Examination of witnesses (Questions 140-159)
Wednesday 21 May 2003
MR VIVIAN
BROWN, MR
JOHN WEISS,
MR JOHN
ORMEROD AND
MR DAVID
ALLWOOD
Q140 Chairman: Lost in the sense
that you will never recover it?
Mr Brown: We may well write-off
through provisions, that is my reason for questioning that. We
may well make provisions but then adjust those. For the business
that we have written over the last 10 years we are paying some
substantial claims on Indonesia, Zimbabwe and Ghana.
Q141 Chairman: Would it run into
billions of pounds, the money you had in practice to write-off
because you will never get it back?
Mr Brown: We calculate our premium
income in such a way as any other insurance business does, that
the premium income that we are taking will cover our expected
loss.
Q142 Chairman: Have you never made
a loss?
Mr Brown: We are meeting our financial
objective.
Q143 Chairman: Seriously!
Mr Brown: In the HIPC area we
are talking about debts which took place in the 1980s, it is yet
to be seen what the level of total loss may be.
Q144 Chairman: Like Lloyds you may
have unknown exposures in the future?
Mr Brown: I would guess that the
total amount we may eventually turn out to have lost as a result
of the 1980s debt crisis is the order of £2 billion sterling.
A lot of that depends on some creditor who may at some stage be
in a position where they can pay.
Q145 Chairman: That is a cost to
the taxpayer, eventually.
Mr Brown: Yes.
Q146 Chairman: Let us go back on
this, you are funded by the taxpayer and you make these loses
which have totalled millions of pounds. Over the period of your
time you have mainly subsidised defence, which is at least half,
together with aviation three quarters of your business, I wonder
whether there is a role for this sort of organisation any longer?
Mr Brown: A few corrections, the
defence is roundabout a quarter of our portfolio and the business
which I am talking about which was the 1980s debt crisis. As a
result of that we had new legislation in 1991. Since 1991 we have
a financial objective which means that the premium income we earn
each year must be or is required to be at a level of half as much
again as our expected loss, in other words, what we eventually
expect we will have to write-off. We have had two economic assessments
of the way in which we—
Q147 Chairman: It must be a very
difficult calculation to make.
Mr Brown: It is a difficult calculation
to make because of the length of time. To illustrate the point,
we are paying claims on Indonesia which relate to business underwritten
in the 1990s and mid 1990s. The debt re-scheduling which the Paris
Club has entered into for Indonesia involves full repayment of
that together with interest but involving a seven year waiting
period and then repayment over a further 23 years. The final outcome
on that business will not be known until roundabout 2030. This
is a long-term business but at the same time we are making a judgment
at any time about our recoverability. If I can finish on what
has happened over the last 10 years, which was your question.
If there is a deterioration in the economy, as there clearly was
in 1997 and 1998, through problems in South East Asia and Russia,
the effect that that has is not that we immediately lose money
or there is any loss to the taxpayer. We may make claims and we
may need to draw on the consolidated fund to fund those, but we
are returning our premium income and the interest we are obtaining
from the recovery of previous debts back to the Exchequer. When
the global economy deteriorates we increase our provisions, as
we did in 1998, so that at that point we were getting to a position
where we had effectively lost our cushion. The premium income
we built up was about equivalent to what we then regarded as the
expected loss. Since then fortunately the position has improved
and a number of pieces of business have run off so that our position
is now a strong one. We will be publishing our accounts at the
end of next month or the beginning of July and that will show
we are comfortably in excess of the financial target. Our premium
income, as for any other insurance business, is judging by our
present assessment of risk, comfortably capable of covering losses
on businesses we have written since 1991. That is the way we will
continue to run the business. It was because of the problems and
financial consequence of the 1980s debt crisis that the Government
brought forward new legislation for ECGD in 1991 and the Treasury
required these financial objectives, which attempt to protect
the taxpayer from having to bear in the future the sort of losses
in the 1980s.
Q148 Chairman: So you have been supplying
predominantly armaments to the Third World at a substantial cost
to the British taxpayer? I wonder whether that is a worthwhile
activity in this day and age.
Mr Brown: What I have just said
since 1991 is precisely that this is not a cost to the taxpayer.
Q149 Chairman: You cannot know that
for certain.
Mr Brown: In a particular year
something like a half of our business could be defence, but the
portfolio we have had as a whole since 1991 is somewhere between
25 and 30% on defence, so it is not a half, it is between 25 and
30% and that does not involve a subsidy. We are charging premium
rates which cover our risk but of course there is uncertainty
with that. If there was not uncertainty then this is a business
which would be undertaken in the private sector.
Q150 Chairman: Exactly. Why do people
come to you if you charge such high premiums to cover all these
risks?
Mr Brown: There is not cover available
in the market. When you get situations where there are deterioration
in risk in particular markets as we have seen in Latin America
in the last year then what private capacity there may be for political
risk cover itself tends to diminish. It is absolutely correct
that this is a government department, this is a public sector
operation because the risks are long term and they are too uncertain
for the private sector at present. However, the private sector
is beginning to take more of those risks. If you look at export
credit agencies' business over the longer period you will see
that the flows of capital to emerging markets rely to a decreasing
extent on export credit agencies such as ECGD and an increasing
amount on private flows, particularly foreign direct investment.
