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
| Country | Per cent
|
| all developing countries—average
| 15.7 |
| over 50 per cent | Iran |
78.4 |
| Lesotho | 56.8
|
| Algeria | 54.6
|
| Gabon | 54.2
|
| Nigeria (HIPC) | 53.4
|
| 40-50 per cent | Congo Brazzaville (HIPC)
| 42.9 |
| 30-40 per cent | Russian Federation
| 37.7 |
| Congo, Democratic Rep (HIPC)
| 33.0 |
| 20-30 per cent | Cameroon (HIPC)
| 26.6. |
| Jordan | 25.8
|
| Angola (HIPC) | 21.8
|
| 10-20 per cent | 18 HIPC countries
| |
| under 10 per cent | 15 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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