House of Commons - Trade and Industry

Select Committee on Trade and Industry Written Evidence

APPENDIX 14

Memorandum by Friends of the Earth

CONTENTS

1. Introduction2. ECGD's Objectives and Business Principles and the ECGD's Role in the Promotion of Sustainable.

Development.

3. ECGD Objectives and Compliance with its Business Principles and Sustainable Development.

4. The Inadequacies of the ECGD's Objectives and Business Principles in the Promotion of Sustainable Development.

5. Recommendations.

6. Targets for Sustainable Development.

1. INTRODUCTION

1.1 Friends of the Earth is an environmental campaign organisation that exists to protect and enhance conditions for life on earth, now and in the future. We advance our environmental campaign and advocacy work from the perspective of socially just sustainable development.

1.2 Friends of the Earth International have national member organisations operating in 68 countries worldwide, nearly half of which are in the global south.[73] This submission has been prepared by Friends of the Earth England, Wales and Northern Ireland, although the points made are also informed by sister organisations around the world, as well as other non-governmental groups. Friends of the Earth's national head office are in London and have eight regional offices in England and offices in Belfast and Cardiff. We have 102,000 supporters in this country and our work is underpinned by about 250 voluntary local groups. Friends of the Earth relies on individual supporters for 95% of its income. Friends of the Earth Scotland is a separate member of Friends of the Earth International.

1.3 Friends of the Earth is pleased to contribute to the on-going debate on the role of the Export Credits Guarantee Department in relation to sustainable development and to the Committee's inquiry. This submission largely falls under three of the issues that the Committee has solicited comments on:

— The ECGD's objectives and business principles.

— The Department's role in the promotion of sustainable development.

— ECGD's corporate governance.

1.4 Our overall position is that the ECGD requires radical reform and that its mission and remit should be amended in order to become a driver of sustainable development in order to support the Government's commitment to sustainable development and human rights. Friends of the Earth are part of a coalition of International NGOs[74] campaigning not only for ECA reforms with respect to environmental protection and transparency, but also human rights, debt, corruption, military expenditures and other social goals relating to sustainable development. The Campaign's reform goals have been articulated in a number of documents, including the Jakarta Declaration[75] signed by nearly 350 organisations from around the world and more recently reiterated in the European ECA Reform platform and ECA-Watch's collective submission to the OECD negotiations.

1.5 Friends of the Earth's position has evolved over several years of tracking various ECGD activities. We believe that there has been little significant concrete change at ECGD since our submission to the Trade and Industry Committee's last inquiry on the role and remit of the ECGD (Third Report in the 1999-2000 session). This submission therefore draws heavily on our previous submission.

1.6 Friends of the Earth concerns regarding the ECGD include:

— For the majority of cases, no information on environmental or social impacts released before a finance decision is made.

— No use of exclusionary screens or "no go zones" to prohibit environmentally high risk projects or clients.

— Limited proactive efforts to fund renewable energy or other sustainable development projects.

— No compliance mechanisms.

1.7 In this submission our concerns focuses on three areas:

— The current lack of policy coherence with respect to the Government's sustainable development objectives including the promotion of human rights, elimination of poverty and environmental protection.

— The inadequacy of the ECGD's existing procedures, standards and sanctions to promote these broad objectives.

— The weakness of governance structures, including accountability to Parliament and associated failings in transparency regarding ECGD's activities.

1.8 Since the Committee's previous inquiry, the ECGD has introduced a New Mission Statement and the associated Business Principles. In his Foreword to the ECGD's Business Principles, Stephen Byers, the Secretary of State for Trade and Industry said;

"It is true to say that actions speak louder than words".

Friends of the Earth couldn't agree more. Unfortunately this submission raises again the majority of the issues raised previously. Some things have changed on paper, but in practice there has been little concrete change in the types of projects supported by ECGD.

