APPENDIX 11
Memorandum from Saferworld
1. INTRODUCTION
Saferworld welcomes the opportunity to comment
on the role and operations of the Export Credits Guarantee Department,
provided by the Government's Review and the Inquiry announced
by the Select Committee.
Saferworld particularly welcomes the intention
expressed by the Secretary of State for Trade & Industry to
look at how the ECGD can help the Government to "achieve
its wider sustainable development objectives" and "continue
to play a leading role in helping countries emerge from debt burden."
1 This intention is expressed against the background of the Mauritius
Mandate commitments by the Chancellor to:
". . . ensure that export credits for poor,
highly indebted countries will only support productive expenditure.
The UK will seek a firm international agreement that all officially
supported credits for poor countries are focused in this way."
2
Moves by the G7, the World Bank and the IMF,
partly in response to the lead given by the UK, towards formulating
strategies aimed at debt forgiveness, poverty reduction and sustainable
development, are also noteworthy in this regard, particularly
the recent support expressed by Michael Camdessus, the IMF Managing
Director, for:
"abolishing the provision of export credit
for military purposes"3
Within this context, Saferworld's particular
concern is with the support given by ECGD to exports of arms and
related defence equipment.
2. PAST PRACTICE:
THE GROWTH
IN EXPORT
CREDITS FOR
ARMS
2.1 New Guarantees
Very substantial sums of public money are involved
in supporting the export of defence equipment, amounting to 24
per cent of all the guarantees issued by ECGD in the last financial
year for which details are available (1997-98). 4 With the exception
of the dramatic escalation in the level of ECGD support for arms
sales in 1992-93 to 1993-94, that current level of support is
in keeping with the proportion of total exposure allocated to
defence sales over the last decade—as shown by Table 1 and
Figure 1. Between 1989-90 and 1997-98 annual export credit guarantees
for arms averaged £819 million. In that period military exports
usually accounted for less than 3 per cent of total UK exports
per annum, yet ECGD provided 25 per cent of their credits to defence
related exports.
However, it is only since the late 1980s that
such a high proportion of export credits have been made available
for defence exports. In the period 1980-81 to 1987-88, for example,
the defence proportion only accounted for around 10 per cent on
average.
2.2 Claims
Not only does the ECGD provide an effective
subsidy for UK defence exports, but states sometimes default on
payments for defence (and civil goods)—because of an economic
or political crisis—leaving the British taxpayer to foot
the bill.
Table 1
ECGD SUPPORT DEVOTED TO DEFENCE EXPORTS,
1989-90 to 1997-98 (CURRENT PRICES)
| Defence as | Defence
| Total |
| % of total | £million
| £million |
| 1989-90 | 19 | 378
| 1,959 |
| 1990-91 | 28 | 640
| 2,300 |
| 1991-92 | 13 | 276
| 2,095 |
| 1992-93 | 42 | 1,591
| 3,802 |
| 1993-94 | 48 | 1,973
| 4,086 |
| 1994-95 | 18 | 543
| 3,005 |
| 1995-96 | 21 | 841
| 4,062 |
| 1996-97 | 14 | 374
| 2,613 |
| 1997-98 | 24 | 763
| 3,166 |
| Annual Average | 25
| 819 | 3,009 |
Source: ECGD Annual Reports, various years.
Source: ECGD Annual Reports, various years.
This was certainly the case with regard to export credits
to Iraq, where defaults on loans for arms exported to Iraq in
the 1980s have cost around £600 million of public money.
Moreover, independent research by the Centre for Defence Economics
has estimated the cost of meeting claims for ECGD support for
defence exports over the period 1984-85 to 1995-96 at £239
million per annum. 5 For the period 1995-96 to 1997-98 the average
annual value of claims payments in respect of defence business
was substantially lower at £65.2 million6—and evidence
in the latest ECGD annual report suggests that it is the civil
market in the former Soviet Union which now appears to be the
main market for claims. But even if recovery rates for defence
business have improved to this extent on a sustained basis, this
spending on defence claims continues to represent a very substantial
charge upon the public purse.
3. REASONS FOR
CONCERN
3.1 The absence of transparency and accountability
There is currently a serious deficit in transparency and
accountability in ECGD reporting and operational procedures. The
ECGD Annual Report is wholly inadequate in the provision of detailed
information on credits for defence exports. In the 1997-98 edition,
for example, the description of the support for defence exports
takes up less than half a page (in a report of 63 pages). There
is also no data in the report on the amount of losses that can
be directly attributed to defence sales, even though total ECGD
exposure is disaggregated in this way (and such information has
been provided in answers to parliamentary questions).
In addition to the opaqueness of information on defence export
credits, there also seems to have been little effort to make ECGD
decision-making more accountable to Parliament, despite criticism
of existing procedures in the Scott Report. Scott documented a
serious error of judgement in the decision to underwrite export
contracts to Iraq to the extent seen during the 1980s, not only
because that country defaulted on its obligations, but also because
British forces subsequently faced Iraqi forces equipped at UK
public expense.
Saferworld considers it of great importance that the lessons
arising from the Scott Inquiry are fully assimilated and applied.
