Select Committee on Environmental Audit Minutes of Evidence


Memorandum submitted by The Corner House

INTRODUCTION

  1.  The Corner House is a not-for-profit research and advocacy group, focusing on human rights, environment and development.

  2.  Over the past 10 years, The Corner House has closely monitored the policies and operations of the UK Export Credits Guarantee Department, submitting evidence to a number of parliamentary inquiries1 and UK Government departments. In addition, it has participated in nine field missions to assess the social and environmental impacts of a number of projects for which ECGD support was or is being sought, notably the Ilisu2 and Yusufeli3 dams and the Baku-Tiblisi-Ceyhan pipeline4. It has also undertaken in-depth research into a number of ECGD-backed projects that have been tainted by allegations of bribery and, following court action, successfully argued for the strengthening of ECGD's anti-bribery rules.5 Recently, it applied jointly with WWF for a judicial review of ECGD's decision to give a legally-binding, but conditional, undertaking to support Shell's Sakhalin 2 oil and gas project before the completion of a satisfactory environmental impact assessment.6

  3.  The Corner House welcomes the Environmental Audit Committee's current inquiry and is grateful for the opportunity to comment on a number of the issues that the Committee has chosen to examine, as set out below.

A.  ECGD'S DECISION-MAKING PROCEDURES AND SUSTAINABLE DEVELOPMENT

  4.  The ECGD has been charged by Ministers with ensuring that "its activities accord with other Government objectives, including those on sustainable development, human rights, good governance and trade."7 This duty, however, is viewed by ECGD as "secondary" (its wording)8 to the fulfilment of what the Department views as its primary purpose: the facilitation of UK exports. 9 10

  5.  The consequences of this ordering of priorities are evident at every level of the ECGD's decision-making:

    —  Not a single application for ECGD support is formally assessed against the UK's stated sustainable development objectives. Although the Department seeks information on the environmental and social impacts of the goods for which applicants seek support, the case handling procedures11 do not assess—or require to be assessed—the acceptability of support for a given export against the Government's current international priorities for achieving sustainable development. 12 13 The extent to which an export will assist in "eliminating poverty in poor countries"14 or in "delivering sustainable consumption and production patterns" or in "reducing the rate of biodiversity loss" is not formally required to be assessed—and could not be reasonably assessed in most cases on the basis on the information gathered through the ECGD's environmental impact questionnaires.

    —  Even where the ECGD's Business Principles Unit (set up to implement the Department's Business Principles) makes a detailed assessment of a project, as in the case of "High Impact" projects such as the Baku-Tbilisi-Ceyhan oil pipeline, "international standards" (such as the World Bank's ten safeguard policies) rather than the UK Government's sustainable development objectives are the benchmark against which the acceptability of the project is assessed. 15 16 Such international standards do not embody either the UK's stated sustainable development objectives (as exemplified by Government statements and initiatives) or the UK's sustainable development obligations (as exemplified by international undertakings). ECGD's decision-making procedures thus entirely omit formal scrutiny of the compliance of projects with a key requirement imposed on ECGD by Ministers under the Department's current Mission Statement.

    —  Seventy-one per cent17 (by value) of the guarantees issued by ECGD in 2006-07 went unscreened for any environmental or social impacts. Despite two parliamentary Select Committees—the Environmental Audit Committee18 and the Trade and Industry Committee19—both recommending that all contracts being considered for support should be subject to environmental screening, the ECGD still excludes defence and aerospace contracts (which make up the bulk of its business) from its screening procedures.

    —  The environmental screening process adopted by the ECGD—described by the Select Committee on Trade and Industry as "the weakest form of environmental screening"—is not designed (let alone intended) to screen out unsustainable projects, but merely to collect information in order to categorise them by their potential impacts. No application for support, to The Corner House's knowledge, has ever been refused on environmental grounds as a result of the screening process. Moreover, analysis of documents released reveal that projects with potentially high impacts (such as nuclear power plants) have been categorised as "low impact", thus requiring no environmental impact assessment.

