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Mr. Harold Best (Leeds, North-West): Thank you, Mr. Deputy Speaker. I wish to address how the Government manage import and export credit guarantees, with particular reference to the arms industry and its trade with the rest of the world.
For the past 12 years, there has been a consistent loss in relation to the underwriting of the arms industry's export trade by the Export Credits Guarantee Department. My observation is based on my reading of an answer from the Secretary of State for Trade and Industry to my hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) in June this year. The answer contains a table of results, for want of a better term, from 1990 to 2001 that makes the losses clear.
As I understand the matter, the ECGD is required to operate with a reasonable expectation of breaking even. Premium levels are set to cover costs and risks, and the reserve margin is added to the premium rate to provide the necessary confidence for a break-even in trade that it carries out. The Minister for Tourism, Film and Broadcasting, in his previous job, emphasised that point, saying
The Parliamentary Under-Secretary of State for Trade and Industry (Nigel Griffiths) : I do not want to take up my hon. Friend's time, but I must intervene. I think that he will find that his information is out of date, and I hope to show that things have dramatically changed in the past five years.
Mr. Best : If that is the case, I will be delighted to hear it, as will most hon. Members. From the information I have, though, things might be getting worse, even when recoveries are taken into account. Maybe that is the Minister's point.
On a macro-economic level, joint research carried out by the Centre for Defence Economics at York university and by the Ministry of Defence concludes that the significance of its results for the wider debate on defence exports is twofold: first, the economic costs of reducing defence exports are relatively small and losses are largely one-off, and, secondly, the balance of argument on defence exports should depend mainly on non-economic considerations. Those two points are of great significance in this debate.
In addition to what seems like an ECGD subsidy, the arms trade benefits from a £10 billion investment by the Ministry of Defence every year, including research and development, and £20 million provided through the Defence Export Services Organisation.
I and others think that the ECGD's support for defence exports should be included in annual reports on strategic export controls. That was also the view of the Quadripartite Committee in 1998. The economic benefits of the arms trade are at best dubious and, on what is essentially a moral issue, the Exchequer should no longer provide a subsidy to it.
This short debate is timely, in that the Export Control Bill is going through the House of Lords, and it provides an opportunity that we should take. We could tighten the Bill to strengthen the Department of Trade and Industry's role in the licensing process, making suitable development one consequence that it must consider in deciding whether to grant a licence. The Chancellor should build on the Mauritius mandate, and export credit should no longer be supplied for arms to go to any developing country. The need for transparency and accountability has never been greater than it is in that area.
I have some questions for my hon. Friend the Minister. First, why has the National Audit Office not investigated the excessive and unwise expenditure by the ECGD? Secondly, what explanation can be offered for the losses in relation to defence-related business? Thirdly, why have such losses been allowed to continue for the past 12 years? I shall be particularly interested in his response to that in the light of his assertion that it is not true. Fourthly, will the Government accept the need for clear and transparent accounts, and disaggregate the figures for sector and country so as to make it clear which areas and sectors are making a profit and which a loss? Finally, will they extend the Mauritius mandate, insisting that ECGD cover should be available only to those 63 developing poor countries that support economic and social recovery and development?
Like most people, I feel passionately about whether the Government of the United Kingdom take a moral approach to the arms trade and how it is financed by Departments. I am sure that all the people of Britain, not just taxpayers, would like to feel comfortable in that their Government are not involved in any financial arrangements that might subsidise the activities of arms manufacturers and the use of arms in other parts of the world.
Mr. Paul Stinchcombe (Wellingborough): Thank you, Mr. Deputy Speaker, for allowing me to speak early in the debate. As you are aware, I have an engagement elsewhere in the House at noon and I apologise to all hon. Members for having to leave early. I shall read with great interest and care all the contributions that I miss.
I congratulate my hon. Friend the Member for Leeds, North-West (Mr. Best) on having secured the debate. He has brought before the House a subject that raises issues of considerable political, moral and economic importance, especially in the troubled times in which we live. It is right that Parliament should have an opportunity to discuss them.
It might help if I make clear the political and moral standpoint from which I view those issues. I am a Christian socialist who, although not a pacifist, has pacifist leanings. I am not a member of the Society of Friends, but I periodically attend Quaker meetings and I have been encouraged to consider the issues
One parliamentary question that I asked sought to discover the total premiums received by the ECGD in respect of the arms trade for each year in the decade 1990 to 2000, and how much was paid out in claims for the same period. The answer was given on 12 June 2000. In respect of the arms trade, it showed that, for every single year of that decade, considerably more was paid out by the ECGD than it received through arms deals.
In none of those 10 years did premiums exceed payments made. During that period, premiums in the sector amounted to £213 million while the sum paid out in claims was a staggering £667 million, which is more than three times the premium. We must think about those figures, because they mean that the ECGD lost £454 millionnearly half a billion poundson arms deals in the last decade of the last millennium. More recent answers to similar questions on different years appear to reveal the same pattern of losses.
Ministers have often said that the ECGD does not operate to subsidise international trade, but to support and insure it. If the ECGD is an insurance policy, it is one that makes a staggering loss every year. When that happens on such a sustained and consistent basis and on such a scale, we must question the ministerial assertions. The figures are compelling, and they leave little room for any conclusion other than that the ECGD operates to subsidise the arms trade significantly. That raises issues of substantial political, moral and economic importance.
