Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 1-19)


8 JULY 2008

  Q1 Chairman: Good morning and welcome. We have until 11.45 and I hope we and you will bear that in mind when trying to pace the questions and answers. Would you like very briefly to introduce yourselves and tell us what your functions are?


  Mr Leaton: My name is James Leaton and I work for WWF UK, focusing on the oil and gas sector and how that is financed.

  Ms Streatfeild: I am Daisy Streatfeild. I also work for WWF UK and I am a researcher on sustainable finance.

  Mr Hildyard: My name is Nicholas Hildyard. I work for a small NGO called The Corner House which focuses on human rights, the environment and development and we have spent the last 10 years or so monitoring particularly the ECGD, both aspects of its environmental and sustainable development policy but also corruption.

  Q2  Chairman: Would you like to start by outlining what your main concerns are in relation to what the ECGD does?

  Mr Leaton: We would like to raise our concern about the lack of accountability and transparency in terms of demonstrating how they incorporate environmental and social issues into the processes of the ECGD. We are concerned about a lack of coherence as a result with other government policy with regard to sustainable development. We believe all UK government departments have a responsibility to contribute towards the Government's targets and commitments on sustainable development but we do not see evidence of how that is being done through ECGD. In our experience ECGD sees sustainable development as secondary and discretionary, which is of concern to us. That has been clear on specific issues like climate change, which has risen up the political agenda, where ECGD denies any specific responsibility for tackling this issue.

  Mr Hildyard: One of our concerns would be that very nearly 10 years after the Business Principles were introduced with a very clear statement that ECGD policy and practice would accord with UK Government sustainable development objectives there is really very little change or evidence of change in the sorts of projects that ECGD has historically assisted in financing and that the procedures that are in place are totally inadequate to enable the sort of shift in financing the types of projects that are financed that would enable ECGD to get anywhere close to being in accord with sustainable development policy.

  Q3  Chairman: Does this affect the whole of ECGD activities or is it only a certain number of projects that they are involved in?

  Mr Hildyard: ECGD's portfolio is heavily skewed towards civil and defence aerospace, and that is of concern. Its very small client base is a concern, but all the major development projects it has been involved in, particularly in the oil and gas sector but also other projects, are characterised by fairly minimal due diligence as to whether they accord with sustainable development policies. It is of concern, certainly to The Corner House, that in assessing major projects like, for example, BP's Baku-Tbilisi-Ceyhan project, there was not any assessment at all against Britain's sustainable development objectives. There was an assessment against World Bank guidelines, against some other guidelines and so on, but these cannot be said to embody Britain's sustainable development objectives. I will give you two very short examples. One of our sustainable development objectives is to meet the Millennium Development Goals. One of the objectives of the Millennium Development Goals is the eradication of extreme poverty. With regard to the World Bank guidelines on resettlement, which the ECGD is nominally committed to meeting—I say "nominally" because there is a huge degree of discretion on the application of those safeguards—their safeguard policy is only to improve or at least restore livelihoods to their previous levels prior to resettlement. You do not eradicate extreme poverty by restoring poor people to their previous level of existence. There is a mismatch there. Similarly, there are no World Bank guidelines on climate change. There is no assessment of projects like Baku-Ceyhan or other oil and gas development projects against, for example, the objectives to which Britain has signed up under Article 2 of the UN Climate Convention, an article which is a commitment to trying to stabilise levels of greenhouse gases in the atmosphere such that they will not cause adverse climatic change. That objective is, we would argue, completely incompatible with funding further oil and gas development. There is no assessment of those two things. Where the Business Principles Unit has raised issues about, for example, the use of non-sustainable resources we have no idea what they recommended because where documents have been released to us that section has been entirely redacted and we have no idea how the Underwriting Committee, which is the committee that actually takes the decisions on these issues, not the Business Principles Unit, dealt with that issue. There is an opacity there which makes it difficult to see how these issues are really being dealt with. On the face of it, and given the sorts of projects that have been funded, we have grave concerns that the processes are not adequate to the task. I would like to say here that this is an institutional criticism; it is not a criticism of the personnel in the Business Principles Unit, for whom I have immense respect and immense respect for their integrity. I think they have tried within a very hostile institutional environment to move this sustainable development agenda forward but it is a very hostile institutional environment.

  Mr Leaton: We would echo the fact that these are high impact sectors of aviation, oil and energy, but we would also look beyond the direct projects themselves in that these projects are very high profile projects. For example, in BP and Shell's largest infrastructure projects which they have undertaken in recent years, for example, the Sakhalin case was the largest foreign investment in Russia ever, they are looking to set a standard for the region. They have responsibilities beyond those projects and furthermore they have responsibilities with regard to other finance from private banks that may come in behind the ECGD. They look to the ECGD in terms of how they are reviewing the environmental and social issues. There is a wider impact beyond just the projects themselves.

