APPENDIX 5
Memorandum from Friends of the Earth
1. INTRODUCTION
AND SUMMARY
OF RECOMMENDATIONS
1.1 Friends of the Earth welcomes the opportunity
to offer its views on the ECGD to the International Development
Select Committee. Friends of the Earth is the UK's leading environmental
public-interest pressure group and a member of Friends of the
Earth Internationalthe world's largest environmental network
with almost a million supporters, and member groups in 58 countries.
Our views on the ECGD reflect the concerns of our partner groups
throughout the networkin both Northern and Southern countriesregarding
the social and environmental impacts of export credit agency activities.
This written evidence is based upon our submission to the Government's
review of the ECGD, which is appended in full. This evidence was
prepared by Duncan McLaren, Senior Research Coordinator.
1.2 The ECGD requires radical reform to
meet the demands of sustainable development in the 21st Century.
Friends of the Earth recommends actions under three headings.
Policy Coherence: the ECGD's mission
and strategy should be revised to ensure coherence with Government
aims of debt relief, poverty alleviation, ethical foreign policy,
compliance with multilateral environmental agreements and sustainable
development.
Objectives, Standards and Sanctions: The
objectives of the ECGD should be revised in line with the above
to support productive development-oriented investment in sustainable
products and technologies. Positive targets should be supported
by best-practice ethical, developmental and environmental standards
and project, country and company screening, alongside sanctions
to ensure compliance.
Governance: The governance structures
of the ECGD should be reformed to ensure coherence with the above
through clear accountability to Parliament, formalised joint responsibility
for ECGD in DFID and the Foreign Office alongside DTI, and the
establishment of a broader, more publicly-accountable Advisory
Council.
2. AIMS AND
OBJECTIVES OF
ECGD
2.1 Friends of the Earth believes 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. This means
targeting support towards sustainable activities which will benefit
the poorest people of the world. The sole role of the ECGD should
be supporting productive investments with development purposes
onlyleaving commercially motivated projects to the private
sector.
2.2 The ECGD should take immediate steps
to develop an Ethical Guarantees Policy, embodying a commitment
to equitable and environmentally sound development. This policy
should be firmly anchored in its Mission Statement, which should
be legally binding. If necessary enabling legislation should be
introduced in Parliament. This Policy should implement the various
commitments made by the UK Government in various international
fora and White Papers to, inter alia:
"work to assure that development
cooperation and other linkages between industrialized and developing
countries are mutually reinforcing" (OECD DAC, 1996.
Shaping the 21st Century: The Contribution of Development Co-operation);
ensure that "the full range
of government policies affecting developing countries, including
environment, trade, investment and agricultural policies, takes
account of our sustainable development objective" (DfID
White Paper, 1997, Eliminating World Poverty: A Challenge for
the 21st Century);
to promote the transfer of technology
to developing countries to develop their economies using less
carbon-intensive energy resources (Kyoto Protocol to the Convention
of Climate Change, 1997);
to apply environmental considerations
to both domestic and foreign direct investments (G8 Environment
Ministers' Communique, March 1999)
2.3 Currently the policies and activities
of the ECGD are clearly not "joined up" with those of
other parts of Government. There is a pressing need for the ECGD
to address its lack of coherence with, inter alia:
the Foreign Office's aspirations
for an ethical foreign policyin particular with regards
to support for arms sales to regimes which might use them for
internal repression (such as Indonesia);
the Department for International
Development's goal of poverty elimination;
the aspirations of the Chancellor
and Treasury to resolve the problems of poor countries;
burdened with unpayable debts to
reduce the risk of future unsustainable debts;
the Department of the Environment,
Transport and the Regions' environmental and broader sustainable
development objectives.
3. REFORMING
THE ECGD'S
PRACTICES AND
GOVERNANCE
3.1 To put policy coherence into practice
will require several practical measures: the adoption of formal
ethical, environmental and social standards; country, company
and project screening; transparent project impact assessment procedures;
compliance monitoring and auditing; an independent inspection
and dispute mechanism; sanctions for non-compliance; positive
targets for sustainable development projects; and other governance
mechanisms to ensure transparent and accountable governance. The
need for these can be clearly demonstrated by the case of the
Ilisu dam in Turkeycurrently under consideration for support
by the ECGD. A briefing on this is also appended.
Ethical, environmental and social standards
3.2 The ECGD should adopt a clear and unambiguous
set of mandatory environmental and development standards, reflecting
current best practice in the field. These standards should be
aimed at ensuring, inter alia, that ECGD-backed projects
and exports:
have the minimum impact on the environment;
safeguard the lives and livelihoods
of those directly affected;
has the prior informed consent of
those directly affected, particularly where forced relocation
is involved; minimise the need for resettlement and ensure that
those resettled are better off than prior to the project or export;
and
permit the full and active participation
of affected people and interested groups in the decision-making
process associated with the project or export.
3.3 These standards should be consistent
with, or higher than those required by the World Bank group, the
United Nations Environment Programme (UNEP), the Organisation
for Economic Co-Operation and Development (OECD), OPIC and US
Exim-Bank. All of these have demonstrable weaknesses, but are
still better than no standards at all and offer a good basis for
improvement.
Country, company and project screening
3.4 The ECGD should not offer cover in countries
which consistently abuse human rights. It should not offer support
to companies which are in breach of the OECD's Guidelines for
Multinational Enterprises, nor those proven to have been involved
in bribery or corruption. More broadly, the ECGD should consider
the past human rights, environment and development record of companies
applying for credits or guarantees, and make support conditional
on meeting at least the environmental and social standards that
they would be subject to in the UK. The ECGD should not offer
support for any projects which have no demonstrable development
benefits, and in particular should not support: extractive or
infrastructure projects in pristine or fragile frontier areas
such as primary tropical forests, UN national parks, World Heritage
Sites and IUCN protected areas I-IV; large dams that disrupt natural
ecosystems or the livelihoods of local inhabitants; projects that
would threaten peace and security in a region; nuclear facilities
or arms sales. The ECGD should also require that contracts it
supports have been awarded through open tendering processes.
3.5 Effective screening would not only deliver
environmental and social benefits, but ensure that the ECGD did
not waste time and money on considering proposals such as that
for the Ilisu Dam.
Project impact assessment procedures
3.6 Whilst some types of project can be
categorically excluded from support, most will require some form
of impact assessment to evaluate their developmental and environmental
implications. Indeed, it is clear that economic appraisal could
be improved too. In 1969 the Pearson Commission (Partners in Development:
Report of the Commission on International Development. Praeger,
New York) reported its concern that export credits often financed
projects whose only "feasibility study available is one prepared
by the equipment supplier" and that borrowing countries pushing
grandiose schemes favoured ECAs because they enforced less rigorous
economic viability tests. Too little has changed. ECAs still rarely
commission or require independent impact assessments, whilst the
moral hazard contingent on ECA support has allowed numerous uneconomic
projects to proceed (such as the ECGD supported Nathpa Jhakri
Hydro Electric Scheme which will generate electricity for only
half the time forecast at almost double the cost).
3.7 A transparent and public system of impact
assessment which at minimum both matches up to the requirements
of the European Union directive on environmental impact assessment
and the World Bank's standards for development assessment is recommended.
In particular, the process must rigorously assess alternatives
to the proposed project, including the option of the project not
being implemented. Without appropriate screening, and impact assessment,
ECGD activities risk contravening various multilateral environmental
agreements such as the Kyoto Protocol, the UN Convention on Biodiversity
and the Basel Agreement (on the Transboundary Movement of Hazardous
Waste), and the requirements of these should be explicitly built
into the assessment framework. Strong impact assessment procedures
are an invaluable aid to project design, and thus to reducing
associated financial risk to the ECGD.
Compliance monitoring and auditing
3.8 Experience of impact assessment in the
European Union has revealed the need for effective compliance
monitoring to ensure that mitigation measures are implemented
and standards adhered to during construction and operation. Similarly,
to ensure that project and company screening mechanisms are effective
requires compliance auditing. At a minimum, the standards of monitoring
and compliance operated by OPIC are recommended.