2. ECGD'S OBJECTIVES AND BUSINESS PRINCIPLES AND THE ECGD'S ROLE IN THE PROMOTION OF SUSTAINABLE DEVELOPMENT

2.1 Friends of the Earth consider sustainable development to be the long-term process that improves the quality of life for all people while respecting environmental limits and ensuring that future generations can enjoy a similarly good quality of life. The concept thus embraces economic development and fundamentally assumes the priority to end poverty within the earth's limits.

2.2 Sustainable development is not simply a question of balancing economic ends against environmental protection. This false notion is often cited in policy discussions where there is, for example, scrutiny of subsidies for industry or possible market interventions geared towards sustainable development goals. Sustainable development is rather about the fundamental integration of economic, social and environmental policy. International Finance Institutions, including the ECGD have an important role to play. Total ECA support for business transactions cover almost eight percent of global annual world trade.[78] A report on International Financial Institutions by DEFRA argues;

"unless investment flows [of IFIs] are explicitly focused on and supportive of environmentally and socially sustainable economic growth, such growth will not be achieved."

2.3 Sustainable development remains, however, more aspiration than reality, as confirmed in a wide and ever growing body of technical literature.[80]

2.4 At the Johannesburg Earth Summit in 2002 Prime Minister Tony Blair acknowledged:

"We know the solution—sustainable development . . . the issue . . . is the political will."

Friends of the Earth believe that all Government departments must play their part in a transition to sustainable development. John Prescott, Deputy Prime Minister has stated:

"Financial investment is essential in achieving all Sustainable Development targets, financial investment which is often not readily available."

2.5 Therefore, the DTI, including ECGD, has a particularly important role to play. We are pleased that the Trade and Industry Committee is revisiting this issue and we note the concern that was raised previously. For example, in the Sixth report of Session 1999-2000 concludes:

"We would be concerned if DTI took their responsibilities for promotion of the Government's commitment to human rights and sustainable development the less seriously because of a perception that other departments would take up those issues, leading in practice to DTI invariably granting priority to commercial considerations."

2.6 There are two areas for consideration. Firstly whether the ECGD is meeting its own aims and objectives in relation to sustainable development as set out in its Mission Statement and Business Principles. Secondly whether the ECGD's current aims, objectives and Mission Statement enable the Department to promote sustainable development.

3. ECGD OBJECTIVES AND COMPLIANCE WITH ITS BUSINESS PRINCIPLES AND SUSTAINABLE DEVELOPMENT

3.1 The ECGD's current Mission Statement contains an objective to operate in accordance with its Business Principles. Friends of the Earth believe that the ECGD is not meeting this objective on several fronts. These are briefly outlined in turn below.

3.2 "To be as open as possible, while respecting legitimate confidentiality, about what we do"

ECGD's lack of transparency has been a cause concern in the past. Despite strong criticism from the Trade and Industry Select Committee in the context of ECGD's handling of the Ilisu Dam project[83], the situation was shown not to have improved as Friends of the Earth tried (without success) to obtain copies of the Environmental Impact Assessment report relating to the proposed Yusufeli Dam in Turkey (also the subject of a controversial and subsequently withdrawn application for support to ECGD) in 2002. In that context FOE wrote to ECGD requesting access to a copy of the environmental impact assessment submitted in connection with that project and held by ECGD. The request was denied on a number of occasions on a variety of shifting grounds (including commercial confidentiality and that the information had been supplied "voluntarily").

3.3 Eventually, when Friends of the Earth indicated that it was considering taking legal action against ECGD, the Minister wrote to FOE stating that it proposed to divest itself of the Environmental Impact Assessment (by returning it to the company in question) within 14 days of their letter to us. Once so divested FOE would not, of course, have been able to obtain the documents from ECGD under the Environmental Information Regulations because the information was no longer "held" by them. The proposed action was, in effect, equivalent to shredding. In the event, AMEC withdrew their application for ECGD support and FOE did not take legal action against ECGD.

