Select Committee on International Development First Report


APPENDIX 14

Memorandum from CAFOD—Catholic Fund for Overseas Development

1.  INTRODUCTION

  1.1  CAFOD is the development agency of the Catholic Church in England and Wales, supporting development and relief programmes in four continents. Export credit guarantees are of interest and concern to CAFOD for three reasons:

    (1)  Export credit guarantees and insurance are an important element in international trade and investment, with significant potential to facilitate productive investment in, and trade with, countries that are poorer and are therefore regarded—at least potentially—as being a high risk market, and avoided for this reason by private sector insurers.

    (2)  When activated by failure to make required payments by the purchaser, export credit guarantees add to the debt burden of the country concerned and ultimately, as part of that burden, hold back development.

    (3)  Export credit guarantees are used to facilitate arms purchases. These, at best, form part of the legitimate defence needs of importing states and, preferably, never need to be used. All too frequently, however, they fuel and facilitate internal conflict, regional arms races and external aggression, divert resources from productive investment and welfare and set back development and economic growth for years.

  1.2  Growth in the use of export credit guarantees has followed growth in world trade and foreign direct investment. According to World Bank figures, export credit guarantees in general are directed mainly at the most buoyant emerging markets, with the top 10 recipients receiving nearly 70 per cent of new commitments in 1996 and the top 20 more than 80 per cent.[13] Export credits are an ambiguous development tool. For exporters and originators of foreign direct investment some form of insurance is clearly necessary, especially when transacting business with higher risk developing countries. The initiative for the guarantee, however, clearly comes from the exporter and not from the country to which the export is being made or where the investment is sited. The export or project may or may not increase productive capacity or represent a "pro-poor" investment. Without some sort of export or investment guarantee or insurance, however, it might be impossible for a developing country regarded as a poor risk to make any significant imports or to attract foreign direct investment without paying in cash.

  1.3  There is clearly an element of competition between export credit guarantee agencies in exporting countries. Many successful contracts have depended, not on the intrinsic merits of an investment or project proposal in terms of quality or cost, but on the financing package which has accompanied it. In this sense the provision of export credit and investment guarantees is the result of an exporter-driven search for business rather than a need on the part of the borrower for funding. One commentator has identified five main problems arising from export guarantees: excess flows, inappropriate projects, design weaknesses, overpriced goods and corruption.[14]

  1.4  In 1996 the Development Assistance Committee of the OECD, drawing on the conclusions of the series of UN Conference since the late 1980s, agreed international development targets to be achieved by 2015. This has encouraged governments of donor countries together with international institutions to scrutinise, in addition to their specific overseas development policies, their trade, agriculture and financial policies for impact on developing countries and coherenece with the targets. The ECGD, which with £3 billion worth of policies a year—roughly the equivalent of the UK's international development budget—has added to the debts to the UK of a number of countries, should also examine its own policies and practices with regard to coherence with the international development targets. CAFOD welcomes the Secretary of State for Trade and Industry's statement that the Review of the ECGD "should look at how it can help the Government achieve its wider sustainable development objectives as the UK continues to play a leading role in helping these countries emerge from debt and poverty burdens and return to the international trading community."[15]

2.  AIMS AND OBJECTIVES OF THE ECGD[16]

  2.1  The Aims and Objectives of the Export Credit Guarantee Department published by HM Treasury in July 1998 make clear that its main purpose is to help UK exporters and investors win business overseas. The one consideration which is not linked to overseas investment or export promotion is the rider in Objective 3 that recovery of ECGD debt should be "consistent with the Government's policy on debt forgiveness".

  2.2  CAFOD recommends that the Aims and Objectives of the ECGD should contain specific references to the Government's commitment to an ethical foreign policy and to wider development objectives as set out in the DFID White Paper, Eliminating World Poverty: A Challenge for the 21st Century, in November 1997.

3.  DEVELOPMENTAL CRITERIA

  3.1  In the Mauritius Mandate of September 1997 the Chancellor of the Exchequer said "the UK will 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." This constitutes a recognition on the part of the Government that developmental criteria should be used to inform decisions regarding the allocation of export credit. There is no reason why this proposal should not be extended to other developing countries not currently regarded as poor and heavily indebted. CAFOD recommends that this criterion should be extended to all those countries classified as Low and Low Middle Income economies.[17] Developmental criteria are as relevant for Low Middle Income countries where a significant proportion of the population is classified as extremely poor, that is, living on less than one dollar a day.