Inspection and dispute mechanism
3.9 Even with the best assessment and monitoring
procedures, there remains a risk that projects supported by the
ECGD may not live up to the expected standards, or indeed that
the ECGD itself may fail to apply its procedures rigorously enough.
To ensure public confidence in such procedures requires an independent
mechanism to address complaints and concerns raised by affected
populations or public-interest organisations, with adequate powers
and sanctions to resolve disputes. Such a process should be supported
by clarification of the legal right of those affected by ECGD-supported
projects to sue in the UK (and to have access to legal aid so
to do).
Sanctions for non-compliance
3.10 Clearly the ECGD needs to be able to
take some sanction against companies which breach its standards
or abuse its procedures. However, at present the ECGD has no procedures
in place even to debar companies which have been convicted of
malpractice. This is despite the UK having signed the Organization
for Economic Cooperation and Development's 1997 convention on
corruption and bribery. The OECD Convention obliges signatories
to adopt national legislation which makes it a crime to bribe
foreign public officials, subject to both criminal penalties,
and economic sanctions including exclusion from entitlement to
public benefits or aid; and temporary or permanent disqualification
from participation in public procurement or from the practice
of other commercial activities. Monetary sanctions equivalent
to the amount of the contract can also be levied.
3.11 The World Bank has already instituted
measures to crack down on bribery. The Bank has adopted guidelines
pledging to "declare a firm ineligible, either indefinitely
or for a stated period of time, to be awarded a bank-financed
contract" if the firm is found to have "engaged
in corrupt or fraudulent practices in competing for, or in executing,
a bank-financed contract". So far, the Bank has debarred
nine relatively small companies. The ECGD should follow the lead
taken by the World Bank.
Transparency
3.12 In the absence of public sector oversight
and market discipline. ECAs are a breeding ground for corruption.
Some minimum standards of transparency are recommended:
Advance notification on pending applications,
detailing the type of project, the amount guaranteed, the companies
involved, the country involved and likely human rights, environmental
and development impacts (again following the lead of the World
Bank in this respect);
Release of all documents relevant
to the human rights, environmental and development impacts of
ECGD-supported projects and to make translations available in
the languages of project affected people; and
A requirement on the ECGD to consult
with affected communities and interested public interest groups
prior to any decision being taken on approval of a project and
to demonstrate how account has been taken of the issues raised.
Accountability
3.13 At present the ECGD is not even fully
accountable to Parliament. At least one MP seeking detailed information
on the ECGD's activities has been "fobbed off". At a
minimum, there should be a requirement on the ECGD to report annually
to the UK Parliament and for the government to hold a debate on
the report. This should be reinforced by measures to broaden the
base of the ECGD's Advisory Council, by including those with an
expertise in human rights, environment and development issues.
3.14 Steps should also be taken to formalise
cross-departmental responsibility for the ECGD, as several departments
have a clear interest in its role and activities, it is inappropriate
that it is accountable to only onethe DTI. At a minimum,
formal accountability to DFID and the Foreign Office should be
imposed. In addition ECGD's relationship with the DETR and the
Treasury should be clarified.
Governance structures
3.15 The ECGD's governance procedures are
also self-referential and unaccountable to the public. No minutes
of the Advisory Council's deliberations, for example, are made
public and its members are drawn from a narrow circle, many of
whom have links with companies which receive the bulk of ECGD
support. No representatives from development or environmental
bodies sit on the Council.
4. THE ECGD AND
DEBT
4.1 The ECGD must recognise that there is
not just a risk of countries "reacquiring unsustainable debts"but
that many still have such debts, and that Paris Club terms have
yet to address the full extent of the problems (van Voorst in
Friends of the Earth US et al, 1999. A race to the bottom).
Thus there is an unacceptable risk of ECGD activity exacerbating
already unsustainable debt burdens. If this cannot be removed
without the amendment of existing legislation, then such amendment
should be actively sought.
4.2 The UK should commission an independent
review of all ECGD generated debt according to the new standards
and screening procedures recommended above, and share or write
off liability for those projects that were poorly conceivedin
particular where failure can be seen to arise in company actions
or omissions (especially a failure to take due financial diligence),
or corruption which cannot be blamed on current administrations.
4.3 At present we suffer the worst of all
worldsdebts have accumulated, creating pressure for structural
adjustment (with associated social and environmental costs). But
however bad things get, only a tiny fraction of debt is ever cancelledmost
is merely rescheduled. As a result Northern taxpayers go on bearing
some costs, whilst Southern people bear the majority. The only
beneficiaries are the exporters (their shareholders) and of course,
the ECAs!
4.4 In the future, with a remit of sustainable
development, there is a strong case that liabilities from failed
projects should be borne by exporters' governments, and not reallocated
to the importer under Paris Club arrangements. This will also
remove moral hazard at the ECGDand encourage a more honest
appraisal of risk and benefit. There are clear precedents for
such an approach. In the case of EDC support for a Candu sale
to China the Canadian Government has accepted (in advance) responsibility
for this loan in the case of default. The ECGD itself is involved
in a similar arrangement in the case of the Rolls Royce and Allen
Steam contract with Bilkent University for power generating equipment
(Jan 1999).
ATTACHMENT 1
The Ilisu Dam and the case for Export
Credit Agency Reform (a Friends of the Earth briefing)
INTRODUCTION
Since 1996 there has been increasing focus on
the need for urgent reform of the Export Credit Agencies (ECAs)
of individual countries, and for internationally harmonised environmental
and social standards to be set by G8 and OECD governments for
these financial institutions.
Such reform need not involve the ECAs turning
their backs on their primary concern of promoting exports but
would require rigorous social and environmental assessment of
projects before they are supported. These measures would draw
the ECAs into line with Multinational Development Banks' procedures
(such as those of the World Bank), and assist further moves towards
sustainable development within the international financial institutions.
This briefing outlines the workings of the world's
ECAs and broadly explains what changes are necessary to bring
the agencies up to date with globally agreed standards for sustainable
social and environmental development.
The Ilisu Dam in Turkey is the latest in a number
of projects highlighted by NGOs to exemplify the desperate need
for changes in ECA policy. It is a project that violates the most
basic development guidelines set by OECD countries, yet one that
at least nine OECD nations are considering supporting financially.
The Turkish connection and its massive political, environmental
and social implications will be looked at in further detail, below.
It is essential to point out that the international
export credit system could be an important tool for beneficial
change in the developing world, but only if the suggested fixes
are made. Otherwise the ECAs will continue to support projects
that contribute to environmental degradation and social impoverishment
of affected communities, violating internationally agreed standards
of human rights and sustainable development.
WHAT'S
AN EXPORT
CREDIT AGENCY?
The primary responsibility of a country's ECAs
is to encourage the export of goods and expertise of national
companies by guaranteeing the loans given by private banks to
risky commercial enterprises abroad. Demand for such support is
overwhelmingly for exports to non-OECD countries, mainly in the
developing world, as these tend to be the markets where the risks
of payment default are the greatest.
In this way the great body of major infrastructure
projects in developing countries is carried out with the support
of ECAs. By their very nature these large-scale projects such
as dams, mines, coal-fired power plants etc often have significant
environmental and social impacts, and are consequently considered
risky ventures. The only way banks will lend money for such endeavours
is with an ECA guarantee. In other words, tax-payers' money in
industrialised countries is committed to shore-up the loan should
anything go wrong.
In the UK our official ECA is known as the Export
Credit Guarantee Department (ECGD). It is an agency within the
Department for Trade and Industry, ultimately answerable to the
Secretary of State for Trade and Industry. Like the vast majority
of the world's ECAs it has no environmental or developmental mandate
and, despite its claims to be one of the most innovative ECAs,
it has been lukewarm about the notion of reform, hitherto demonstrating
no leadership and making little contribution to the debate.
