Examination of Witnesses (Questions 280
- 297)
TUESDAY 20 APRIL 2004 (Afternoon)
BASIC
Q280 Mr Djanogly: But not to give
state handouts surely?
Mr Paul Ingram: No, that was just
an offhand comment, saying that at the moment we are giving a
subsidy through the Export Credits Guarantee Department and it
is an inefficient way of doing so. I was not suggesting for one
moment that it would actually be effective just to give BAe Systems
£50 million to go home and do nothing. That was not the point
I was making, but it probably came across that way.
Mr Mark Ingram: The issue is what
incentive effects are created by providing a subsidy in a particular
form. Currently the subsidy, if there be such a thing, which we
strongly believe there is, creates an incentive to export arms
predominantly, but certainly to export under long-term contracts
to risky areas of the world products which are currently manufactured
in the UK. That is the incentive effect of the current subsidy
regime. There is no incentive effective for technology transfer
into civilian areas which I could identify, because that does
not seem to fit the requirements of the subsidy. There is no incentive
even to maintain high-technology jobs. It may be that there is
an incentive to go down market.
Q281 Mr Djanogly: Let us say switch
production to the general public.
Mr Mark Ingram: There may be an
incentive to switch production to factories overseas. We have
a problem here in terms of local content which is being insured
by ECGD.
Q282 Chairman: You made the point
about alternative industrial activities like promoting wind technology,
for example. I just ask you this as an off-the-wall question.
At the present moment one of the most highly subsidised areas
of industrial production in the UK is wind farm technology. Are
you telling us that in your view some forms of subsidy are desirable
and others are not?
Mr Mark Ingram: I am no expert
in that industrial area; I am not even an expert on subsidies
in general, so my opinion is probably not even worth stating.
Q283 Chairman: That was really what
I was trying to establish.
Mr Mark Ingram: As a general principle,
I would assume that you want to subsidise industries which are
likely to grow in the future and therefore generate jobs in the
future and industries which are not subsidised elsewhere, so one
pound of subsidy generates the maximum incremental impact on that
industry.
Chairman: The only problem therefore
is that wind farm technology may not be the best one and at the
present moment. Sad to say, there is an inexorable, not necessarily
increasing but sustainable demand for weapons of war. I merely
make that point. One of the things we have to do here is to assess
the quality of the evidence and your arguments might be good,
but your asides might be misleading. I am trying to strip away
some of that.
Q284 Judy Mallaber: I note that in
paragraph 6.1 you do say "We believe it to be economically
axiomatic that subsidies can be justified when they effectively
negate market failure . . . or for social or political reasons".
Presumably on the wind technology example you would argue that
was environmentally and therefore politically and socially justifiable.
Would that be your argument?
Mr Paul Ingram: It is of course
the government's prerogative to determine what is a social and
political objective. What we are trying to separate out from that
is an economic objective. The problem is that when you bring in
something which is an economic objective, you very quickly get
into a situation where market intervention distorts the market,
which is not necessarily a bad thing, but it is only a positive
thing if it is to address market failure or for political or social
reasons. If it is for purely economic reasons, then it is more
likely to do more harm than good and that is a generally established
economic position.
Q285 Judy Mallaber: Going back a
few paragraphs in your evidence to paragraph 5.3 you are moving
on there from talking about issues of efficiency in terms of subsidies,
to getting quite scary. You are talking about the possibility
of catastrophic events exposing ECGD to massive losses. How real
is this threat?
Mr Paul Ingram: You only have
to look back in history to see some what I would call minor catastrophic
events, the first being the debt crisis of the early 1980s which
still, even today 20 years later, accounts for somewhere in the
region of 85% of ECGD's losses. You can look at the crisis in
South East Asia in 1999 which again was a relatively minor catastrophic
risk, which led to significant losses, even on a cash basis, for
Export Credits Guarantee Department. These are events which happen
as time passes. What we have not seen is a major catastrophic
event. We are not talking nuclear war here, we are talking significant
economic disturbance which leads to an inability or unwillingness
by sovereign governments to pay their debts.
Q286 Judy Mallaber: The events to
which you are referring historically had a very severe effect
on institutions across both public and private sector. Are you
saying that in an even more catastrophic economic situation globally
it is feasible to be able to put that threat into these calculations
of risk?
Mr Paul Ingram: No; that is the
problem. If we were to have a catastrophic event, it would be
the government which had to pick up the pieces at a time when
it is probably least able to do so, because it is also likely
to have suffered economically from that event. Even our method
does not take into account severe catastrophic risk, because in
the end, the British Government also guarantees the private banks.
Mark may like to talk more about that. It is inconceivable that
this government would allow NatWest, Barclays and such banks to
go under; it is just politically unacceptable. Even with our method,
we are still not able to price catastrophic risk because we still
end up as the government being the lender of last resort or the
insurer of last resort on the finance markets.
Q287 Judy Mallaber: Is this not true
for any organisation? They cannot draw up all their plans based
on the assumption that they can cover any catastrophic risk, wherever
in the market they are.
