House of Commons - International Development

Select Committee on International Development First Report

FIRST REPORT

The International Development Committee has agreed to the following Report:—

EXPORT CREDITS GUARANTEE DEPARTMENT — DEVELOPMENTAL ISSUES

Introduction

1. The Export Credits Guarantee Department (ECGD) is a department of the Secretary of State for Trade and Industry. Its primary function is to facilitate exports of goods and services by the provision of guarantees and insurance. We have already discussed ECGD in the context of our two past inquiries into debt forgiveness. The United Kingdom is the sixth largest creditor to heavily indebted poor countries (HIPCs). Most of the debt owed to the United Kingdom Government by HIPCs is owed to ECGD.[1] On 27 July 1999 the Secretary of State for Trade and Industry, the Rt Hon Stephen Byers MP, announced a review of the mission and status of ECGD.[2] Given the involvement of ECGD in the developing world, in particular its position as a major creditor, and the influence its decision to provide or refuse cover to a country has on other investors, we are obviously concerned that the Review take full account of developmental issues.

2. The terms of reference of the review were announced in response to a written parliamentary question from David Borrow MP on 27 July 1999 and are as follows:

"To review the aims and objectives, role and status of ECGD and to make recommendations to the Secretary of State for Trade and Industry.

The Review should take account of the relationship of ECGD's activities to HMG's wider objectives and the need to balance the benefits of ECGD's support for UK exporters and investors against the risks to the taxpayer. The Review should consider international practice in the provision of export credit and investment insurance both in the public and private sectors.

It should also take into account the results of other concurrent reviews which may have a bearing on ECGD's future activities, namely the Reinsurance Scheme Review (announced 27 April, Official report column 84) and the Risk Management Review (announced 26 May, Official report column 1998/99).

The Review should also include a period of public consultation to seek the views of exporters, investors, lenders, private credit insurers and their representatives and other interested parties.

The Status element of the Review should be conducted in accordance with established principles for "Next Steps" reviews, taking account of any proposed change to ECGD's Mission Statement, to consider how its services can best be delivered and whether any change in the Status of ECGD would be required.

ECGD will be writing to all customers seeking their views and I very much look forward to receiving ideas and suggestions from all sections of the exporting community and, indeed, from others who have an interest in developing the role of ECGD and strengthening the partnership between Government and industry."

3. ECGD circulated a Public Consultation Document which includes a questionnaire on, to quote ECGD, "what we do and how we deliver our services". The Rt Hon Stephen Byers MP, in launching the Review, said that the Review should look particularly at "what else ECGD could do to help the Government achieve its wider sustainable development objectives, as the UK continues to play a leading role in assisting the poorest developing countries to emerge from debt and poverty burdens and return to the international trading community."[3]

4. Included in the terms of reference is a commitment to "take account of the relationship of ECGD's activities to HMG's wider objectives". This must include its objectives of sustainable development and the eradication of poverty as set out in the Government's Development White Paper. We decided to publicise the Review amongst the development community and invite memoranda to determine how ECGD can contribute to this wider anti-poverty agenda. We have forwarded the memoranda and background papers received to the Review team. The Trade and Industry Committee is also conducting an inquiry into the ECGD Review and has conducted a series of oral evidence sessions. A number of memoranda received were sent to both Committees. Certain memoranda are published with this Report. Others are included in the evidence to be published by the Trade and Industry Committee. A full list of papers received is contained at Appendix I.

5. We are content for the moment to send on the memoranda to ECGD and wait for the outcome of the Review. We include, however, in this Report a brief summary of the main developmental points to emerge from the evidence we have received. We intend to return to these issues in the new year and hope that further consultation will take place before the finalisation of the Review. We do, of course, expect developmental concerns to be seriously addressed during the course of the Review and discussed fully in the report of the Review's findings. In this Report we limit our recommendations to various points which we believe should be considered during the Review process.