THE TURKISH
CONNECTION
The South East Anatolia Project (GAP)
The Ilisu dam is part of the South-East Anatolia
Project (GAP), a huge irrigation and hydropower scheme on the
Euphrates and Tigris rivers in the Kurdish part of Turkey. GAP
was designed to involve 22 major dams, 19 hydroelectric plants
and dozens of irrigation systems. Its projected completion date
is in 2010 and already hundreds of thousands of people have been
displaced to make way for it, many without compensation [1]. Because
of the war between the Turkish army and Kurdish guerillas local
opposition to this project cannot be voiced for fear of state
reprisals.
The Ilisu Dam itself is on the Tigris river,
and is currently the largest hydropower project in Turkey, 40
miles upstream of the Syrian and Iraqi borders. Its reservoir
will flood 15 towns and 52 villages, and is expected to displace
about 20,000 people [2].
Ilisu is a relatively expensive power-project,
electricity being produced at a cost of $1,300 per kW. Alternatives
have not been properly assessed and an in-depth study of the project
by the Berne Declaration, a Swiss NGO, argues that it would be
considerably more cost-effective to modernise Turkey's notoriously
wasteful power transmission system than to build the dam [3].
Who's funding the project?
According to the Berne Declaration "The
World Bank declined to fund GAP projects in 1984 and will not
become involved in Ilisu." [4] This loan refusal by the World
Bank meant that private banks saw Ilisu as "high risk"
and therefore demanded support from ECAs before they would put
any money into it.
Currently nine OCED countries (Austria, Germany,
Italy, Japan, Portugal, Sweden, Switzerland, the UK and the US)
are considering underwriting a loan of about $850 million [5]
to finance an international consortium of construction companies,
headed by Balfour Beatty (UK), Impregilo (Italy), Skanska (Sweden)
and three Turkish companies, to work on the Ilisu Dam. Balfour
Beatty, the lead contractor in the controversial Pergau Dam project
in Malaysia, is seeking guarantees worth hundreds of millions
of pounds from the ECGD.
The ECGD has claimed that a ". . . full
Environmental Impact Assessment study [was] produced by Hydro
Concepts Engineering, Switzerland" and submitted to Swiss
Government [6]. The Swiss Government's review of the report was
passed to the ECGD in 1998, neither have since been published.
Balfour Beatty was reported as saying that ". . . it is too
early for anything but preliminary environmental assessments to
have been made and they should not be published." [7]. This
non-disclosure of project details is entirely in-line with current
ECA procedure.
Why the World Bank steered clear
The World Bank had very good reason to refuse
any funding of the GAP scheme since it appears to violate five
World Bank policy guidelines, on 18 accounts, and breach the UN
Convention on Non-Navigational Uses of Transboundary Watercourses
(the Berne Declaration details these breeches [8]). There are
four main problem areas.
Political
The GAP scheme raises enormous security questions
both internally and externally. The scheme is situated in the
Kurdish region of Turkey where a bitter civil war is being fought
between the Kurdish Workers' Party (PKK) and the Turkish military.
According to Nicholas Marsh, in his study of water-related flashpoints
in the Middle East for the UK Defence Forum, the Ankara Government
hopes the new wealth and infrastructure for hitherto impoverished
Kurds, due to the dam projects, will act as an inducement for
the people to support the Government. Marsh also sees the scheme
as radically altering the social geography of the region; moving
Kurds out of their traditional mountain homes into planned urban
areas will mean the Government is better able to control them
and will also deny the PKK their topological advantage [9].
The international political implications of
the project are vast. In 1997 Turkey was one of only three out
of 133 countries to reject the UN's Convention on Transboundary
Waterways, devised to restrict the negative impacts of waterway
development projects on neighbouring riparian states. The Tigris
courses into Iraq and Syria 40 miles from the Ilisu Dam. The dam
will profoundly affect the quantity and quality of water reaching
these neighbouring states, both of which rely on the river for
drinking water, irrigation and electricity generation, and will
give Turkey the power to cut off the supply of water downstream
entirely, should it wish to. At the formal opening of the Attaturk
Dam (part of the GAP scheme) the then Turkish President, Demirel,
gave a speech in which he stated that "Neither Syria nor
Iraq can lay claim to Turkey's rivers anymore than Ankara could
claim their oil. This is a matter of sovereignty. We have a right
to do anything we like. The water resources are Turkey's, the
oil resources are theirs. We don't say we share their oil resources,
and they cannot say they share our water resources". [10]
The South-East Anatolia Project is, therefore,
a huge bargaining chip for Turkey since both the Tigris and the
Euphrates run through it before reaching Syria or Iraq. Turkey
now has a measure of power over Syria, which has been sympathetic
to the PKK for many years but which, in 1998, expelled the notorious
PKK leader Abdullah Ocalan. Iraq has most to lose from the GAP
project as it is furthest downstream, however, due to its weakened
position following the Gulf War it has lacked the political leverage
needed to mount opposition to the dams. The mutual antagonism
and distrust between the three states suggests that a consensual
solution to the problem is unlikely, indeed a report by the UK
Defence Forum warns of the potential of armed conflict over the
right to water from the Tigris. Both Syria and Iraq (through Jordan)
have recently made formal protests to the UK Foreign Office over
the Ilisu Dam. Is this dispute something the UK really wishes
to further intensify?
Impact assessment
Although the previously mentioned Environmental
Impact Assessment (see What's an Export Credit Agency?)
has not been published and the full details are only familiar
to the commercially interested parties, it is known that no local
consultation was undertaken, nor was any independent panel of
environmental panellists engaged with. No comprehensive cost-benefit
analysis was carried out, neither was there assessment of alternative
investments, according to information given to the Berne Declaration.
All these are specific requirements, of a very basic nature, for
World Bank project funding.
Resettlement
The World Bank calls for involuntary resettlement
considerations to be dealt with at the earliest stages of project
preparation, and states that ". . . affected hosts and resettlers
need to be systematically informed and consulted during preparation
of the resettlement plan about their options and rights."
[11]. In the case of the Ilisu Dam decisions regarding displacement,
resettlement and compensation had not been made by the time the
project was submitted to ECAs, and the affected communities have
never been privy to any project information, nor given an opportunity
to participate in planning. Indeed, it appears the only attempt
to assess the likely numbers of displaced persons from the 15
towns and 52 villages that will be flooded, has been carried out
by helicopter.
With previous projects in the GAP scheme, such
as the Attaturk Dam, compensation has been inadequate. Hundreds
of thousands of people have been displaced but only some have
been compensated, many were not even rehoused and shifted to the
slums of big cities such as Diyarbakir and Istanbul. Compensation
has, in the past, usually been tied to property. Since it is mostly
the village headmen who hold the land in South-East Anatolia many
landless families were left with nothing [12].
Cultural damage
Turkey's cultural heritage is also under threat
from Ilisu. The reservoir will flood Hasankeyf, one of the oldest
settlements in the world and the only town in Anatolia to have
survived since the middle ages. Prior to the announcement of the
project the 5,500 inhabitants were forbidden even to build a hotel
in the town, such was the complete archeological protection awarded
to the site; now tourists are being encouraged to visit before
it's too late, wrote a foreign correspondent in The Independent
[13].
WHAT'S
WRONG WITH
THE CURRENT
ECA SYSTEM?
In the view of Friends of the Earth, and the
multitude of other NGOs looking at this issue, international ECA
policies and procedures are seriously flawed due to the lack of
any adequate environmental or development mandate in the majority
of institutions. ECAs are able to approve, indeed they actively
support, loans made for projects that other departments in Government
would have to legally back well away from. On top of this the
ECAs act behind closed doors, their activities are kept hidden
from the public and project details remain confidential.
Race to the Bottom
The fact that there are no recognised common
standards means that those few agencies that have signed up to
clear and transparent environmental and development criteria (as
some have in the US, such as the Export-Import Bank and the Overseas
Private Investment Corporation or OPIC, due to the high level
of NGO lobbying there) are placed at a competitive disadvantage
and there is a "race to the bottom", with those
ECAs willing to ignore potential social and ecological costs winning
contracts. In 1996 the US Export-Import (Exim) Bank turned down
an application to fund the Three Gorges Dam on environmental grounds.
