House of Commons - Trade and Industry

Select Committee on Trade and Industry Ninth Report

3 ECGD support for the BTC pipeline project

15. As part of its evidence to our inquiry into the work of the ECGD, the Department told us that since January 2001, an impact analysis had been part of ECGD's case assessment process to ensure that the environmental, social and human rights aspects of ECGD-supported projects were compatible with standards used by multinational financial institutions such as the World Bank and the European Bank for Reconstruction and Development (EBRD).[9] During the course of that inquiry we received a significant body of evidence, written and oral, from a number of witnesses which raised questions about ECGD's support for the Baku-Tbilisi-Ceyhan (BTC) pipeline project, as a junior partner of the Lenders Group of banks, export credit agencies and other financial institutions. ECGD had committed to provide cover of up to $150 million for the project. The Department's critics had questioned compliance with its own business principles as they relate to the Government's objectives for sustainable development, environmental protection, the protection of human rights and the prevention of corruption. In their oral evidence ECGD officials disputed the claims made against the organisation, but could not respond in sufficient detail to some of those claims. We therefore asked ECGD to provide a written response to the complaints that we had received. We subsequently invited ECGD's critics to comment on the Department's response. What follows is a summary of the issues raised by witnesses at both stages of our inquiry and ECGD's defence of its actions and procedures.

16. ECGD responded to our request for supplementary evidence in two ways. Together with a number of documents already in the public domain and some which it was content to be made public, it supplied a copy of the Departmental Business Principles Unit's (BPU) review of the project, which provided a summary of the assessments made by or on behalf of ECGD and the rest of the BTC Lender Group of the environmental, social and human rights aspects of the project within the context of the legal framework of the host countries, and international law. We understand that this document constituted a major element of the information considered by the Department's Underwriting Committee prior to its decision to authorise support for the project. ECGD also supplied a copy of the executive summary of the Environmental and Social Review prepared by the independent consultants Mott MacDonald for the BTC Lender Group.

17. Unfortunately, ECGD insisted that the BPU's review of the project was a confidential document within the meaning of the 'Code of Practice on Access to Government Information.' In addition, the Department explained that it held the full Mott MacDonald report in confidence as part of the BTC Lenders Group and so could not supply us with the complete document. We understood the difficulties involved in gaining the agreement of the whole Lenders Group to the release of the Mott MacDonald report, although we did not understand ECGD's reluctance to attempt to do this. We were more disturbed at the Department's reluctance to put its own BPU report into the public domain, particularly as this would have provided an essential insight into ECGD's decision-making process and enhanced our ability to explain our scrutiny of its actions.

18. For ECGD, Mr John Weiss[10] explained the Department's insistence on confidentiality:

19. The Department had published a 'Note of Decision' on its website.[12] This brief document describes in very general terms the factors which were taken into account in ECGD's decision to support the BTC project, but falls a long way short of the assessment of the project produced by the BPU. Mr Weiss conceded that it might in future be possible to provide a more detailed justification for ECGD support than was published in this case.[13] We found ECGD's explanation for its reluctance to put its own assessment of the BTC project into the public domain unconvincing and unsatisfactory. Such reluctance has affected our ability to explain our own conclusions about ECGD's involvement in the project. Much more importantly, it runs counter to the Department's professed commitment to transparency in its business. It should have been possible for ECGD to demonstrate how it had considered all of the concerns raised during the consultation exercise on this project without betraying commercial and political confidences. We recommend that in future, at the same time as it announces a major funding decision, the Department publishes a detailed analysis of the issues raised during public consultation with a full explanation of how those issues have been addressed.

Criticism of ECGD's actions

ASSESSMENT OF THE SOCIAL AND ENVIRONMENTAL IMPACT OF THE PROJECT

20. ECGD's critics alleged that the Department had relied too heavily on information provided by the project sponsor, BP, during the Department's evaluation of the project and in the decision-making process which led to its agreement to support the project as part of a consortium of export credit agencies, banks and other financial institutions. They felt that the Department was too ready to accept companies' assurances that the necessary environmental and social standards were being observed, rather than undertake independent investigations to establish the accuracy of those assurances. BCC was particularly concerned:

"In practice, this can amount to an effective abdication of due diligence responsibilities and lead to an institutional culture under which project sponsors know they are unlikely to be held fully to account."[

21. BCC suggested that while the project may have met international environmental and social standards on paper, its implementation in practice was inconsistent with international best practice[15]. BCC had alleged more than 170 violations of mandatory World Bank Safeguard Policies, EU directives and local law in the project's Turkish Environmental Impact Assessment (EIA).[16] The NGO believed that it had identified 42 specific breaches of International Finance Corporation guidelines on consultation, six breaches of European Bank for Reconstruction and Development guidelines and four breaches of the EU Directive on Environmental Assessments, with which the project was legally required to comply.

22. BCC also raised concerns about the limited nature of the consultation process carried out in Turkey, where it was alleged that less than 2% per cent of the affected population was contacted,[17] the quality of information provided to those affected was poor, and there was misinformation about their legal rights.[18] BCC has produced extensive and comprehensive analysis in support of its allegations, all of which is in the public domain and which we do not reproduce in this Report. It is fair to say that the Campaign raised significant issues which ECGD needed to address before it made the decision to support the project.