The Mission of ECGD

6. The first question in the questionnaire sent out by ECGD as part of the Review process asks, "What specific changes do you think should be made to ECGD's Mission Statement?" Friends of the Earth respond trenchantly, believing, "that the Mission Statement of the ECGD should be radically rewritten. Like all other Government Departments and Agencies its fundamental remit should be to promote sustainable development, in the case of the ECGD, both internationally and in the UK, through the nature and volume of support it provides to UK exporters ... The sole role of the ECGD should be supporting productive investments with development purposes only - leaving commercially motivated projects to the private sector".[4]

7. Tearfund argue more generally that "The explicit linkage by the Secretary of State [for Trade and Industry] of ECGD with the Government's wider sustainable development agenda, including the alleviation of poverty, could and should be reflected in ECGD's mission statement."[5] This position was also supported by the World Development Movement, CAFOD and Oxfam.

8. The Development White Paper made clear that the Government believes there is no contradiction between the good of the United Kingdom economy and the sustainable development of the poorer countries of the world, "As a country which depends more than most on international trade and investment, jobs and prosperity here in the UK depend on growth in the global economy to which developing countries could contribute so much in the future".[6] Given the direct involvement of ECGD in so many developing countries, the lack of any reference in the Mission Statement to the Government's development objectives is a serious omission. Submissions vary as to whether they demand in the Mission Statement simply a commitment to "consistency" with the Government's development objectives or, as Friends of the Earth appear to suggest, the transformation of ECGD into a development organisation. We have stated above that we do not intend in this Report to make specific recommendations on the future of ECGD. However this is a fundamental and obvious point, and we recommend that the Review propose an inclusion of the Government's developmental objectives in ECGD's revised Mission Statement. We will examine with interest the specific wording proposed by the Review.

Environmental, Social and Developmental Standards

9. One of the most commonly cited criticisms of the work of ECGD is the lack of appropriate environmental, social and developmental standards by which ECGD can judge which projects to support in developing countries. Dam projects are the object of particular criticism. Particular projects criticised included the Ilisu Dam in Turkey (Friends of the Earth, The Berne Declaration, Kurdish Human Rights Project, The Corner House), the Lesotho Highlands Water Project (International Rivers Network, The Corner House), and the Naptha Jhakri Hydro Project in India (South Asia Network on Dams, Rivers and People, The Corner House). The Corner House argue that ECGD was in effect supporting "sunset" companies and technologies at odds with the sustainable development agenda propounded at recent international conferences and by the current Government.[7]

10. A number of NGOs propose mandatory social and environmental standards for ECGD in the consideration of projects for cover, including Friends of the Earth, Oxfam and Traidcraft. A particularly full set of proposals is put forward by The Corner House, who point out that "At present, the ECGD has no legal obligation to consider the environmental impacts of its investments or the contribution they will make to development; no obligation to ensure that all its projects comply with a set of mandatory human rights, environmental and development standards; and no obligation to screen out projects with adverse social and environmental impacts."[8] The recommendation is therefore that "ECGD should adopt a clear and unambiguous set of mandatory environmental and development standards, reflecting current best practice in the field."[9] The World Bank's environmental and development standards are cited both by The Corner House and others as useful standards for ECGD to adopt.[10] Oxfam and The Corner House urge ECGD to act unilaterally to introduce such standards but note the work being done multilaterally within OECD to introduce such standards amongst all export credit agencies (ECAs). The Corner House commented, "Despite several years of discussion within the OECD Export Credit Group, little progress has in reality been made in reaching common environmental standards for ECAs."[11]

11. The commitment of ECGD to such a set of standards would, according to NGOs, have a number of implications. There would have to be project impact assessments to ascertain the environmental, social and developmental impact of the proposed project. Local communities would have to be consulted as would relevant departments of state within Whitehall. In addition to such initial assessment there would also have to be compliance monitoring and a system of inspection and dispute resolution in case of complaint.

12. Amnesty International UK discuss in some detail the need for ECGD to include in its Mission Statement a clear commitment to human rights and argue that ECGD should encourage all companies to be aware of the human rights implications of their operations in line with the 'Human Rights Guidelines for Companies' produced by the Business Group of Amnesty International UK.