In the particular case of Iraq, a sustained error of judgement
was compounded and perpetuated by its systematic concealment from
Parliament and the public. In its own review of the lessons of
the Scott Report, Saferworld argued in March 1996 that:
". . . information relating to export credits allocated
for defence purposes should be notified to Parliament on a yearly
basis, integrated into a process of disclosing information to
Parliament pregarding major arms and dual use contracts. . . Furthermore
in view of the fact that military equipment was also funded by
export credits allocated to Iraq for civil contracts, details
of civilian contracts secured through ECG should also be made
available for Parliamentary scrutiny." 7
In short, commercial confidentiality for defence export credits
should be accorded a lower priority than public accountability
and thorough scrutiny by Parliament—a view shared by Scott:
"Of greater importance, in my opinion, was, and is, the
right of Parliament and the public to be informed and to require
Ministers to account publicly for the manner in which public money
is being utilised." 8
3.2 Tax payers' subsidy of arms exports and the ethical
dimension in UK foreign policy
The interest rate subsidies provided by the ECGD allow overseas
buyers of British defence equipment to benefit from cheap loans,
while the insurance cover provided by ECGD guarantees compensation
to exporters in the event of a buyer defaulting on payments. The
facts that these provisions act as a subsidyfor UK defence exports
is readily acknowledged. Reporting in 1989, for example, the national
audit office stated:
"The willingness of United Kingdom exporters to bid for
overseas defence contracts and of the lending banks to provide
loan finance often depends on the availability of Export Credits
Guarantee Department cover and fixed interest rates which can
have the effect of providing a subsidy for sales to developing
countries." 9
If it is indeed the case that without these provisions certain
arms exports would never take place, then there are many compelling
ethical, security and economic arguments for foregoing such contracts.
In the past, these arguments have tended to be over-ridden by
defence-industrial interests. In the case of Iraq, for example,
human rights concerns and implications for regional stability
were clearly over-ridden by such interests. Similar concerns were
expressed regarding arms exports to Argentina at the time of the
Falklands War and are currently being raised in connection with
Indonesia. Particular concern attaches to the £691million
exposure with regard to underwritten defence related exports to
Indoniesa. 10
3.3 Opportunity costs: squeezing out civil exports?
It seems likely that the large proportion of export credits
granted to military contracts will have a negative impact on civil
exports. In 1997-98, for example, the total number of exporters
(both civil and military) guaranteed cover was 199 (up from 162
in the previous year). If the proportion of cover allocated to
defence contracts (often involving large multinational suppliers)
were to be reduced, more money could be made available to support
civil exporters and especially small and medium sized businesses.
4. RECOMMENDATIONS
The UK Government should take a lead by initiating multilateral
negotiations to exclude defence and dual use equipment sales entirely
from support from ECGD. 11 In the context of the Government's
objectives in areas such as debt relief, development and a more
ethical foreign policy, it is inappropriate to use public funds
to support unproductive spending on arms, military, security and
police equipment, which inevitably has the effect of squeezing
out spending on civilian purposes and associated imports, especially
to those countries which are most in need of underwriting.
Pending the phasing out of export credits for arms exports,
such credits should require specific Parliamentary approval and
an interim ceiling should be introduced for the defence component
of export credits, e.g. a ceiling of 10 per cent for the share
of defence in export credits.
Since subsequent events in Indonesia have borne out Scott's
concerns, Saferworld reiterates its call for a full Parliamentary
scrutiny process, through public hearings by the relevant Select
Committee, of ECGD's year-on-year operations as the minimum necessary
to meet legitimate public interest in this area. To facilitate
such scrutiny, the 1991 Export Credit Guarantee and Investment
Act should be amended to require prior notification of any proposed
military credits to Parliament.
Future ECGD Annual Reports should provide clear, country-by-country
statements on the level of annual export credits for military
sales, and the levels of claims and recoveries related to credits
for military sales. Such data is already provided broken down
by region but should be made available by country. Information
on the value of arms exports per destination country is already
available from customs data. There should be no obstacle in principle
to providing similar information relating to export credit guarantees.
FOOTNOTES
1 Statement in reply to a written Parliamentary Question
by David Borrow MP.
2 HM Treasury news release 10 August 1997.
3 Address by Michael Camdessus, Chairman of the Executive
Board and Managing Director of the IMF to the Board of Governors
of the Fund Washington DC, 28 September 1999.
4 ECGD Annual Report and Trading Accounts, 1997-98.
5 Dr Stephen Martin, "Limiting UK Defence Exports",
Centre for Defence Economics, University of York, Research Monogram
No 10, July 1998.
6 Written Answer to Parliamentary Question from David
Lock MP, 4 November 1998.
7 "The Scott Report: Implications for UK Export
Policy", Saferworld, March 1996.
8 Report of the Inquiry into the Export of Defence
Equipment and Dual-Use Goods to Iraq and Related Prosecutions,
House of Commons Paper 115, London: HMSO 1996, paragraph, D2.119.
9 National Audit Office, Ministry of Defence: Support
for Defence Exports, HC 303, London: HMSO, 10 April 1989,
29.
10 Response to Parliamentary Question from Ann Clwyd
MP, 27 July 1999.
11 This is already the case in some countries, including
Austria, Switzerland (although dual-use goods can be underwritten)
and the US (except in special circumstances, such as arms exported
for anti-narcotics purposes).
Saferworld
September 1999
|