  Q4  Colin Challen: What is the scale of negative environment impacts that can be traced back to lending decisions of the ECGD?

  Mr Leaton: We have certainly seen on the larger projects, such as the oil and gas pipelines, that there are impacts on the ground in terms of the local communities not being treated with adequate respect, processes not being followed. For example, on Sakhalin there were impacts on fisheries, on protected areas, on endangered species. The problem we have is that the ECGD does not report on what their impact is, so whether it is positive or negative we cannot give them credit for positive impacts but equally it is not clear or accountable the extent of the damage caused, whether that is greenhouse gas emissions or impacts on the ground.

  Q5  Colin Challen: They do not do it themselves then, but surely other independent NGOs perhaps do it. In the case of Sakhalin we have been able to keep pretty much up to date with all the environmental damage that that has been caused, so if somebody independent was doing these assessments what would be their view of the negative environment impacts of the department?

  Mr Leaton: It is a case of what you hold them accountable for. They are claiming that they have a positive impact but we do not see that they have that positive, constructive impact.

  Q6  Colin Challen: Are there no projects that they have supported which have had a positive environment benefit?

  Mr Leaton: Not that I am aware of.

  Mr Hildyard: ECGD is not involved in Sakhalin, because Shell withdrew its application but the BP Baku-Ceyhan pipeline the ECGD is involved in. The Corner House is deeply concerned by reports (and I think submissions have been made to the Committee by the Kurdish Human Rights Project and PLATFORM) about ongoing and continuing problems over compensation to those affected by the pipeline, ongoing problems about reinstatement, an apparent lack of compliance with the Environmental and Social Action Plan on reinstatement and concern over the potential impacts in the future. Another committee of the House of Commons three years ago was presented with quite a considerable amount of evidence, about which its remit did not allow it to look into or adjudicate on, on the potential for major leaks along the pipeline, because a coating that BP had been warned by its own consultant that it had not informed ECGD about was entirely unsuitable for the pipeline, and there are continuing issues with that, so again a potential impact. Much more globally, ECGD's funding of oil and gas projects, not for sustainable development reasons but much more to do with securing energy supplies for Europe and so on, without consideration for those sustainable development impacts is a real concern, particularly given recent warnings about the imminence of potential global catastrophe because of climate change.

  Q7  Colin Challen: Does this perhaps tell us more about the British economy than it does about the ECGD, because if the bulk of applications, for example, come from companies that are engaged in these activities and this is a stronger part of our manufacturing and engineering skills base,—we are now one of the world's largest, if not the largest, arms exporter, for example—does that not pre-determine the kind of work that the ECGD will support? If we had Germany's renewables industry then perhaps the balance would shift. Is it fair to say that the ECGD should try itself to alter that balance?

  Mr Hildyard: I think it is not only fair; it is part of their duty. They have now adopted a set of Business Principles which are supposed to accord with sustainable development policy. They say that that is just part of the business of promoting exports but it is a duty upon them and they have not put in place the sorts of policies—in fact, I would say they do not have a policy—that would reflect a mechanism for delivering what they have committed to under the Business Principles Unit. In terms of the structure of the British economy, ECGD has just introduced new rules on support for foreign content so they now can support 80% of foreign content, so it does not necessarily have to be manufactured here as long as it has got a British exporter involved. It could well involve 80% of components made abroad.

  Mr Leaton: You could also argue that by focusing on those sectors they are perpetuating that situation by effectively giving a subsidy to those kinds of industries and, whilst we have heard from Gordon Brown that there are a lot of opportunities in terms of environmental businesses and clean energy that we could take advantage of globally if we had the sector that Germany has, perhaps that is a missed opportunity because of the way ECGD is operating.

  Q8  Colin Challen: Would you accept there is a need for the ECGD or could we quite happily manage without it?

  Ms Streatfeild: I suppose it is difficult to know without seeing what would happen without it in terms of competition. I am sure they would say that because other countries and other industries have the support of their export credit agencies we will automatically lose out. Obviously, without a counter-factual of the ECGD disappearing just to find out, it is difficult to know. I think you would have to look at the financial side, which is not our area of speciality, as to whether that is the case. Potentially they can have a role. As we said, government guarantees set the standard often for other finance coming into projects and if ECGD fulfil their Business Principles and ensure that these projects they support are meeting the standards that they should, are consistent with the Government's sustainable development policy, potentially they can have a role in improving projects. What we have not seen yet is them managing to achieve that. It is unclear whether they have any positive effect on the projects that they support at all.