Client Company Screening

13. The Corner House emphasise the need for ECGD to consider not only the impact of particular projects but also the record of the companies applying for ECGD credits and investment guarantees. Their submission recommends that ECGD consider their "past human rights, environment and development record", require them to meet the same environmental, labour and development standards in other countries as they would be expected to observe in the UK, cancel all cover to companies which have been proved to have been involved in bribery or corrupt practices and disbar them from future support for 10 years, and ensure that all contracts which it supports have been awarded through an opening tendering process.[12] We note in passing that the requirement that companies abide by UK standards in all their dealings overseas does not appear to be consistent with the emphasis made elsewhere on the need to apply internationally agreed standards. Friends of the Earth and CAAT also support the refusal of support to companies involved in bribery or corruption.[13]

Transparency and Accountability

14. A number of submissions criticise ECGD for a lack of transparency and accountability. Traidcraft, for example, write, "The lack of transparency within the ECGD regarding country cover criteria, risk assessment etc. is consistent with the lack of transparent, accountable environmental and social development criteria available to assess projects, making commercial and developmental mistakes significantly more likely".[14] Friends of the Earth cite another possible outcome of secretive procedures, "In the absence of public sector oversight and market discipline, ECAs are a breeding ground for corruption".[15] The issues of transparency and accountability are also raised more specifically, in the context of support for arms exports, by Saferworld, Oxfam and the Campaign against the Arms Trade (CAAT). The comment of The Corner House summed up the various submissions received, "Despite the UK Government's commitment to open and transparent government, the ECGD remains one of the most secretive and unaccountable of all UK government departments".[16]

15. The Corner House argued that ECGD should have a presumption in favour of the release of documents. Detailed suggestions from NGOs include advance notice of pending applications (The Corner House, Friends of the Earth, CAAT) and the release of all documents relating to the environmental, social and human rights impacts of proposed projects. Accountability is to be improved through consultation with local affected communities (Friends of the Earth), an independent complaints procedure to adjudicate on complaints received from the public over ECGD-backed projects (The Corner House), consultation with the FCO, DFID and DETR as appropriate (Friends of the Earth, Traidcraft, Amnesty, Oxfam), independent experts placed on ECGD's Advisory Council and the publication of the minutes of the Advisory Council (Oxfam, The Corner House, Friends of the Earth, CAAT), and a full Annual Report to Parliament giving comprehensive details of ECGD's activities (The Corner House, Friends of the Earth, Saferworld, CAFOD, Amnesty).

Support for Arms Exports

16. Much of the criticism of the secrecy of ECGD was in the context of discussion of support for arms exports. Saferworld, for example, complain that "The ECGD Annual Report is wholly inadequate in the provision of detailed information on credits for defence exports ... There is also no data in the report on the amount of losses that can be directly attributed to defence sales, even though total ECGD exposure is disaggregated in this way".[17] They recommend that "Future ECGD Annual Reports should provide clear, country-by-country statements on the level of annual export credits for military sales, and the levels of claims and recoveries related to credits for military sales".[18] In addition to greater transparency, there are also calls for more parliamentary scrutiny of ECGD support for arms exports. Saferworld argue for "a full parliamentary scrutiny process, through public hearings by the relevant Select Committee, of ECGD's year-on-year operations as the minimum necessary to meet legitimate public interest in this area. To facilitate such scrutiny, the 1991 Export Credit Guarantee and Investment Act [sic] should be amended to require prior notification of any proposed military credits to Parliament".[19]

17. Many of those who gave evidence were against any form of export credit support for arms exports - this was the position of The Corner House, Oxfam, Jubilee 2000, Saferworld and CAAT - and Michel Camdessus, IMF Managing Director, was quoted in support of this position. Moreover, some of the criticisms levied seemed to refer to arms export policy generally rather than the particular responsibilities of ECGD. Amnesty International UK was "particularly concerned that the ECGD should not provide support for transfers of arms and equipment which are used to commit human rights violations abroad".[20] This is clearly an important concern, but one the Government claims to meet through its export licensing system. The International Development Committee is currently engaged, along with the Defence, Foreign Affairs and Trade and Industry Committees, in an inquiry into the 1997 and 1998 Annual Reports on Strategic Export Controls. Criticisms of arms exports to particular countries and of the application of human rights criteria are being considered in detail in the course of that inquiry. ECGD should not have to second-guess or duplicate the system for the scrutiny of export licence applications. Similarly, the points made by Amnesty International UK and Oxfam on the need also to control the sale of arms through joint ventures and to introduce end-use monitoring are really issues of arms export policy rather than particularly relevant to ECGD. We have made recommendations on both points in our recent Report on Conflict Prevention and Post-Conflict Reconstruction.[21]

