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Session 1999-2000
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Delegated Legislation Committee Debates

Draft Export and Investment Guarantees (Limit on Foreign Currency Commitments) Order

Second Standing Committee on Delegated Legislation

Tuesday 18 July 2000

[Mr. George Stevenson in the Chair]

Draft Export Guarantees (Limit on Foreign Currency Commitments) Order 2000

10.30 am

The Minister of State for Trade (Mr. Richard Caborn): I beg to move,

    That the Committee has considered the draft Export and Investment Guarantees (Limit on Foreign Currency Commitments) Order 2000.

I welcome you to the Chair, Mr. Stevenson. This is the first time that I have had the privilege of serving under your chairmanship, but I understand that you are a firm but fair Chairman. I hope that you will match that description this morning.

The order is proposed to be made under section 6(4)(a) of the Export and Investment Guarantees Act 1991. It will raise the limit regulating the Export Credits Guarantee Department's foreign currency commitments on its insurance activities from 25,000 million of special drawing rights to SDR 30,000 million. The 1991 Act allows the limit to be raised by a maximum of SDR 5,000 million up to three times. The proposed increase will be the third and final increase.

I admit that I did not know what an SDR was worth, so I asked my officials, who informed me that one SDR is worth 88p in the pound. The SDR is determined using a basket of currencies and is a unit used by the International Monetary Fund. Sometimes, it is good to know exactly what we are talking about.

At the middle of the month, the ECGD's foreign currency commitment stood at SDR 22.2 billion. That represents a substantial increase on the total of SDR 19.4 billion at the start of the 1999-2000 financial year and leaves less than SDR 2.8 billion of head room for supporting new commitments. The proposed increase is therefore vital to ensure that the ECGD has sufficient capacity to meet the needs of United Kingdom exporters in securing major overseas contracts.

The assumption of financial commitments is at the heart of the ECGD's business. The ECGD is not a lender; it encourages UK exports by insuring banks and exporters against the risks of not being paid. The ECGD also provides financing support to the banking system to enable UK exporters to offer overseas customers fixed-interest loans at market-related rates of interest on competitive terms in line with internationally agreed guidelines. The ECGD balances the needs of UK exporters and banks with the equally legitimate needs of the public purse. It does not compete with private sector insurers. It complements them by providing insurance for longer-term and higher-value projects that the private sector cannot normally cover.

The ECGD continually tries to identify and develop new and innovative ways of assisting exporters in winning overseas business. The ECGD is at the forefront of developments in export finance and works in close partnership with banks and exporters. Through its cover for UK exporters of capital goods and projects, the ECGD benefits hundreds of smaller companies as subcontractors and further benefits the UK economy. The increase will ensure that UK project and capital goods exporters can continue to bid for major foreign currency contracts overseas.

The fact that a further increase in the foreign currency limit is being sought only two years after the previous request reflects the continued success of our exporters. Last year, despite the effects of the economic problems in south-east Asia, the ECGD issued guarantees worth more than £5 billion to cover exports to more than 40 countries. That was the highest total for 15 years. The Government are determined for such success to continue.

A further reason for the increase is technical and it reflects trends towards currency financing in the international marketplace. The ECGD gives cover in a number of foreign currencies, including the US dollar, the yen and the deutschmark. It is leading efforts to ensure that the local currency is used in a number of transactions. The Botswana pula and the Egyptian pound are being used, albeit in small amounts, which collectively add up to about 2 per cent. of the total SDR portfolio. Nevertheless, encouraging use of the local currency is a move in the right direction. The ECGD deserves credit for developing that for its own facility and for trying to encourage other export credit agencies to do the same.

Guarantees are now being underwritten in euros, which would be set against the foreign currency limit. Last year, more than 70 per cent. of the ECGD's support for credit business was underwritten in foreign currencies. As a result, while the sterling limit is under no pressure at all, liabilities against it are declining. Less than SDR 2,800 million remains within the current limit of SDR 25,000 million.

The remaining limit is unlikely to be sufficient for more than a few months. Given the large scale of projects under consideration by the ECGD, it could be exhausted quickly. UK companies are bidding or preparing to bid for a large number of contracts worldwide. It is therefore important that the increased foreign currency limit allowed under the Act is put in place now to meet that potential demand. As international competition for orders becomes ever fiercer, it is vital that ECGD support remains viable and available to underpin the payment risks involved. The existing currency limit will be reached soon, so it is sensible to take action now.

I stress that increasing the limit, as proposed, will not in itself involve additional expenditure for the taxpayer. The ECGD's operations showed a positive cashflow to the Exchequer in 1999-2000 for the fifth successive year. The proposal will allow the ECGD to continue working with exporters and banks to support a greater volume of export contracts denominated in foreign currency, especially the US dollar, which is the preferred currency of financing for exports of capital goods and projects.

The proposed increase in the foreign currency limit will in no way dilute the ECGD's prudent underwriting standards, which are operated within delegated authorities from the Treasury. The ECGD continues to underwrite new business under the disciplines of its portfolio management system, for which a financial break-even objective applies.

I hope that the review of the ECGD's mission and status will be published before the end of the parliamentary year. I look forward to the debate on the review's findings. Awaiting publication of the review and the related debate before considering the proposal to increase the statutory limit could preclude giving effect to the increase until the autumn. That would almost certainly result in ECGD operations being curtailed by an inability to underwrite new business. It is therefore important that we consider now the proposal to increase the limit.