This project was later taken up by German, Swiss, Japanese and
other ECAs. In this way best practice is penalised whereas ECAs
with no standards benefit.
High Risk Projects
International private sector investment, with
the necessary backing from ECAs, is the greater part of finance
going to the developing world, and growing in proportion compared
with official aid budgets. Consequently, this funding has major
development implications and is increasingly used for large infrastructure
projects with enormous local and global environmental repercussions.
Because these projects are taken on without
adequate impact assessments they run a higher than otherwise risk
of failure. They are also more risky than other projects due to
the nature of ECA funding; businesses are more willing to take
a chance since they know that if the deal goes wrong the public
sector will bail them out.
In addition to the ECA's resident tax payers
paying the price for risky ventures, the countries hosting the
projects are seriously undermined by failed schemes. Over 95 per
cent of Third World debt owed to the UK is in the form of export
credit guarantees; these are often backing up irresponsible loans
that, in many cases, would never have been cleared by the multilateral
development banks or official development aid bodies [14].
Conflict with Existing Laws and Agreements
The nature of the projects they support often
brings the ECAs into direct conflict with existing national and
international rules or commitments regarding sustainable development
and ethical standards. The kind of loans guaranteed also mean
that tax-payers' funds in major exporting countries may be working
at cross purposes, as governments press for better environmental
and development standards from the multilateral development banks
whilst continuing to support the mainly ethically unaware ECAs.
Anti-sustainable development
The same Governments that signed up to international
environmental commitments at the 1992 Rio Earth Summit, including
the Climate and Biodiversity Conventions and Agenda 21, are seriously
undermining moves towards sustainability through their official
support for ECA-backed projects. These projects often have huge
environmental and developmental costs for countries due to their
scale and the lack of rigorous impact assessments being carried
out. Britain's ECGD continues to insure financing for projects
to build hugely polluting coal-fired power stations in the developing
world despite the leading role taken by the Deputy Prime Minister,
John Prescott, at the International Climate Negotiations in Kyoto.
These projects include the Shiheng II, Heze II and Liaocheng plants
in Shadong Province in China, the Huaneng power station in Dalian
Province, also in China, and a plant in Visakhpatnam in Andhra
Pradesh in India.
In addition, tax-payers' money is working at
cross purposes if it is being spent both on making stringent agreements
to advance international sustainability and to further tighten
the environmental and development mandates of the multilateral
development banks whilst also being used to shore up loans for
projects that are ecologically and socially devastating.
Policy incoherence
The actions of the UK's ECGD is in flagrant
opposition to the present Government's high profile "ethical
foreign policy". This is a policy that pledges to respect
and reflect environmental and human rights issues throughout government
with the Foreign Office at its helm. In February 1999 Robin Cook,
the Foreign Secretary, made a speech in which he stated that ".
. . the environment must be central to foreign policy because
it cannot be separated from other issues with which we have to
grapple. The prospects for peace in the Middle East would be enhanced
if the region's freshwater were properly conserved." [15]
Clearly this line is not reflected in the present approach of
the ECGD in the case of the Ilisu Dam.
A major focus of this foreign policy "with
an ethnical dimension" was its stated aim not to back sales
of arms to countries where the items could be used for internal
repression. In the last two years, two-thirds of arms exported
from the UK have gone to regimes with appalling records on human
rights, including Saudi Arabia, Turkey and Indonesia; many of
these exports have had ECGD support. Indeed, in Indonesia, which
presently deploys death squads in East Timor, the ECGD is currently
exposed to £760 million for "defence" related equipment
[16].
In the European context the dislocation between
rhetoric and reality is even more blatant. In the Maastricht Treaty,
Article 130v calls for "coherence" between the activities
of ECAs of member states and their development assistance policies
(most of which now include ideals of sustainable development and
require environmental impact assessments). This policy aim has
clearly made little difference on the ground.
Lack of Transparency
The secretive and unaccountable nature of most
ECAs is a scandal. A study by Yale University in conjunction with
the Environmental Defence Fund has found that even the most basic
information on transactions is kept hidden by many agencies such
as the breakdown details of transactions by country, sector and
projects unsupported. This kind of information is readily available
for any multilateral development bank in its annual report [17].
The DTI has assured NGOs that it is looking
at strengthening its assessment of the environmental impacts of
the projects it supports, but no details of this have yet been
released and neither NGOs nor project affected people have played
any part in this review [18]. Even the 1998 OECD Statement of
Intent on Officially supported Export Credits and the Environment,
which has been cited by many agencies as the basis for their "improved
standards" remains secret, though according to accounts given
to Bruce Rich of the Environmental Defence fund, the Statement
is ". . . rather general and vague, and in no way involves
a commitment or movement towards common, harmonised environmental
and social policies and standards." [19]
In June 1999 FOE was on course to sue the UK
Government over its refusal to even reply to a request to publish
details of the Swiss Environmental Impact Assessment it holds.
As mentioned earlier, it is thought that this document falls very
far short of being an adequate study of the potential environmental
and social risks of the Ilisu Dam project. This withholding of
information was judged by FOE to be at odds with the EU's freedom
to access to environmental information Directive 1992 and certainly
not in the spirit of earlier commitments to openness made by the
Government. The DTI responded with a letter to FOE with claims
that it was only given the environmental assessment report ".
. . on the clear understanding that the documents were confidential
and would only be used for the purposes of evaluating the project."
[20] In the same letter Brian Wilson, the Minister for Trade with
responsibility over the ECGD, announced that the DTI had commissioned
an independent report which would be published as soon as possible.
This last shift in position is taken as clear evidence of short-comings
in the original Swiss study.
REFORMING THE
SYSTEM
Addressing all the problems outlined above is
a major and urgent priority if the UK Government intends to keep
a credible hold of its "ethical foreign policy". For
far too long the secret dealings of the world's ECAs have gone
unchallenged, but in the last few years NGOs from OECD countries
have been gathering forces to take on the tightly aligned international
agencies.
The many grounds for reform were detailed in
a letter to Robin Cook, the UK Foreign Secretary, from 13 groups
working on the issues, prior to the latest round of G8 discussions
at the end of June 1999 [21]. The calls for reform focus on the
need for clear and common obligatory environment and development
mandates for all OECD Export Credit Agencies and Investment Insurance
Agencies, with the standards used by the World Bank and OECD Development
Assistance Committee (DAC) as the baseline for negotiations. The
workings of the agencies must be made more transparent and accountable,
giving the public access to environment and development impact
information and ensuring adequate consultation with those affected
by or with an interest in the projects under consideration.
If the ECAs are to have a legitimate development
role in the future then ethical standards will form an essential
part of their policy. It is apparent that if standards are set
they must be common to all Agencies if some are not to suffer
competitive disadvantage, as the Exim Bank and OPIC in the United
States currently do.
Clear, Common Standards for All
A major breakthrough was made at the last G8
summit in June 1999 following repeated lobbying by concerned NGOs.
After many years of prevarication and delay the G8 made a decision
to ". . . work within the OECD towards common environmental
guidelines for export finance agencies. [They] aim to complete
this work by the 2001 G8 Summit." [22]. At last a timetable
has been given for some standardisation. Of course we can't know
what these standards will be yet and so it is more important than
ever that groups working on this issue continue to make their
demands for strong, transparent policies heard.
It has already been noted that existing World
Bank and OECD DAC standards should be used as a baseline for reform.
