House of Commons - Environmental Audit

Select Committee on Environmental Audit Seventh Report

Scope and impact of the reforms

19. Aerospace and defence projects are typically associated with high environmental and developmental impacts.[17] In the civil sector, a high proportion of ECGD's support goes to large industrial and infrastructural projects in developing countries, such as power plants, large dams, mining projects, road development and oil pipelines, all of which can have significant social and environmental impacts.

20. The balance of ECGD's portfolio, with over half in aerospace and defence, has remained the same despite the introduction of its Business Principles and case impact screening procedures. The Corner House, a research and advocacy group working in the fields of human rights, the environment and development, told us

"a comparison of the support provided by ECGD prior to the adoption of its Business Principles and post adoption reveals no substantive change in the sectors supported or in the percentage breakdown of support by sector" and that ECGD's portfolio remains dominated by unsustainable projects and sectors.[18]

Proportion of ECGD support by sector

1999/2000 2001/2002

Aerospace 22% 24%

Defence 31% 29%

Civil 47% 47%

Defence and aerospace

21. In part this consistency may be explained by the fact that applications for support for aerospace and some defence-related projects are exempt from ECGD's impact assessment procedures. ECGD told us that

"aerospace applications are not screened as all UK manufactured aircraft or components comply with international environmental and safety standards. Sharp-arms are screened by the DTI export licensing system. ECGD is not party to this process but will only support export for which a valid export licence has been granted".[19]

22. ECGD will not provide cover for such projects unless an export licence has been issued by the Department of Trade and Industry in consultation with other departments as appropriate. The export licensing procedures used by the DTI have been significantly tightened since 1997 and now include scrutiny for human rights, environmental and other concerns. It would be pointless for ECGD to duplicate work that has already been undertaken by another branch of Government, provided that the criteria used are broadly consistent. We are concerned, however, that ECGD are apparently unaware of the extent of environmental screening performed by the DTI's export control organisation.[20] We recommend that ECGD ensure that the sustainable development impact screening performed by the DTI's Export Control Organisation for sharp-arms defence exports is at least as rigorous as those which it uses for civil projects.

23. Excluding applications for support for exports of aircraft and aircraft components is less justified. All aircraft and aircraft components manufactured in the UK comply with agreed EU and US environmental and safety standards and the international standards and noise and emissions set by the International Civil Aviation Organisation. ECGD argue that this makes "environmental screening on a case by case basis by ECGD unnecessary".[21] Such adherence however reveals nothing of the social, developmental or human rights consequences that such exports may have in the buyer country nor about the effect they may have on the local or regional economy - issues that would be covered by ECGDs existing case impact screening. We note the Government's rejection of the Trade and Industry Committee's recommendation in 2000 that aerospace projects be covered but find its grounds for doing so unpersuasive.[22] We recommend that ECGD bring all aerospace-related applications within its impact screening processes.

Transparency

24. ECGD's mission statement notes that transparency is important to maintain public confidence and to demonstrate accountability. Its Business Principles commit ECGD to being as open as possible and some steps have been made to implement this. ECGD's Annual Report now includes a chapter on sustainable development. The minutes of the ECGD Advisory Group are published on ECGD's website and a transparency working group has been established.[23]

25. Several of our witnesses welcomed increased openness of the part of ECGD staff and greater engagement with stakeholders since the Business Principles were introduced but felt that ECGD's transparency still fell far short of best practice. The Friends of the Earth told us that "the prevailing culture of shadow and secrecy remains intact",[24] citing some high profile instances of their inability to extract environmental information from ECGD.

26. Mr Brown, ECGD's chief executive, argued that in some cases ECGD was not the owner of the environmental information it was asked to disclose: "it is not simply a question of exercising discretion or doing a balance; we are not entitled to reveal that information".[25] In other cases, information may be of a commercially sensitive nature. We recognise the awkwardness of ECGD's position but it is one which it can, and should, resolve. It is taxpayers' money that ECGD is using to support British business. Taxpayers have a right to demand that ECGD can be held to account for the way in which it uses taxpayers' money. Moreover, as The Corner House commented, it is extraordinary that a public body should withhold Environmental Impact Assessments in particular when the whole purpose of such documentation is to be consulted upon and to inform the public.

