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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC1622-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE International Development Committee
THE AUTUMN MEETINGS OF THE WORLD BANK AND THE imf
Thursday 19 OCTOBER MR JEFF POWELL and MS OLIVIA MCDONALD
RT HON HILARY BENN MP, MR MARK LOWCOCK and MR MARK BOWMAN Evidence heard in Public Questions 1 - 77
USE OF THE TRANSCRIPT
Oral Evidence Taken before the International Development Committee on Thursday 19 October 2006 Members present Malcolm Bruce, in the Chair John Barrett John Battle Hugh Bayley Richard Burden Mr Quentin Davies James Duddridge Ann McKechin ________________
Examination of Witnesses Witnesses: Mr Jeff Powell, Coordinator, Bretton Woods Project and Ms Olivia McDonald, Senior Policy Officer, Christian Aid, gave evidence. Q1 Chairman: Good afternoon to you both. I am sorry to have kept you waiting but, as you will appreciate, we are at that stage of the Parliament where we are tidying up business, running whips and a lot of competing business, which is one of the reasons why the Committee is not as fully represented as it would normally be although one or two colleagues may join us a little later. Thank you for agreeing to come in. You will not be surprised if I start off by sounding out your views on the Secretary of State's initiative before Singapore where he announced the withholding of £50 million of UK contributions to the World Bank because he was dissatisfied about their progress on conditionality, which was a slight surprise to some people because he kind of implied that he was not that dissatisfied in the past. I would be interested to get your take on what you think was behind that and what you think he and his Department can do - or from your point of view should do - to change the way the World Bank operates to one that is more pro-development and less pro- what might be called the western or the developed countries' agenda. Ms McDonald: We were really pleased with the announcement that he made on the £50 million; we thought it sent quite a strong public signal internationally about how seriously he is taking this issue. There is a divide between the Bank's policy and practice on this issue and that of the UK Government and I think it brought this debate out into the open a bit more so that was really good. My understanding of what lay behind it was a general concern that the Bank's policy is not that it was not necessarily being implement effectively but they could not really tell how effectively it was being implemented because of the way the Bank was reporting it. They were relying on quite simplistic monitoring to get an assessment of how they are meeting commitments to countries. Q2 Chairman: Is it your judgment that the Bank is still applying unreasonable pressure on developing countries to liberalise and privatise? Again we have had discussions with the Secretary of State and he says that there are two sides to that. Quite often the country itself says they believe that liberalisation and privatisation is a means of development and they want advice as to how to do it, which is not the same as them doing it because the World Bank has asked them. Is it your judgment that there is still undue pressure? Ms McDonald: Yes. A partner organisation of ours called The European Network on Death and Development actually did some research on this and they found there were still privatisation conditions attached to World Bank loans. That is not to say that a country might not decide to undertake these projects, but at the end of the day we believe that it is up to the country to decide whether it wants to privatise or liberalise and what kind of form it wants to take, but it should not be imposed through a World Bank condition. Mr Powell: I would back up Olivia on that position. There are a number of studies that our colleagues have done which suggest that both at the Bank and at the Fund the five good practice principles that the World Bank has adopted are not being observed, or being observed in a very uneven manner. There is also quite a gap between what is reasonable good rhetoric at the centre in the Bank department which is responsible for this issue and what is actually happening at a country level. Q3 Chairman: I want to ask you about Paul Wolfowitz's comment that once the details are published in November Hilary Benn will have no cause for concern. Ms McDonald: If you are talking about one of the good practice principles around ownership, the Bank has tended to measure it in quite a quantitative way: "We had this many conditions in 2002 and now we have this many conditions", whereas to me to really get an assessment of that you need to have independent monitoring and it needs to be done by speaking to the countries concerned, asking them if they feel the Bank is really making progress on this. I do not know how they can do that in one month. Q4 Hugh Bayley: Surely the best form of independent monitoring would be to insist that every major loan or grant proposal from the Bank that is discussed by the government of the developing country goes to that country's parliament for approval as part of a budget process. Is that something you can make recommendations about? Ms McDonald: We have been making recommendations about parliamentary scrutiny. We have been doing quite a lot of work with the Bretton Wood project on that. Generally what we would support is the Bank complying with what the domestic legislation is. If the country has a law that says that any new loans must be read by the parliament and parliament must be able to reject them because that is part of the democratic scrutiny, then the Bank has a due diligence obligation to comply with that. Mr Powell: I would support that. Q5 Hugh Bayley: In how many countries is there such a law and are you campaigning with NGOs for such laws to be introduced? Mr Powell: We are indeed. I do not have the number to hand but I will try to get it for you. It is on the books of a very large number of countries, but what research has shown is that the number of countries where it is actually observed is in fact very small. We are trying to work both with those organisations that are doing capacity building for budget monitoring as a whole as well as organisations that monitor the work of the international financial institutions to build the capacity of parliamentarians to understand the loan negotiation process, what are the key points of intervention and how they can work together with their local civil society to make a difference in terms of the kind of oversight that you are suggesting. Q6 Chairman: The Parliamentary Network at the World Bank is a rather ad hoc organisation designed to help that process. In fact I was invited - but could not go - to a meeting which was supposed to be taking place in Nairobi which I see has now been cancelled because of objections by the government of Kenya. I completely agree with what Hugh Bayley is saying; even parliamentarians need to know how to evaluate these projects and need to be trained. Leaving aside the Parliamentary Network, do you think there is more that could and should be done much more vigorously to train parliamentarians? Mr Powell: If I could just make one point about the Parliamentary Network since you raised it, there was some talk of establishing a working group on IFI accountability. I think that would be very healthy in that up until this point the Parliamentary Network has established working groups which are somewhat more in the interests of promoting the World Bank's agenda, so there is a Trade Working Group or an HIV/Aids Working Group. That is quite healthy and we encourage that but I think something like this which would be turning the lens in the other direction would be quite good. We need to get some MPs both north and south who are interested in that issue to back that idea. That would be something that we think could be done very effectively. Ms McDonald: Just to give one specific example, an organisation we work closely with called Afrodad (African Network on Death and Development) have done a lot of work for the Southern African Development Community Parliamentary Network in training them on the whole process about loan decisions and how they are made, and that has been quite a constructive dialogue that has been taking place for a couple of years. They are being supported by Christian Aid and other organisations so there is definitely a role for strengthening the role of civil society and parliamentarians working together on these issues. Mr Powell: There was a minister's conference in Namibia last year and they are having a similar effort for African MPs which is going to be held in Ghana in December. I think DFID has shown support for these kinds of initiatives and we would simply want to encourage them - that is very much a priority - and to continue to support these kinds of initiatives. Ultimately that is really the best way to ensure that these kinds of things are happening on the ground as we want them to happen instead of repeatedly doing evaluations that are done by bank staff where they can be interpreted very differently by different perspectives. Q7 Richard Burden: Can we just look at the relationship between the IMF and the World Bank? When they were set up it was relatively clear what they were each for and they seem to have transformed quite a lot since then. Both of your organisations have been fairly critical about the way they have operated in many ways, but how do you think they should be developed in terms of what they should be responsible for? Mr Powell: One is always a bit reluctant to step first into this question, but I would first want to preface this by saying that we have some serious concerns about the process that has been set up to look at this question officially; we question the independence of the external committee. It is largely made up of former World Bank/IF staff; it comes from a very specific economic perspective and to some extent you know the answer that such a committee is going to come up with before they begin their work. It does not have a mandate to go to the country level and ask the broader stakeholders that would have an interest in these kinds of issues. Small business and labour have an interest in what kind of role the World Bank and the IMF play and these kinds of organisations in the south are not going to have a voice in this committee. First and foremost we would want some questioning by the Government of the value of an external committee in way it has been set up. Ms McDonald: Something that we would want to be coming out of any discussions about looking at the Bank and the Fund - and we welcome the fact that this is actually being talked about - is taking the two institutions separately and asking what role each one should be playing. There is obviously duplication and that is undermining their effectiveness in some way, in particular we just do not see that the role that the IMF is currently playing in low income countries is the best role it could be playing. It does seem to duplicate a lot of what the World Bank does and it takes them away from what their purpose should be which is monitoring every country and providing short term balance of payment support for countries in financial crisis. There have been mutterings on this from people in government. Mr Blair said something similar to this issue; maybe we need to look at the roles that they play, get the Bank focussed on development and the Fund focussed on global financial stability. That was good but the mutterings do not seem to have led into a policy statement from government really looking at the fundamental roles of the institutions. Q8 Richard Burden: If they were split roughly in that way, if they came round with a blank sheet of paper and asked you what they should do, how should they focus their attention in that way and what are the mechanisms for coordination between them that you would actually like to see? I think I understand the criticisms of what there is and maybe the processes of they are going about reviewing them, but if you were given a blank sheet of paper how would you do it? Mr Powell: We have always taken the position that the Fund should be returning to its credit union role. It is owned by its membership and there is automatic access to funds up until a certain limit that you can prescribe to; beyond that then funds get cut off. That is how it was originally envisaged. Taking it into low income countries clearly takes it into an area where: is the economic view of the Fund which prioritises stability over growth an appropriate one in a low income country? Is the kind of staff that is attracted