Regardless of what moves are made by the above organisations it
is clear that the ECGD must start to take responsibility for its
own actions and make some urgent commitments of its own to sustainable
development. Any reform the ECGD makes must include those undertakings
within the international agreements and conventions the UK has
previously ratified. The Corner House, a research and solidarity
group, provides a list of such agreements in their detailed study
of the export credit system. They include the UN Covenant on Economic,
Social and Cultural Rights; the UN Convention on the Rights of
the Child; the UN Convention on the Elimination of Discrimination
Against Women; the UN Climate Convention and Kyoto Protocol; the
UN Convention on Biological Diversity; the Rio Declaration (on
sustainable development); the Basle Agreement (on the transboundary
movement of waste); the UNCTAD Rules for the Control of Restrictive
Business Practices; and relevant International Labour Organisation
conventions [23]. The Corner House study also highlights the need
for good corporate practice by those companies taking up ECGD-backed
commissions abroad, including working to the same environmental,
labour and development standards that they would be expected to
use in the UK.
Transparent, accountable policies
Robin Cook made clear his recognition of the
need for transparency when "wiring in" the environment
to the work of international organisations, in a speech he made
to the Green Alliance in February 1999. He stated that "Concerned
citizens and pressure groups can have a huge impact. Their principle
weapon is fact, and so they need access to the facts." This
is indeed the truth, but is in fact far removed from the reality
of the situation with ECAs. For the Agencies to be accountable
to both the tax-payers from whom they borrow money, and those
people affected by ECA-backed projects, their policy and procedures
must be truly transparent.
In the case of the ECGD, there are calls for
a number of changes to be made. Advance notification should be
given of projects under consideration for ECGD backing, and details
and documents pertaining to likely social and environmental impacts
should be made available to the public. Translations in the languages
of those potentially affected by any project should also be available.
Prior to the approval of any project the ECGD should be obliged
to consult with both affected communities and interested parties
and subsequently be able to show how the issues raised have been
taken account of. In addition, grievances regarding ECGD backed
projects should be heard by an independent committee, similar
to the World Bank's Inspection Panel.
CONCLUSION
It is clear that there is a long way to go before
the world's ECA's are all singing from the same sustainable development
song-sheet. This is a necessary and achievable aim, as the latest
G8 decision on ECAs demonstrates, but one that needs continual
reassessment. There is an opportunity for the ECAs to foster more
environmentally and socially responsible development than they
do currently, but only if the changes suggested by the international
environment, development and human rights NGOs are taken up.
With better standards of assessment the risk
of projects failing will decrease. This mitigation of risk is
in the best interest of the clients, tax-payers and project-affected
people. The reduction of risk would also lessen the growth of
debt in developing countries. Indeed, it has been argued that
the debt portfolios of ECAs should be reviewed and that the financial
responsibility for those projects that were poorly conceived be
shared or written off.
It is possible that in the future ECAs will
move away from non-productive programmes including arms exports
and, instead of backing environmentally and socially destructive
projects, concentrate on developing a more sustainable future
for those less able to foot the bill. In the meantime, the case
of the Ilisu Dam must be urgently addressed by the ECGD. FOE,
supported by Britain's United Kurdish Committee, is calling on
Brian Wilson, the Trade Minister, and the ECGD to:
Withhold support for the dam pending
a full public debate and consultation with locally affected communities
and neighbouring countries.
Release all documents it holds regarding
the social, political and environmental risks posed by the dam.
Agree a policy to prevent serious
environmental and social impacts arising from any other projects
supported by the ECGD, by at the least incorporating existing
World Bank standards.
BIBLIOGRAPHY
1 Peter Bosshard (1998), The Ilisu Hydroelectric
Project (Turkey): A test case of international policy coherence,
Berne Declaration, p3.
2 Ibid, p3.
3 Ibid, p4.
4 Ibid, p2.
5 Ibid, p1.
6 Hansard Written Answers, 11 February 1999, col 411.
7 Paul Brown, 1 March 1999, Britain Backs Controversial
Dam, The Guardian Newspaper.
8 Peter Bosshard, op cit, p7.
9 Nicholas Marsh, Wars Downstream, The UK Defence
Forum, p4.
10 Ibid, p5.
11 Peter Bosshard, op cit, p9.
12 Ibid, p3.
13 Justin Huggler, 24 May 1999, The doomed life of
the damned, The Independent Newspaper
14 Nicholas Hildyard, May 1999, Letter to Robin Cook
MP from 13 NGOs (including FOE).
15 Robin Cook MP, 15 February 1999, Britain and the
global environment, Speech to the Green Alliance.
16 Nicholas Hildyard, op cit.
17 Bruce Rich, March 1998, Export Credit and Investment
Insurance Agencies: The international context, Environmental
Defence Fund, p15.
18 Nicholas Hildyard, June 1999, Snouts in the trough.
Export Credit Agencies, corporate welfare and policy incoherence,
The Corner House, p9.
19 Bruce Rich, November 1998, Export Credit Agencies:
The need for more rigorous common policies, procedures and guidelines
to further sustainable development, Environmental Defence
Fund, p10.
20 Brian Wilson, 30 June 1999, Letter to Friends of
the Earth concerning the proposed Ilisu Dam and access to environmental
information.
21 Nicholas Hildyard, May 1999, op cit.
22 G8 Communique, June 1999, Cologne.
23 Nicholas Hildyard, June 1999, p24.
Friends of the Earth
July 1999
ATTACHMENT 2
FOE's submission to the ECGD review
Summary of Recommendations
The ECGD requires radical reform to meet the
demands of sustainable development in the 21st Century. Friends
of the Earth recommends actions under three headings.
Policy Coherence: The ECGD's mission
and strategy should be revised to ensure coherence with Government
aims of debt relief, poverty alleviation, ethical foreign policy,
compliance with multilateral environmental agreements and sustainable
development.
Objectives, Standards and Sanctions: The
objectives of the ECGD should be revised in line with the above
to support productive development-oriented investment in sustainable
products and technologies. Positive targets should be supported
by best-practice ethical, developmental and environmental standards
and project, country and company screening, alongside sanctions
to ensure compliance.
Governance: The governance structures
of the ECGD should be reformed to ensure coherence with the above
through clear accountability to Parliament, formalised joint responsibility
for ECGD in DfID and the Foreign Office alongside DTI, and the
establishment of a broader, more publically-accountable Advisory
Council.
Introduction
Friends of the Earth welcomes the opportunity
to offer its views on the ECGD's mission and status. Friends of
the Earth is the UK's leading environmental public-interest pressure
group and a member of Friends of the Earth internationalthe
world's largest environmental network with almost a million supporters,
and member groups in 58 countries. Our views on the ECGD reflect
the concerns of partner groups throughout the networkin
both Northern and Southern countriesregarding the social
and environmental impacts of export credit agency activities.
This submission focuses on three key concerns:
first the current lack of policy coherence with respect to the
Government's sustainable development objectives including the
promotion of human rights, elimination of poverty, debt relief
and environmental protection; second the consequent inadequacy
of the ECGD's existing procedures, standards and sanctions to
promote these broad objectives; and third, the weaknesses of governance
structures, including accountability to Parliament, and associated
failings in transparency regarding the ECGD's activities. These
concerns underpin the answers we give to the specific review questions,
which we have addressed in turn below.
Section 1: The ECGD's Mission
What specific changes do you think should be made
to ECGD's Mission Statement?
Friends of the Earth believes 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. This means targeting
support towards sustainable activities which will benefit the
poorest people of the world.
Whilst a healthy economy is necessary for sustainable
development, it is now clear that the pursuit of a higher volume
of economic activity can be damaging to the public interest, and
that a key focus of public-sector bodies must be to ensure that
economic activity is of high quality in that it supports social
inclusion, environmental protection and prudent use of natural
resources. Thus is would be inappropriate for the ECGD to continue
to seek to maximise the amount of export business it supports.
The ECGD should take immediate steps to develop
an Ethical Guarantees Policy, embodying a commitment to equitable
and environmentally sound development. This policy should be firmly
anchored in its Mission statement, which should be legally binding.
If necessary enabling legislation should be introduced in Parliament.
This Policy should implement the various commitments made by the
UK Government in various international fora and White Papers to,
inter alia:
"work to assure that development
co-operation and other linkages between industrialized and developing
countries are mutually reinforcing" (OECD DAC, 1996.