    —  Although ECGD requires all projects that it supports to comply "in all material respects" with the World Bank's 10 safeguard standards, 20 these standards do not represent best practice in sustainable development and do not address many of the issues on which the UK Government has promulgated sustainable development objectives with which the ECGD is required to accord—for example, human rights, sustainable consumption and good governance. Indeed, the World Bank standards are now recognised as being wholly inadequate for safeguarding against the environmental and social impacts of dams, an issue which The Corner House has brought to the ECGD's attention. 21

    —  Although the Business Principles Unit is responsible for ensuring that cases being considered for support comply with ECGD's Business Principles, 22 it has no powers that would enable that responsibility to be adequately or properly discharged. It can gather information on a project and it can relay its concerns, along with recommendations, to the ECGD's Underwriting Committee. But it is for the Underwriting Committee to decide whether or not those concerns are acted upon, for example through recommending that the project be refused or that conditions are written into the project agreements. In The Corner House's view, this institutional arrangement fatally de-prioritises the ECGD's sustainable development obligations.

    —  ECGD has reserved wide powers to derogate from its stated sustainable development and procedural standards, thus seriously weakening their effectiveness. Categorical policy statements (for example, that all projects should comply with World Bank safeguard policies) are hedged by other statements that allow ECGD to exercise wide discretion in their application (for example, that its procedures as laid down in its "Case Impact Analysis Process" paper are "not a statement of what will be done in every case").23 The ECGD does not normally disclose decisions to derogate or the nature of the derogations applied. However it has acknowledged to The Corner House that derogations were applied to the South Pars oil development in Iran (classed by ECGD as a high impact). 24 ECGD has refused requests from The Corner House for information on the specific derogations. However, the lawfulness of the ECGD's claimed power to derogate from procedures that the Secretary of State has chosen to incorporate into ECGD's decision-making practices (such as requiring an environmental impact assessment) has recently been the subject of an application for judicial review (JR) by WWF and The Corner House in relation to the ECGD's decision to give a legally-binding but conditional commitment to support Shell's Sakhalin 2 oil pipeline, despite the project's environmental impact assessment being incomplete. 25 The JR application has now been withdrawn following Shell's withdrawal of its application for support.

    —  Although the ECGD notifies other Government departments about "Sensitive Cases" and invites their input, the notifications that have been released to the public do not seek or even invite comment on compliance with the UK's sustainable development objectives. In the case of the Sakhalin 2 oil and gas project, ECGD sent the following note:

    "Dear All, I would like to brighten up your Friday afternoon by letting you know about two potentially sensitive cases that the ECGD is currently considering. The first is the Sakhalin II (Phase II) oil and gas project in eastern Russia... The assessment of the project is likely to go on for at least another six months but we are asking you to indicate your initial interest within the next two weeks... If anyone has any questions or would like to discuss either project, please feel free to get in touch." (see Annex 1 for full text)

  No specific questions are asked and no indication is given as to the areas of compliance with UK sustainable development policy on which ECGD would seek advice.

  The Department of Trade and Industry (DTI) reply to this note focuses only on the Department's strategic relations with Russia. Whilst this was a legitimate concern, given that accord with UK trade objectives also forms part of the Business Principles, the lack of any commentary on the project's compatibility with those sustainable development objectives for which the DTI had responsibility26 is of concern. Indeed, it is hard to see how the ECGD could properly assess such compatibility without reasoned input from the DTI:

    "Thanks for this. Sakhalin II is of course well-known to us and features prominently in our Russian strategic thinking. We have no concerns at this stage, but we would like to be kept aware of the developments and discussions to avoid things going pear-shaped." 27

  Although Department for Environment, Food and Rural Affairs (Defra) responded directly addressing policy concerns relating to sustainable development—expressing fears over the project's "potentially devastating effects... on the local environment and in particular on an endangered population of whales" (see Annex 2)—ECGD nonetheless gave a legally-binding (if conditional) undertaking to support the project.

  Departmental replies to other Sensitive Case Notifications that have been made public also raise questions over the adequacy of the information provided to ECGD as a basis for deciding whether or not a project complies with the UK's sustainable development commitments. 28

  6.  The Corner House views the decision-making procedures set out above as totally inadequate to the task of re-orientating the Department's activities towards compliance with the Government's sustainable development objectives, let alone ensuring such compliance. Although the Business Principles Unit has been able to use the environmental screening procedures to bring some small improvements to projects, 29 overall the ECGD's portfolio remains as skewed as ever towards sectors, such as arms exports, and oil and gas infrastructure development, whose adverse impacts on sustainable development are well documented.