18. Both Oxfam and Saferworld emphasise the high proportion of ECGD cover provided for arms exports. Saferworld state that in 1997/98 24 per cent of all the guarantees issued by ECGD were for defence equipment. This was in keeping with the total exposure on defence equipment over the last decade but significantly higher than the equivalent figure for 1980/81 to 1987/88 (10 per cent on average).[22] In the last decade military exports usually accounted for less than 3 per cent of total UK exports per annum.[23] Oxfam conclude that "the defence industry is currently enjoying a disproportionately large slice of ECGD's cake".[24] Evidence notes not only the high proportion of ECGD cover going to defence equipment but also the higher than average default rate on such exports, "The fact that such a large proportion of ECGD debt (around 40 per cent based on figures given in Hansard) relates to defence deals also suggests that defence-related contracts yield a higher than average default rate. In this way, ECGD can effectively subsidise, and not just facilitate, arms exports".[25] Saferworld state that "spending on defence claims continues to represent a very substantial charge upon the public purse".[26]

19. Oxfam recommend that "ECGD draws up a proactive strategy for diversifying its client base and reducing the proportion of its business which is connected with defence exports".[27] Saferworld argue that a "ceiling should be introduced for the defence component of export credits e.g a ceiling of 10 per cent for the share of defence in export credits".[28] The World Development Movement explain this concern over the proportion of support given to the defence industry. Noting the significant percentage of ECGD cover which in the last decade has related to defence equipment, WDM then claims, "At that time there was evidence that civilian exports were unable to get export credit backing. That would indicate that ECGD does already distinguish between different types of business in favour of arms exports".[29] We recommend that the Review investigate the claim that the high proportion of cover provided by ECGD for defence equipment is at the expense of non-defence related exports.

20. In the Mauritius Mandate, announced by the Chancellor of the Exchequer in September 1997, the Government made a commitment not to provide export credits for "unproductive expenditure" by Highly Indebted Poor Countries (HIPCs). Defence equipment would ordinarily be included in such "unproductive expenditure". The United Kingdom is clearly concerned not to increase what is already an unsustainable debt burden for such countries. We have in our Report on Debt Relief and the Cologne G8 Summit encouraged the Government in its attempts to secure an international agreement on the provision to HIPCs of export credits for productive expenditure only, and this is currently being pursued within the OECD. We have already mentioned the fact that a number of memoranda argued for the end of all export credits for defence equipment. In addition, Oxfam point out that "the majority of HIPC countries are off cover for ECGD anyway as their high levels of indebtedness make them a poor risk. To be truly meaningful, we believe that this clause would need to apply to a wider group of poor countries". They recommend that the restriction of ECGD cover to productive expenditure be extended to cover all low income countries, not just HIPCs.[30]

Debt Relief

21. Evidence also discussed more generally the relationship between ECGD and current debt relief initiatives. Some of the evidence received argued for the cancellation of the remaining debt owed to ECGD, which accounts for 95 per cent of all non-concessional debt owed to the United Kingdom Government by developing countries. This was the position of Jubilee 2000, the World Development Movement and Oxfam. The World Development Movement emphasised the minimal impact of such debt forgiveness on the United Kingdom taxpayer.[31] Oxfam cited the recent proposal of President Clinton to write off 100 per cent of bilateral debt owed to the United States. They recommended "that the UK offer 100 per cent debt write-offs of all outstanding ECGD debt to those HIPC countries who have adopted a clear poverty reduction strategy. In line with the communiqué issued at the end of the Annual Meetings, it is vital this initiative should be funded from new money and not from funds diverted from the aid budget".[32] The Chancellor has indicated that he is willing to consider the writing off of ECGD debt on a case by case basis. Most ECGD debt forgiveness is agreed multilaterally through the Paris Club of bilateral creditors. We consider the protection of DFID's budget, mentioned in the Oxfam recommendation, to be an important principle in this debate on the forgiveness of ECGD debt. Any write-off should be borne by the Treasury and should have no implications for the future funding of DFID. We also believe that it is important to link debt forgiveness to poverty reduction strategies.

