would be interesting to know what our
performance was with regard to low income countries compared with
other countries.
(Mr Caborn) We will try and get that information and
write to you.[8]
111. Finally, I think you have a Good Projects
in Difficult Markets Scheme.
(Mr Brown) Yes.
112. Can you say something about how successful
that has been?
(Mr Brown) The initiative has been in existence for
a little bit over 18 months. We have not yet signed up any particular
projects under it, although we have had a lot of interest. Many
of the poorer markets which we have been talking about are ones
where we think that we would not be prepared to do business against
the sovereign risk, and therefore add to the indebtedness of the
Government of that country, but, the Good Projects in Difficult
Markets initiative is about trying to find particularly private
sector development. I think the Chairman also talked on the investment
insurance side about how many of those private sector investment
projects may be commercially viable. It is those sorts of projects
that we are interested in looking to see whether we can support
and particularly ones where the flow of revenue from that particular
project can be held offshore and can be held in hard currency
so that it protects the taxpayer and our insurance against the
risks.
(Mr Caborn) This is an area where we can actually
have very many discussions with DFID and some of the funding agencies
as well where there is a mixture between the aid part and the
commercial transaction as well, where you can get a revenue flow
that is independent of the state charges, the airport charges,
water charges, where you can fund the debt through that mechanism.
There are some quite interesting ideas around on that. Again I
think it fits into the context of a changing scene in terms of
debt relief and access to markets. If one can bring some type
of security and a little confidence into these areas then those
types of things can be a bit easier to do than they were in the
past.
(Mr Brown) Perhaps one particular initiative that
we are interested to pursue in the Mission and Status Review is
whether we can work more closely with DFID in supporting projects
which are somewhere between the concessional and the commercial
area. The White Paper on Poverty Alleviation published by Clare
Short talked about the possibility that mixed credits could be
used to provide a mixture of commercial and concessionary finance.
We are very interested in trying to work more closely with DFID
in pursuing projects which may enable us to support projects in
a wider range of markets than those where we have to apply very
strict commercial tests.
(Mr Caborn) It is called joined-up government.
Mr Robathan
113. I would just like to come in on a similar
theme, in fact, about cover for developing countries. In particular
I would like to home in on risk assessment. You may be aware of
a short document we were sent by DFID which says that ECGD risk
assessment is currently made at country cover level "...
whilst a necessary step, it is important also to look at risk
more explicitly at project level which will reduce the need for
the current on-off cover approach". Do you think risk assessment
should continue to be made a risk at country cover level and do
you accept the criticisms that are made in this document, they
are not deep criticisms but about the current risk assessment
procedures?
(Mr Brown) I think it follows on from what I was just
saying in answer to questions from Mr Worthington. The Good Projects
in Difficult Markets Scheme is precisely about saying our ability
to support projects in particular markets is not just influenced
by whether we are on or off cover for that market as a whole and
therefore it enables us to support projects, as you rightly say,
on the basis of the individual case. More generally, I think our
risk assessment is changing because the nature of projects which
are being initiated in developing countries and more widely is
increasingly reflecting the greater private sector involvement
and private sector investment in those projects. So as well as
the risk assessment which in the past had to look very much at
the country risk, the transfer risk, the problems of not having
an exchange system which would enable countries to remit hard
currency, we are trying to look also at the risks associated with
corporate buyers, with private sector buyers in individual countries.
I think there are two answers to the question, yes our ability
to look at individual projects, particularly through the GPDM
scheme, enables us to support projects in markets where we might
not otherwise do business; secondly our risk assessment systems
are changing very substantially because we now need to take account,
not just of the country risk but also of the project and corporate
risk.
Chairman
114. Can you tell me why you have a list under
this scheme of ECGD's Good Projects in Difficult Markets' scheme,
of those countries specifically cleared for the scheme and those
excluded from the scheme? Why could we not, on the basis that
you have just laid down, actually work in all countries, including
countries that you have specifically excluded, such as Uganda
and Kenya?
(Mr Brown) The answer to that is that the development
of that list of countries in which the GPDM can be offered has
been one which has been drawn up by several government departments.
We would feel much more comfortable personally with widening the
number of countries in which we do GPDM but a number of other
departments have raised objections, and I think the Committee
will need to ask them the reasons for those.
115. Thank you very much for making that clear.
Does the Department of Trade and Industry, Minister, agree that
recent economic policy changes in developing countries provide
the United Kingdom exporters with new market opportunities? Is
the current emphasis on arms and aerospace a cause for your concern?
What could be done to diversify the portfolio? Is there a greater
take up by ECGD for arms and aerospace enquiries than for enquiries
from other sectors?
