Select Committee on International Development First Report

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 International—the 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 network—in both Northern and Southern countries—regarding 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 only—leaving 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 policy—in 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 Turkey—currently 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 one—the 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 conceived—in 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 worlds—debts 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 cancelled—most 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 ECGD—and 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).

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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

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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 international—the 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 network—in both Northern and Southern countries—regarding 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 would—in the short term at least—reduce 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 only—leaving 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 Quishan—the 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 activity—with 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 policy—in 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 investments—for 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 conceived—in 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 worlds—debts 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 cancelled—most 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 ECGD—and 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 taxpayer—but 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 countries—the 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 bottom—seen 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-Im—still 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" role—for 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 one—the 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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Prepared 20 December 1999