to the Fund appropriate? Does the country presence which the Fund lacks in low income countries allow it to operate appropriately in low income countries? Has the focus on these issues in fact detracted from the fact that it has not done enough about the contribution of northern financial systems to global instability? We have gone around setting up a series of institutions instead of the Fund - for example the Financial Stability Forum, the Bank for International Settlements - which are essentially doing what the Fund should have been doing in the first place. Thinking about those rules for the Fund, if we had a blank sheet of paper as you say, would be quite important. If that is what the Fund is about then there is obviously much less need for coordination with the World Bank which is much more focussed around long term development financing. Q9 Chairman: Is your view in a sense that the IMF, given its history and its background, does not have much to contribute to low income countries and that mostly what it is doing is harmful? Mr Powell: In brief, yes. There is some role in that there may be some capacity building around fiscal management, around debt sustainability frameworks - a limited role - but I would hope it should be driven by what country governments and parliamentarians would want to see done by the Fund in terms of technical assistance and not as it is right now where it tends to be supply driven. There is a real concern on our part that with the Fund in such financial difficulties over the foreseeable future that it will try to increase its role in terms of capacity building and will probably pass the hat around to try to get northern donors to fund that. That is a concern on our part. Q10 Mr Davies: You obviously want to see the Fund going back to basics, back to 1944 essentially, and just deal with a small number of low income countries in the fields you have mentioned. What are your preferred proposals for the internal governance of the IMF? Do you have any ideas about how it should be re-organised or how its governance should be improved internally? Ms McDonald: Obviously this is an issue that was strongly on the agenda at Singapore. My assessment would be that what came out of Singapore does not go far enough to get a reform of the governance of the IMF that will make it a more effective institution. We would like to see a system that moves it more towards one member, one vote. In the interim one of things that we were suggesting is double majority voting which would be a system where there would be one country, one vote alongside the current system which at least should give middle income countries and low income countries much greater influence on this institution where obviously the ramifications of what it says on domestic countries and the global economy are quite important. Mr Powell: I would agree with a kind of back to basics description of what we want the Fund to do, but hopefully it would not be just that. We would also want the Fund to be able to deal with what is increasingly a complex global financial picture. To give one example, the increasing volume of derivatives that threaten to swamp southern capital markets, we would want a Fund that would be able to deal with that issue which is a very current financial issue and rapidly evolving. When we say back to basics I would not want to presume that that just means the Fund as envisaged in 1944. Q11 Mr Davies: You want the IMF to take responsibility for the stability of western financial markets. Mr Powell: It is not taking responsibility for them but it is understanding how those systems are working and how they may be contributing to global instability and there may be a need for regulation of those funds, for example. Q12 Mr Davies: I believe in that respect the Fund would be replacing the present responsibilities of the central banking systems. Mr Powell: It would not be replacing the central banking systems; it would be taking some of the role that is currently being taken by the Financial Stability Forum and our concern about those kinds of institutions is that they are even more opaquely governed by a small group of northern countries than the IMF. These are decisions which have, in some ways, more implications for small capital southern countries than they do for northern governments where that capital is coming from. They should have a voice in setting the rules of the game. Q13 Mr Davies: There seems to me to be a contradiction, Mr Powell, in the proposals that Ms McDonald has put forward and your own. If you are going to give a one man, one vote in the IMF so that you are going to have, for example, Malawi with the same vote as the United States, and you are then going to ask the Fund to take responsibility for or certainly to get involved in the management and stability of financial markets which are 99 % located in a small number of western countries (actually as far as their derivative markets are concerned almost entirely New York, London, Paris, Tokyo, Frankfurt) so there must be a contradiction there. You are asking people who have no such markets in their own countries, who have no such expertise at all themselves to take decisions affecting the stability of these highly technical markets. Mr Powell: I would beg to disagree. Certainly where these funds are located is in northern countries, but where these funds can often have a most deleterious impact can be in some of your middle income countries. That is the case of what we saw, for example, in the Asian financial crisis. Impact and location of where the funds are are often quite different, and those who are impacted by these funds I think should have some voice in the rules. Chairman: I think we need some clarification on what exactly you are proposing. The extreme view - the one that Quentin Davies was articulating - is the one member, one vote. What you appear to be saying is that what you want is that there should be more of a voice for the smaller income countries, particularly on the policy areas that affect them. I just wanted clarification of which point you are arguing. One is simply saying they should have more say over the things that matter; the other one is saying they should have more say over the entire fund. Q14 Mr Davies: Mr Powell, are you really saying to the Committee this afternoon that you think the people in Zambia have a great deal to contribute to the analysis of counter-party risk in the derivative markets? Mr Powell: No, I am not. I think we need to clarify the double majority issue, which is not a one person, one vote; it is trying to balance the current system - which is essentially a one dollar, one vote system - with a one country, one vote (the UN system of sovereign nations). By having a double majority we are seeking to have a balance between those two, so we are not having a one person, one vote, allowing a Zambian farmer to have the same say on international financial flows. Q15 Mr Davies: Ms McDonald was actually saying that her ideal scenario was one man, one vote. She put forward the double majority system as a half way house, an acceptable half way stage but not the ideal solution. I think there would be very considerable contradiction between your views about what the role and responsibilities of the IMF should be and her views which you appear to endorse as to what the government structure should be. Ms McDonald: If it came across as one man, one vote then I apologise about it; I meant one member, one vote. At the end of the day these are important international decisions and I strongly believe that in an international world they should be made in that kind of forum, but I appreciate what you are saying about the realities of the impact and consequences, so I think, as Jeff says, it is a good half way house between the one member, one vote and the one dollar, one vote, and I think it is a proposal that people who support both should be working together to try to get it. Q16 Hugh Bayley: There is another point in your evidence, Olivia, about which we are not convinced, which has to do with your statements about corruption. You acknowledge in your paper that the World Bank has an obligation to ensure that its resources are going to where they are intended; we know that in the past that has not always been the case and previously the Bank has turned a blind eye to corruption (it was a word that was not allowed in the World Bank vocabulary). That has changed and now you seem to be saying that you do not think the World Bank should have a major role in seeking to improve standards of governance. That is starkly at odds with what the new DFID White Paper says. Are you sure about this or do you want to retreat? Ms McDonald: I do not want to retreat at all but maybe I want to clarify the issue. I think on corruption what we were trying to guard against is the World Bank taking the role of being kind of like a global watchdog to developing countries. Q17 Hugh Bayley: Surely as the biggest donor it must be a watchdog in relation to its own decisions. Ms McDonald: No, I think there is a difference between the World Bank ensuring that its own resources are going where they are intended, but then morphing that role into setting standards that all other donors follow behind on what is and is not corrupt and setting the parameters for what a country has to do. Q18 Hugh Bayley: You have to have coordination between donors. It would be daft if they had different rules to combat corruption put forward by DFID and the Bank and others. You want coordinated rules. Ms McDonald: I think the Bank has a role to play; I think the Bank needs to coordinate with other donors. The Bank has done quite a lot, for instance, on funding public financial management and it has a role to play in that. However, for instance, when it comes to working with parliaments which is a very, very key point in fighting corruption by their oversight role I do not think that is the Bank's role. There are other donors that have had effective engagement with parliaments of developing countries over the years, so it is about how they all work together. Mr Powell: To add to this, partly what we are trying to prevent is the Bank creating yet another set of rules around corruption. I think that is what Mr Wolfowitz would like to see. There is already the UN convention against corruption and there are the OECD/DAC rules against corruption and we would like to see the Bank playing by those rules, one important partner amongst an international framework to deal with corruption. I think that is the emphasis here. In developing this framework we have had some serious concerns about the process by which it has been developed. It has been developed in a rush without going to talk with the various groups who have an interest in seeing how it has developed. There has been some research done by our colleagues at CAFOD which showed that the starting point is problematic. Both the Bank and its leadership lack serious legitimacy when it comes to talking about the issue of corruption and this has to do with Bank involvement in the past - there were some very questionable projects - and of course the personal reputation of Mr Wolfowitz and his involvement in what can be called some dubious state rebuilding in Iraq where there has been an enormous amount of funds that have gone missing. So there is a real problem of legitimacy there. Q19 Hugh Bayley: Those were not Bank funds. Mr Powell: No, those were not Bank funds; this is the personal legitimacy of the leader of the World Bank which is leading those in the south to really question whether or not the World Bank is the appropriate institution to play a leadership role in this issue. Q20 Hugh Bayley: Would it not be better if you developed arguments against the institution that its policy is wrong rather than ad hominem? It sounds to me as if you are creating an Aunt Sally because you have some personal axe to grind. Mr Powell: I am referring to a study that was done in terms of perception by groups in the south who want to see how this framework is developed, not my personal views. Q21 Hugh Bayley: Surely it is really important for the Bank to deal with corruption. It needs corruption policies; it needs to coordinate with other agencies. Why are you knocking this? Mr Powell: It absolutely is; it is a question of how. It is really a question of how. What happened is that it looks as if Wolfowitz decided that this was his personal issue and so from the end of last year he started cancelling various projects. Q22 Hugh Bayley: Leave Wolfowitz out of it; the Bank is an institution that is much bigger than the individual. My Africa All Party Group has just produced a report on corruption. I applaud