Politically, we must confront what appears to be the simple fact that a covert subsidy for the arms trade exists, which would be an overt breach of Government policy. As my hon. Friend the Member for Leeds, North-West suggested, the ECGD is specifically required by the Government to operate with reasonable confidence that it will break even. It is not remotely breaking even on arms deals and it makes losses year on year. If the ECGD is confident that it is breaking even in the sector, its confidence seems badly misplaced.
If that is the case, we must ask significant questions. How can we require the ECGD to break even when we allow it to sustain losses on such a scale? How can we decry any subsidising role for the ECGD while simultaneously allowing it to fulfil exactly that role? Those are questions of profound political importance, and I trust that the Minister will address them.
The figures also raise a moral issue for us all. The arms sector, in which the ECGD operates, is no ordinary industrial or manufacturing sector, but one of the most sensitive sectors of all. That requires us to answer a simple question: do we believe that it is right for the weapons trade to be subsidised by our Government? I am not a Quaker or a pacifist. I believe, albeit reluctantly, that in our dangerous world it is necessary for nations to be armed and able to defend themselves. That means that I believe it legitimate to make and sell arms, but I question whether it is right for the Government to underwrite that trade to the extent that they manifestly do.
Consider the countries and people to whom we have sold arms, and the extent to which they have benefited from such subsidies. Saddam Hussein has been the lucky beneficiary of £630 million of arms subsidies, not a penny of which has been recovered. In today's time of great peril, it seems that we could sell arms to Pakistan and India, backed by ECGD support. I hope that I am wrong, but I fear that I may not be. Subsidising arms deals to that theatre at this moment may not make the world safer.
The extent of the apparent subsidy seems to raise large economic issues. Apart from the domestic consequence of diverting such sums to the arms trade, the subsidy surely distorts the economies of the countries to which we sell the weapons, especially developing countries. That means that their scant resources are being diverted to arms deals. Many peoplenot only in the House, but in the country as a wholealready despair at the amount that developing countries spend on weapons. That money could be spent on schools, medicines or economic infrastructure, but our Government are apparently offering some of those nations subsidies to encourage them to continue buying arms that they may not need.
My right hon. Friend the Chancellor appears already to understand that. Under the 1998 Mauritius mandate, to which my hon. Friend the Member for Leeds, North-West referred, my right hon. Friend announced the end of support for arms export sales to the world's most highly indebted poor countries. That is warmly to be welcomed, but we must follow that lead and extend the policy globally. We shall then have an ethical policy of which we can all rightly be proud.
Sue Doughty (Guildford): I, too, begin by declaring my credentials: I am a Quakera member of the Religious Society of Friends. That does not necessarily bring with it total acceptance of the idea that we cannot have arms anywhere, and each of us constantly searches our conscience to work out where peacekeeping and justice are necessary. We do not simply say "No!" in every situation; we must think about what we do. Like other hon. Members in the Room, however, I have come to the conclusion that the ECGD should not be involved in the arms trade. Its involvement in such things does morals, ethics and the ethical dimension of our foreign policy no good. It also seems to cost us money, which we could invest in other countries positively rather than negatively.
ECGD export credit guarantees for defence-related sales have grown in recent years, which makes it a priority that we examine the department's activities. An answer that I received to a parliamentary question shows that £0.37 billion of guarantees were issued for exports of defence equipment in 199697. Under this Government, that figure has risen every year, and it reached £2.73 billion in 200001, which is the most recent year recorded.
I do not want to take a cheap swipe at the Government's ethical foreign policy. The intentions are there, but we need much stronger commitments, and if that means anything, it means examining the ECGD
We must ask ourselves why arms exporters cannot go to the private market to cover risks, because if they can find cover there, they should. If private investors find the risks too high, they are surely also too high for the British taxpayer. The net cost to the ECGD confirms that.
Supporters of the subsidy to the arms trade advance various arguments in its favour, such as the fact that it provides employment, supports research and development and contributes to British technological excellence and the security of domestic sources of defence procurement. However, one could almost put those arguments in favour of the drugs trade. Last week, we heard of a big gang bust in south London and of the way of life of some of the people involved. One could say that getting rid of drugs gangs would cost jobs or car salesthat logic does not seem too different from that used by supporters of the subsidy.
Let us consider that logic. Ministry of Defence economists concluded in their analysis last December that the economic costs of reducing defence exports are relatively small and largely one-off, and they suggested that the transfer of resources from a capital-intensive industry such as arms production to a more labour-intensive industry might mean a net increase in employment.
Reference has already been made to the report "The Subsidy Trap", published by Oxford Research Group and Saferworld, which further undermines the claims about jobs in the arms sector. It estimates that each job in defence exports receives a subsidy of £4,200, although those figures can cut both ways and people can claim that they mean or do not mean certain things. However, whatever one says, Government subsidy is everywhere in arms exports. It could go somewhere elseto railways, renewable energies or forces for the sustainable environment. The engineers could be redeployed, and their skills would have a role elsewhere.
When considering technological excellence and security of supply, we still have to take a realistic approach based on the dangers and challenges that we face. Our involvement in recent conflicts has been as a member of international coalitions based on our membership of the North Atlantic Treaty Organisation and the European Union. Defence procurement takes place with our allies, as in the case of the Eurofighter. For those who believe that that is the way we should go, the development of such co-operation is much better for our security and it will do more to strengthen than to undermine it.