Mr Paul Ingram: Yes, we are just
trying to price the subsidy and in pricing the subsidy we are
not taking into account catastrophic risk. We thought we should
identify that as an issue.
Q288 Judy Mallaber: That would apply
to public policy generally outside the financial markets. On that
basis you might say we could not possibly cost out the costs of
our health service because how would it cope with some dramatic
epidemic even worse than those we have seen? It is almost a recipe
for inaction of any kind and just saying we might as well not
even try.
Mr Mark Ingram: The difference
here is that we are not seeking to provide a benefit in such circumstances
for the UK economy. Effectively we are insuring catastrophic risk
for other countries. Therefore there is a question as to whether
or not we want to be in the market of providing catastrophic risk
insurance for other countries, which is effectively what this
is doing, as opposed to risks within the health service which
are domestic. Of course it is the role of government to provide
support for catastrophic risk domestically; that is what the British
Government is about, but I wonder whether it is about providing
catastrophic risk insurance internationally.
Q289 Judy Mallaber: In effect what
you are saying is that this adds a very substantial amount more
to the calculation you would make of the subsidy.
Mr Mark Ingram: It is very difficult
to quantify how much more it adds. The one thing I would say is
that we do know the British Government pays a higher risk premium
than other governments in terms of borrowing. I would say that
the fact that we are prepared to act as insurer for international
catastrophic risk to the extent we are may be a factor in the
fact that we pay more interest than other sovereign borrowers.
Q290 Judy Mallaber: Because indeed
the companies we saw this morning were saying to us that the Department
was currently too cautious in its assessment of risk in comparison
with other countries.
Mr Mark Ingram: In comparison
with other ECAs. We do not challenge the fact that all ECAs are
subsidising currently.
Q291 Linda Perham: Do you think that
the ECGD's new business principles represent progress as far as
you are concerned?
Mr Paul Ingram: To be absolutely
frank with you, it is beyond the scope of our evidence to look
at the business principles because they were more associated with
environmental and corruption issues. We do think that when considering
the mission and the principles it is important that the subsidy
is taken into account and the premiums reflect that in terms of
raising those premiums. We think that needs to be reflected in
the mission and principles, but in order to keep our evidence
focused on the issue we have brought before you, we have not actually
looked in detail at the business principles.
Q292 Chairman: We have just about
covered all of the points. I just want to get a handle on things
here, get a sense of proportion. Let us assume that there is a
major catastrophic situation—and I am not quite sure of
the difference between a major catastrophe and a minor catastrophe,
it is a bit like something being partially unique. How much taxpayers'
money is at risk in respect of this scheme in relation to a major
catastrophe?
Mr Paul Ingram: I am trying to
remember.
Mr Mark Ingram: About £20
billion.
Mr Paul Ingram: It is about £20
billion. In essence it is the value of all the contracts which
Export Credits Guarantee Department is insuring as of today.
Q293 Chairman: To what extent do
actuaries take account of a total collapse in their thinking?
Mr Mark Ingram: The direction
in which you are going is very much the value at risk methodology.
It is whether we can assign a probability to this £20 billion
loss, which is possibly 0.0001% or something very small. What
probability can we assign to a £19 billion loss, £18m,
£17 and so on? Can we end up with a distribution of probabilities
associated with likely loss levels? Actuarially you are looking
into the future, you are gazing into your crystal ball, which
is exactly what the ECGD is proposing to do in order to cost its
operations. It is quite unsatisfactory.
Q294 Chairman: Just in the grand
scheme of things, we are in a building here which cost £200
million. There is a Parliament building in Scotland which started
off at £39 million and is about £410 million this week;
it will be £420 million next week. Since the war we have
had the AGR programme and we have had Concord, both of which have
been public expenditure projects, but in some respects it seems
to be within the risk elements of government to handle this.
Mr Mark Ingram: I would agree
with you, if it were not for the fact that the private sector
has already answered your question. The private sector has already
said how much they believe the cost of such risk should be and
that is the risk premium they apply to government debt overseas.
Q295 Chairman: I think the point
we would be making here is that the Committee has yet to find
evidence which suggests that the lender of last resort argument
is not relevant in so far as even where there are private cover
facilities in other countries, the guarantor for that facility
is the government of the country.
Mr Paul Ingram: In a sense we
are not challenging that. Even with our method, when it comes
to catastrophic risk, the buck stops with the government. What
we are trying to do is cost everything but the catastrophic risk
in a more appropriate manner.
Q296 Sir Robert Smith: Are you saying
that there is private long term money available which is not underwritten
by government?
Mr Mark Ingram: No, sorry; no,
we are not saying that. All the international bond markets are
effectively underwritten by one government or another.
Q297 Chairman: We have covered pretty
well all the ground and more. Thank you very much for your evidence;
it has been very stimulating. We shall certainly direct the attention
of ECGD towards the paper you have given us and see whether we
can get anything more than a Delphic response from them.
Mr Paul Ingram: We should be very
interested.
Chairman: Watch this space. Thank you
very much for coming; we appreciate it.
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