Q151 Mr Thomas: You say your present
portfolio is about 25% quota defence. What about an historic indebted
country's portfolio, does that reflect that level of defence or
is it a higher level of defence?
Mr Brown: For the HIPC markets
I would be almost certain it would be a much lower percentage
of that because our defence sales is nearly always to middle income
countries. I do not have the figures available and I think it
might be difficult to put them together looking back to the 1980s,
but we did do an analysis for your Committee in 2000 to draw out
the distinction between the nature of support for very poor countries
where the support was predominantly for civil projects, bridges,
that sort of thing, getting food to market and that sort of activity.
Q152 Mr Thomas: Because of the crisis
in the Far East, for example, you have been having to write off
loans to those middle income countries as well.
Mr Brown: Right. It is important
to draw the distinction between write off and provisioning. We
increased our provisioning as a result of that, but like many
other banks we have released our provisions as the situation has
improved.
Q153 Mr Thomas: So you could not
tell the Committee here today just how much of that overall provisioning
that you are making for bad debt or likely bad debt is due to
defence?
Mr Brown: It would not be possible
to do that. What we do is we build into our provisioning what
we regard as the expected loss in all the business that we undertake.
We build up our premium income from an assessment of the expected
loss, but we need to cover that expected loss together with the
margin to provide the cover for the uncertainty and also to cover
our administration costs. That is essentially what our premium
is made up of. Those expected losses form an important part of
our provision. As there is deterioration on a particular piece
of business that we have done which was not captured in the original
expected loss we may increase that expected loss to represent
the deterioration either in relation to cases where there have
not yet been claims or in relation to cases where claims have
been paid and we have a lower expectation as to recoverability.
Q154 Mr Thomas: On defence, have
you supported any sales of depleted uranium weapons?
Mr Brown: Not as far as I am aware.
Q155 Mr Ainsworth: Following on from
your questioning, Chairman, I am still not sure why, if your principal
role is to support British exports, we are requiring the taxpayer
to take risks which the market is not willing to take, but let
us park that for a minute because I want to look at the screening
process and how that actually works in practice. I understand
that you have opted for a case by case approach towards projects,
referring of course to your business principles as published in
2000 or whenever they were. Why not set up a specific list of
environmental and sustainable development criteria against which
all projects will be judged instead?
Mr Brown: I think we are fairly
close to that. If you look at the questionnaire which our applicants
have to fill in, there are a whole series of issues which they
have to address which seem to me fairly close to a list. Equally,
I think we have said that we will apply World Bank standards and
people can see what those standards are. So I think we go effectively
as far as you are implying we should.
Q156 Mr Ainsworth: With respect,
I am not sure you do. It reminds me of Clement Attlee who said
I am a man of principle and one of my principles is expediency.
The way that you are approaching this does not give clarity, does
not give certainty and leads to a great deal of subjectivity in
the application of the screening process. I cannot see what the
disadvantage would be of having an up front set of criteria against
which all projects would be judged. It would seem to be more simple
and make the whole process more comprehensible and accountable.
Mr Brown: We indicate in our application
form which particular areas we will be looking at and we invite
people to say whether or not a particular project has impacts
in particular areas. We also say that we will apply World Bank
international standards in relation to those. As a minimum we
say we would apply the host country standards, but it would require
some exceptional circumstance for us not to apply international
standards and I am not sure that we could go much further than
that, but I will ask David to comment.
Mr Allwood: I hope we make it
very clear that we apply international standards. Obviously we
require host country standards to be met otherwise we would be
supporting illegal operations and we would not do that. That is
clear-cut, it has to be host country standards. Where international
standards are more stringent then we will expect those to be applied.
We do not think it is our role to tell project promoters you have
to comply with these particular guidelines or those particular
guidelines. It is up to them to choose which international standards
they wish to apply to their project, but we make it very clear
to them that they need to tell us which they are. We know the
World Bank ones and we know the World Health Organisation guidelines,
but there are a range of them using European standards, Asian
and African development banks, EBRD use European standards. There
are a range of standards used by a range of international financial
institutions. We are flexible in that we will accept any of those,
but we will benchmark every project against all of the appropriate
ones that matter. So we do not need to say we choose World Bank
only and therefore if you are complying in Africa with African
development bank standards but they do not happen to meet World
Bank standards we are not going to provide support, I think that
would be unreasonable. We allow the project sponsor the flexibility
to choose the international standards that they think are appropriate
and we benchmark those standards against all the others.
Q157 Mr Ainsworth: With respect,
this seems terribly wobbly. This is presumably why you say in
your memorandum not that you apply World Bank standards but that
you "normally" apply World Bank standards.
Mr Allwood: Sometimes World Bank
standards are not appropriate and sometimes World Health Organisation
standards might be more appropriate for particular circumstances.
We apply the ones that are appropriate. We look at each individual
case on its own basis.
Q158 Mr Ainsworth: And you make the
judgment as to what is appropriate?
Mr Allwood: Yes.
Q159 Mr Ainsworth: You do?
Mr Allwood: Yes.
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