We must remember, on behalf of the Government, what our over-zealous and unethical pursuit of the arms trade has led to in the past, and this debate is part of that. Sales have been made to countries such as
Mark Thomas, of Channel 4, found that, within a week or two, he could become a middleman arms broker, facilitating the sale to Zimbabwe of gun parts originating in Britain. At the time, we were friendly with some countries or hostile regimes to which we sold arms. How do we know what arms Iraq has? Because we sold Iraq the arms and we have the receipt, so we know that Saddam Hussein has dangerous weapons.
Sometimes we do not even think before we sell, or we think the wrong thoughts. There are ethical considerations that cannot be ignoredthis is a matter not just of subsidy, but of ethics. The Government have taken positive steps by stopping the use of guarantees for exports to some of the world's poorest and most indebted countries, and we all welcome that, but there is still concern about exports to India and to Indonesia, the instability of conflict areas such as Kashmir and the message that the continued sales sends to the countries involved. Jack Straw says that the deal was not intended to support the conflict, but we are sending mixed messages.
People are not happy about the taxpayer's role in such conflicts. Our priority, and I hope that the Government will continue with this, is to assist in achieving peaceful resolutions rather than to support conflict. Although nations have the right to defend themselves, I am no cheerleader for the arms trade. It is part of international trade, but we should not help it through Government subsidy. We must negotiate and, if necessary, act unilaterally to make our arms trade an ethical exporter or to bring it as near as possible to a strict definition of an ethical exporter. Conducted ethically, the trade may even work towards greater global stability.
I must make a further point on the ECGD and corruption. Susan Hawley, for Cornerhouse, presented a paper on that subject at the "Beyond Best Practice" seminar in Parliament on 23 May. The paper identified the amount of bribery undertaken by British business and identified the ECGD as an organisation with a long history of backing projects involving corruption. Bribery by British businesses remains a significant problem, despite the OECD convention, and Gary Campkin of the CBI said recently:
In concluding, one might ask what the ECGD is for. It results in a peculiar subsidy that is taken from the better side of our export trade and given to the arms business. That is totally unacceptable. However, at the 23 May seminar, we heard nothing about the ECGD promoting renewable energy, which is a force for peace and economic development in the world's poorest countries. If we are to retain the ECGD, we should ask that it support sustainable businesses that benefit British exports and do good rather than harm in the world overall.
Harry Cohen (Leyton and Wanstead): First, I congratulate my hon. Friend the Member for Leeds, North-West (Mr. Best) on securing the debate and presenting it so well. I agree with him and the other hon. Members who have spoken in their criticisms of the ECGD.
Harry Cohen : No, the Labour Government did not do that, but the last Conservative Government did. However, that is the system under which the ECGD operates, which led to that situation. Some £4,100 million of military-related guarantees are still at risk.
Oxford Research Group, which has done a lot of excellent work, estimates that the net subsidy via the ECGD is £227 million per annum. The ECGD persistently makes losses, although Ministers have said that it is supposed to break even and have given clear instructions to that effect. It has made losses every year
Harry Cohen : I hear that point and I know that that was the Government's position, but it is contradicted by figures in parliamentary answers. If the subsidy is not direct, it is a back-door subsidy of the size that I mentioned. Despite ministerial requirements that the ECGD should break even, there have been consistent losses, year after year. That is why my hon. Friend the Member for Leeds, North-West and I have sent a joint letter to the Comptroller and Auditor General, asking him to meet us to discuss the issue. The ECGD is clearly not operating in the way that it is required to operate.
The ECG is only part of the overall subsidy to the arms industry. The Campaign Against Arms Trade has just issued its document "Shelling Out", which details the amounts involved and shows that the overall subsidy is £763 million a yearthat is, £30 for every person in this country ever year, despite the fact that defence constitutes only 2 per cent. of our overall exports. We could build 10 hospitals or 100 schools with that subsidy.
I want to list several criticisms. The arms that we sell end up in the hands of people for whom they are not intended and there is no end-user requirement on arms exports. That creates all sorts of misery, war and conflict in other parts of the world.
One consequence is that refugees seek to escape those conflicts, which have been fuelled by our armaments and armaments subsidies. Those refugees then come to Britain and we are told every day by the press, such as the Daily Express, that asylum carries a cost, which it does. It is right to offer asylum, because we must treat people decently and not allow them to be tortured or killed, but of course that costs money. That is a hidden subsidy of the arms trade, which should be added to the bills already identified by the Campaign Against Arms Trade, Oxford Research Group and Saferworld.
The arms trade also does harm through wars worldwide. My hon. Friend the Member for Wellingborough has tabled an early-day motion emphasising that no impact assessment has been carried out on the arms trade or the work of the ECGD. There is a licensing system, but that is not the same as an impact assessment covering human rights, the effect on the environment and the effect of wars and refugees. Such an assessment should be carried out before subsidies are given.
The Government and those who favour subsidies for the arms trade often make the excuse that many jobs are involved. "The Subsidy Trap", published in July 2001 by Oxford Research Group, estimates that annual
It went on to suggest that employment levels are likely to benefit from investments being transferred to more labour-intensive, but lower wage, economic activities. I believe that we could create more jobs and more income for the nation by putting such subsidies directly into productive jobs.
We must consider the issue of free trade and protectionism. We are told by the Americans and members of our Government who are in favour of globalisation that we need to end protectionism and subsidies, but subsidies go directly to the arms trade, which contradicts what they say. Those subsidies amount to a trade barrier. There is consensus in the OECD on the effect of such subsidies in other areas, which are restricted, but that does not apply in agriculture and defence, so all sorts of hidden subsidies occur as a result. They distort overall Government borrowing because we have to pick up the bills, especially in the case of default, and they penalise other productive sectors.