the fact that this is going up the political agenda as far as donors are concerned. I was very pleased to see that the new DFID White Paper gave a much greater focus on the importance of improving governance because we know that with bad governance a lot of aid is misused. To be creating the impression that it is wrong for the Bank to move in the same direction seems to me that in a policy sense it is going to harm development and therefore harm the poor rather than be helpful. Ms McDonald: If that is the suggestion that is coming out that is unfortunate because I do not think any of us take corruption at all lightly. As far as I am concerned it is a question of what is the best way of dealing with corruption. We have substantial policy concerns with the approach the Bank has used in the past and the approach that could be used in the future. There have been successive changes of their anti-corruption draft which is now improved but six months ago some of the stuff that was said was quite alarming. It was basically saying that they were going to do assessments at the outset and if a country is corrupt they would not lend to it. We are seriously concerned that that strategy would harm people in that country. We are not saying that you just give money to that country, that the Bank should not be looking at these things. What we are talking about is how do you deal with corruption in that country? I think what came out in the White Paper was really good in linking governance and corruption. What I am worried about is that that link is not being made very clearly in the Bank and it is quite a battle to get that to be seen in the Bank. It really is a policy issue. Q23 Mr Davies: Are you actually saying to us that you think that Mr Wolfowitz is an unsuitable person to be president of the Bank? Mr Powell: Yes. Q24 James Duddridge: I would like to ask you about the Norwegian Government's recent decision to cancel the debts of five countries, both in terms of their rationale for doing that and what policy implications are for other countries. Ms McDonald: I am not what we call a debt-head but I will give it a try. Christian Aid have been pushing for the issue of illegitimate debt to be raised and discussed and potentially cancelled so we really welcome what the Norwegian Government has done in deciding to cancel loans to five different countries. What we would particularly like to see is that the UK Government and the World Bank begin to look at this issue in the same way that the Norwegian Government has. Mr Powell: The Norwegians have put forward some funds to look at this same issue from a multi-lateral lens within the World Bank and we are looking forward to the results of that research. We hope that the Government would take an active role in supporting that research and following up on any recommendations that do come out of it. Q25 James Duddridge: Do you agree with the current British Government's view that the HIPC initiative is a much more effective way to deal with sovereign debt? Do you think there are lessons to be learned from the Norwegian example or is the British Government still correct to stick with HIPC? Ms McDonald: From my understanding the idea of illegitimate debt is that it has three different elements: a debt that cannot be paid; debts that are unstable for human development interests; and the issue of odious debts. HIPC only really deals with the fact that a country cannot afford to service its debts so how does that impact on development? It is not particularly looking at the question of who the loan went to, and it does not look at the question of whether the loan was something that was overpriced and did not work, in which case the person giving the loan was maybe somewhat complicit in that loan should that country be still shouldering that debt. The UK Government has done a lot to get HIPC and the MDRI debt initiatives through. We are just saying it is time to look at the broader picture of illegitimate debt. Q26 Chairman: You are not a debt head as you put it, but are there any circumstances institute which HIPC would not actually embrace odious or illegitimate debts? They are not going to be able to pay it anyway. If it is odious and if it is illegitimate that is probably true. Is there any evidence of what is defined as odious or illegitimate debt not meeting the HIPC criteria? Mr Powell: There are two cases. One is that many countries which might be HIPC eligible either have not yet got into the process or have been very slow going through the process. If part of those debts were so-called odious debts they should have been cancelled immediately. There is an issue of accumulation on those debts so that if loans were used for purposes other than for which they were contracted, of course they have been paying interest on those debts for anywhere from five to ten to twenty years and there is an issue about what to do on those accumulated arrears as well. Then there is the question of middle income countries which are not eligible for HIPC so you do have countries in Latin America or Indonesia which are never going to be eligible for HIPC and where odious debt is still a key issue. Q27 Mr Davies: Would you just take the example of two countries with the same per capita income, the same economic characteristics altogether, the same level of external debt; the only difference is that over the last ten years one of them has had an entirely democratic regime and the other one for most of the time has had a nasty totalitarian regime. Under your proposals the debt of the second country would be cancelled and the debt of the first country would not. Is that not a curious, perverse incentive to create? Ms McDonald: As I said when I was talking about illegitimate debt and the fact that we are talking about unpayable, unsustainable and odious debt ----- Q28 Mr Davies: I do not want odious. You were saying that odious gets cancelled right away because it is odious before you even start getting involved with HIPC and so forth. I have just given you the example of two countries which are totally comparable except that one of them, because it has had the undesirable experience of having a nasty totalitarian regime, all its debt is characterised as odious, all of it is written off. So it gets an enormous dividend and everybody's wealth in that country is enhanced overnight for the simple reason that they had a nasty totalitarian regime, whereas the other country in my example which has been a perfect democracy all this time does not get any benefit at all. Is that not an unfair and perverse incentive to create? Ms McDonald: That is a really good question. Q29 Mr Davies: Had you not thought of it? Ms McDonald: No, I am not a debt head. Q30 Mr Davies: Then you should think about it before you take this proposal any further, if I may say so. Ms McDonald: If you let me respond I would argue that what we were saying earlier about the role of having democratic scrutiny of loans, if you had that process at the country where citizens and parliamentarians could say, "Why are you agreeing this loan? Why are you agreeing this loan, this loan, this loan? We do not need this factory. We do not need this. We cannot afford to shoulder this. This is eating into our budget" then actually you would not have a situation where a country had built up that debt in the first place. Mr Davies: You have not answered my question. If you look at countries that have had nasty totalitarian regimes and you say it is not the fault of the people that that debt has been taken on and therefore it is odious debt, so you simply write it off; it is no longer repayable, it is a free gift to that country. So that country gets a free gift for having a totalitarian regime. Do you see my point? Hugh Bayley: Maybe it is a reward for better governance. Q31 Mr Davies: It is not a reward for better governance because the country that has had the better governance because the country that has been the ideal democracy all along is not getting any reward out of the system whatsoever. That is what is perverse about it. I would like you to think about that before you take this process any further. Mr Powell: This is not an arbitrary decision about what is odious debt. It is establishing some kind of international mechanism which we do not have the answers for of how it would be set up, but that is what needs to be investigated, to make careful decisions about what is odious debt. Mr Davies: The principle is that the worse the government's record the more likely it is that the debt is going to be written of. You have a king-sized perverse incentive created, that is my point. Q32 Chairman: Are you saying that or are you saying that it would be the case if the country had got rid of that regime? Mr Powell: That is what we are trying to get to. There is a whole question of how you would deliver that benefit. If it is still an odious regime in power there are different mechanisms you could explore about holding that money back until such time as there is a change in power. That is the point I was trying to get to and I think there is the whole question of an odious regime you do not have the counter-factual of what actually those funds might have gone towards to be invested in economic growth. So that odious regime, even though growth may have been reasonable, may have punished the citizens for decades. Mr Davies: Odious regimes are not necessarily economically ineffective. The Pinochet regime in Chile which might be thought of as an odious regime was immensely successful economically. My point stands. Q33 Chairman: I do not want to go down that route. This debate was there right at the beginning of the whole HIPC process which is why, as you say, we need to be reassured before we write off debt that things have changed whereas some NGOs were saying write off all these debts unconditionally. I think to some extent Mr Davies' point was being borne in mind, namely that you cannot reward a people for irresponsibility on corruption, at the same time there is no point in going on insisting on the repayment of debts when you will never get the money back. I think Mr Davies has made a fair point that there is a dilemma there and if this definition is taken forward it would be helpful to try to address that. We are getting towards the end of our time but I would like to move onto energy and climate change because one of the things that the Bank in particular has stated that it is in favour of moving towards is low cost solutions, renewable energy, alternative energy. As far as I understand from the briefing we have is that in reality its funding is still going to things like fossil fuels and nuclear power and large scale hydro-electric. Is this an over-hang? Is change coming or are you concerned that it is another case of rhetoric not matching the delivery? Mr Powell: The language is improving and we hope that there will be change. There has been some increase in the renewables portfolio but yes, we are worried that it still seems largely symbolic. Renewables are still less than ten per cent of the Bank's public portfolio, less than six per cent of its private portfolio and largely they are made up by a few very large projects that still involve clean coal and large hydropower. So far we have not seen the evidence to really back up the encouraging change in the language of what the Bank is doing. We are worried that the definition of what is renewable energy really is not shifting. We also have some concerns about the repeated reliance on carbon markets as the only way that we are going to solve these problems and seemingly a refusal to look at strengthening mechanisms. Q34 Hugh Bayley: The Commission for Africa called for a huge increase in spending on infrastructure, an additional 20 billion a year they called for in Africa. The Bank is by far their largest single donor on infrastructure projects and its funding for infrastructure is increasing, but what is your view of the Bank's decision to champion high-risk/high-reward projects, given the problems there have been with some large infrastructure projects in the past? Mr Powell: Again the language we get from the Bank is that we have learned the lessons of the past, from the white elephant projects that we had in the seventies and eighties. However the reality on the ground is that in the last five years - a little bit beyond five - the Baku-Ceyhan pipeline, the Chad-Camaroon pipeline (the Chad-Camaroon is the biggest investment in Africa; the Baku-Tbilisi-Ceyhan is the biggest investment in Central Asian infrastructure), the damn infrastructure in Laos, it looks like there is going to be enormous investment in large hydropower in Pakistan imminently, so it looks like these