3.4 Further contact with ECGD in the period since then has indicated strongly to FOE that the lessons of Ilisu and Yusufeli have not been learnt in this area and that a culture of secrecy continues to be all pervasive at ECGD (despite some very modest changes in ECGD's disclosure policies). Indeed, what is remarkable to FOE is the lengths to which ECGD are prepared to go in order not to release environmental (and other) information to the public. Whilst EIAs are now required for category A projects, their release prior to project approval—along with release of other information—is at the project developers' discretion.

3.5 Taking into account important developments in this area in international (Aarhus Convention); European (Directive 2003/4 on freedom of access to information on the environment) and domestic (draft Environmental Information Regulations [2004]) ECGD's approach to freedom of information on environmental matters may well become the subject of unwelcome judicial scrutiny in due course.

3.6 "To ensure that in its operations ECGD takes full account of existing and developing Government policy in the economic, trade, foreign policy, developmental and environmental spheres."

The ECGD have supported many projects in the mining, pulp and paper, oil and power sectors-which have had devastating social and environmental impacts. Friends of the Earth believe the ECGD have failed to take account of government developmental and environmental policy in a great number of cases. Examples of these include the Dabhol Power Plant, Maharashtra, India; Defence equipment sales in South Africa; and the Baku-Ceyhan Pipeline.

3.7 "To ensure that ECGD does not contribute to human rights abuses or violations in providing cover for any project or investment."

The ECGD sponsored Baku-Tblisi-Ceyhan (BTC) pipeline project has been dogged with allegations of widespread human rights abuses, inadequate compensation and consultation of locally affected people and regional destabilisation and militarisation. Furthermore, the Host Government Agreements (HGAs) signed by the Azerbaijani, Turkish and Georgian Governments override all local environmental and social laws for the next half century and effectively give BP sovereign power along the pipeline route. Recipient countries receiving this kind of external pressure undermines global efforts to increase governance in the global south.

3.8 This controversial project has also recently been reported in a leaked report84 as involving project sponsor corruption, mismanagement and incompetence. John Horam, MP is reported to have said the ECGD had failed to monitor the project properly and should consider withdrawing its loan. A spokesperson for the ECGD confirmed, that BP had not informed it of any problems relating to the field joint coating prior to approval of an ECGD loan. Friends of the Earth, along with a large coalition of environmental and human rights organisations believe this to be unacceptable.

3.9 "To take account of the environmental and social impact of projects for which ECGD support has been requested."

[84]

The Sakhalin II Oil and Gas Pipeline Project, currently under ECGD consideration has been reported in The Observer[85] newspaper as putting the fragile marine community of Asian grey whale under significant threat. ECGD investment in this project would be inconsistent with National, European and United Nations Conservation Policies.

4. THE INADEQUACIES OF THE ECGD'S OBJECTIVES AND BUSINESS PRINCIPLES IN THE PROMOTION OF SUSTAINABLE DEVELOPMENT

4.1 ECGD is not currently set up as a champion of sustainable development. Indeed, staff at ECGD have argued that the Export and Investment Guarantees Act 1991 limits the ability of ECGD to adopt an exclusion lists of unsustainable projects. Friends of the Earth believes that a review of this Act is necessary. If the conclusion of such a review concurs with the view that the Act is hindering the ECGD's progress towards supporting sustainable development, then the Act should be rewritten in order to bring the ECGD in line with the Government's stated commitment to sustainable development. Friends of the Earth is keen to see this question resolved.

4.2 The UK Government Sustainable Development commitments from WSSD Outcomes[86] include:

— Agreement that corporate social responsibility should be actively encouraged and promoted by government.

— Integration of international trade into the wider sustainable development agenda.

— Urgently and substantially increase the global share of renewable energy sources, to develop more diverse, advanced, cleaner, affordable and more efficient energy technologies and, where appropriate, to phase out energy subsidies which inhibit sustainable development.

— Ask IFI's and other agencies to support efforts to create a level playing field for renewable energy and distributed and decentralised energy.

— Create closer links between development and environment policy, in the service of sustainable development.

4.3 The ECGD's mission statement claims the ECGD will:

". . . take into account the government's international policies".