PIPELINE CONSTRUCTION QUALITY

23. In his evidence to us Mr Derek Mortimore was critical about the selection procedure that the project sponsor, BP, had employed to decide upon the anti-corrosion coating to be used on the pipeline as part of the construction process. He felt that his views had been ignored by the company, which had selected what he considered to be an unsuitable coating for the pipeline, given the conditions under which it was to be applied. He also felt that his views had been given insufficient consideration by ECGD when he had voiced his concerns.[19] His evidence was supported by Dr John Leeds, who was also critical of BP with respect to its selection of the pipeline coating, as well as the quality assurance procedures that the company had put in place to ensure the integrity of the pipeline.[20]

24. Contributions from Mr Michael Gillard and Mr John Alexander from E H Wood & Co, manufacturers of a pipeline coating which was not chosen by BP, also concentrated on what they felt were shortcomings in the company's selection process. Mr Gillard went further and alleged that BP executives had not demonstrated due diligence in the coating selection and in their supervision of the implementation of the project.[21]

ASSESSMENT OF THE IMPACT OF THE PROJECT ON HUMAN RIGHTS IN TURKEY

25. BCC and the Kurdish Human Rights Campaign (KHRC) complained that ECGD had taken insufficient account of the potential impact on human rights in the countries in which the project was being implemented (particularly in Turkey) and had not reacted appropriately to the instigation of legal proceedings in Turkey on this issue. On several occasions KHRC had complained about the Turkish authorities' treatment of a Turkish national who had protested against the construction of the pipeline, which the Campaign alleged had resulted in his imprisonment.[22]

26. For ECGD, John Weiss explained that the Department relied on advice from the Foreign and Commonwealth Office (FCO) when it assessed the merits of complaints such as these. On the basis of that advice, he was confident that ECGD had taken full account of the concerns expressed by the NGOs.[23] The FCO was also satisfied that the imprisonment of the anti-pipeline protester had no connection with the pipeline project itself.[24]

ECGD's response

27. In its response to the allegations made against it, ECGD chose not to address each of the claims made by the other witnesses. The Department drew our attention to the scrutiny process adopted by all of the institutions involved in the Lender Group. The Department made the point that it had carried out an assessment of the financial, social, technical and environmental risks associated with the project prior to taking the decision to support the project. In arriving at its decision, ECGD had been advised by a number of independent experts and were not, as was alleged, over-reliant on information provided by the project sponsors. The Department explained that, as was its normal practice for projects of such a size, ECGD had, together with the other lenders, carried out a wide ranging consultation with NGOs and other stakeholders about BTC, including NGOs in the three host countries. John Weiss was emphatic:

"We have been transparent about our consideration of the application throughout, and our final decision took into account the information that was presented to us during the consultation."[

28. Mr Weiss insisted that where NGOs raised specific issues ECGD had investigated them properly, taking advice from the independent consultants appointed by the Lenders Group to assess the project application and monitor the implementation of the project. The ECGD's Business Principles Adviser had conducted field visits covering much of the area to be affected by the pipeline in order to clarify specific issues and to verify the findings of the Department's consultants. The BPU's report to ECGD's Underwriting Committee reviewed the concerns expressed by the NGOs during the consultation process. Where he found those concerns to be justified, he recommended that ECGD support for the project should be conditional upon action being taken by the applicant to provide a remedy to the problem. These recommendations were accepted by the Department and ECGD support for the project was made subject to a number of conditions, compliance with which was monitored by the BPU and by ECGD's consultants.[26]

29. Having reviewed the material supplied to us in confidence by ECGD, we are satisfied that the Department did take full account of the concerns expressed by those who contributed to its consultation exercise and that, in deciding to support the BTC pipeline, it acted in a manner consistent with its business principles.

SUPERVISION OF PROJECT IMPLEMENTATION

30. Some witnesses drew our attention to what they saw as failures of quality control in the implementation of the pipeline construction project and what the Campaign interpreted as inadequate supervision by ECGD. PLATFORM alleged that the management and quality control of the construction of the pipeline fell some way short of the standards normally expected for such a project.[27] The organisation told us that it had subsequently drawn the attention of ECGD to allegations, from employees of the company building the pipeline in Turkey or its subcontractors, of major breaches of standard quality assurance practices, including inadequate record keeping, and evidence that faulty welding had been permitted to go unrepaired.[28] Both BCC and PLATFORM called into question ECGD's ability to effectively monitor the implementation of such a large project.

31. ECGD explained that the construction phase of the project was subject to regular inspection and monitoring by the Lenders Group's independent consultants, WorleyParsons, which was supplemented by less frequent site inspections by the BPU. The Department was satisfied that the regime of inspection and audit which had been put in place would be successful in maintaining best practice during the construction of the pipeline. ECGD's Business Principles Adviser, David Allwood, was satisfied that the construction defects identified by BCC had been remedied by the company, which had discovered the problem with defective welding during its own quality assurance procedures, and had rectified the fault before the engineering consultants had visited the site.[29]

32. It is not surprising that quality assurance problems occur during major construction projects such as the BTC pipeline. What matters is that those problems are identified and addressed. We are satisfied that ECGD's monitoring of the pipeline's construction, in cooperation with the other members of the Lenders Group, is proportionate and consistent with the Department's business principles.

9 HC 506-II, App 10, para 14 Back

10 Mr Weiss is Deputy Chief Executive, ECGD Back

11 Q 2 Back

12 www.ecgd.gov.uk Back

13 Q 4 Back

14 HC 506-II, App 10 Back

15 Ibid Back

16 These are set out by BCC at http://www.baku.org.uk/eia_review.htm Back

17 Review of the Environmental Impant Assessment for the Baku-Tbilisi-Ceyhan Pipeline (Turkey Section), BCC and others (2003) Back

18 Environmental and Human Rights Fact Finding Mission Baku-Tbilisi-Ceyhan Pipeline(Turkey Section), BCC and others (2003) Back

19 App 4 Back

20 App 5 Back