lessons are not being learned. Small de-centralised energy provision is better for the poor, it creates jobs and it avoids all the enormous problems that we have encountered in terms of human rights abuses in terms of not living up to the economic potential of these large projects in the past. It is very much the case that although we agree very much that there is the need for an increase in investment for infrastructure, the question of what kind of infrastructure does not seem to be changing. Q35 Chairman: Thank you very much. I am sorry this has been slightly curtailed because of the vote, but thank you both for coming in. Our exchanges are always, I think, robust but good natured and they do help us to formulate our ideas about policy and there are conflicts within the development of policy which governments and international agencies have to struggle with as well. I very much appreciate the fact that you have taken time and trouble not only to provide written submissions but to come in and explain them and subject yourselves, as I say, to friendly but robust questioning. Mr Powell: Thank you very much for the afternoon. Memorandum submitted by the Department for International Development Examination of Witnesses Witnesses: Rt Hon Hilary Benn, a Member of the House, Secretary of State for International Development, Mr Mark Lowcock, Director General, Policy and International, Department for International Development and Mr Mark Bowman, Director, International Finance, HM Treasury gave evidence. Q36 Chairman: Secretary of State, thank you very much for coming before us. Would you first of all introduce your team, please? Hilary Benn: On my right is Mark Bowman, Director of International Finance from the Treasury, and on my left is Mark Lowcock who is the Director General, Policy and International, from DFID. Q37 Chairman: Secretary of State, you set some ripples running before the AGM in Singapore in which you stated that you were withholding £50 million of British Government contribution to the World Bank because you were not satisfied with the progress on conditionality. I have to say - I think it is probably worth putting on the record - my recollection of a meeting this time last year is that you said something different and you did but we subsequently got a correction, namely you said that the Bank had said they will only use conditionality on privatisation and trade liberalisation in exceptional circumstances and then the correct went on to say that you had pressed this further and such a specific commitment has not been given. Does that actually capsulate the problem, in other words you are not satisfied on delivery or you are not satisfied on intent? Hilary Benn: I think the principles that the World Bank drew up are good principles and they are ones that I support, but it is about the implementation of those. As you will be aware, when we made our contribution to IDA 14 we said that £100 million of that would be linked (a) to progress on harmonisation and (b) on conditionality and that was specified in the governor's resolution. I think the issue for me has been that the Bank produced its development policy lending retrospective which was considered by the Board in July 2006 and although it provided some useful information bluntly I thought it was a bit thin and really did not give me the facts and the figures and the detail that I need in order to make a judgment about how the principles - which I welcome - are actually being applied in practice. Therefore our executive director at that meeting said that we wanted further information. We were trying to persuade the Bank to provide it. There was not a lot of support; I think there was only one other country at the Bank Board meeting that said it shared our view. However, having reminded the Bank that the payment of the further amount of money was going to depend on satisfactory progress - and I spoke to Paul Wolfowitz about it - the Bank then agreed in the run up to Singapore that they would produce a further report and I welcome that enormously because that is what I need in order to enable me to make a judgment. Q38 Chairman: Mr Wolfowitz seemed to give two slightly contradictory replies. In a letter to The Financial Times he said that you and he were at one and that once you saw the details in November you would be entirely satisfied that the Bank were delivering on policy. I think he put out a press release that said he thought your motives were political or a gesture rather than a substantive and I suppose the question really is how much influence can you have and what is it that you are looking for? How are you going to be able to explain to us, Parliament, and to the Bank what has satisfied you or, indeed, are there circumstances in which you will continue to withhold that money or, indeed, withhold more? Hilary Benn: I cannot withhold more. I set out very clearly at the start of the IDA 14 process what we were holding back, conditional upon progress on two issues: harmonisation and conditionality. I was very clear and upfront about that and that formed part of the resolution that was considered by the Standing Committee in February 2006 looking at the IDA 14 statutory order. The honest answer is that it depends what the further report shows. Christian Aid got Eurodad to do their own assessment of a number of different countries and I think that the problem with that was that it was not absolutely clear: what is a condition that the Bank is insisting upon? What is a benchmark? What are benchmarks that countries themselves have set? The question here is: is there real ownership by developing countries? Since the thing that I have been particularly concerned about is trying to enforce on countries what I regard as controversial areas of economic policy conditionality and in particular trade, liberalisation, I just want to know how the principles that were agreed and which I support because they are the right ones have actually been reflected in practice. Because we have now encouraged - and I regard what I did in the run-up to the World Bank Annual meeting as an encouragement - the Bank to do what our executive director asked them to do when the report was considered in July, that the Bank having heard our reservations (it was not at that point planning to produce a further report but were encouraged) in the run up to Singapore decided that they would produce a further report which is going to come out in November and I welcome that. We have used our influence to some effect. Q39 Chairman: That report was a direct response to your initiative. Hilary Benn: Yes, that is unquestionably the case. Q40 Chairman: The 50 million is out of a total of 1.43 billion of aid that we have committed last year to the Bank. This Committee, on a number of occasions, have discussed an expanding aid budget which is continuing to expand regardless of debt relief in absolute terms and in a sense you have to work through international agencies because the capacity of DFID to do more is limited - not totally limited but by definition limited - so you are left with not much choice other than to support the World Bank. The question always has been: how do you deal with the World Bank if it is not doing the right thing? Where else could you put the money if you did not give it to the World Bank? Hilary Benn: We are very strong supporters of the World Bank and we give the World Bank a lot of money and it does a lot of good work. In the end you have to strike a balance. Some of the campaigning NGOs - Christian Aid and others - have been urging us to withhold a very large amount - if not all - except the funding for the debt relief. After a clarification on their part I do not think that would be the right thing to do. We have to recognise, as you say, that we are one of a number of members of the Bank and we do not wholly control it. I think it is fair to say that on this issue of conditionality we and one or two other countries who have taken a particular interest, but it is not an interest that is shared by everybody else. Having worked to get good principles drawn up, what I now want to see is how they are being applied in practice and the answer to your earlier question is that it depends on what that report shows and in the end I am going to have to make a judgment as to whether I think the Bank has made sufficient progress - and in the end I will take responsibility for that - in implementing those principles in practice. One of the benefits of getting this further report is that the original retrospective covered - I think I am right in saying - the period of January to June. The Bank has now agreed to go back to October of last year to October of this year so we will get a longer period covered. I hope very much that we will get further and much more detailed information that will allow us to make a judgment because some of the campaigning NGOs, having made an attempt themselves to do that kind of assessment, I think the best thing is for the Bank to do it itself. I welcome the fact that in the run up to the Singapore meetings the Bank decided that it would produce that report which, as I say, was I think in response to some encouragement from us. Q41 Chairman: We have asked this in the past and it seems that, for reasons you have explained quite clearly, you have upped the ante. Do you not think that given the significant amount of British tax payers' money that is going in the World Bank and given the debate that you have initiated and the fact that you have to make a judgment about it, that it would be appropriate for the Government to initiate a debate in the House to explain what that policy is? This Committee is not generically opposed to the World Bank at all; we meet with them regularly and deal with them and appreciate the work that they do. At the end of the day the point is that we are giving a significant amount of our aid budget through that route and Parliament really ought to have the opportunity for debating it. You have said in the past that you would have a look at it and you think it is a good idea, but do you not think, having made this stance, that it would perhaps appropriate timing to have a debate in the near future, perhaps at the point at which you evaluate the decision? Hilary Benn: I hope very much that we are going to get an opportunity soon in the main chamber to debate a number of things to do with development and no doubt this is one of the issues that will come up because I hope we are going to get the chance to debate the White Paper which is published in July and I have no doubt that this issue which we are discussing now will figure in that debate when we get it. There are real issues here to discuss about the choices we make as to where we put our money within the multi-lateral system and what effect we get for those choices. There is also a real debate to be had about how we pursue the policy approach that we now have on conditionality in multi-lateral institutions, recognising that we are just one voice. I do think in the end that it is about striking the right balance and that is what I am seeking to do. Q42 John Barrett: Secretary of State, you mentioned campaigning NGOs in relation to the Singapore meeting and you may be aware that some NGOs were aware of the major problems getting into Singapore despite the Singapore Government having signed a memorandum of understanding that accredited groups and organisations would be allowed to attend. Has the Government carried out any enquiries as to why the Singapore Government felt it necessary to ban certain individuals, some of them British, from the Annual meetings of the World Bank and the IMF? Secondly, what will Her Majesty's Government do to ensure that the hosts of future meetings do not arbitrarily decide who to exclude from those meetings? Hilary Benn: When we became aware that there was a problem we and others made representations - as did the World Bank - and I did discuss this with Paul Wolfowitz when I arrived in Singapore. I know that as a result of those representations from a number of people some of those who had not been allowed in were allowed in, but I also very conscious that some could not change their plans were finally a decision was taken to permit them to get into the country. I really do regret what went on. I find it frankly pretty inexplicable and I do not think it reflected terribly well on the Government of Singapore, particularly because there was this memorandum of understanding. What I think we do now need to reflect on - I hope the Bank is doing so and I shall go away following this session to check whether that is the case - is to try to ensure that in future a memorandum of understanding between the Bank and the