It is crucial that UK exporters feel able to compete in the international marketplace with the support of the ECGD. I therefore look forward to the Committee's support for the proposal to increase the foreign currency limit.

10.38 am

Mr. Nick Gibb (Bognor Regis and Littlehampton): I should like to add my welcome to you, Mr. Stevenson. This is not the first time that I have served on a Committee under your chairmanship, and no doubt it will not be the last.

The order is a small and relatively uncontroversial measure. Provided that ministerial answers to my questions are satisfactory and full, I shall not seek to divide the Committee.

The Conservative party has long been a strong supporter of free trade and free markets. With only 1 per cent. of the world's population, we are the fifth largest world trader in goods and services. Britain is also the world's second largest outward investor, with hundreds of billions of pounds of overseas investments, which generate tens of billions of pounds of annual income. Our entrepreneurial activity is one of our greatest exports. As regulations and red tape continue to grow in our domestic market, so more of our entrepreneurial brains are plying their skills abroad. That is bad for our domestic long-term job prospects but, provided that regulation does not force owners of capital in this country to live abroad, it will result in ever-growing invisible earnings.

The order is not controversial. As the Minister said, it merely increases the foreign currency commitment limit from SDR 25,000 million to SDR 30,000 million. The increase is proposed under section 6(4)(a) of the Export Investment Guarantees Act. The original limit under that Act was SDR 15,000 million, but it permitted three increases of SDR 5 billion at a time. The first increase took place in 1995 and the second in 1998. We are now at the third and final increase permitted under the 1991 Act. Four years—1991 to 1995—elapsed before the first increase; then three years; and now just two years. That demonstrates a strong increase in exports under a strong pound. It throws cold water on the argument that not being a member of the euro threatens our export industry.

When the former Trade Minister, now at the Home Office, the hon. Member for Hornsey and Wood Green (Mrs. Roche), proposed the previous increase in July 1998, she said:

    On current trends, we expect that the head room created by the new limit will last for three or four years and that a further order will not be needed until then.—[Official Report, Sixth Standing Committee on Delegated Legislation, 1 July 1998; c.11.]

In fact, the head room did not last three years, let alone four. Current trends have changed. Will the Minister tell us how long the new limit will last—two years or even less? He said that the current £2.8 billion was likely to last only a few months. How long will £5 billion last? If the limit requires a further increase, what are the Government's plans for introducing primary legislation, which would be required to implement it?

During the previous Standing Committee on Delegated Legislation in July 1998, the Minister said that the ECGD generated a positive cashflow into the Treasury of £400 million per annum. In 1998-99, the figure was £363 million. In introducing this order, the Minister referred to a positive flow in 1999-2000, but I am suspicious because he did not state the figure. Will he clarify how much ECGD contributed in 1999-2000?

In the same Committee of July 1998, the Minister said that ECGD reserves on new business stood at nearly £700 million, which was more than two and a half times the expected loss on the amount at risk under guarantee. The Minister said that the measure would not cost the taxpayer: that is true, but it exposes the taxpayer to higher risks. In 1997-98, ECGD accounts showed a decrease in the reserve coverage ratio to 1.0. It was initially 2.5; it decreased the following year to 1.0; and at the end of 1998-99, it had risen to 1.3. Will the Minister confirm the reserve cover ratio figure at the end of 1999-2000? What level of contingent liabilities is provided for in the Government's accounts? How do they compare to previous years? What increase in contingent liabilities will result from the increases proposed today?

In 1998-99 China was the ECGD's top market for exposure—followed by Nigeria and Indonesia. Will the Minister explain the link between the Foreign Secretary's ethical foreign policy and the ECGD's exposure to those three countries? What proportion of the SDR 5 billion increase proposed today will be used to cover exposures to China, Nigeria and Indonesia? What are the Department's estimates? What proportion of the SDR 5 billion increase will be used to cover exposure to the so-called amber-zone budget system countries?

Two years ago those countries were Algeria, Argentina, Azerbaijan, Brazil, China, Egypt, Ghana, Hong Kong, India, Indonesia, Jordan, Kazakhstan, Malaysia, Oman, Pakistan, Philippines, Peru, Qatar, Russia, Saudi Arabia, South Africa, Syria, Turkey, Turkmenistan and Uzbekistan. Is that still the list of the AZB countries or have there been any additions or subtractions? Will any of the increase be used for projects under the ``Good Projects in Difficult Markets'' scheme? How many projects are there so far under that scheme and what is their estimated value?

In July last year, the Government announced a fundamental review of the ECGD's mission and status. That review was due to report by the end of 1999 with the decisions being published by the end of March this year. It is now the middle of July. The Minister now says it will be the end of the parliamentary year. What does he mean by that? Will it be published before the recess on 28 July, before our return on 23 October, before the Queen's speech or by the end of the calendar year?

The Trade and Industry Committee carried out its own review of the ECGD. It managed to complete it by the end of last year and published its report on 11 January. It is now the middle of July and still we have had no Government response to that report. January to July is an extraordinarily long time to take to respond to a Select Committee report. It is also discourteous. When does the Minister's Department intend to respond? This is an important, albeit uncontroversial, statutory instrument. It involves considerable sums. In view of the extra SDR 5 billion risk to the taxpayer, the Committee deserves a full response, particularly to the financial questions that I have asked this morning.

10.47 am


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Prepared 18 July 2000