In the example of the ECGD, which breaks even overall, civil industryproductive industryis paying the bill for subsidies to non-productive areas, such as defence, when the money should go to productive sectors of the economy. Why not let the market do the job anyway? There are plenty of other credit agencies. Why not let the arms industry live or die by the market, as other areas of the economy are being told to do?
I believe that the Government have proposed a 6 per cent. rate of return on capital, as the New Statesman article said. That is welcome to a degree, although the arms industry is already campaigning against it. Even if it is implemented, will it be required? If the ECGD is supposed to break even, it will not, so is it just another target that will not be met? For those reasons, all Government subsidies and credits to the arms industry should be ended completely. That is long overdue.
Mrs. Alice Mahon (Halifax): I shall be brief. I, too, thank my hon. Friend the Member for Leeds, North-West (Mr. Best) for obtaining the debate. Hon. Members have expressed their opinion on war, so I shall express mine. I am not a pacifist, although I wish I had the strength of mind to be one. I am probably one of the world's natural warriors, but I am interested in conflict resolution and I seem to spend most of my working life concentrating on that. If this country were attacked, however, I would hope that we had the correct arms to defend ourselves.
For that reason, I realise that we cannot do without some sort of arms trade, but I do not believe that our taxes should be used to subsidise other regimes through it. I agree with my hon. Friend the Member for Leyton and Wanstead (Harry Cohen) that we can do nothing about the end use of arms, and there have been tragic
What the Government do in my name is hugely important to me. The ECGD is clearly subsidising the arms industry, and we are still helping India and Pakistan to increase their arms, which fills me with horror. They were teetering on the brink of nuclear war just weeks ago, and that threat has not gone away.
A number of other Members have tabled early-day motions, such as that condemning the sale of F16 fighter aircraft to Israel. We cannot control end use. I shall give an example. Earlier today, the sovereign so-called democracy of Israel used an F16 to fire a missile into a residential area, supposedly to assassinate a Hamas leader. So far, 16 civilians have died, eight of them children. The incident is being called the slaughter of the innocents, which it certainly is.
That slaughter was carried out not by an organisation operating outside the state or an organisation from an aspiring state, but by the state, taking part in murder. The fact that eight civilians who died were children is coincidental. The attack was ordered by Ariel Sharon, who is already dripping in blood from Sabra and Shatila. I want an answer from the Government on why the rules for obtaining export licences were changed, allowing British components for the F16 fighter to be sold to Israel via America. Will the Minister explain the ethical dimension of allowing the Department to subsidise the arms trade and grant licences to countries such as Israel and, in the past, Iraq and Indonesia?
As other hon. Members have said, if we are to subsidise, we should do so for humanitarian reasons. A company in my constituency made a terrific productdrills for obtaining water in developing countries. I bet that it would love a subsidy. It did a useful job, as most of the developing world is without clean water supplies, and I would like my taxes and those of my constituents to go on something like that. I agree with the hon. Member for Guildford (Sue Doughty), who talked about sustainable energy and worthwhile projects, which we would all like to see.
I want to speak only briefly, so I end by pleading with the Government and the Minister to take note of the extremely sensible advice of the Quadripartite Committee, which is that they should stop subsidising the arms trade. If there is talk of ethical dimensions to policy, let us put our money where our mouth is and carry it out for once.
Dr. Vincent Cable (Twickenham): I congratulate the hon. Member for Leeds, North-West (Mr. Best) on choosing this important subject, and on the brevity and clarity with which he introduced it. He thereby gave other hon. Members the opportunity to develop arguments in a manner that is rather unusual in this Chamber, where the introductory speeches are often rather self-indulgent.
I approach the issue from the standpoint of an economic liberal. I do not quarrel with the basic proposition that there has to be an arms tradecountries have to defend themselves, so they have to acquire arms, which have to come from somewhere, and have to be bought and sold across frontiers. There is, therefore, a legitimate role for trade and for the UK, both as an importer and an exporter of arms.
However, the arms trade is different from trade in other products. It therefore has to be hedged with regulation to take account of the dangers of internal repression and of the sort of instance described by the hon. Member for Halifax (Mrs. Mahon), in which the arms export trade can fuel conflict. I take come comfort from the strong position taken by the IMF, which has been extremely critical of the role played by export credit guarantee agencies, not only the British one, in relation to the arms trade. It argues that normally, when an export credit guarantee operates for the supply of, say, machine tools or a power station, it is supplying a productive asset that generates income and wealth. It therefore contributes to development and that development helps the country to repay the debt that it has acquired. However, that does not apply in the case of the arms trade, because what is being sold is an unproductive asset. Weapons generate no income or wealth. One has, therefore, to be extraordinarily careful to ensure that the supply of weapons under export credit agreements does not undermine the development of the countries concerned. The IMF has taken a critical view of the role of export guarantee agencies. This is not just a moral issue, it is also an economic one.