country which has offered to host the meeting results in the spirit of that memorandum being implemented, namely that people who are properly accredited are able to come to the country. Q43 John Barrett: Was there a feeling at the time the because of the lack of attendance that something was missing? Some of the forceful individuals and organisations would have felt that they were being kicked out and it does not benefit anybody, I would suggest, not to have the maximum amount of participation. Hilary Benn: I agree with that completely because one of the features of the Annual meetings is that there are the formal meetings with the representatives of the various countries, but there is also a lively fringe - to put it absolutely bluntly - and I think it is important that all of those voices are heard in the debates and discussions. That is certainly the case outside of the formal meetings, the Annual and the Spring meetings, and I really think it is highly regrettably and honestly I do not understand it. Surely no-one has anything to fear from listening to all of the voices about these really, really important issues. I hope it does not happen again. Q44 Chairman: It is true that some of the NGOs said in advance that they did not like the location of Singapore because they feared this would happen. What steps are taken to ensure that when a venue is selected you can ensure that this does not happen? Hilary Benn: I think in the light of the experience there has been, I am sure the Bank will want to make sure that there is not a repetition of this. As I say, I only became aware relatively close - I cannot remember the exact day - to the Annual meetings that this was a problem. It came out of the blue and as soon as we became aware then, as I say, we and others made representations, but I do hope that the Bank on reflection would now pick up exactly the point you have made and ask countries that are hosting future meetings whether we can be absolutely clear that what it says in the memorandum of understanding is what is going to happen. Q45 Mr Davies: Secretary of State, do you accept that the World Bank is right to enforce conditionality relating to economic policies to make sure that the economic policies pursued by recipients of their loans and their aid packages are not going to damage their economic development? Hilary Benn: For me, as we have discussed before Mr Davies, the debate about conditionality is about the right kind of conditionality. I take a particular view about certain types of economic policy conditionality and they were set out clearly as far as our own policy is concerned in the review Partnerships for Poverty Reduction: Rethinking Conditionality which we published last year. There are other types of conditionality where it is right and proper for donors - international institutions like the World Bank - to link to lending and aid and it is a question of judgment as to where you are going to do that, consistent with the principles that have been laid out, and I welcome the principles that the Bank adopted. Q46 Mr Davies: We have discussed this matter before and I know that you are perfectly happy with conditionality applying to human rights, for example monitoring the spenditure of aid and we both agree about that. Do you not agree that it makes no sense at all to give aid to a country if they are pursuing policies which run quite counter to the economic development which one is trying to encourage? For example, if the country's regulatory and tax policy is such as to discourage entrepreneurship there is absolutely no point in the tax payers of this country or other countries providing a large amount of aid because the domestic process of wealth creation has been stymied by the policy of the government concerned. Equally I came across a country the other day, for example, that has a rule that foreign investors can only take out of the country the amount they put in. In other words, any investment cannot achieve a return because you can only take out what you put in. That, of course, as I said to the president of the country concerned, effectively putting a large sign above the country saying that they do not want foreign investment there. What is the point of providing aid packages, whether through multi-lateral, multi-national agencies like the World Bank or bi-lateral donors like ourselves if the country is actually turning away FTI by perverse policies? Surely it would be irresponsible for donors not to draw the attention of recipient countries to perverse or damaging policies of that sort and not to insist on occasion that those policies be changed because otherwise what you are doing is stepping on both the accelerator and the brake which can make no sense whatsoever. Hilary Benn: I agree with you completely that it is right and proper for all donors, including the Bank, to raise the issue and you draw attention to two very good examples in that particular case. However, I think it is a matter of judgment as to whether, having done that, you are going to encourage the government in question to make progress or make it a condition of lending and it depends on what kind of lending you are giving. If it were a programme for education would it be sensible to link progress - albeit on a very important issue that you have raised, Mr Davies - to a decision about lending on an education project? I think there has to be a balance in these things. Q47 Mr Davies: You would not have a quarrel with Mr Wolfowitz if the World Bank adopted conditionality of the kind I have just set out where their own programmes are concerned. Hilary Benn: As long as it is consistent with the principles that the Bank itself has adopted. Q48 Mr Davies: Would that conditionality that I have just described be consistent with those principles in your view? Hilary Benn: It depends. Since the first of the principles is country ownership; to what extent is there country ownership of action to deal with the problem that you yourself have identified? That is what the Bank itself has adopted. I know the debate about ownership is very fraught because some people ask how do you demonstrate that it really was the partner government that decided they were going to do this? Were they leaned upon? Were they encouraged? Were they given the impression that if they did not move on this they would not get the money? That is why it is quite difficult to come up with a hard and fast rule. Q49 Mr Davies: That is really my question. Would that make it unacceptable to you? Would that be a breach of the principles? If the World Bank said that in order to get this particular grant you must change this policy and then the government said they would change the policy, would that mean that there was no ownership? Would mean that the old principle number one was breached? Would that mean the kind of conditionality that was being imposed was unacceptable to you? Hilary Benn: It would genuinely depend on the circumstances, whether the country in the end had decided that this is what it wanted to do and it is very, very hard to define where the line is to be drawn between being required and the country itself deciding that this is something that it wanted to progress. Q50 Mr Davies: So you are against conditionality which actually influences policy? Hilary Benn: No, I am not. As I have said repeatedly, Mr Davies, that it is about the right type of conditionality. Let me give you an example. In the case of our own budget support for Sierra Leone we have an element of that which is dependent on progress on a number of issues. One that I was concerned about was the linkage of drugs that were purchased by the central drugs purchasing agency and whether they reached the regional and district health clinics. When I was in Sierra Leone in July I learned that the problem is a combination of inability to record whether the drugs have got there and some speculation about whether some of the drugs had been diverted. One of the measures that we are going to use to determine what we do with the variable element of our budget support is going to depend on progress on that. It so happens that the government of Sierra Leone is itself committed to making progress on that so, if you like, it is a shared conditionality and the fact that they have a public expenditure tracking system now allows them much better to identify what proportion of the drugs bought centrally actually get to the people for whom they are intended. Q51 John Battle: The International Monetary and Finance Committee of the IMF decided to have a two-stage process of reform with the ad hoc increases in quotas. Why did our Government back the two-stage reform process and agree to delay the reform of the quota formula for two years? Do we think that the loss of quota particularly by India is a satisfactory outcome? As you will know, China, South Korea, Turkey and Mexico saw their quotas increase; India's has decreased. Is that what you were looking for? Hilary Benn: As you know the Fund voted 19.6 % for these reforms and China, Korea, Mexico and Turkey - the four most under-represented - are going to get quota increases. That is the first thing. Secondly, we recognise that in particular the low income countries - especially those in Africa - in the run up to the meeting had concerns about the pace of progress and we would definitely like to see an increase in the voting share for low income countries and we are prepared to look at seeing the share of basic votes trickling at least in order to try to ensure that that is the case. In relation to the specific point to do with India, since I was not at the meeting but Mark Bowman was, he might be able to help the Committee. Mr Bowman: The issue about doing this in two stages is a very difficult debate, having a discussion on the distribution of quotas. I think the important thing about getting agreement to the first stage is that there is a very strong commitment to following through on the two year process which is a more fundamental review of the quota formula to simplify the process, to make it more transparent and to have a system which properly reflects the economic weight of countries in the global economy. The other absolutely essential element for us is increasing the basic vote, the number of votes that are given to individual countries irrespective of their size. We have a very clearly stated objective of increasing the voting share of low income countries overall. It would have been nice to do this in one process, but the absolutely essential thing about the agreement in Singapore is the overall commitment to following through on this two year process of overall reform. Q52 John Battle: The Indian finance minister did not think that the formula was right for India; do you? Mr Bowman: The current formula is the product of successive negotiations over the past forty years. Q53 John Battle: The reform will not make any difference. Mr Bowman: There is a clear commitment in the resolution that was agreed by the governors in Singapore to simplify the formula - make it more transparent - and that is a process and a debate that will go on over the next two years. Q54 James Duddridge: Secretary of State, what steps is the Government prepared to take to ensure that developing countries have a better representation on the executive board and will that greater representation mean a commensurate reduction in European involvement and British influence? Hilary Benn: In relation to the Bank we are stuck on voice, which is the issue that we are discussing. We want developing countries to have a greater voice on the Bank but currently the various proposals that have been put forward for changing the structures have not been able to command a majority and we are going nowhere. That is a very blunt and rather gloomy assessment of where we are at. Secondly I would say that it would be nice if, even within the limited representation that developing countries have on the Bank Board currently, we heard a little bit more noise about voice. That is just an observation having been to a number of meetings. The third point I would make - it is one I have made to the Committee before - as I reflected on the lack of progress (and it is not for want of trying but for lack of consensus) it occurred to me that trying to make progress on conditionality - coming back to the point that we have just been discussing - was quite an effective way of giving developing countries a greater voice in what happens because if the principle of country ownership is encouraged and upheld then that puts them in a stronger position to take decisions about the future of their own countries in relation to support they get from the Bank than has been the case in the