Shaping the 21st Century: The Contribution of Development Co-operation)
ensure that "the full range
of government policies affecting developing countries, including
environment, trade, investment and agricultural policies, takes
account of our sustainable development objective" (DFID
White Paper, 1997, Eliminating World Poverty: A Challenge for
the 21st Century)
to promote the transfer of technology
to developing countries to develop their economies using less
carbon-intensive energy resources (Kyoto Protocol to the Convention
of Climate Change, 1997)
to apply environmental considerations
to both domestic and foreign direct investments (G8 Environment
Ministers' Communique, March 1999)
The Mission should address the ECGD's influence
over both the patterns and the nature of flows of Foreign Direct
Investment to ensure that it is directed to countries and projects
where it will contribute to sustainable development.
Would you be Prepared to See a Tax Increase to
Extend the Range and Volume of ECGD's Activities or Support?
Whilst in theory the adoption of a new Mission
and remit might merit an increase in the volume of support offered
by the ECGD, in practice, there is a strong case for curtailing
the range of its activities in such a way as wouldin the
short term at leastreduce the volume of support required.
In this respect there should be no need for an increase in the
public budget of the ECGD. Below we advocate the reform of the
ECGD's default mechanisms to eliminate the creation of unsustainable
debt. This also might merit increased public support, although
we would anticipate that with effective project screening mechanisms
to ensure sustainable development, the rate of defaulting should
be reduced.
What Role Should the ECGD Play in the Credit Insurance
and Export Finance Markets in Relation to the Private Sector?
The sole role of the ECGD should be supporting
productive investments with development purposes onlyleaving
commercially motivated projects to the private sector. This would
not only be consistent with the UK's support for free trade and
fair competition, but with long-standing economic theory which
suggests that subsidisation of exports is economically harmful.
Adam Smith castigated such "mercantilist" economic policies
for favouring a few industrialists at the expense of the working
class and the economy as a whole. More recently the US General
Accounting Office noted that government export-finance assistance
programs "largely shift production among sectors within
the economy, rather than raise the overall level of employment
in the economy. Hence, the jobs figure that the Ex-Im bank reports
may not represent net job gains" (GAO, 1997. Export-Import
Bank: Key Factors in Considering Eximbank Reauthorization. GAOT/T-NSIAD-97-215).
The Thatcher government is reported to have silenced a Treasury
report which reached similar conclusions (Adams, P. 1991. Odious
Debts, Earthscan). Benefits do not necessarily even accrue
to UK shareholders, as ECGD like other ECAs, often subsidises
UK subsidiaries of overseas-based transnationals. Rather than
a mechanism that helps the UK economy, export credits must be
seen as patronage-based subsidies that distort the economy and
sustain uncompetitive enterprises that by their very existence,
starve new competitive and sustainable businesses of capital and
opportunities for growth. A clear example is the financing of
nuclear power stations such as Daya Bay and Quishanthe
sort of projects that are now anathema to commercial banks even
in developed countries. Because the financing terms of deals do
not reflect the real level of risks, there is an illusion of cheap
finance which encourages unnecessary borrowing, inefficient allocation
of capital, waste and even corruption.
However, once limited to a development role,
the ECGD would gain an important educational function. The private
sector can only be expected to promote sustainable development
insofar as the regulatory framework it faces ensures a congruence
between profitability and sustainable development. Although this
is the case, at least in the long term, the private sector has
little experience of operating in such a fashion.
As a public-sector agency, the ECGD can play
two key roles in this respect. First it should demonstrate the
fact that sustainable development can also be profitable, by implementing
standards and procedures as advocated below, thus leading by example,
and helping importers develop experience in such practices. Second
it should help those UK companies involved in this sector develop
their own sustainable development objectives and procedures, both
in the context of specific projects which are public-private partnerships
in respect of their financing, and more generally.
What Can ECGD do to Encourage Private Sector Insurance
and Other Support?
As noted above, we do not believe that it is
the role of the ECGD to promote an increased volume of exports
regardless of their nature. Thus it should not be taking a proactive
role in this activitywith the exception of the promotion
of good standards and governance, as suggested above. Of course,
the refocusing of the ECGD on development-oriented investments,
as advocated above, would have the beneficial effect of minimising
moral hazard for exporters (the likelihood that their decisions
will be distorted because they are not bearing the full costs
of risk), by ensuring that they obtain insurance on private sector
rates and conditions. At present export credits act instead to
reduce market pressures for economic reform and good governance.
How Can ECGD Help Exporters Compete to Win as
Much Worthwhile Business as Possible?
This is a critical issue. A significant amount
of the past business won through ECGD support cannot be considered
worthwhile. The catalogue of existing and potential environmental
and social impacts from projects such as the mines at Ok Tedi
(PNG) and Alumbrera (Argentina), the sale of Hawk jets to Indonesia,
dams at Ilisu (Turkey) and Nathpa Jhakri (India) makes this clear.
We would define "worthwhile" as contributing
to sustainable development, and given such a definition, the ECGD
can play an important role in promoting environmental modernisation
and an ethical transformation in UK business that will equip it
for the competitive environment of the 21st century. In this coming
economic environment international agreements and standards, and
ever more discriminating consumer demands will require businesses
to achieve unprecedented social and environmental standards.
The introduction of sustainability standards
and screening, and active promotion exports of sustainable technologies,
such as renewable energy and public transport, will therefore
help UK companies win future markets. This implies the careful
targeting of available resources by the ECGD.
How Could ECGD Help to Increase the Capacity of
SMEs to Exploit Opportunities Abroad?
Insofar as SMEs with a contribution to make
to sustainable development will have less capacity to market their
products abroad, this is a significant question. The ECGD should
pay particular attention to the needs of SMEs for relatively small
amounts of support, and should collaborate with other bodies,
such as the Regional Development Agencies, seeking to support
SMEs. This is relevant for firms exporting sustainable technologies
such as renewable energy. A recent US study (Institute for Policy
Studies, Friends of the Earth, and the International Trade Information
Service, 1999, OPIC, Ex-Im, and Climate Change: Business as
Usual) found that renewables and alternative energy projects
with significant non-financial benefits were often too small for
ECA support, yet have high up-front costs and would thus benefit
directly from such support.
To support such SMEs better the ECGD should
recruit specialists in small business at both staff and board
(advisory committee) levels. It should also seek to learn lessons
(positive and negative) from the International Finance Corporation's
SME Scale Program with the Global Environment Facility, created
to stimulate greater involvement of SMEs in preserving biodiversity
and reducing greenhouse gas emissions, where the IFC pro-actively
selects institutions to act as intermediaries providing long-term
loans.
How Should ECGD Play a Role in Helping Promote
the Government's Sustainable Development Policy and Take Forward
its Trade and Environment Principles Which Include:
Using the international framework
to resolve global environmental problems;
The development of environment
and trade policies in a framework of good governance;
Trade arrangements with developing
countries being used to promote sustainable development;
Helping to ensure that developing
countries do not reacquire a burden of unsustainable debt?
FOE is pleased that the ECGD is posing this
question. The first step to improvement is recognising the problem.
The ECGD appears to have recognised several aspects of the unsustainability
of its current activities: contributing to global environmental
problems, undermining good governance; distorting trade and stimulating
increased indebtedness. However, the challenge of sustainable
development also includes supporting human rights and promoting
ethics.
Currently the policies and activities of the
ECGD are clearly not "joined up" with those of other
parts of Government. There is a pressing need for the ECGD to
address its lack of coherence with, inter alia:
the Foreign Office's aspirations
for an ethical foreign policyin particular with regards
to support for arms sales to regimes which might use them for
internal repression (such as Indonesia);
the Department for International
Development's goal of poverty elimination;
the aspirations of the Chancellor
and Treasury to resolve the problems of poor countries burdened
with unpayable debts and to reduce the risk of future unsustainable
debts;
the Department of the Environment,
Transport and the Regions' environmental and broader sustainable
development objectives.