I was fortunate enough to introduce a debate on the subject in February 2000, and I made many of the points that the hon. Member for Leeds, North-West has made today. I want not to go over that ground again, but to identify the areas in which Government policy has moved on, so that we can update the debate. I would point to two factors. First, the role of the ECGD has been reviewedindeed, I think that it is now in the middle of a second review. There is clearly some discomfort in Government about it, and I believe that that arises from wondering why the ECGD is not turned over to the private sector. The Government have been happy to do that with National Air Traffic Services and other organisations, so if the ECGD is purely commercial and will be subject to commercial discipline, why is it not privatised? That would be a logical step for a body that was subject to full commercial discipline, but it has not happened; the ECGD has been retained as a public agency. Therefore, Members of this House have, very reasonably, asked why, if it is a public agency subject to public policy concerns, we should not have a look at what it is doing.
That has raised several secondary issues. The environmental agencies are rightly asking why a public body is providing credits that are, arguably, subsidised, to promote coal burning in power stations, which undermines the Government's Kyoto objectives. Questions are also asked, as they have been today, about why the organisation is apparently promoting
The second big change since I introduced the debate a couple of years ago is the evolution of Government policy towards arms exports. The Minister will know about the Export Control Bill, as he piloted it through the House. I trust that we will not hear any more about it tomorrow on the Floor of the House, but we are not quite sure about that. It has almost completed its passage through Parliament. In general, my colleagues and I welcome it, and we also welcome the fact that the Government took the initiative to introduce this legislation, which provides a framework of discipline for arms exports and licensing.
However, there has been much ambiguity in the Government's attitude towards arms exports, notably in respect of sustainability. The Government have ignored an all-party consensus on that issue, hence the Tanzanian dealon which, as the Minister knows, I have strong views, and about which I have spoken in the main Chamber. There is also a lack of effective controls over deals involving third countries, which has led to the current arrangements in relation to Israel.
There has been a lack of transparency, because the Government have chosen to ignore the recommendations of the Quadripartite Committee. That is very important in the context of the narrow discussion on subsidies, because we do not know how much of the arms section of the ECGD portfolio is subsidised. The issue is wrapped in secrecy, and the Department's annual report hardly refers to the arms part of its business, even though it accounts for almost 50 per cent. of its activity. There is very little transparency and clarity and we have little idea of what is actually going on.
Dr. Tonge : Does my hon. Friend agree that one of the amendments that we tried to push through to strengthen the prior scrutiny provisions in the Export Control Bill would have ensured much greater transparency and enabled the whole of government to see where the deals were being done? That might have brought the ECGD under the control of Parliament rather than one or two Ministers.
Dr. Cable : I agree, and that is the single most disappointing retreat that the Government have made in this policy area. It is relevant not only to licensing but to the way in which the deals are financed.
When I raised the issue of subsidy in a debate more than two years ago, I was told, as the Minister has obviously said to Labour Members now, that our figures were out of date and that the Government would demonstrate to us in the course of time that they had tightened up on implicit subsidies through defaults on ECGD contracts, so there was no subsidy at all.
However, the hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) asked a penetrating question that demonstrated that the net loss from ECGD business is accelerating, not declining. While this Government have been in power there has been a net cash loss of £80 million a year, as opposed to £57 million a year before 1997. That is expressed in simple cash terms, but the cash losses understate the extent of the subsidy.
As hon. Members have already said, two major reputable academic studies have cast light on the problem. The first one to be published, to which we first had access a few years ago, was the York study conducted by Professor Hartley and his colleagues, which focused on the fact that the ECGD was required merely to break even, rather than to generate the 6 per cent. return required of organisations such as the Post Office and London Underground. The subsidy was calculated on that basis. The ECGD has subsequently said that it does not merely break even, but makes a 5 per cent. return on its capital. The problem is that we do not know the return on its arms business, because it does not say; it has not broken the figures down and it probably does not analyse them. That is the department's defence, but it is rather shaky.
A more sophisticated study, which was recently carried out at Oxford, nails down the fully subsidised nature of the department's arms activities. It examined the cost of export credit guarantees, which are, effectively, a form of political risk insurance provided by the ECGD to arms exporters. Those involved in the study went round the market asking what deals would have cost had they been financed in the international capital markets, particularly using the new derivatives available in those markets. They then applied the same weighting for risk that would apply in a purely commercial transaction. The result was a sophisticated, methodologically faultless study, which came up with a figure of £225 million a year for the subsidy to the arms exporters. Without it, they would have had to pay higher premiums in the market.
To conclude, I do not understand why the Government are so reluctant to apply market discipline to arms exporters. After all, it is now accepted that many aspects of PFI projects must be financed in the market and carry the full market cost. Why should our arms exporters be exempt from that discipline? Ministers
Mr. Robert Key (Salisbury): I, too, start by congratulating the hon. Member for Leeds, North-West (Mr. Best), who initiated the debate. It is important that we have the opportunity to air our feelings about these extremely important issues on behalf of our constituents, and I shall seek to do just that.
Hon. Members seem to have been declaring interests, so I had better declare mine. Earlier this year in the main Chamber, I said that it might be a good idea if we declared where we were coming from on issues with moral and ethical dimensions. I therefore have no difficulty in saying that I am a fully paid-up member of the Church of England and that I take my religion seriously.
All those who have spoken have considered only one side of the equation as regards exports, and particularly defence exports, and I shall seek to redress the balance somewhat. I look forward to the Minister's comments; indeed, I think that he might even have some news for us, because we are expecting an announcement quite soon.
I want to move the debate from utopia to the real world. It has always been my understanding that the ECGD's purpose was to share risk in the national interest, not to subsidise exports. That is a fundamental difference in view between the hon. Member for Leeds, North-West and myself.