22. In addition to the question of the forgiveness of HIPC debt, more general points on debt were made in a number of the memoranda. The Corner House and Friends of the Earth suggest an investigation of past projects and the forgiveness of debt incurred on those projects which were poorly conceived according to the new standards they advocate.[33] Jubilee 2000 argue that the current requirement for ECGD to break-even should be dropped, "It should be acceptable for ECGD to record a loss, if this a result of progressive action on cancelling the debts of a debtor country in need".[34] One of the current objectives of ECGD is "To recover the maximum amount of debt in respect of claims paid by ECGD in a manner consistent with the Government's policy on debt forgiveness." The Peru Support Group argues in effect for a strengthening of this position, recommending that ECGD's commitment to the UK taxpayer should be balanced with a commitment to reduce outstanding debt so as to provide relief from poverty for poor countries.[35]

23. There was also a concern to ensure that ECGD did not contribute to future unsustainable debt burdens. It was argued that the application of the environmental and developmental standards outlined above would reduce the incidence of poor projects and subsequent defaulting.[36] Oxfam and CAFOD recommend that any consideration by ECGD of cover for a particular project should take into account the capacity of the developing country in debt management.[37] More broadly, they propose that export credits should only be used to support productive expenditure aimed at contributing to an agreed national poverty reduction strategy.[38]

The Developmental Impact of ECGD

24. In addition to the specific issues cited above, which must be seriously considered during the ECGD Review, there is also the broader question of the impact on the developing world of the activities of the ECAs. CAFOD state, "There is clearly an element of competition between export credit agencies in exporting countries. Many successful contracts have depended, not on the intrinsic merits of an investment or project proposal in terms of quality or cost, but on the financing package which has accompanied it. In this sense the provision of export credit and investment guarantees is the result of an exporter-driven search for business rather than a need on the part of the borrower for funding. One commentator has identified five main problems arising from export guarantees: excess flows, inappropriate projects, design weaknesses, overpriced goods and corruption".[39]

25. As was stated above, the Review is committed to examine "what else ECGD could do to help the Government achieve its wider sustainable development objectives".[40] The phrase suggests that any developmental impact can only be considered as an 'added bonus' to ECGD's mainstream activity. We have already made clear that ECGD is directly and immediately implicated in developing economies and ECGD must therefore explicitly embrace the objectives of the Development White Paper as its own. If the Review is to consider this issue seriously, it must go beyond particular topics such as debt relief, important though they are, and conduct an examination of the effect of export credit agencies in general, and ECGD in particular, on the developing world. We have in the past criticised other bodies, such as the European Commission, for drafting policy proposals without conducting the necessary research into the effect of those policies. We expect ECGD to review current research and if necessary commission new research into the impact of ECGD, and of export credit agencies more generally, on developing economies.

26. One of ECGD's 'High Level Objectives' is "to pursue international agreements that provide for fair competition by limiting or eliminating all export subsidies".[41] This is, of course, a welcome commitment and underlines the importance of considering the future of ECGD within the wider context of reform of the work of other ECAs. Discussions amongst ECAs take place within the Export Credits Group of the OECD. We recommend that the Review place its policy proposals within a strategy for the internationally agreed reform of export credit agencies, and that this strategy have as a priority the elimination of poverty in developing countries.

1 Third Report from the International Development Committee, Session 1997-98, Debt Relief, HC563, para.23 Back

2 ECGD's Mission Statement is reproduced as an Annex to this Report. Back

3 Review of ECGD's Mission and Status - Public Consultation Document p.2 Back

4 Evidence p.7 Back

5 Evidence p.40 Back

6 The White Paper on International Development 'Eliminating World Poverty: A Challenge for the 21st Century' Cm. 3789 para.1.21 Back

7 Evidence pp.69-70 Back

8 Evidence p.66 Back

9 Evidence p.66 Back

10 Evidence p.71, and Evidence p.51 Back

11 Evidence p.72 Back

12 Evidence pp.69 Back