  Q9  Colin Challen: So we are locked into this international situation where everybody else has one so we have to have one and we do not want to be the first to give anything up? Do other similar agencies elsewhere have better or worse sustainable development standards than we do or are you looking at it?

  Ms Streatfeild: I think it is fair to say that it is quite variable. I would not be able to tell you that there is an export credit agency that is far and away the best, but when we are talking about things like sustainable development reporting on the effect you have on your projects, whether they have negative or positive impacts, I would draw your attention to the Danish Export Credit Agency which annually produces a 30-page report detailing the statistics on the negative and positive impacts of all their projects. In the same year, 2006, this sustainable development report which I have here was produced, which is one page in their annual report. From the point of view of at least being transparent about what the impacts of their projects are certainly they do not meet the best standards of some export credit agencies. No doubt there are others who are worse and they say rightly that they have better standards than some export agencies do, but we would advocate that they at least meet the best practice of other export credit agencies as a minimum and go beyond that where they have to if it is to be consistent with the Government's sustainable development policy.

  Q10  Colin Challen: The Government has other agencies and departments which can target assistance in particular areas in relation to sustainable development. It sounds like you would support the suggestion that ECGD should have the ability to target such goals itself. Would that not create an overlap and a bit of duplication and perhaps reduce the need for something like the ECGD?

  Mr Leaton: I think that is up to the Government. If they feel there are other ways of meeting those objectives that are more efficient and deliver on the sustainable development goals in a better way then that is a way forward. We just feel that the ECGD in its current form and with its current mandate is not fit for the 21st century and there seems to be an opportunity to either bring it up to date or look at alternatives, as you say.

  Ms Streatfeild: Certainly other countries have seemed to use their export credit facilities slightly more creatively with links with other departments that may provide a certain element of subsidy for particular sustainable development goals. Again, the Danes—not that I want to harp on about them—have a system of mixed credits to support their renewable energy industry which is a subsidy that comes from their development agency as part of the system. It appears that the Government is fairly unwilling to confer a subsidy in any way for industry and has tried to reduce that, and I think ECGD is probably one of the better agencies in limiting subsidy. However, at the moment we have an unhappy medium of no subsidy to help potentially positive industries with sustainable development, such as clean energy, but at the same time you are effectively offering a subsidy by reducing the risks to a very small proportion of British industry and some of the most environmentally damaging, such as oil and gas, so the halfway house that we have at the moment appears to be quite unsatisfactory.

  Mr Hildyard: I do not see ECGD being able to fulfil a development role. I do not think it is set up to do that. Structurally I think it would not work. I do not think development goals are best served by subsidising western companies rather than by direct grant aid and loan aid to the developing countries. What I do think is essential is that where you have a public agency putting taxpayers' money at risk and having a nominal subsidy of about £150 million, according to the Treasury, that agency should be subject to very strict rules about how the money is used, and where it is committed to its activities being in accord with government sustainable development policy that commitment should be honoured and there should be mechanisms in place to ensure that that commitment is carried through. That is the problem at the moment, so I think it is more about trying to limit the harm done rather than giving a positive development mandate to ECGD. I do not think it is the agency for that. I have somewhat shifted my views on that in the 10 years that I have been looking at this.

  Q11  Chairman: Could you leave us that Danish report you mentioned?

  Ms Streatfeild: Absolutely.[23]

  Q12 Dr Turner: What you are saying about the ECGD could be said about various other government agencies where there is a general pattern of primary duty and a series of secondary duties. Ofgem is another example. Agencies tend almost inevitably to focus on their primary duty and pay very little attention to their secondary duty and clearly this is the case with the ECGD. Would you agree that the fact that its primary remit is so very clearly focused on supporting exports is the nub of the problem and do you think you would see something different if we were to change that primary remit?