The Conservative party has supported arms sales to foreign Governments where those sales conformed to the accepted consolidated criteria that have been put in place. Arms should be sold only where we are satisfied that they will be used for the legitimate purposes of security and defence. During the recent stand-off between India and Pakistan, my right hon. Friend the Member for Devizes (Mr. Ancram) said that we should temporarily suspend arms sales to the region. That is now inappropriate in the light of the de-escalation of tension between the two countries. There is therefore no doubt that we take a pragmatic approach, but it is based on a strong ethical foundation.
Hon. Members who are not Ministers have no access to intelligence or defence reports or to the diplomatic analysis available to the Government. Only the Government have that informationand quite right, too. They have the legitimate right to make executive decisions on exports, and we scrutinise those decisions under our constitution through the Select Committee system. The Defence Committee, as the hon. Gentleman knows because he served on it with me, has access to secret information on a limited basis, which can help to inform us. For those reasons, however, my party and I reject the suggestion that there should be prior parliamentary scrutiny. In the end, the Executive have the right to govern, and only they have the information.
Under the United Nations charter, countries have the right to self-defence. I believe that it is morally bankrupt to say, "Let's trust the United Nations to sort out the world's problems and accept that nations will buy armsbut not from my country, because I am morally superior." That is not a sustainable argument.
The overriding reason for the existence of the United Kingdom defence industry is, always has been, and always will be the supply of equipment and services needed by the British armed forces to ensure that our country's national security interests are protected. Exports are increasingly vital for the continued maintenance of a viable defence industrial base in the United Kingdom, and the industry cannot be sustained by reliance on procurement by the Ministry of Defence alone. Due to the high technology input and the cost of a large proportion of the defence industry's output, it is essential to lengthen production runs and reduce unit costs. Therefore, it is vital to export.
The benefits of the United Kingdom defence exports to the Government in reducing defence equipment costs outweigh their cost by a significant margin. Rather than being subsidised, as we have heard consistently from hon. Members today, defence exports represent a significant net benefit to the United Kingdom economy. Sales averaged about £6 billion in 199899 and supported almost 100,000 of a total of 400,000 defence jobs. Many of those were high quality jobs in cutting-edge, high-technology industry.
It has been estimated that the ending of defence exports from the United Kingdom would involve a one-off adjustment cost of between £4 billion and £5 billion, which is equivalent to about 0.5 per cent. of one year's gross domestic product. In addition, there would be a continuous net cost to the taxpayer of between £90 million and £200 million a year.
The Government's policy of supporting the legitimate efforts of the United Kingdom industry to win export orders are primarily based on their contribution to our defence and international security interests. Defence exports help to support a strong United Kingdom defence industry and contribute to the security of our friends and allies.
The benefit of the defence exports is felt by not only British companies but by United Kingdom industry as a whole, because defence exports are a catalyst for national economic and technological development. Exports also help to defray the costs of the United Kingdom's research and development. The Ministry of Defence has estimated that defence exports through extended production runs reduced unit costs by £350 million to £400 million per year from the United Kingdom defence budget.
It is unsurprising that the United Kingdom's share of the world defence export market is rising, because the global defence market has been in steady decline since the mid-1980s. That market is still lucrative and valuable financially while also having important intrinsic strategic and political implications. The benefits for the companies involved and for the wider British economy are substantial. The market protects the United Kingdom's national interests through the maintenance of our indigenous manufacturing capability, and British political influence around the world. Companies often fund a considerable portion of the research and development activities that develop the equipment needed by the British armed forces from export-generated income. Exports help to keep the United Kingdom at the cutting edge of high technology development, giving our armed forces a technological advantage. The Export Credits Guarantee Department is probably the most reviewed agency of Government at the moment. I hope that the Government will, within the next 24 hours, stop dithering and tell us what they plan for the ECGD.
Defence should be judged by the same criteria as any other sector when ECGD cover is considered. Once it has fulfilled the conditions of the consolidated criteria, it is no different from any other industry. I hope that the ECGD, and defence exports, will be treated accordingly. I also hope that the ECGD process will not be used to second-guess issues such as sustainable developmentsubjects on which we have had substantial debate both in the House of Commons and in the other place.
If an export licence is issued by the Government, firm and open reasons should be given for any subsequent refusal of ECGD support. Examples are regularly quoted of cases in which Treasury interventionor some other mysterious interventionstops a particular export, even if it is a reorder by a NATO ally, but the company involved is never told. Sometimes hints are dropped, but that is as far as it goes. If we seek transparency, that is an area in which there should be more; companies should know why their applications are being rejected.
Some aspects of defence procurement might not be shared by the majority of other bidders for ECGD support. Project fulfilment often spans many years, the customers are usually Governments, not companies or consumers, and the risks are sometimes political as well as commercial. Banks will often refuse to provide cover in such circumstances, even when an export licence has been granted. The hon. Member for Leyton and Wanstead says that we should let companies live and die by the market, but that would not necessarily be in the national interest. If the banks will notfor a very good
What does the ECGD support? Is this just about arms? Of course it is not. The exports that it has supported have included textile machinery for Uzbekistan and power stations for China. Yes, there has been defence-related equipment, but civil aircraft take 21 per cent. of the budget, and among £800 million of overseas investments there is an office building in Morocco. The projects featured in the annual report include double-decker buses for Hong Kong, low-cost housing for Romania, road improvement schemes for the Pacific island of Vanuatu, a pharmaceutical plant in Croatia, social services vehicles for Barbados, navigational equipment for Trinidad and Tobago and investment in an aluminium smelter in Mozambique, generating 800 jobs.