  3.2  CAFOD has not seen the Treasury definition of "productive expenditure" but would support an interpretation which would include infrastructure and exports and investments related to the health and education sectors together with those that have a more direct connection with production and livelihoods. CAFOD therefore welcomes the ECGD interpretation of productive investment as "expenditure which is deemed to be socially developmental and economically productive",[18] which is sufficiently flexible to encompass all these forms of investment.

  3.3  This would mean, among other things, that guarantees for arms exports to those countries could not be provided by the Export Credits Guarantee Department—a measure that CAFOD would support, although CAFOD does not oppose arms exports in all circumstances.

  3.4  In addition the ECGD should be required to produce a public "Developmental Impact Statement" for guarantees above a certain threshold sum. This threshold should be proportional to government revenue in the recipient country. For some smaller Low Income countries a £1 million purchase or investment will be greater than 1 per cent of government revenue and the decision to buy equipment or make an investment for that sum will have signifcant opportunity costs. Such an investment or purchase would merit close scrutiny on developmental grounds. In contrast, the government revenue of China, a very poor country with a very large economy, is £33.5 billion[19] and an arbitrary £1 million threshold would not be appropriate. In general, the relevance of, and need for, a developmental impact statement will be proportional to the size of the export order or investment. ECGD provides significant support to exports and investments in some very poor countries: Russia, Indonesia, Philippines and Thailand, all Low Middle Income Countries, have figured in the list of ECGD's top 10 markets in the three years to 1997-98. China, Ghana (also a Heavily Indebted Poor Country), Pakistan and Vietnam—all classified as low Income Countries—have also appeared in the top 10 markets list in the same period. The "Developmental Impact Statement" would apply to all export and investment guarantees above these threshold sums to Low and Low Middle Income countries and would constitute the ECGD's official statement regarding the developmental purpose of the export or investment in question.

  3.5  The ECGD's Overseas Investment Insurance (OII) scheme appears to be a creative response to the difficulty which low income countries have in attracting productive investment from the private sector or mixed investments involving both private and public sector funds. Insofar as OII reduces the volatility of investments and loans, by facilitating investment and discouraging overseas investors from precipitately withdrawing from poor countries, this scheme is to be commended. The ECGD should explore further how the OII can be used to encourage more stable, longer term flows, particularly foreign direct investment, to Low Income countries. We note, however, that currently the list of countries where OII scheme insurance has been extended contains only seven HIPC or Low Income countries as against nine upper Middle Income countries, six Low Middle Income countries and one High Income country.[20]

4.  ETHICAL CRITERIA

  4.1  The Government has an accepted general responsibility to promote human rights and not to excacerbate or provoke internal or external conflicts and to ensure that arms exports from the UK are consistent with this responsibility. This means in practice that arms exports to countries with records of violation of human rights or internal instability, or those involved or likley to be involved in local or regional conflicts should not be permitted and should not therefore receive ECGD guarantees. The consistent implementation of the EU Code of Conduct on Arms Exports by the UK and other EU member states would resolve some of the ethical issues relating to arms exports.

  4.2  CAFOD does not believe that the scrutiny and control of arms exports should be accomplished by means of decisions by the ECGD whether to guarantee payment of the loan which finances particular contracts. The fact remains, however, that the vigorous promotion of arms exports by the UK through the Defence Exports Services Organisation has resulted in 30 per cent of UK export credits going to defence for the period 1990-95 and 25 per cent in the five years from 1993-94 to 1997-98.[21] This compares—for 1993—with 1 per cent of German export credits and 21 per cent for France[22] In making this comparison, however, we note that the share of defence exports and projects in ECGD's overall business varies considerably from year to year and this is likely to be the case for other countries which export defence equipment.

  4.3  The application for the Mauritius Mandate "productive investment" criterion to a much wider range of developing countries (the Low and Low Middle Income economies) would include several to which arms exports have been permitted in the past and would therefore eliminate from consideration a number of countries (including Indonesia) which might raise ethical issues.

5.  EXPORT GUARANTEE DEBT

  5.1  If an export or investment guarantee is activated the liability owed to the private sector in the exporting country passes to the public sector and is added to the total stock of official bilateral debt. The sums involved—and these arise from export credits from all sources both bilateral and multilateral—are significant, and should prompt a rethink of the criteria which govern the provision of export credit guarantees. The international community is now placing enormous emphasis on the development targets. The World Bank and the IMF are insisting that in order to be eligible for debt reduction under the HIPC initiative governments must draw up poverty reduction plans. It is logical that official export credit guarantee agencies too should contribute to the achievement of these targets by measuring the exports and investments which receive the guarantees against the IDT objectives. There is now a move on the part of donor countries and institutions towards the position that there should be no further lending at commercial rates to heavily indebted poor countries in order to prevent them from falling into further debt crises in the future and that all development finance should be in the form of grants. It is important that export credit guarantee agencies of the major exporting nations should not themselves contribute to future unsustainable debt.