This has not prevented the ECGD in providing guarantees that disregard some of the UK government sustainable development objectives outlined at 4.2. Friends of the Earth believe this mission statement must be revised to ensure the ECGD operate under a framework of sustainable development.

4.4 Officials from the ECGD have been cited as reporting "pressure from nongovernmental organisations as a factor in their decision to release environmental information about projects before making a decision on the project."[88] A more proactive approach from the ECGD is necessary. Friends of the Earth believes that the ECGD's Mission Statement should be radically rewritten so that its fundamental remit is to promote sustainable development. If necessary enabling legislation should be introduced in Parliament.

5. RECOMMENDATIONS

Friends of the Earth, as previously stated in a submission to the Trade and Industry Committee's last inquiry, believe the ECGD must:

5.1 Adopt a Clear and Unambiguous set of Mandatory Environmental and Development Standards

These must reflect current best practice in the field. These standards should be aimed at ensuring, inter alia, that ECGD-backed projects and exports:

— have the minimum impact on the environment;

— safeguard the lives and livelihoods of those directly affected;

— has the free prior and informed consent of those directly affected, particularly where forced relocation is involved;

— minimise the need for resettlement and ensure that those resettled are better off than prior to the project or export; and

— ensure full and active participation of affected people and interested groups in the decision-making process associated with the project or export.

These standards should be consistent with, or higher than those required by the World Bank group, the United Nations Environment Programme (UNEP), the Organisation for Economic Co-Operation and Development (OECD), OPIC and US Exim-Bank. All of these have demonstrable weaknesses, but are still better than no standards at all and offer a good basis for improvement.[89]

5.2 Undertake Country and Company Screening

The ECGD should rule out the offer of cover in countries which consistently abuse human rights. It should not offer support to companies which are in breach of the OECD's Guidelines for Multinational Enterprises, nor those proven to have been involved in bribery or corruption. Companies found guilty of corruption should be banned from further support for five years, and export credit agencies should not underwrite commissions as part of the contracts they support. More broadly, the ECGD should consider the past human rights, environment and development record of companies applying for credits or guarantees, and make support conditional on meeting at least the environmental and social standards that they would be subject to in the UK.

5.3 Develop a Concise Project Mandate

The ECGD should not offer support for any projects which have no demonstrable development benefits. The ECGD should develop a clear project mandate. The ECGD should also define certain "no-go zones" including for infrastructure projects in areas of high conservation value such as primary tropical forests, UN national parks, World Heritage Sites and IUCN protected areas I-IV; large dams that disrupt natural ecosystems or the livelihoods of local inhabitants; projects that would threaten peace and security in a region; nuclear facilities or arms sales. The ECGD should also require that contracts it supports have been awarded through open tendering processes.

Effective screening would not only deliver environmental and social benefits, but ensure that the ECGD did not waste time and money on unsustainable proposals and companies operating illegitimately or illegally.

5.4 Develop a Coherent Transparency Policy

Transparency, public access to information and consultation with civil society and affected people is essential in both OECD and recipient countries at three levels: in the assessment of ongoing and future investments and projects supported by the ECGD; in the preparation within national ECGDs of new procedures and standards; and in the negotiation within the OECD and other fora of common approaches and guidelines. The adoption of binding criteria and guidelines is essential to end ECGDs' abetting of corruption. According to Transparency International, the continued lack of action by ECAs to address this issue is bringing some ECA practices "close to complicity with a criminal offence."[90]

The ECGD, as has other ECAs long argued that transparency policy must be limited to protect legitimate business interests. However, a GAO report[91] that studied 24 projects after Ex-Im's environmental guidelines found "limited evidence" of any impact on competitiveness. The report also concluded that specific concerns of business regarding environmental standards were "largely anecdotal and difficult to confirm".