I mention those because they are all part of the same equation; we cannot separate defence from everything else. It is straightforward. If, as a nation, we are to come back to the moral and ethical position, apart from ensuring that we have a healthy industrial base for the prosperity of our people, we need to reduce the need for arms around the world. That has been a prime mover in the whole of western strategic defence analysis.
We have learnt the lessons of the cold war, and we are now learning the lessons of terrorism and the consequences of asymmetric warfare. We see the horrors of mines around the world and the damage that they do to the economy. We are talking about areas of instability, such as the great arc of instability from the Caucasus through the middle east and along the Maghreb to the western or Atlantic end of north Africa. Instability generates a need for arms and leads to economic migration and further political and military instability.
In 1996, I served on the Select Committee on Defence. I cannot remember whether the hon. Member for Leyton and Wanstead was on the Committee thenI think that he was. We visited nearly all the countries on the northern shores of the Mediterranean and talked to them about reducing risk, economic inequalities and the need to migrate.
The root cause of all the instability is poverty. All the nations of the developed world need to start thinking differently. The hon. Gentleman has been thinking along those lines since 1996 at least, when the Committee produced the report outlining that need. If we talk about reducing the need for arms, we should also talk about reducing poverty and the lack of food, water and education, and health problemsespecially women's health. They are the root causes.
Dr. Tonge : I thank the hon. Gentleman. If he believes that poverty is the cause of all the instability he referred to, does he not feel a little ashamed that the Conservative Government reduced the proportion of GNP spent on overseas aid to 0.25 per cent, and that, as the Conservative spokesman on international development has explained, it is not his party's policy to raise the proportion to the 0.7 per cent. that the United Nations recommends?
Mr. Key : That is not an accurate representation of my party's policy. I certainly do not feel any shame. I feel disappointment, and did so many years ago, when I was Parliamentary Private Secretary to the then Minister for Overseas Development, Chris Patten. We were constantly battling with the Treasury, just as people in Departments do now, to try to increase the proportion of the budget that went to our Department.
The hon. Member for Guildford (Sue Doughty) said that the ECGD must take a lead in eliminating corruption. That is an extraordinary request to make of the ECGD. I do not think that such a role is in its constitution. Let us get back to reality.
It is important to recognise that the largest slice of ECGD support53 per cent. was the latest figure that I could get hold ofgoes to civil programmes. Those will be crucial if we are to start eliminating the poverty that leads to all the instability that leads to the arms trade.
I hope that we can get more of a note of realism in the debate. If all we can do is try to stop the arms trade, we will not get very far forward. I read with interest the letter from bishops and others in The Times yesterday about that issue. I thought that their hearts were wholly in the right place, but that they should get their feet on the ground and think of the broader equation that I have tried to outline.
The Parliamentary Under-Secretary of State for Trade and Industry (Nigel Griffiths) : I congratulate my hon. Friend the Member for Leeds, North-West (Mr. Best) on securing this important debate. I also congratulate all hon. Friends and hon. Members on their excellent contributions, and on giving their sincerely held views.
Before answering the five questions that my hon. Friend the Member for Leeds, North-West put, I shall set out the value of the ECGD's work. In its recent annual report, the ECGD showed that the guarantees were aimed at ensuring that countries could benefit from the expertise of UK businesses, and that UK businesses are not disadvantaged when bidding for contracts abroad, whether civil or defence related.
More than 50 per cent. of the ECGD's support goes directly to civil contracts. I expect that civil contracts in 2001-02 will take up 70 per cent. of such support, and that the proportion taken up by defence contracts will fall to 30 per cent. Civil projects include, for example, the export of Airbus aircraft to Austria, Canada, Chile, Croatia, El Salvador, Finland, Hong Kong, Iceland, Korea, the Netherlands, Singapore, Sri Lanka, Switzerland and the United States.
All hon. Members can see that the ECGD plays an important role in supporting the aerospace industry's export drive. It also helps business to export buses to Hong Kong; it aids the construction of a port in India; it provides a desalination plant in Oman to supply fresh water for thousands of homes; it builds bridges and a 500 MW gas-fired combined-cycle power station in the Philippines; and it supports a food-packaging plant in Turkey. All those examples are testimony to the value of export credit guarantees. The ECGD also welcomes applications for sustainable energy projectsas hon. Members know, that is a subject close to my heart.
More than 30 countries received goods backed by export credit guarantees last year, and details are given in the annual report. Those countries include South Africa, the United States, Australia, Lithuania, India, Italy, Sweden and Greece. In Romania, export credit guarantees helped a UK defence manufacturer to supply border surveillance vehicles. That is a part of the world that I know well, and the whole House knows that nearby territories were subject to the worst type of ethnic cleansing. The command and control systems for South Korea's navy were supplied by UK manufacturers helped by export credit guarantees. Of course, some items that were formerly supplied using export credit guarantees were the subject of great controversy. Those include the Hawks that the Conservatives sold to Indonesia in 1990.
My hon. Friend the Member for Wellingborough (Mr. Stinchcombe) mentioned the Mauritius mandate and demanded that ECGD cover should not be granted to the poorest developing countries. I agree. My right hon. Friend the Secretary of State told the House on 4 December:
In fact, those countries have received precisely no ECGD cover for defence items in any of the past five years. We go further than the OECD statement of principles on official export credit support to heavily indebted poor countries, which lists only 41 countries, as my hon. Friends know.