past. We have put a certain amount of energy - as the discussion we have just had demonstrates - into trying to make progress on conditionality because at the moment genuinely I do not see how this is going to move forward in the Bank. There is no sign of it happening and I regret that. Q55 James Duddridge: Who is responsible primarily for this resistance? Hilary Benn: There is not a majority in favour of making change. Also because there have been different proposals as to how a change might be made and there has not been a sufficient head of steam in support of any one of those to get it through. It really has not been for the want of trying. The sad thing is that in the last couple of meetings voices figured less prominently in the discussions - certainly in the Spring meetings; we did not discuss it in the autumn meetings - and that was not the case when I first came onto the Bank Board; it was quite a live issue but we have not been successful. Mr Lowcock: I think the pressures for change in the World Bank on this topic will grow if the second stage of the reforms in the IMF are complete. At the Development Committee the shareholders of the Bank did ask the Institution to keep this issue under review with, from our perspective, the hope that there will in due course be scope for some change. However, as the Secretary of State has said, there needs to be a sufficient number and proportion of the membership who want it to change in order to set up a meaningful discussion. Hilary Benn: One of the things that we are currently doing through this trust fund is providing support to the Sub-Saharan African executive directors to give them greater capacity in order to represent their constituencies on the Board itself. That is a small practical step that we have taken to try to assist them in the absence of agreement on a bigger way forward. Q56 Chairman: Is there not inertia in the fact that there is a deal between the IMF and the World Bank that the managing director of the IMF will be European and the World Bank will be an American and that suits the Europeans and the Americans very well? Even though we were not terribly happy with the Wolfowitz appointment we were not prepared to rock the boat that far. To be blunt, are the big powers basically saying it is okay but they do not have an interest in diluting their power. Hilary Benn: I honestly do not think that the arrangement for appointing the heads of the two institutions is the reason why there has not been progress on voice. I genuinely think it is for the reasons that I have set out; I wish it were otherwise. Q57 Richard Burden: The Paris Declaration commits donors to try to work more closely together. The White Paper itself mentions the poor and the importance of trying to develop an internationally agreed approach to tackling corruption. How would you like to see the governance arrangements that you are developing through the White Paper and processes? How would you like to see that coordinated with other donors, with other players in the game? Hilary Benn: This goes right to the heart of what I thought was an excellent discussion that we had at the Annual meetings on the governance and corruption paper. In the run up to the Annual meetings the issues that were at the heart of that debate were not all terribly clearly reported in some of our newspapers and I am sorry about that because it was the most useful and genuine discussion at the Development Committee that I have ever experienced. It is not always characteristic of the Development Committee that there is a full, frank and free exchange of views. The reason why there was a full, frank and free exchange of views is that there are a number of things that we are grappling with here. First of all, on the issue of being tough on corruption so to speak everyone is at one on this; there is no argument about that whatsoever. However, where there was debate was where the Bank is investigating cases of alleged corruption and how does its internal investigation procedures work? Chairman: We will break now to vote and resume as soon as possible. The Committee suspended from 4.02 pm to 4.13 pm for a division in the House. Q58 Chairman: Secretary of State, are you ready to carry on? You were in full flow. Hilary Benn: I was, yes. I will try to pick up where I left off. I think I was making a point about the Bank's investigations. Obviously the Bank has to do investigations where there are allegations, but concerns were expressed at the meeting about the length of time some of those investigations were taking, the extent to which others were being informed of progress, the impact those investigations then had on other Bank lending. These were all points made at the meeting. One of the things we agreed was that the Bank said it was going to undertake a review INT. That was the second issue that came up. The third issue - and I think there is a consensus on this - even where there is corruption we should not walk away from the country because it is not the fault of the poor people that there is corruption going on. Fourthly, as well as being tough on corruption as someone might once have said, you need to be tough on the cause of corruption, in particular tough on fixing the problem because corruption is a manifestation of poor governance. Finally the issue that was debated is what should be the division of responsible between the Bank (which has particular expertise in public expenditure management, for example) and other donors. We felt that the document had come a really long way; we did not think it was quite there and that is why we agreed what we did in the communiqué. It was the best debate I have ever heard because it was a genuine debate about how we deal with this really important but knotty problem. Q59 Richard Burden: If we take an example of where you took action - it is not purely on the issue of corruption but where you took action and in one of our previous meetings we had one or two suggestions to make about it - which is the withholding of money from Ethiopia and Uganda, and if you recall we said there that we understand the reasons but it would be good on those sorts of issues if there was greater coordination. If the process that was commenced at the Development Committee actually went the way you would like, how would you have seen that sequence of events to be different? Hilary Benn: In the case of Ethiopia it was not corruption that was the issue it was human rights and governance as you will remember and all of the donors did the same thing. All of us who were giving direct budget support said that we were not going to give direct budget support any more. In the case of Uganda where there were also concerns about governance, as I recollect - but I would need to check - I think there were one or two other countries that took the same approach in terms of reallocating some of the money away from what they had been giving in budget support to other forms of activity. In our case I think it was £15 million this year that we put into more humanitarian relief in the north because of the problems of the LRA. There are within each country donor coordination meetings and when an issue like this arises not surprisingly the donors get together and say, "Okay, folks, what are we going to do?" Some countries will come with a very clear view of the process they are going to take; others are not so sure and want to see what others are doing. I think that provides the best mechanism for trying to ensure that we do march in step when these problems arise. Mr Lowcock: I would like to add that one of the reasons why we were so keen to encourage the Bank to take forward a much more comprehensive programme of consultation on its approach is exactly because it is really important that if you are a recipient of these funds - the finance minister in a low income country - you are getting a coherent message, not different nuances across the piece. It is important to us that as this consultation goes forward the Bank engages for example with the EEC who have their own governance profile instrument but also with a lot of the other players as well as with civil society and the private section and so on. Q60 Richard Burden: Would you see that procedure as applying to situations where the focus is not particularly corruption? When we last discussed this I think Mr Davies asked you about this whole area and you said you would go away and reflect on some kind of common procedure and approach being established. Is this the one you were talking about? Hilary Benn: In the end it is going to depend on the decision that each individual donor makes and different donors may be giving their aid in different ways anyway so there are some that do not go in for budget support and therefore they could not be part of any consensus to change and move away from budget support because of problems in a country. Mark is absolutely right; it is much, much better if we can try to act in concert and we certainly seek to do that. There is a great pressure in part because people do not want to be left out on their own, but you have to recognise that it may not be possible in all circumstances because the pressures a country is under back home, what may be a big issue in one donor country may not be a big issue in another. The circumstances do vary. Q61 Chairman: In those two countries, Uganda and Ethiopia, how much coordination has there been? Hilary Benn: In the case of Ethiopia a lot because we came to a view right across the piece that we would not give direct budget any more and then some of the donors took the view that there are a lot of poor people in Ethiopia and we should not walk away - the point I was making a moment ago - and therefore have found another mechanism through the Basic Services Grant. Some of the donors came on board; some have been a bit reticent, waiting to see how things unfold. We took the lead in that because we thought it was important to find another way notwithstanding the real concerns that we had about governance. The government of Ethiopia was extremely cross that the international community took this step but I am absolutely clear it was the right step to take in view of what had happened because it did breach one of the principles of the Development Partnership that we have laid down. I think it is important to show that those principles mean something and when something goes wrong there is a consequence, otherwise why would one adopt the principles in the first place? Q62 Chairman: If I can slightly abuse that on the Uganda point, it does create a problem for your own department in as much as budget support is easier to manage and what you did with the money was to give it mostly to two UN agencies and other people questioned whether that was the best way to do it. I appreciate it was an easy and legitimate way to do it, but the question that then arose was that if we get any kind of peace deal in northern Uganda people are saying they want development money to replace aid money, but they need to ensure that it goes to the north and not siphoned off to the south or corrupted. How can you manage that if you do not coordinate with other donors, and even if you do does it not put an awful lot of pressure on the DFID post in country actually to manage it? Is there not a big difference between simply giving budget support and having transparency, and trying to deliver poverty relief which you cannot work through that route? Hilary Benn: It certainly does put pressure on. In the case of Uganda, as you say, we found another mechanism and there are great needs in the north; I think everybody recognises that. In the case of Ethiopia it was an enormous amount of work to change tack from the budget support arrangements that we had been assisting with and developing to say that we have to do something completely different. I have to say that the team responded magnificently, but not without a lot of very, very hard work in the circumstances. As far as a peace deal in the north is concerned, it all appears a bit in the balance because actually at the moment it is not clear how this is going to turn out. I fervently hope that there is finally going to be a resolution to this terrible trauma that the people of northern Uganda have suffered and I think it is very important if there is a deal that President Museveni and the government show that they are then going to turn their attention to supporting the people in reconstructing their lives and developing in the north. It is one of the priorities that he has set himself if there is a peace deal because he recognises the importance of building on a foundation of peace after all of these years of the most appalling suffering. Q63 Mr