B.  INADEQUACY OF BUSINESS PRINCIPLES AND NEED FOR PROACTIVE APPROACH

  7.  The objectives of the ECGD's Business Principles are largely aspirational and, as documented above, their implementation discretionary. As such, they fail to provide the incentives, penalties and binding rules that would make them a suitable instrument for ensuring that the ECGD business practice accord with sustainable development objectives.

  8.  The Corner House believes that the ECGD's operations will continue to remain at odds with the Government's sustainable development commitments unless the Department takes proactive measures to exclude businesses that are unsustainable. At present, however, the ECGD is entirely passive in its approach to the sectors its supports, arguing that it is required under its founding Act of Parliament to consider all applications and that it "can consider supporting only that business which comes to us".30

  9.  The Corner House notes that the ECGD already operates what are in practice "exclusion lists", ruling out, for example, applications for countries that are off cover. Projects that involve child and forced labour are also nominally excluded from consideration for support (although recently the ECGD has weakened the wording of its commitment to this policy). 31 The Corner House sees no reason why ECGD should not institute such an exclusion list (as operated by the European Bank for Reconstruction and Development) for projects that it considers at odds with its sustainable development objectives. The Corner House believes that such a list could be instituted without exceeding its lawful powers under the 1991 Export and Investment Guarantees Act, from which the Department derives its statutory duties.

C.  ECGD'S DUE DILIGENCE AND MONITORING

  10.  The ECGD does not normally disclose the impact assessments that it makes of projects and has only ever done so in response to Freedom of Information requests. Despite initially acceding to multiple requests for assessments, the Department has recently refused to release more than two at a time, with requests being dealt with on a "first come first served basis".

  11.  Very few assessments have therefore made their way into the public domain. Those undertaken for the Baku-Tblisi-Ceyhan (BTC) oil pipeline project; Shell's Bonny Island Nigeria LNG Project; the South Pars 9 and 10 project, Iran; and the P-52 oil production platform project, Brazil, have been released to The Corner House. However, the Business Principles Unit's assessments of the projects have, in all cases, been entirely redacted. It is thus impossible to know what their assessments were.

  12.  Attempts by The Corner House to obtain the unredacted minutes of the Underwriting Committee meeting at which the BTC project was considered (and thus to assess whether or not the recommendations made by the Business Principles Unit with respect to the project were accepted and what form any subsequent action took) have also been refused. However, from the material disclosed, it is clear that at the time the project was approved, a number of environmental and social issues remained unresolved. 32 These included:

    —  Return of land usage rights in Turkey;

    —  Ceyhan fisherman report and compensation;

    —  Oil spill response plan.

  The failure to ensure that compensation and land rights issues had been resolved prior to approval constitutes, in The Corner House's view, a clear breach of the World Bank's safeguard policy on Involuntary Resettlement33—one of the standards against which ECGD assessed the project. It is also of concern that subsequent monitoring by non-government organizations, including The Corner House, record that compensation issues remain unresolved for many villagers. The Corner House understands that evidence to this effect has been submitted by the Committee by Green Alternatives (Georgia) and by PLATFORM and Kurdish Human Rights Project (UK).

  The failure to secure an oil spill response plan prior to approval of the BTC project is also of great concern, the more so given the subsequent release (by the then Department of Trade and Industry) of a Foreign and Commonwealth Office telegram (dated 1 April 2004—thus after ECGD approval for the project) detailing the absence of any credible Emergency Response plan in Azerbaijan, one of the three countries through which the pipeline passes. The telegram reports on a "UK-US-BP stock-take" hosted by BP's Health and Safety team, and summarises the state of emergency planning in the event of a major accident involving the pipeline:

    "The bad news is that there is no machinery for policy co-ordination or planning input from relevant ministries or agencies beyond the Presidential Aparat, and no link into the National Security Council. So in a major civil contingency or terrorist attack, apart from the purely military response there would be no civil command structure, no lead agency and probably no effective communication between relevant ministries and agencies. This leaves BP's own crisis response team exposed, as they laconically put it, to "over- or under-enthusiasm" from the military and other interested agencies getting in the way of an effective response"34

  13.  The Corner House is also concerned that a number of projects with potentially high environmental, social, debt or developmental impacts, including the alleged use of child labour, have been classified by ECGD as being of medium or low impact. Projects classed as being of low impact are not scrutinised further by the Business Principles Unit; medium impact projects require a limited "impact questionnaire" to be completed; and both are exempted from requiring an environmental impact assessment.35 Examples of concern include:

YearMarket ExporterProject Case Impact

2005-06KoreaAlstom Power Conversion Ltd Shin Kori Power StationLow
2005-06KoreaAlstom Power Conversion Ltd Shin Wolsuing Power StationLow

Comment:
Although both projects are listed in the ECGD's Annual Report for 2005-06 as "power stations", they are in fact nuclear power stations.
After a number of refusals, The Corner House obtained the Case Screening form for the Shin Wolsuing Power Station. The original screening appears to have been undertaken by COFACE, the French export credit agency, with the export being reinsured by ECGD.
Although the case screening officer correctly responded "Yes" to the form's question as to whether or not the project was a nuclear plant, s/he (the officer's identity has been redacted) nonetheless classified the export as "low impact" despite a note in the form that states: "If "yes" to any of these [questions] then probably Medium or High impact".
No impact questionnaire was subsequently completed.




YearMarket BuyerProject Case Impact


2005-06IndiaJindal Vijayanagar Steel Ltd No. 3 Single Strand Slab CastersLow


Comment:
Vijayanagar has been accused of using child labour in its mines. 36 Although the charge has been denied by the company, 37 The Corner House believes that the ECGD's absolute ban on the use of child labour in the projects it facilitates should have triggered enhanced due diligence.
The completed screening form has been released to The Corner House. Although one "yes" was given to a question where a "yes" response merits a probable "medium" or "high" impact classification, the project was nonetheless classed as low impact.
The completed screening form gives no indication that ECGD was even aware of the allegations of child labour.
An impact questionnaire was also completed for the project (although, technically, as a low impact project, this was not required). Many of the questions in the questionnaire are unanswered, including those relating to resettlement and whether or not the project would "cause, require, bring about or stimulate" child labour.




YearMarket BuyerBuyer Case Impact


2005-06IranKala Naft Co Dry compressorsLow


Comment:
Kala Naft is listed by the Japanese Ministry of Economy,Trade and Industry (METI) as a company suspected of involvement in procuring biological, chemical and nuclear weapons of mass destruction. The list, which is updated annually, is available at
http://www.meti.go.jp/press/20080610009/20080610009-2.pdf.
The Wisconsin Project, a US organisation that monitors Iran's weapons programme, has also reported that that Kala Naft was "identified by the British Government in February 1998 as having procured goods and/or technology for weapons of mass destruction programs".



YearMarket ExporterProject Case Impact


2005-06PhilipinnesMabey and Johnson Highways, bridges and flyoversLow


Comment:
The contract has been subject of corruption allegations. 38 In addition, concerns have been raised over its minimal development benefits. Many of the bridges, built for a two-lane highway, connected to single track dirt roads; others did not even connect to a road. 39


  14.  Documents released to The Corner House also raise questions about the adequacy of the ECGD's due diligence on the choice of an experimental anti-corrosion coating for the Baku Tbilisi Ceyhan oil pipeline project, for which BP obtained ECGD support. The coating had never been used previously on a pipeline of similar design, nor had it been properly tested prior to its selection by BP. 40 In 2002—two years before the approved funding for the project—BP's own consultant, Derek Mortimore, warned that the chosen coating (known as SPC 2888) was "utterly inappropriate to protect the pipeline".41 As predicted by Mortimore, the SPC 2888-coated sections of the pipeline have been subject to extensive cracking. BP did not inform ECGD, which found out only after the problem was exposed in Britain's Sunday Times newspaper. Over one quarter of the pipeline in Georgia (through which the pipeline passes) was later found to have been affected. 42 In June 2004, the ECGD (and its responsible Minister) claimed that the coating had been widely used on similar pipelines. 43 The claim was repeated by the ECGD in a letter to Trade and Industry Committee of 19 July 2004, 44 despite the ECGD having informed the Minister office on 8 July 2004 that SPC 2888 "had not previously been used on a pipeline with polyethylene coating".45 Such confusion strongly suggests a lack of due diligence on the part of ECGD, which should have been aware whether or not such a major safety component of the pipeline was or was not experimental.