5.5 Reform of Extractive Industries Investments

The ECGD should fully implement the recommendations of the World Bank's Extractive Industry Review.[92] This review initiated in 2000 and completed in 2004 involved consultations with business, government and civil society to formulate guidelines for a suitable future for World Bank investment in the extractive industries. The review recommendations the World Bank include:

— a phase-out of funding for all oil and coal projects;

— full and open consultation with affected communities, and indigenous peoples, and an end to forced resettlement;

— no oil, mining or gas investment in areas with endangered species and areas of armed conflict;

— no more financing of harmful mining technologies; and

— respect for human rights commitments.

5.6 Require Project Impact Assessment as a Matter of Course

The ECGD has made some progress on this and requires an environmental impact assessment for high impact cases. However, it still does not even require an impact questionnaire to be completed for defence and aerospace related applications. Friends of the Earth is pleased that the Trade and Industry Committee raised this in its last review that states:

"We see no reason for defence equipment and aerospace sectors to be exempted from the screening process and request an explanation for the exemption"

We also agree with the subsequent statement that

"The questionnaire is possibly the weakest form of environmental assessment that could have been chosen."

Friends of the Earth believes that the ECGD has a long way to go before it can be said that is carries out rigorous and comprehensive impact assessment. Friends of the Earth believe strategic environmental impact assessments should be conducted for all development projects unless there is a clear case for not doing so. These assessments should then be published on the EBRD website with appropriate notice given, and made available for a 120 day period of stakeholder consultation before a finance decision may be made.

5.7 Adopt a Compliance Monitoring and Auditing System

Experience of impact assessment in the European Union has revealed the need for effective compliance monitoring to ensure that mitigation measures are implemented and standards adhered to during construction and operation. Similarly, to ensure that project and company screening mechanisms are effective requires compliance auditing. At a minimum, the standards of monitoring and compliance operated by OPIC are recommended.

5.8 Develop an Inspection and Dispute Mechanism

Even with the best assessment and monitoring procedures, there remains a risk that projects supported by the ECGD may not live up to the expected standards, or indeed that the ECGD itself may fail to apply its procedures rigorously enough. To ensure public confidence in such procedures requires an independent mechanism to address complaints and concerns raised by affected populations or civil society organisations, with adequate powers and sanctions to resolve disputes. Such a process should be supported by clarification of the legal right of those affected by ECGD-supported projects to sue in the UK (and to have access to legal aid so to do).

5.9 Develop Sanctions for Non-Compliance

Clearly the ECGD needs to be able to take some sanction against companies which breach its standards or abuse its procedures. However, at present, the ECGD has no procedures in place even to debar companies which have been convicted of malpractice. This is despite the UK having signed the Organisation for Economic Cooperation and Development's 1997 Convention on Combating Bribery. Under the Convention, among the sanctions that signatories are required to consider for the offence of bribery of a foreign public official are "exclusion from entitlement to public benefits or aid" and "temporary disqualification from participation in public procurement or from practice of other commercial activities". The OECD's 1997 Revised Recommendations on Combating Bribery also recommend that signatories ensure that "public subsidies, licences, government procurement contracts or other public advantages . . . could be denied as a sanction for bribery". (NB—this wording would reflect more strictly the actual text of the Convention, which is unfortunately slightly less forthright than the original text implied).

The World Bank has instituted measures to crack down on bribery. The bank has adopted guidelines pledging to "declare a firm ineligible, either indefinitely or for a stated period of time, to be awarded a bank-financed contract" if the firm is found to have "engaged in corrupt or fraudulent practices in competing for, or in executing, a bank-financed contract". So far, the Bank has debarred approximately 150 small companies.[95] A report by the Corner House[96] concludes ECA's are central to efforts to combat corporate bribery worldwide. The ECGD should follow the lead taken by the World Bank. Debarment would be one of the most serious and effective deterrents against bribery. It would also ensure that the ECGD did not support companies with poor track records on corruption.

6. TARGETS FOR SUSTAINABLE DEVELOPMENT

6.1 The ECGD has recognised that positive measures are also needed to bring forward sustainable projects for support. Friends of the Earth welcomed its announcement to:

"make available cover for at least £50 million of exports each year that meets its normal project and country underwriting criteria; and, participate in an outreach programme, run by DTI's Trade Promoters and the private sector, to stimulate exports of renewable energy goods to emerging markets to help overcome the low number of renewable energy applications for ECGD cover."