27. ECGD introduced new disclosure measures in 2002, including the publication of a list of guarantees issued in its Annual Report. However, these measures apply only to one third of the overall portfolio (defence and aerospace being omitted); are dependent on the permission of the client company;[26] and are limited to the disclosure to exporter, market buyer, a brief project description and ECGD's maximum exposure. No indication of the environmental or social impacts of the projects is included. This severely hampers systematic analysis of ECGD's performance.[27]

28. Other ECAs provide examples of good practice in this area that ECGD could look to for guidance. The Canadian ECA, for example, provides a clear statement on the types of information which it considers can be withheld on the grounds of commercial confidentiality and its decisions on these matters are subject to review by an ombudsman. The Ex-Im Bank in the USA and the Australian ECA have for some time been the most transparent in terms of prior disclosure. Japan and Switzerland introduced prior disclosure in 2002.

29. Earlier this year ECGD agreed to publish details of high potential impact cases under consideration on its website. The details are limited to the name of the project, a brief description and contact details for sources of environmental information. This is a welcome improvement but we are still concerned over the limited nature of the information provided and the fact that disclosure is subject to client consent. We recommend that ECGD publish on its website details of all high and medium potential cases under consideration, including relevant information on economic, social and environmental impacts. Acceptance of such disclosure on the part of the client should be a condition of ECGD support.

30. Companies have the right to expect ECGD to treat information which is commercially sensitive in a confidential manner but the onus should be on ECGD's clients to demonstrate the need for confidentiality. Requests for confidentiality should be tested against rigorous criteria to ensure that only such information as might genuinely compromise clients' commercial activities is withheld. A high degree of disclosure should become a condition of ECGD support. We recommend that ECGD adopt a clear predisposition to disclosure of information relating to the projects it supports, especially information regarding social and environmental impacts.

31. Moreover, the restrictions which currently apply to the disclosure of environmental information may fall foul of the new European Directive on Public Access to Environmental Information which is expected to come into force later this year. We recommend that, as a matter of urgency, ECGD liaise with the Department for the Environment, Food and Rural Affairs to ensure that its practices adhere to EU regulations on environmental information now and in the future.

The civil sector and constructive engagement

32. It is possible to make some general observations on that part of ECGD's portfolio which is subject to case impact screening, based on the information available. An increasingly large proportion of ECGD's overall business is supporting power generation and fossil fuel dependent energy projects, often in developing countries. Such energy projects are often associated with high levels of emissions of greenhouse gases such as carbon dioxide. Climate change, driven largely by emissions of greenhouse gases, is the greatest environmental challenge facing the world and a key element of the UK Government's sustainable development agenda. The Government is committed not only to reduce domestic CO₂ emissions but also to assisting developing countries to curb theirs.[28] WWF-UK argued that the increase in support for such projects, up from 42 per cent in 1999 to 47 per cent in 2001, indicated that ECGD was "not being effective in reducing the emphasis on oil and gas and on a carbon economy".[29]

33. We asked ECGD directly whether it had ever rejected an application for support on sustainable development grounds. It told us "no cases have been turned down on purely environmental or social grounds".[30] However, ECGD argued that this was a result of its policy of "constructive engagement" with its clients, in which it seeks to improve "the quality of the projects rather than changing the nature of particular projects".[31] Any success that ECGD may have had in this approach would not be reflected in figures on the amount of support given to particular types of projects because they do not provide any indication of the quality of the project. ECGD told us that it had no concerns about the increase in support for fossil fuel projects "provided we are looking at those projects and we satisfy ourselves they meet the necessary international standards".

34. The Corner House argued that "ECGD's policy of constructive engagement in order to improve the quality of the project, though admirable in intent… fails to recognise that a number of the sectors in which ECGD is involved are inherently environmentally unsustainable".[32] The policy is however consistent with the Government's position on the future of energy provision. The recent White Paper on Energy notes the complex decisions that countries will have to make on fuel mix and recognises that there will continue to be a demand for fossil fuel-based energy generation, especially poor counties where the provision of energy is closely connected with both economic development and human welfare.[33] The UK has strong energy, oil and gas sectors that attract overseas business and ECGD is itself dependent on the applications for support received. We endorse ECGD's policy of constructive engagement and its attempts to improve the quality of the projects it supports.