  15.  Reports released to The Corner House also reveal that the ECGD's consultants made no mention in their monitoring reports during the relevant period of the extensive cracking along the pipeline in Georgia. 46 Although BP's failure to report and remedy the cracking constituted a clear default of the environmental reporting conditions in the loan agreements, the default procedures were not invoked. 47 The failure of the US Overseas Private Investment Corporation (OPIC), one of the US lenders to the project, to invoke the default clauses has been the subject of a complaint to the agency's Accountability Office by Green Alternatives of Georgia. 48 OPIC's response confirms that BTC Co failed to disclose crucial information in a timely manner, but did not pronounce on whether the project was in default of OPIC's loan agreements. It recommended closer monitoring of the pipeline coating in order to prevent corrosion and leaks. 49 In 2006, a major investigation by Bloomberg, the financial news agency, reported that BP had given the monitoring contract for its Azerbaijan assets to Rasco International Ltd., a Baku-based building company with no previous pipeline monitoring experience. 50

  16.  More generally, The Corner House is concerned that the arrangements used by ECGD to monitor projects are not sufficiently independent. In the case of the BTC pipeline, BTC Co blocks the release of environmental and social monitoring reports if it disagrees with their findings51 but such findings are only made public after they have been presented to the BTC board. 52 In addition, the terms of reference for the Social and Resettlement Action Plan (SRAP) panel set up to monitor the social impacts of the project specifically state that its main role is not to identify areas of compliance and noncompliance but rather to provide guidance and troubleshooting advice. 53 As such, it is questionable whether it should be considered a source of definitive judgment on compliance.

D.  INFORMATION DISCLOSURE

  17.  Under the Environmental Information Regulations (Regulation 4/1), the ECGD has a duty of proactive dissemination of environmental regulations, at least for information obtained after 1 January 2005. The Corner House's experience is that ECGD is failing to discharge that duty. Key documents which would enable the public to monitor (and improve) the effectiveness of ECGD's due diligence and other procedures are either denied to the public (for example, derogations from standards) or made available only after prolonged Freedom of Information requests. The Corner House believes that ECGD should adopt a policy of posting on its website all completed environmental screening assessments, impact questionnaires and other assessments of projects by the Business Principles Unit as a matter of course, albeit, if necessary, with redactions to preserve commercial confidentialities.

  18.  The Corner House also believes that, as a public institution supported by public funds, ECGD should make publication of basic project information—name, a short description of the project, its potential environmental, social and human rights impacts and its impact category—a precondition of appraisal for all projects, including cases involving insurance only.

  19.  The Corner House notes that documents released as a result of Freedom of Information requests have regularly revealed institutional failures and, in some cases, arguably unlawful decision-making by ECGD (for example, with respect to the weakening of anti-corruption procedures and to the granting of a legally-binding, if conditional, undertaking to support the Sakhalin 2 project). The Department's current approach to dissemination of information can only encourage the impression that its refusal to release documents reflects a desire to keep the public in the dark rather than to protect legitimate confidentialities.

E.  THE OECD AND ECA REFORM

  20.  The OECD's Working Party on Export Credits and Credit Guarantees (known as the Export Credits Group) is the only multilateral forum addressing environmental and social standards for export credit agencies.

  21.  The Group operates at the pace of its most recalcitrant member, all decisions having to be made by consensus.

  22.  Since 2000, the group has been negotiating common environmental standards for OECD Export Credit Agencies, adopting an agreement (known as the "Common Approaches") in 2003. The Common Approaches was updated in 2007 and now has the stronger status of an OECD Recommendation. Although progress has been made in expanding the number of standards against which ECAs must now assess the projects they support, and with which projects are expected to comply, the Common Approaches retains a loophole allowing derogations. This loophole has widely been exploited by ECG member ECAs, bringing the Common Approaches (and indeed the ECG) into disrepute. Projects from which UK companies have withdrawn on environmental grounds (such as the Ilisu Dam in Turkey) have now been funded despite the financing ECAs acknowledging that the project violated 150 important World Bank/IFC Performance Standard requirements.

  23.  No mechanism currently exists within the Export Credit Group to hold member ECAs to account. Until such a mechanism is instituted, the Export Credit Group is unlikely to prove more than a taking shop for standards, rather than a mechanism for on-the-ground improvements in ECA-backed projects.

  24.  In 2007, non-governmental organizations set out proposals for independent peer assessment of member ECA as a mechanism, consistent with that employed elsewhere in the OECD, for improving the implementation of the Common Approaches. The proposals were sent to ECGD and to the Export Guarantees Advisory Council in March 2008. 54 No response has been received from either body, nor even an acknowledgment.

June 2008



 
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