However, as far as Friends of the Earth are aware, no cover has been provided for renewable energy since. This reflects a lack of applications. However, such applications are unlikely to be forthcoming—particularly from small businesses—unless the ECGD take a proactive approach, promoting the fund and specifically favouring renewables over conventional energy projects. Support for renewable energy must therefore go hand in hand with phasing out support for fossil fuel projects. The ECGD has, this year, given export credit support for the Baku Tiblisi Ceyhan pipeline, which every year will transport the oil equivalent of nearly 30% of the equivalent of the UK's yearly carbon dioxide output. The ECGD is also currently considering two other big fossil fuel projects.[98]

6.2 In addition to its renewables fund, the ECGD should develop positive and proactive strategies for supporting environmental technology and services, information and communication technology and other sectors with long-term sustainable development potential, and within construction and infrastructure, it should strategically prioritise support for resource efficiency and recycling, embedded renewable energy and public transport, rather than mining, fossil power, dams and roads. In the same way as the ECGD provides guarantee funds for specific countries, it could do so for specific sectors that match UK expertise with developing country needs for sustainable technologies.

6.3 The ECGD should set incrementally rising targets for positive investments—for example, beginning by ensuring that 20% of power lending goes to renewables by 2005.

The OECD Development Assistance Committee declared in 1996 that:

"we should aim for nothing less than to assure that the entire range of relevant industrialised country policies are consistent with and do not undermine development objectives."

Friends of the Earth believe radical reform of the ECGD's current structures, policies and practices is fundamental in order to meet these objectives.

February 2004

73 Sometimes known as developing countries. Back

74 ECA-Watch www.eca-watch.org Back

75 Jakarta Declaration For Reform of Official Export Credit and Investment Insurance Agencies, http://www.eca-watch.org/goals/jakartadec.htm Back

76 ECGD now claims that all projects "should comply in all material respects with the relevant safeguard policies, directives and guidelines of World Bank group". However, the "should" allows for discretion, and there is no way that anyone can check for "medium" and "low" impact category cases as no information is given on them. Back

77 Therefore there is no way that the public can challenge the information contained in the questionnaire, or the impact category defined of the project. Back

78 Bruce Rich: Trade Above All, Tom Paine. Common sense-A Public Interest Journal, http://www.tompaine.com/feature.cfm/ID/4357. Back

79 Report of a Royal Institute for International Affairs/Forum for the Future workshop held on behalf of DEFRA-Brian Pearce and Paul Ekins "International Financial Institutions: Enhancing their role in promoting sustainable development" October 2001 http://www.sustainable-development.gov.uk/wssd/ifi/02.htm Back

80 See Redclift, M (2000) Sustainability: life chances and livelihoods, Routledge, London and Pearce, D (1995) Sustainable Development: The Political and Institutional Challenge in Kirkgby, J, Okeefe, P,, Timberlake, L, Earthscan Reader in Sustainable Development, Earthscan, London and Hanf, Kenneth & Jansen, Alf-Inge ed (1998) Governance & Environment in Western Europe: Politics, Policy & Administration, Longman, UK. Back

81 John Prescott, in DETR (1999) "A better quality of Life-a strategy for Sustainable Development in the UK", DETR, London. Back

82 Select Committee on Trade and Industry-Sixth Report-Application for support from ECGD for UK participation in the Ilisu Dam project. 28 February 2000. Back

83 Trade and Industry Select Committee (TISC)-12th report (11/5/01) "it is not the first time that our detailed consideration of the request for export credit for the Ilisu dam has been bedevilled by excessive secrecy." This followed from TISC's earlier report TISC 6th (9/3/00) referring to "deplorable and counter productive lack of transparency in the way in which documentation has been kept from the public on the Ilisu Dam Project". The Environmental Audit Committee Report (Seventh, 2002-2003) noted that "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 souces 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." (para 29). Back