35. It is however at present impossible to tell whether the policy of constructive engagement is actually resulting in improvements in project quality because the data required to make such judgements is not available. There is some anecdotal evidence to suggest improvements in some cases. ECGD argued that UK companies concerned with the Ilisu Dam withdrew from the project when it became apparent that compliance with environmental standards would make the project commercially unviable - although NGOs contested this analysis.[34] The Secretary of State for Trade and Industry drew attention to a particular project where ECGD involvement has resulted in "significant improvements to the design and implementation" although as the particular project concerned was unnamed, these claims cannot be tested.[35]

36. ECGD told us that it was in the process of developing sustainable development indicators to measure its impact. We welcome the commitment to develop indicators to measure ECGD's impact on project quality but their production and publication has to be in addition to, rather than instead of, greater disclosure on the nature of applications and supported projects.

Promoting sustainable trade and investment

37. ECGD is reactive organisation, dependent on the applications for support that it receives to determine the shape of its portfolio. This does not mean however that it can not send out appropriate signals to industry and commerce to encourage applications for projects and exports which would make a positive contribution to sustainable development.

38. Improving the energy capacity and infrastructure in developing countries is an essential element of poverty reduction and sustainable development. The use of traditional fossil fuels to achieve this can be very damaging both to the environment and quality of life for local inhabitants. The UK has an opportunity to contribute to sustainable development on a global scale through the provision of renewable energy technologies and equipment.

39. The Prime Minister announced during the World Summit on Sustainable Development in Johannesburg in 2002 that ECGD would make £50 million a year available to support renewable exports and projects. Mr Brown told us that

"the purpose of that was to proactively indicate that we were particularly open to projects of that kind coming forward" and assured us that "if we had more projects involving renewable energy coming forward then we would be happy to consider them. £50 million is not a ceiling".[36]

We welcome the establishment of the £50 million a year underwriting facility for renewable projects as a step in the right direction, particularly because of the signals it sends to industry and commerce and the encouragement it gives to companies operating in that sector to compete for overseas contracts. However, this should not be a substitute for treating environmental criteria as a mainstream objective.

40. Isolated action on the part of ECGD is however unlikely to impact on UK overseas trade and industry in any significant manner. The renewable energy sector illustrates this point well. Take up of the fund is dependent on companies making applications for support. Companies will not make such applications unless they have the right products and services to offer to buyer countries. We have commented before on the difficulties faced by the renewable energy sector in the UK and the lack of Government support for the development of renewables technologies.[37] If these technologies are not brought to market in a commercially viable manner, there will be little potential for UK industry to exploit the ECGD's provision. The Government should ensure that all public bodies concerned with the support, development and promotion of UK trade and industry adopt a consistent approach to sustainable development and ensure that initiatives are co-ordinated to achieve maximum benefit.

41. Some witnesses argued that ECGD itself could do more to foster and enhance the competitiveness of the UK environmental sector. ECGD would face a number of barriers in doing so. Environmental projects often have high up-front costs and longer payback periods, increasing the risks associated with a project; nor does ECGD have the facility for short-term loans which are often favoured by the small and medium-sized companies typical of the UK environmental sector. Moreover, many companies operating in this sector are eligible for grants from other parts of Government. It is however possible to identify a role for ECGD to "provide real leadership in supporting UK environmental exporters and improving environmental quality in host countries".[38] Ex-Im, JBIC and some other ECAs encourage environmental exporters through the provision of extended terms of finance and other measures. We recommend that ECGD should develop its capacity to support environmental exports further and should explore the possibilities of offering extended terms of finance and other incentives such as fast-track processing.

17 For an analysis of the environmental impacts of aviation, see forthcoming report from the Environmental Audit Committee on The Budget 2003 and Aviation. Back

18 Ev 22. Back

19 Ev 59. Back

20 Q132. Back

21 Ev 66. Back

22 Third Report from the Trade and Industry Committee, Session 1999-2000, on the Future of the Export Credits Guarantee Department, HC 200; and the Tenth Special Report from the Trade and Industry Committee, Session 1999-2000, Government Observations on the Third Report on the Future of the Export Credits Guarantee Department, HC 849. Back

23 Ev 60. Back

24 Ev 4. Back

25 Q178. Back

26 Two clients, between them with guarantees accounting for slightly less than 10 per cent of the total, withheld permission for publication. Back

27 Ev 22. Back

28 In 1997 the Prime Minister told the Special United Nations Session on Sustainable Development that "industrialised countries must work with developing countries to help them combat climate change … we must live up to our side of the bargain and ensure that they have the resources to do this". Similar, Rt Hon Michael Meacher, when Minister for the Environment, emphasised the need for policies that "encourage developing countries to abate their greenhouse gas emissions while taking full account of their legitimate need to eradicate poverty and achieve sustainable development". Back