(Mr Caborn) First of all, on the change of the economic
scene, I hope there will be a lot of opportunities. I think what
we have been doing as a Government, and also in the international
institutions, is to try to create a climate whereby we get, as
I said earlier, the virtuous circle which is debt forgiveness,
regeneration of the economies, access to markets, and in all the
institutions, whether it is the IMF, whether it is the EU or whether
it is the World Trade Organisation we are trying to put that package
together. We see as a financial instrument ECGD being more proactive
in that area, and particularly our relationship with DFID on those
issues. The officials and myself here today, we have tried to
say that is how the Mission Statement we hope has been unfolding
and we will come back with more information. In terms of the aerospace
industry and the defence industry, I do not think we determine
that, we need to respond to that as the ECGD. There are very clear
criteria laid down in responding to that. There are judgments
which have to be made at the end of the day. I do not believe
it is out of balance with other nations giving ECGD cover. Again,
I just reiterate again, in the totality of exports from the United
Kingdom, ECGD is around about three and a half per cent that we
are talking about, of which between 20 to 30 per cent of that
three and a half per cent is the cover you are talking about.
In the bigger picture it is very important, and I do not under-estimate
that, and the political importance attached to that I do not under-estimate.
I think one has just got to keep the bigger picture in mind when
you do this evaluation or else you become a little obsessed with
it and the focusing needs to be all embracing.
116. Is there a greater take up though for ECGD
by arms and aerospace enquiries than for enquiries from other
sectors?
(Mr Caborn) I think that is a difficult question.
I think you have to distinguish between what you mean by aerospace
and defence. As I say, I think Mr Brown has explained very clearly
that we probably have the best record that there is in terms of
being open about the split of defence and civil business we support.
When you say aerospace that can get confusing because we underwrite
quite a lot of the Airbus, for example, which is very important.
If you want us to produce a list of what is being supplied by
other OECD Export Guarantee Agencies and ourselves, we will try
and extrapolate those figures.[9]
117. Gentlemen, I am grateful but you get an
enquiry which results in business and you get an enquiry that
does not result in business. What I am asking is do you get more
business from a certain number of enquiries on the aerospace/arms
side than you do from enquiries from other sectors?
(Mr Brown) I can try and answer that because I think
it is a function of the level of competition for particular types
of business and particular sectors of business. When you talk
about enquiries we will have the United Kingdom exporters who
will come to us and say, "We are interested in tendering
for business in particular markets. Will you give us quotations."
I think that is what you mean by enquiries. There is a relationship
between those, the number of enquiries and the success which United
Kingdom exporters have in the procurement process in securing
a contract that leads to a guarantee and firm business. You are
absolutely right that in civil business where there is a much
wider field of competition there is going to be a higher relationship
between the number of enquiries and the number of guarantees or,
put it the other way, we will give a larger number of indications
but a relatively small number of guarantees. If you look at the
point of civil aerospace, the two main people competing for civil
airlines are Boeing and Airbus and by definition the relationship
between indications and guarantees is very different in that sector.
118. Thank you. What you said to us, Minister,
is it not that fact you are concerned about, the balance. You
have told us that it results from your reactive role but you are
wanting to promote underwriting investments in hospitals and utilities
and civil opportunities in developing countries. I think that
is what you have said to us.
(Mr Caborn) Absolutely.
(Mr Weiss) I wanted to respond on that, Chairman.
The ECGD does undertake a lot marketing of itself in overseas
countries. For example, in Brazil we focus on the oil and gas
sector and the power sector in India. Although this is not intended
to diversify the portfolio, we are looking at areas which are
not aerospace and are not defence and trying to persuade those
who make the decisions to buy British on the back of the excellence
of the ECGD product they would get if they did that.
Ann Clwyd
119. I wanted to put to you a point by the former
Treasury Deputy Secretary, Huw Evans. You may be aware of the
evidence he gave where he said the ECGD is vulnerable to intensive
lobbying of Ministers by large corporations and it should become
an independent agency. What is your view on that?
(Mr Caborn) Again, that is part of the consultation
that we are doing on the status of ECGD and we will come to a
view on that. I am bound to say that there has been no evidence.
Who is the lender of last resort? Who actually picks up the tab?
It is the Government, the taxpayer, and I do not believe that
that should necessarily go out into the private sector. I do not
agree with that statement. We will see in the fullness of time
exactly how we come out with the Mission Statement and then with
the status plan. I do not believe that there is a lot of evidence
to support that point of view.
8 See Evidence p. 38. Back
9
Note by witness: Defence Sector: ECGD publishes a breakdown
of business covered by sector (civil/aerospace/defence) in its
Annual Report. Similar breakdowns of business supported are not
normally provided by other Export Credit Agencies, and it is therefore
not readily possible to compare the support provided for defence
exports. In addition, some ECAs, eg, US Eximbank, do not provide
support for defence exports, as such support is given under the
"Defense Export Loan Guarantee" (DELG) scheme operated
by the US Defense Department. Back
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