To put policy coherence into practice will require
several practical measures: the adoption of formal ethical, environmental
and social standards; country, company and project screening;
transparent project impact assessment procedures; compliance monitoring
and auditing; an independent inspection and dispute mechanism;
sanctions for non-compliance; positive targets for sustainable
development projects; and other governance mechanisms to ensure
transparent and accountable governance.
Ethical, environmental and social standards
The ECGD should adopt a clear and unambiguous
set of mandatory environmental and development standards, reflecting
current best practice in the field. These standards should be
aimed at ensuring, inter alia, that ECGD-backed projects
and exports:
have the minimum impact on the environment;
safeguard the lives and livelihoods
of those directly affected;
has the prior informed consent of
those directly affected, particularly where forced relocation
is involved;
minimise the need for resettlement
and ensure that those resettled are better off than prior to the
project or export; and
permit the full and active participation
of affected people and interested groups in the decision-making
process associated with the project or export.
These standards should be consistent with, or
higher than those required by the World Bank group, the United
Nations Environment Programme (UNEP), the Organisation for Economic
Co-operation and Development (OECD), OPIC and US Exim-Bank. All
of these have demonstrable weaknesses, but are still better than
no standards at all and offer a good basis for improvement.
Country, company and project screening
The ECGD should not offer cover in countries
which consistently abuse human rights. It should not offer support
to companies which are in breach of the OECD's Guidelines for
Multinational Enterprises, nor those proven to have been involved
in bribery or corruption. More broadly, the ECGD should consider
the past human rights, environment and development record of companies
applying for credits or guarantees, and make support conditional
on meeting at least the environmental and social standards that
they would be subject to in the UK. The ECGD should not offer
support for any projects which have no demonstrable development
benefits, and in particular should not support: extractive or
infrastructure projects in pristine or fragile frontier areas
such as primary tropical forests, UN national parks, World Heritage
Sites and IUCN protected areas I-IV; large dams that disrupt natural
ecosystems or the livelihoods of local inhabitants; projects that
would threaten peace and security in a region; nuclear facilities
or arms sales. The ECGD should also require that contracts it
supports have been awarded through open tendering processes.
Effective screening would not only deliver environmental
and social benefits, but ensure that the ECGD did not waste time
and money on considering proposals such as that for the Ilisu
Dam.
Project impact assessment procedures
Whilst some types of project can be categorically
excluded from support, most will require some form of impact assessment
to evaluate their developmental and environmental implications.
Indeed, it is clear that economic appraisal could be improved
too. In 1969 the Pearson Commission (Partners in Development:
Report of the Commission on International Development. Praeger,
New York) reported its concern that export credits often financed
projects whose only "feasibility study available is one prepared
by the equipment supplier" and that borrowing countries pushing
grandiose schemes favoured ECAs because they enforced less rigorous
economic viability tests. Too little has changed. ECAs still rarely
commission or require independent impact assessments, whilst the
moral hazard contingent on ECA support has allowed numerous uneconomic
projects to proceed (such as the ECGD supported Nathpa Jhakri
Hydro Electric Scheme which will generate electricity for only
half the time forecast at almost double the cost).
A transparent and public system of impact assessment
which at minimum both matches up to the requirements of the European
Union directive on environmental impact assessment and the World
Bank's standards for development assessment is recommended. In
particular, the process must rigorously assess alternatives to
the proposed project, including the option of the project not
being implemented. Without appropriate screening, and impact assessment,
ECGD activities risk contravening various multilateral environmental
agreements such as the Kyoto Protocol, the UN Convention on Biodiversity
and the Basel Agreement (on the Transboundary Movement of Hazardous
Waste), and the requirements of these should be explicitly built
into the assessment framework. Strong impact assessment procedures
are an invaluable aid to project design, and thus to reducing
associated financial risk to the ECGD.
Compliance monitoring and auditing
Experience of impact assessment in the European
Union has revealed the need for effective compliance monitoring
to ensure that mitigation measures are implemented and standards
adhered to during construction and operation. Similarly, to ensure
that project and company screening mechanisms are effective requires
compliance auditing. At a minimum, the standards of monitoring
and compliance operated by OPIC are recommended.
Inspection and dispute mechanism
Even with the best assessment and monitoring
procedures, there remains a risk that projects supported by the
ECGD may not live up to the expected standards, or indeed that
the ECGD itself may fail to apply its procedures rigorously enough.
To ensure public confidence in such procedures requires an independent
mechanism to address complaints and concerns raised by affected
populations or public-interest organisations, with adequate powers
and sanctions to resolve disputes. Such a process should be supported
by clarification of the legal right of those affected by ECGD-supported
projects to sue in the UK (and to have access to legal aid so
to do).
Sanctions for non-compliance
Clearly the ECGD needs to be able to take some
sanction against companies which breach its standards or abuse
its procedures. However, at present, the ECGD has no procedures
in place even to debar companies which have been convicted of
malpractice. This is despite the UK having signed the Organization
for Economic Cooperation and Development's 1997 convention on
corruption and bribery. The OECD Convention obliges signatories
to adopt national legislation which makes it a crime to bribe
foreign public officials, subject to both criminal penalties,
and economic sanctions including exclusion from entitlement to
public benefits or aid; and temporary or permanent disqualification
from participation in public procurement or from the practice
of other commercial activities. Monetary sanctions equivalent
to the amount of the contract can also be levied.
The World Bank has already instituted measures
to crack down on bribery. The bank has adopted guidelines pledging
to "declare a firm ineligible, either indefinitely or
for a stated period of time, to be awarded a bank-financed contract"
if the firm is found to have "engaged in corrupt or
fraudulent practices in competing for, or in executing, a bank-financed
contract". So far, the Bank has debarred nine relatively
small companies. The ECGD should follow the lead taken by the
World Bank.
Other mechanisms to ensure transparent and accountable
governance are addressed below in Section 3.
Targets for sustainable development
Whilst measures such as screening and assessment
procedures are essential to ensure that unsustainable projects
are not supported, positive measures are also needed to bring
forward sustainable projects for support. The ECGD should develop
positive strategies for supporting environmental technology and
services, information and communication technology and other sectors
with long-term sustainable development potential, and within construction
and infrastructure, it should strategically prioritise support
for resource efficiency and recycling, embedded renewable energy
and public transport, rather than mining, fossil power, dams and
roads. In the same way as the ECGD provides guarantee funds for
specific countries, it could do so for specific sectors that match
UK expertise with developing country needs for sustainable technologies.
The ECGD should set incrementally rising targets
for positive investmentsfor example, beginning by ensuring
that 20 per cent of power lending goes to renewables by 2005.
To deliver this it can learn from the IFC's environmental project
unit and related funding initiatives such as its "Renewable
Energy and Efficiency Fund". Similarly it could learn from
EBRD's Energy and Efficiency Team, which has triggered EBRD investment
in energy service companies in Poland, and from Ex-Im's Environmental
Exports Program (set up since Ex-Im developed its environmental
standards). This program demonstrates that relevant technical
expertise will be needed in ECGD, and that consistent standards
underpin such programs.
How Should the ECGD Manage its Debt? At Present,
ECGD Manages a Substantial Portfolio of Debt, but is Obliged,
Under Existing Legislation to do so in a Manner, Which Represents
Proper Financial Management to Maximize Recovery of Claims Paid.
ECGD will Write Off Debt Only in Conformity with this Obligation
and Government Policy on Debt
The ECGD must recognise that there is not just
a risk of countries "reacquiring unsustainable debts"but
that many still have such debts, and that Paris Club terms have
yet to address the full extent of the problems (van Voorst in
Friends of the Earth US, 1999. A race to the bottom). Thus
there is an unacceptable risk of ECGD activity exacerbating already
unsustainable debt burdens. If this cannot be removed without
the amendment of existing legislation, then such amendment should
be actively sought.