  Mr Hildyard: I think changing the primary remit would help. It is probably essential in terms of any real movement towards fitting the ECGD more with government sustainable development objectives, and certainly at The Corner House we have always argued for a change in the remit that would, for example, impose a duty of care on the ECGD to take due regard of environment issues and indeed to have a duty of care to those affected by the financing, so I think that primary legislation would help enormously. However, going through primary legislation is a major problem and I think there are things that they could do within the existing legislation which would enable them to take steps to better manage their portfolio. They could do a number of things within that scope and one of them is to introduce exclusion lists. They have a policy at the moment of constructive engagement. Unfortunately, it is constructive engagement which is bounded by no real rules. This is like having a school trying to bring in an anti-drugs policy. In the first years of an anti-drugs policy of course, you expect the staff to constructively engage with the pupils, perhaps supplying medical attention and psychological help and all those sorts of things in order to get a drug-free school, but this only works if you have got firmly bounded engagement where you can say "No" to certain things. The ECGD prides itself on never having said "No" on environment grounds to any project whatsoever. It would be quite possible to bring in exclusion lists, much firmer policies, albeit allowing for an element of discretion on the part of ministers. You obviously cannot fetter ministerial discretion, but they have introduced, at least on the face of it, a firm policy of not supporting child labour, although I notice that in recent statements to the press they have said that it is intended to avoid the use of child labour rather than banning it. There is an example of, where you have a firm rule, if there is departure from that then public law, policy and so on would expect them to justify that publicly and allow the potential for judicial review. There are things that could be done. Much firmer rules, exclusion lists, clear benchmarks and so on could be introduced.

  Q13  Dr Turner: That is fine and in theory there is probably sufficient content in the secondary duty to be able to make a big difference if ECGD were to allow them to sufficiently influence the primary remit, if not override it, but can you actually see that working in practice without any change of culture in the people operating the agency or a change in the personnel themselves, and is it a workable proposition? Do you think so?

  Mr Leaton: I think you are right that legally speaking the obligations that the Department has are set out in the primary legislation which stems from 1991 and I would argue that perhaps the priorities of the UK as a society have moved on since that time and therefore the primary duty should also move on. In our experience there is an issue there. When pushed on the exact standards or the exact processes that will be applied by ECGD with regard to these secondary duties the response we have had in writing has been that those powers are discretionary and they can be ignored.

  Q14  Dr Turner: Quite so, and, of course, the parent department BERR is probably the only department which can exert adequate influence on them. Do you detect any willingness on the part of BERR to influence the ECGD to change its ways?

  Mr Leaton: Not in my experience.

  Ms Streatfeild: No, I have seen no evidence particularly that they have. Clearly we do not know what goes on behind closed doors. For example, we have offered to meet John Hutton, and that has been turned down, to discuss some issues that we would like to see improved in its operations and although we have recently received a letter and we are very grateful for that in terms of our engagement with BERR, we have seen little evidence that BERR are making ECGD consider sustainable development.

  Q15  Dr Turner: But even if you could get ECGD and BERR to take on the environment responsibility do you think they have got staff with sufficient knowledge and expertise to do it effectively because it is quite a challenge to apply these principles in practice when there is big money at stake?

  Mr Leaton: With any change in activity you obviously have to resource it adequately. Obviously, the current Business Principles Unit is quite small within ECGD and therefore we question whether they have the capacity to monitor and assess these huge projects, which takes up a significant amount of time, not just in the assessment phase but on an ongoing basis to ensure that the commitments that may have been made on environmental or social issues are being delivered on. Yes, we would argue that to do this properly you would need more resources.

  Q16  Dr Turner: So the conclusion is that from the point of view of sustainable development the ECGD neither has the right structure, the right legal remit nor the capacity to deliver and is not fit for purpose in this respect?

  Mr Leaton: That would be my view.

  Ms Streatfeild: And to add to the issue of capacity, I think they would probably say that they have access to other government departments and the expertise within those, for example, say Defra or the FCO, but I would highlight the Defra submission where they say they have consulted in sensitive cases, of which Sakhalin was one when they were still considering the application before it was withdrawn, and Defra's analysis of the project was that the benefits of it did not outweigh the danger to biodiversity in the area and yet, despite having that input provided to them, we have not seen any evidence. They carried on considering the project for a number of years after that submission and there was no evidence to us—

  Q17  Dr Turner: They consulted and ignored the response?

  Ms Streatfeild: We have no evidence that they took it on board and they were still considering supporting that project in spite of those criticisms.

  Q18  Jo Swinson: If I may pursue this point about evidence of what difference it has made, earlier you said that there was very little evidence of change in the last 10 years. Is there any evidence from anywhere that Business Principles have had an impact on the way the ECGD does its business?