  5.2  There is now consensus that the responsibility for unsustainable debt is shared between borrowers and lenders. For this reason ECGD, before agreeing to commitments that could potentially add to a country's debt burden, should look at that country's debt management capacity and ask whether the commitment which is being entered into is coherent with an overall debt management strategy. This should be part of normal commercial logic but acquires an additional development dimension when the overall debt and debt servicing commitments of very poor countries are taken into account.

  5.3  As the table below shows, export credit debt makes up more than 10 per cent of debt of a majority of the heavily indebted poor countries.
Export credit debt as percentage of total debt CountryPer cent
all developing countries—average 15.7
over 50 per centIran 78.4
Lesotho56.8
Algeria54.6
Gabon54.2
Nigeria (HIPC)53.4
40-50 per centCongo Brazzaville (HIPC) 42.9
30-40 per centRussian Federation 37.7
Congo, Democratic Rep (HIPC) 33.0
20-30 per centCameroon (HIPC) 26.6.
Jordan25.8
Angola (HIPC)21.8
10-20 per cent18 HIPC countries
under 10 per cent15 HIPC countries

Source: World Bank, World Development Finance, 1999—country tables.

6.  TRANSPARENCY

  6.1  As a UK government department relating both to the UK businesses and to developing countries, the ECGD should be prepared to make public its individual country policies and justify its decisions against explicit developmental and ethical criteria. The addition by the Chancellor of the Exchequer, and latterly by the Secretary of State for Trade and Industry, of wider developmental considerations in ECGD's mandate has formally widened the circle of ECGD's stakeholders to include the "development community" in general. This requires in principle that relevant documentation such as studies and assessments of projects or large contracts on which decisions to approve or withhold guarantees are based should be publicly available together with a full list of projects and exports which ECGD has supported with guarantees. It is only through such information that DFID, development specialists and others will be able to form judgements about the way in which ECGD is managing the inevitable tensions between commercial advantage for UK exporters and investors and developmental and ethical criteria. Annual reports should comment on performance against developmental and ethical criteria.

SUMMARY OF RECOMMENDATIONS

  1.  ECGD should include formal developmental and ethical criteria in its Aims and Objectives.

  2.  Guarantees and insurance for business with Low and Lower Middle Income countries should be restricted to "productive investment".

  3.  Guarantees and insurance for investment and exports above certain threshold amounts in Low and Lower Middle Income countries should be backed by a "developmental impact statement".

  4.  A country's overall debt management capacity and strategy should be one of the criteria used by the ECGD for underwriting business in that country.

  5.  Studies and assessments which back decisions to provide guarantees for large projects or export orders should be publicly available. ECGD should publish a full list of exports and projects which it has supported.

  6.  The ECGD's annual report should comment on performance against developmental and ethical criteria in its Aims and Objectives.

CAFOD

October 1999


13   World Bank, Global Development Finance 1998, Analysis and Summary Tables, p 56. Back

14   Fues T. Reforming export guarantee systems: challenges ahead for Northern NGOs, 1994, cited in Eurodad, Debt-creating aspects of export credits, Paris, 1999, mimeo. Back

15   Written parliamentary reply by the Minister for Trade and Industry, ECGD Press Statement, 1 August 1999. Back

16   Aim
To help exporters of UK goods and services to win business and UK firms to invest overseas, by providing guarantees, insurance and re-insurance against loss.
Objectives
To help UK companies win as much worthwhile export business as possible where there is benefit to the UK economy as a whole.
To seek to maintain the competitiveness of UK exports by ensuring as far as practicable a "level playing field" internationally in relation to Government-supported Export Credit Agencies.
To recover the maximum amount of debt in respect of claims paid by ECGD in a manner consistent with the Government's policy on debt forgiveness. 
Back

17   Low Income economies are those in a GNP per head of less than $785 per year and Low Middle Income economies between $785 and $3,115 per year. World Bank, World Development Indicators 1998, p xxiv. Back

18   ECGD Annual Reports and Trading Account 1997-98, HMSO, p 13.  Back

19   World Bank, World Development Report 1998-99, Tables 1 and 14. Back

20   ECGD, op cit, p.20. Back

21   ibid p 6. Back

22   Cooper, Neil, The Cost of UK Defence Exports, p 13 (Department of Politics, Plymouth University), mimeo, 1999. Back


 
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Prepared 20 December 1999