Nigel Griffiths : I will not give way to the hon. Member, because she came in late and did not hear the contribution of my hon. Friend the Member for Leeds, North-West. I want to answer the points raised by hon. Members who have been here throughout.
In the past five years, export credit guarantees have not been granted for defence contracts to any African country, expect Egypt and South Africa. Total Government aid to African countriesexcluding, of course, the export credit guarantees to the two countries that I mentionedtotalled £450 million in 199798, £575 million in 199899, £634 million in 19992000 and £778 million last year.
The UK has one of the most responsible and transparent export licensing regimes in the world. In response to questions that have been raised, I should say that neither Pakistan nor Israel has benefited from UK defence companies using ECGs in the past five yearsnor, since 1998, have Indonesia and India. When Thabo Mbeki's democratic Government sought to ensure that his country and all the citizens of South Africa had the necessary protection, they awarded a contract to BAE Systems and its partners to supply 52 aircraft. An application for ECG was accepted.
Dr. Cable : Before the Minister does that, I want to ask him about the transparency that he just described. Will he explain why he has just approved export licences for the sale of military equipment to the Channel Islands, including helicopter parts, machine guns and much else, given that the Channel Islands does not even have an army?
Nigel Griffiths : The issue is transparency. The hon. Gentleman knows about those export licences because the information is in the public domain, but I am happy to write to him about any specific questions that he wants to ask.
My hon. Friend the Member for Leeds, North-West asked why the National Audit Office is not examining the ECGD. As hon. Members will know, I served on the Public Accounts Committee, and I have the greatest admiration for the work of Sir John Bourn and his colleagues. They decide what they will investigate and they have clearly chosen to focus on expenditure that causes far more concern than that of the ECGD.
My hon. Friend's second point related to losses. The ECGD charges a premium to cover its costs and any expected losses, and as my right hon. Friend the Secretary of State told the House on 22 January 2002, it is her policy to eliminate subsidies from export credits. For several years, ECGD has made a net contribution to the Exchequer: £128 million in 1999 to 2000; £205 million in 200001; and I understand that a similar contribution is expected for 200002.
My hon. Friend's third question referred to the amount of ECGD support for defence manufacturers during the past 10 years, which he claimed amounted to a subsidy. Let me give the Chamber a fuller account of our stewardship since May 1997. For defence businesses supported from 17 May 1997, claims outstanding are zero. In fact, ECGD earned about £100 million in premium for defence business in the same period. The
My hon. Friend's fourth question related to the need to provide figures country by country. The Secretary of State has done precisely that in her full answers to parliamentary questions. Let us be clear about how we ensure the defence of the UK. Our spending on equipment is almost £10 billion. We canand do buy some of that equipment abroad. We purchase other equipment from UK firms, which employ about 245,000 people in this country. Those companies also seek to export some of that equipment, or modifications of it, to other countries that want to defend their territory. That generates an income of about £5 billion a year.
Some would argue that such exports should be abolished, shrinking the defence industry to two thirds of its present size. That would not remove the need for the UK's armed forces to have equipment, but it would require the MOD to source more of it from abroad. Export credit support for defence exports is available from all the major exporting countries. Competition in the defence sector is fierce, and if UK manufacturing exporters are to remain competitive, they should have access to the same sort of support that is available to their overseas rivals.
Nigel Griffiths : I did refer to Israel earlier, when I assured hon. Members that my information was that Israel had not benefited from defence-related export credit guarantees for the past five years under this Government's stewardship.
I have been closely involved with the Export Control Bill, and it is important to realise and accept what the Quadripartite Committee said: we have one of the most transparent and effective export control regimes in the world. We are, however, seeking to strengthen it, because there is no complacency in our approach, and I shall describe some of the improvements that we have made.
First, we set out our ECGD business principles in 2000 to ensure that the ECGD promotes a responsible approach to business and takes account of the Government's policies on sustainable development, the environment, human rights, good governance and trade. Any support for the defence sector must now be consistent with those principles.
Secondly, we have increased transparency by ensuring that the ECGD publishes a list of guarantees in the annual report for the first time. Defence manufacturers are not exempt from the terms of confidentiality that apply to all other business sectors. Thirdly, the ECGD has strengthened its anti-corruption and due diligence procedures.
All nations have the right to self-defence; it is enshrined in article 51 of the United Nations charter. However, many countries do not have an indigenous defence industry and rely on purchasing equipment from elsewhere to safeguard their national security.
Nigel Griffiths : Every country has the right to self-defence, but I take it that my hon. Friend is not defending some of the terrible practices in Iraq. A few moments ago he openly condemned the purchases of past decades. Indeed, even those who contributed to licensing them have recognised that they were a mistake. I hope that that answers my hon. Friend's question. [Interruption.]
Nigel Griffiths : This has been an important debate. It has covered an issue that cuts across party differences, and many sincere contributions have been made. It is our job in government to ensure that there is no repetition of the arms-to-Iraq scandal and others. I welcome the interventions that have been made, and the keen interest shown by many Members of Parliament, particularly those who are present. For many years, they have highlighted any reprehensible practices, and they seek at all times to hold the Government accountable for export policy and the way in which export credit guarantees are given.
The debate has given those of us in government the chance to explain how our policy is working, and I urge every hon. Member to read this year's annual report. I thank my hon. Friend the Member for Leeds, North-West for securing the debate and enlightening us all.