  Mr Leaton: I think we supplied you with, appended to our submission, the Business Principles Unit assessment of the Baku pipeline in which all the assessment by the BPU was redacted,[24] so how can we tell? They may have made a very valid assessment that we agree with but the Underwriting Committee has ignored it, or they may have disagreed with everything we said and that is why the Underwriting Committee made its decision. We have no way of telling because a lot of this information which we consider is environmental information, is withheld for other reasons. It is very hard to get information on the actual decision-making process. We have tried to track it on things like Sakhalin in terms of going through long-winded processes to get the Defra submission, to get how the ECGD has interacted with the applicants. We got some more information just last week through environmental information regulations regarding how the ECGD has interacted on a report they commissioned from what were billed as independent consultants to review the Sakhalin project, and in the final three months of producing that report the main activity was sitting down with Shell (who managed the process despite it allegedly being independent) and their lawyers to go through it page by page. To me that is not constructive engagement; that is defensive engagement to try and make sure there are no liabilities or legal issues going forward. We do not see the positive side coming out.

  Mr Hildyard: I think there are two levels in which one would be looking for change. One is in the portfolio—this is the big issue, in a sense; the test of how far the Business Principles have really seeped into the culture and practice of the institution—and there really has been no real change there. At the level of projects, where NGOs have been engaged on a project and that engagement has given the Business Principles' Unit some political stick to beat within the Department, I think the Business Principles' Unit has been able to make some small changes here and there that have been beneficial: adding things into the Environmental and Social Action Plan; putting some covenants in on specific issues on the environment on certain projects. But I think it is a very defensive approach. The main political purchase that the Business Principles' Unit seems to have is where there is a risk of a judicial review by NGOs, at which point they can go to the rest of ECGD and say, "Wake up. You need to take some account of these issues or you may well find yourself in court," but this is not coming from within the institution, if you like; it is more reacting to outside. Even where environmental clauses are put into the covenants, it is of grave concern to us that these clauses do not seem to be properly enforced. I would go back to the example of the coatings on Baku-Ceyhan. Regardless of whether or not the coating is a risk or is not a risk, it is of concern that BP never notified ECGD that there had been problems with this coating. ECGD was completely unaware and denied for some time that the coating was an experimental coating and it had never been used on a plastic-coated pipeline of that type before. Although 26% of the joints joining up the pipe in Georgia failed after the project had been approved by ECGD, BP never notified ECGD of that at the time, within the timeframe they were supposed to under the project agreement. They did not notify that there had been a change in the application specifications for the coating. The problem was not rectified within 90 days—which is supposed to be required. The Trade and Industry Committee was supplied with evidence of internal BP memos showing that there were still problems with disbondment of the coating in June—so way beyond 90 days—and yet ECGD took no action. This is of concern. Where you have clauses within an agreement that allow you to act on breaches, to see these breaches being constantly rolled over is of concern. Of course it is very difficult for NGOs to police this. It takes two or three years through FOIA to get the environmental covenants—in fact, we obtained that through a US FOIA request—and it is very difficult to be able to react on that.

  Q19  Jo Swinson: Do you think the Business Principles themselves need to be reviewed or is it the implementation or lack thereof that is the problem?

  Mr Hildyard: I think the Business Principles have very mealy-mouthed language which needs to be tightened, but principles without procedures for enforcement are worthless. Absolutely worthless. They are not worth the paper they are written on. It is the lack of clear policy on sustainable development and, particularly, the lack of scrutiny against any of Britain's sustainable development objectives, that is of concern. How can you test whether or not a project accords with your sustainable development objectives if the Department does not have any statement of what those objectives are and its understanding of those objectives? Certainly, from what we have seen, it does not assess the projects against those objectives. There needs to be a very clear process by which that is done. It may be that part of that assessment is to assess against World Bank guidelines and so on, but, as I say, those World Bank guidelines do not and cannot be taken as a statement of UK Government policy on sustainable development. Our sustainable development objectives, as outlined by the Government, go way, way, way beyond the benchmarks that ECGD currently uses to assess projects.

  Mr Leaton: I would agree that they are fairly meaningless as they are. ECGD confirmed to us in writing that ECGD can provide support even where a breach of international standards has been identified. That gives us no assurance that there is a minimum standard. To us the Business Principles should at least assure a minimum standard of performance. There is also an issue of timing here. We recognise that the ECGD may get involved in projects after they have been started, after construction has been initiated, but because there is lack of clarity over the exact bar that is going to be required, there seems to be a fudge later on; so that, rather than raising the standards of the project, ECGD lowers its standards down to where the project is. Most businesses or investors, we feel, would like more certainty. If you are investing in a project, you want to know at the beginning: These are the standards I have to meet, this is how much it is going to cost, this is what I have to do going forward. We feel that giving more certainty and a clear level that they require would be better for business.

  Ms Streatfeild: The principles themselves do not mention climate change. In the current climate, we feel it would be sensible for that also to be included.

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