Davies: Perhaps I can make a practical suggestion. I know the executive branch does not always appreciate practical suggestions, but I just wondered whether there might not be merit in formally raising this with your EU counterparts with a view to ensuring that where a warning needs to be given - and hopefully warnings are given before sanctions are imposed or it is subsequently necessary to take action - that that is done on an EU basis involving all the Member States and the Commission speaking with one voice because it seems to me that the leverage you could get there would be greater and the warning would be more likely to be heeded and therefore perhaps the sanctions less necessary to apply. Certainly you would get the coordination before you started with a very substantial portion of the total donor players in that particular country in almost any case you can think about. Hilary Benn: I undertake to reflect on that. As a sort of first reaction it strikes me as a sensible way to proceed and by and large I think that is what donors try to do. There is particular incentive for coordination and cooperation amongst EU partners and I accept entirely the point that if donors are able to reach a shared view then it has much more effect if there is a single approach, a single view expressed to partner countries when there are problems rather than a lot of different ones. Q64 Mr Davies: I wondered if you raised it formally and got a formal protocol - I see Mr Lowcock is nodding - you would obviate the danger either that some other country gets out of line in advance and does something which then surprised you, or alternatively you take sanctions against some country or give a warning and some other EU country says, "Do not worry; we'll compensate. We'll carry on and we can give you more aid." That, of course, would negate the effect of your action. It would mean that our actions would be much more effective. If one were to raise the idea I cannot anticipate what the response would be, but I have no reason to suppose that other EU donors and indeed the Commission itself are not confronting exactly the same kind of pragmatic problem that we face here and have faced recently in Uganda and Ethiopia. Hilary Benn: We certainly are. Mr Lowcock: I think, as the Secretary of State says, we need to reflect on this. Your proposal builds, in fact, on two things that already happen but it does extend them somewhat. The first thing that happens is that there are provisions in the Cotonou Convention for what to do when there are certain breaches of the fundamental principles. Those provisions of course affect only the EC Commission's own money. Nevertheless there is that process and it reads across to bi-lateral flows as well. The second thing that happens is that EU heads of mission in a country will very, very frequently issue a collective point of view, a statement ----- Q65 Mr Davies: Often they do and sometimes they do not, I agree. My suggestion formalises and makes it more transparent and clearer to all concerned. I am grateful to you for taking it on board. Perhaps I can ask another question, a slightly different one, which is just to have on record, Secretary of State, your response to the Norwegian initiative which has been to fund some studies into the concept of defining illegitimate debt with a view to writing this off. This is an interesting new development in the development area and we would like to know what you think about it. Hilary Benn: I am not sure it is funding studies. As I understand it Norway recently cancelled some debt for failed ship export projects. Q66 Mr Davies: I have not done any research on this myself but my briefing tells me that the Norwegian Government has sponsored studies currently being undertaken at the World Bank and the United Nations into illegitimate debt. My question to you is what is your response to that initiative? Are we joining that initiative? Are we supporting it? Are we waiting with interest for the results? Are we sceptical about it? Is there anything else relevant you would like to tell us about it? Hilary Benn: I am happy to confirm - you are better informed than I was until a moment ago - that Norway are funding the Bank's work. The Bank and the UN are doing some work on this concept of odious debt and Norway is giving it some funding. Personally I think there is a difficulty trying to define what an odious debt is. I was discussing it with the representatives of some of the NGOs yesterday and the example was given of lending in the past, as I recollect, for an energy project that had not been very successful and had not produced a lot of power. Whether you classify that as an odious debt, to be honest I am not entirely sure. I see there is an issue here because I do recognise that in the past - and maybe in some cases continuing - there has been bad lending and bad borrowing (if I may use that term), but quite how you would quantify something called odious debt, to be honest I do not see how you could do it. Therefore our position at the moment is that we look with interest at what Norway has done on the ships. We note the fact that they are funding this and we are going to wait and see what comes out of this UN and World Bank work and then we can reflect upon it. Q67 Chairman: You will know that there is some controversy about the extent to which debt relief should be treated as ODA and I think a group of NGOs have said that they inflate our percentage target by a significant amount over debt relief. Indeed, if you take the debt relief out this year they did not even increase their aid at all. It is not an argument against debt relief or indeed the issue of illegitimate and odious debt, but do you accept that there is an issue here? If you are writing off debt that you were not going to get back anyway and crediting that towards your aspiration of a 0.7 per cent target, in reality you have not made an additional contribution to reducing poverty. Can I anticipate your response? You are going to say that the governments can now spend the money they would have spent on the interest, but if they were not paying the interest anyway is that a real test? Hilary Benn: It is not us who counts it this way; it is the OECD/DAC that counts it this way. You can see the figures with the debt in it and you can see the ODA figures without the debt in it. It is all available for people to look at, but I do accept that depending on the pattern of debt cancellation you can get spikes from your ODA/GNI and we are certainly seeing that currently because of two big debt deals. Secondly, my argument on this has always been: additional to what? How did you know what the aid was going to be without the debt cancellation? Thirdly, there is no doubt that the debt cancellations that we have seen, and here we are 15 months after Gleneagles with 20 of the poorest countries - this was reported of course to the Annual meetings - all of the debts they owed to the World Bank, the IMF and the African Development Bank have been written off and that is real progress. When you look at how the countries are using the benefit of that debt cancellation - because they no longer have to service those debts - for expenditure that is helping them to make further progress towards getting all their children into school, improving health care and so on, this is real progress. This argument has been going on for a very, very long time. That is the position that I take on that question. Q68 Hugh Bayley: At the G8 last year climate change was a priority and I would like to explore what seems to me to be an inconsistency between our own climate policy with the development dimension of our climate policy. The Energy Review which the DTI published a few months ago envisages an ambitious five-fold increase in generation from renewables. The World Bank puts a lot of money into energy lending but only six per cent of that currently goes on support for renewables. The Extract of Industry Review called for a phase out of World Bank funding on fossil fuels and an increase in funding for renewable energy by 20 per cent annually. How strongly committed is your department to driving that forward and reflecting it in its own development lending? Hilary Benn: I hope people would feel that we are strongly committed and anyone reading the White Paper - having seen an entire chapter devoted to natural resource use, climate change, the impact on developing countries - would see that reflected in what we are saying and in what we are seeking to do. Last year the Bank more than doubled its investment in renewables. We had a further report on progress on the energy investment framework but the fundamental issue we know is this: developing countries have a need for more energy. We were talking about Uganda a moment ago and when I last met President Museveni he listed three priorities. One was progress in the north and the second was that they need more energy supply. China is building one new power station every ten days. This is happening. The issue is that developing countries want increased energy supply. We know we have an enormous problem with climate change; the figures are quite stark, they are very frightening and we do not have a lot of time left. The question is: how can we better pool together existing Bank lending for energy? About a third of the Bank's work is on infrastructure and a lot of that is energy. How can we ally that with where most of the money is going to come from for this investment - and the answer is from the private sector together with the other regional development banks - to both help developing countries to acquire greater energy supply (because that is what they are going to do anyway) while at the same time helping them to do that in a way which is cleaner while in time we will try to get to a position where energy supply in the world is clean and we can cope with the CO2 emissions without raising the temperature to an unsustainable level. This is a huge challenge. When Nick Stern's report is published in the near future it is going to lay this all out in pretty stark terms. We have to understand where developing countries are coming from and if the Bank were to say that from now on they were not going to lend for any of that and countries say they have coal and gas and they are going to draw on that because that is the easiest resort they have in the short term to get energy supplies up, we are going to be passing each other in the night. The question is how do we ally what the Bank is trying to do to support other types of investment and to work with developing countries which themselves are becoming more aware. This is a process of change that we are all going through, including our own country, in order to ensure that we can both meet the needs for energy (there are 1.6 million people who do not have access to energy at all and that is essential for development) but at the same time be able to make rapid and fast progress when dealing with the problem of unacceptable levels of CO2 emission. Q69 Hugh Bayley: Can I broaden to infrastructure more generally? The Commission for Africa identified the need for an additional 20 billion a year to be spent in Africa on infrastructure and there has always been an assumption that a large proportion of that finance will come from the private sector. We noted in our Private Sector Development Report that the priorities of the private sector may not be poverty reduction - that may be a bi-product but that is not going to be their core focus - and within the energy field there may not be investment in renewables because generation from renewables is usually less cost effective than generating from fossil fuels. Does your department think that we have the right balance of investment between the private sector and government funding for the growth in investment in infrastructure in Africa? Do we have the right level of involvement from local African private sector partners? How do you ensure that this infrastructure is infrastructure which will lead to the poverty reduction that we wish to see in Africa? Hilary Benn: I think the first thing to say is that one of the things that came out of the Commission for Africa Report was the Infrastructure Consortium for Africa and we played, as you know, Mr Bayley, a really important role in getting that up and running. I can tell the Committee that since it was inaugurated in October 2005 eleven regional infrastructure projects have been funded to the total value of 765 million dollars. Thirteen studies to develop new projects have been funded; 7.9 million dollars have been put into those studies. Sixty-one projects have been funded at country level worth 3.5 billion dollars. What the Infrastructure