The UK should commission an independent review
of all ECGD-generated debt according to the new standards and
screening procedures recommended above, and share or write off
liability for those projects that were poorly conceivedin
particular where failure can be seen to arise in company actions
or omissions (especially a failure to take due financial diligence),
or corruption which cannot be blamed on current administrations.
At present we suffer the worst of all worldsdebts
have accumulated, creating pressure for structural adjustment
(with associated social and environmental costs). But however
bad things get, only a tiny fraction of debt is ever cancelledmost
is merely rescheduled. As a result Northern taxpayers go on bearing
some costs, whilst Southern people bear the majority. The only
beneficiaries are the exporters (their shareholders) and of course,
the ECAs!
In the future, with a remit of sustainable development,
there is a strong case that liabilities from failed projects should
be borne by exporters' governments, and not reallocated to the
importer under Paris Club arrangements. This will also remove
moral hazard at the ECGDand encourage a more honest appraisal
of risk and benefit. There are clear precedents for such an approach.
In the case of EDC support for a Candu sale to China the Canadian
Government has accepted (in advance) responsibility for this loan
in the case of default. The ECGD itself is involved in a similar
arrangement in the case of the Rolls Royce and Allen Steam contract
with Bilkent University for power generating equipment (Jan 1999).
What Factors Should ECGD Consider When Determining
the Availability of Cover for a Country?
As noted above, the ECGD should screen countries
according to their human rights record. Thus, like OPIC, the ECGD
should not offer cover in countries such as China or Burma. There
may also be a case for screening out countries where markets are
not subject to effective regulation to ensure fair competition,
accountability and transparency. In such circumstances the availability
of export credits simply risks slowing down economic reform.
Should ECGD Distinguish Between Different Types
of Business When Allocating Cover for Some or All Countries According
to their Economic Circumstances?
See above.
Section 2: Striking the Balance
Friends of the Earth is concerned that many
of the "trade-offs" suggested in this section are false
dichotomies, which may be unhelpful. Nonetheless we have endeavoured
to fit our views into the framework offered.
Risk vs Cost
This question is posed in a way that presupposes
the desirability of "greater amounts of trade" without
regard for the increased social and environmental risks created
by such an simplistic approach to trade.
Moreover, taxpayer risk can be managed in different
ways which do not preclude support for desirable sustainable projects.
Improved screening and assessment procedures would go a long way,
whilst withdrawing from the "race to the bottom"
will help the control financial and political risks associated
with projects. The same mechanisms should help reduce the risk
of creating more unsustainable debt.
Sustainable Development vs Comprehensive Support
This question is similarly misleading. No UK
exporter or investor can afford to ignore the imperative of sustainability.
If they do, then they will not offer much employment or wealth-creation
in the future. Therefore ECGD support for the transition to sustainability
will be to the longer-term benefit all UK companies.
Debt Forgiveness vs Cost
Friends of the Earth is of the view that the
right approach would be for the tax-payer to bear the current
cost of debt forgiveness, especially as this is a relatively small
cost (as little as £6 million per year for the next 30 years
for the HIPC countries, given realistic assumptions about likely
repayment rates). Such a level of forgiveness would increase economic
certainty in those countries and ensure a firmer foundation for
future ECA support. Reforming the sovereign guarantee arrangements
as suggested above would also impose more potential costs on the
UK taxpayerbut less on the poor of countries who cannot
afford to take on that burden.
Ethics vs Comprehensive Support
In our view, the whole point of an "ethical
foreign policy" is that such a discriminating approach would
be applied such that the UK would "once again be a force
for good in the world" (as Robin Cook put it, 12 May
1997).
Without effective ethical screening, ECGD support
allows companies to largely ignore the financial risks of dealing
with dictators and undemocratic governments, thus effectively
helping to sponsor bad governments and crony capitalism. The Indonesian
regime of President Suharto is perhaps the most dramatic example
of one in which a succession of ECA supported projects propped
up the regimes's system of economic and political monopolies,
and indeed provided some of the weapons used by Indonesian armed
forces to protect corporate interests in unsustainable exploitation
of mineral and timber resources (see Soentoro & Fried in Friends
of the Earth US, 1999. A race to the bottom).
On the other hand, at present the majority of
ECGD support goes to a handful of countriesthe main recipients
of FDI inflows. The reorientation of the ECGD to a development
role should result in a broader distribution of support across
importing countries.
Unilateralism vs Competitiveness
Once again the question poses a false dichotomy.
There are clear potential benefits in the ECGD taking leadership
on the conditions of support. There are real benefits to be gained
by UK companies in being "first-movers" in adopting
environmental and ethical standards that match consumers' future
expectations. As Ex-Im has found, new standards have presented
new opportunities. Ex-Im has had unilateral standards since 1992
(and an environmental review process before that). There has not
been appreciable harm to the US economy as a result. Indeed, in
the light of the analysis presented earlier, theses standards
have probably helped the US achieve its unparalleled record of
job-creation in recent years.
However, the race to the bottomseen in
the preparedness of other ECAs such as the EDC (Canada), ERG (Switzerland)
and Hermes (Germany) to underwrite the Three Gorges Dam after
it was rejected by Ex-Imstill create pressures to skimp
on standards, in the face of intense political lobbying by industrial
special interests. The sooner other ECAs, including the ECGD,
follow Ex-Im's lead, the sooner these pressures can be relieved.
The ECGD should also take a leadership role in accelerating ongoing
EU and OECD initiatives to develop common standards.
Last Resort Cover vs Cost
The ECGD clearly has an "insurer of last
resort" rolefor appropriate projects.
Section 3: Status and Structure
Given the recommendations for radical reform
made above, Friends of the Earth believes that a development-oriented
ECGD should remain in the public sector. However, alongside the
mission and procedural reforms suggested above, there is a clear
need for governance reforms under three broad headings: transparency,
accountability, and structures of governance.
Transparency
In the absence of public sector oversight and
market discipline, ECAs are a breeding ground for corruption.
Some minimum standards of transparency are recommended:
Advance notification on pending applications,
detailing the type of project, the amount guaranteed, the companies
involved, the country involved and likely human rights, environmental
and development impacts (again following the lead of the World
Bank in this respect);
Release of all documents relevant
to the human rights, environmental and development impacts of
ECGD-supported projects and to make translations available in
the language of project affected people; and
A requirement on the ECGD to consult
with affected communities and interested public interest groups
prior to any decision being taken on approval of a project and
to demonstrate how account has been taken of the issues raised.
Accountability
At present the ECGD is not even fully accountable
to Parliament. At least one MP seeking detailed information on
the ECGD's activities has been "fobbed off". At a minimum,
there should be a requirement on the ECGD to report annually to
the UK Parliament and for the Government to hold a debate on the
report. This should be reinforced by measures to broaden the base
of the ECGD's Advisory Council, by including those with an expertise
in human rights, environment and development issues.
Steps should also be taken to formalise cross-departmental
responsibility for the ECGD, as several departments have a clear
interest in its role and activities, it is inappropriate that
it is accountable to only onethe DTI. At a minimum, formal
accountability to DFID and the Foreign Office should be imposed.
In addition ECGD's relationship with the DETR and the Treasury
should be clarified.
Governance structures
The ECGD's governance procedures are also self-referential
and unaccountable to the public. No minutes of the Advisory Council's
deliberations, for example, are made public and its members are
drawn from a narrow circle, many of who have links with companies
which receive the bulk of ECGD support. No representatives from
development or environmental bodies sit on the Council.
As noted above, an Independent Inspection and
Dispute Panel should also be established.
SECTION B
This response is submitted on behalf of Friends
of the Earth (England, Wales and Northern Ireland) (FOE). It has
been prepared by Duncan McLaren (Senior Research Coordinator).
FOE is a public-interest environmental group and part of an international
network of such groups (FOE International) in around 60 countries.
Many FOE groups have encountered the ECGD and other ECAs as agencies
supporting projects of environmental or social concern. For some
time several FOE groups have been part of an international NGO
coalition seeking ECA reform.
Friends of the Earth
October 1999
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