Consortium was about was trying to pull together a number of the different players in this field to say, "Come on folks, how are we going to work more effectively together to meet the needs that have been identified in the face of Sub-Saharan Africa by the countries themselves?" That is the first point. The second point is that it is for the countries themselves to determine what their priorities are. One of the things I know that Don Kaberuka at the African Development Bank has been working on is trying to make sure that the Bank's money could be shifted more quickly to support infrastructure projects because frankly, as you know, it has had problems in the past in getting the money out of the door. You might as well get the money you have out of the door more effectively because then you are in a better position to argue for more cash to make further progress. The third thing I would say is that in some areas of infrastructure one sees the private sector investment coming. I think mobile telephony is a really good example of that because there is absolutely no doubt that the investment is coming to Africa (there are three times as many mobile phones in Africa as fixed landlines, skipping a generation of technology); it is the fastest growing market in the world and there is no doubt that mobile telephony is helping economic activity. For all the reasons that we have discussed before, it enables people to do business more effectively. There are areas where the private sector investment is coming; there are others - one thinks particularly of roads and other transport infrastructure - where money from the Bank and the European Union and others is going to have to help make a difference, but it is for the countries themselves to determine what the priorities are. Mr Lowcock: The latest figures we have seen indicate that there is a growth in investment in Africa and infrastructure both, in fact, from the private and the public sector. The Bank's own infrastructure lending - this is not just Africa but in total and it reflects an African growth as well - has increased from 5.4 billion dollars in 2003 to 7.3 billion dollars in 2005. That is largely public sector obviously but there is a lot also on the private sector side. It must still be the case though that that rate of growth needs to increase if we are going to meet the kinds of needs that African countries legitimately have. Q70 Hugh Bayley: Could I ask a final question about progress with the IFFm and what the Treasury sees as the timescale for launching a fully-fledged, generalised IFF? Hilary Benn: On IFFm I think we are pretty close to the issuing of the bonds. I was at an event last week for investors who were coming along to look at the proposal with a view to encouraging them to subscribe to the bonds. I would say on the bigger IFF, why IFFm is so important is because it is just about to demonstrate that the model works. You put the key in the IFF engine, you turn it and, lo and behold, you can raise funds for development, in this case the hugely important cause of vaccinating in the next ten years five million children saving their lives. It is absolutely right and proper to go for IFFm as a way of demonstrating that this works because then that means we can continue to keep up the argument with others: if we can do that for vaccination and immunisation, why can we not do that for other things as well? Mr Bowman: That is exactly right. On the IFF immunisation the legal framework documents are all in place; everything is now ready to go. What is happening at the moment is that a series of road show events are happening with investors, discussing the bond and there will be a launch of the bond in the next few weeks. A date has not been set yet but it will be in the next few weeks. Clearly once this is up and running it is all about proving the concept and going out to people to show them that this works as a model and it is a mechanism for front loading resources which can be used to immunise children pretty much straightaway. Q71 Hugh Bayley: I wish you well but how long will it take for a successful IFFm to create the confidence in the market to launch a fully fledged model? Are you talking about a couple of years? Mr Bowman: There will be very real demonstrational effects very soon. The bonds will be launched in the next few weeks. The resources will then come in and be dispersed and on the ground children will be vaccinated very soon. We will be able to demonstrate that a very significant amount of resources have been front loaded and are actually having a real impact on the ground. We are not talking two years; we are talking the next month in terms of actual, real, concrete front-loaded activity on the ground. Q72 Hugh Bayley: So you could be selling bonds - making a bond offer - for the generalised IFFm this time next year. Hilary Benn: You mean the IFF proper. Q73 Hugh Bayley: The generic IFF, yes. Hilary Benn: It all depends on how many countries are prepared to come in for the IFF proper. We have a group of countries, as you know, who have supported IFFm and I think we will be in an even stronger position to argue the case but I cannot say what the reaction of other potential partners is going to be as to whether they are prepared to come on board for the bigger IFF. Undoubtedly, as Mark says, we will be able to point to the model at work, in this case saving children's lives. Q74 John Battle: You mentioned technology and the internet. I seem to remember twenty years ago a report suggesting that the key to India getting out of poverty and becoming a middle income country was actually technology in the form of the aeroplane, internal air flights and external connections, international travel. I just wondered in terms of climate change and the environment policies, I think I read in the corner of the White Paper that DFID is committed to supporting an air travel levy (which is a little bit like the rejigging of the Tobin tax, a way of raising extra ODA fund) and I want to know if I have read that correctly. I particularly want to ask whether there has been any estimate or any work done on the implications not only of a levy for ODI but if we did a carbon tax on travel and transport what would be the effect on trade for Africa given, for example, that Kenya sends its flowers every day to Europe? If we tax it will there be compensation? I am not saying we do not do it; I am asking do we think it out. Even representatives of poorer countries coming to meetings of the World Bank and the IMF, if they are all in the north how can they get there if they cannot afford the air fare because we have put two lots of levy on them? Have we thought that through and re-thought how we enable the countries - particularly in Africa that are locked out of trade at the moment - will be unable to join in if we actually decide to claw back on air travel? Hilary Benn: The UK does, as you know Mr Battle, have an air passenger levy and I think that is the reference in the White Paper that you were talking about. There is a real dilemma here and you have just expressed it because for countries like Kenya, Ethiopia (who is now into the same sort of market), Zambia (with green beans that turn up in out supermarkets) this is one of the ways those countries are participating in the global economy and yes they look on air freight to get things here fresh and in time so that we can buy them. Yet we know we also have a fundamental problem with climate change. The big political challenge that we have is: how can we continue to create some space for developing countries to develop - in the process of that there will be some CO2emission - while keeping within the earth's total capacity to cope with CO2 emissions? That is why a stabilisation target is what is required. You have to decide first of all what you think you can manage with. You know what the carbon sinks are going to take away, natural or artificial. You then know how much - I always think of it in terms of a bath tub - water comes in to stop the bath overflowing. That, in essence, is the problem that we have. That is going to require us, in the rich developed world - who have used much more than our fair share of resources - to significantly reduce our CO2 emissions to provide a bit of space. You are right; so much of the world economy is now dependent on air travel. How we are going to make that transition, how we can make air travel reduce the CO2 impact may be partly technology, it is partly going to be about a fairer distribution of resources. You are right; it is an absolutely fundamental question that we face in trying to tackle climate change. Q75 Ann McKechin: Secretary of State, I wonder if I could just tease out a little bit further this question about investment and infrastructure. Mr Lowcock indicated that really the rate of increase really had to go rapidly upwards if we are going to actually achieve the Millennium Development Goals. A comment was made to me last week by the Rwandan ambassador (he is representative of a poor and small nation, as we know) who said, "The thing we need the most is investment in infrastructure. However, under the current IMF rules we are limited in how much we are allowed to borrow. We are restricted in terms of availability of grants and borrowing for infrastructure. Most of the aid which we received from our donors is concentrated on public services such as education and health rather than investment in transport and industry." The information as I understand it is that the IMF increasingly wishes to move away from this kind of PRSP structure and not be bound by it. I am really trying to tease out what are the current interface between the World Bank conditionalities of their own (grants and loans) and that of the economic controls maintained by the IMF under the PRSP structure as I understand it, and whether or not they really cohesive, if we are talking about trying to massively increase investment in infrastructure. Hilary Benn: This really goes back to the point that Mr Davies was pursuing at the beginning of this session. All countries in the end are going to have to make choices on how they are going to spend the resources they have, the resources they raise themselves, the resources that they get from the Bank, the Fund and donors. There is always going to be a finite limit. That is the first thing that we have to acknowledge. Secondly there are choices for the countries to make within that total as to how they are going to spend it. Thirdly, for some of this investment - I gave one example a moment ago in relation to communication technology - the climate that the country itself creates for investment for business (Mr Davies gave two really important examples of that) can make a difference. It is not just a question of the money because if you create the right climate and that encourages people to come in and invest, then they know we are willing to pick up some of the costs of infrastructure. Mr Lowcock: On the specific point you raise about whether what the IMF says to countries really makes all this much more difficult, the Managing Director of the IMF, Mr de Rato, has been looking at this himself and made what I think is quite an important speech covering this amongst other topics on the Fund's role in low income countries at the end of July. He did commit them to being much more pro-active in helping countries deal with and absorb growing aid resources in a way which sometimes in the past the Fund has been very cautious about. Of course a lot depends on the terms. The Fund is right to advise countries to worry about a re-building up of debt. If the Gleneagles commitments on aid growth are achieved then many countries would choose to spend on its infrastructure, much of that ought to be in grant form so should not be a problem. Q76 James Duddridge: Coming back to something Mr Lowcock said in terms of investment in Africa, both public and private sector, increasing year on year, I would certainly find it helpful if you could provide us with some figures of where that money is coming from and where it is going to both in terms of geography and also sector. Hilary Benn: I will happily do that. Q77 Chairman: Can I just say, to go back to where we started on the £50 million and the conditionality, obviously we will look forward with interest to the point at which first of all I guess the Bank produces their details and that you respond. I would have thought that if you feel you have achieved things you will be happy to come to the House and explain them. I think a statement would be good if we cannot have a debate. Hilary Benn: I am always happy to come to the House. Chairman: Thank you all very much for coming here today. |