Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 20-38)


8 JULY 2008

  Q20  Jo Swinson: Given that the amount of business that ECGD has been processing since 2000 has fallen off dramatically and it is much, much smaller than it was, how important is this in the grand scheme of things?

  Ms Streatfeild: In terms of the benchmark it sets for other export credit agencies, and, where it does finance a project, the standards that it may then require other financiers to come up to or have to meet, from that point of view, as an exemplar, it remains important. Yes, you are right, the amount of business has decreased. We may see in the current economic climate that things change somewhat. But this is a Government Department giving guarantees to projects. I do not think you can overestimate the importance of not meeting standards and the message that sends to other private sector and public sector finance for what is appropriate. I would say it remains important despite the decline in ECGD's business.

  Mr Leaton: It maybe raises a question around the ongoing role if there is less demand for ECGD's activities, as to whether it is appropriate to continue in the way it is and, also, whether having this Department is good value for money, as it were. I know the NAO has looked at that.

  Q21  Mr Caton: You have already raised question marks about the assessment methods that the Department uses. Could we look in more detail at the Case Impact Analysis Process? The Department works on the basis of information provided by exporters and categorises these into low, medium or high impact, and requests more information for medium and high impact cases. For high impact applications, a full environmental and social impact assessment is required. It publishes details of these so that interested parties can make representations. On the face of it, that seems a reasonable approach. How could it be improved in terms of environmental issues and sustainable development?

  Mr Hildyard: First of all, it does not have to publish these details for anything other than category A projects until after the guarantee has been given, so there is not much possibility of intervening on those other guarantees prior to the guarantee being issued. We have some concerns about that. We looked or tried to look at as many of the categories B and C or low and medium impact projects in 2005 and 2006 as possible. We had considerable difficulties in getting hold of the assessments that were made, the screening forms that had been filled in. ECGD initially released to Friends of the Earth a batch of about seven. When we put in for the entire block that had been done that year, we were told it was too many; others put in for five and were told that was too many. They have been coming in dribs and drabs. But we do have some concerns for that particular year and we will be looking at later years as well. I raised these particular cases, not because we have analysed them in any great detail, but, having looked at the fact that they were classified as low impact and then done web searches and had some conversations with colleagues in the countries where they are taking place, there have been red flags that we certainly think ECGD should have picked up on, but on the forms that we have seen they do not appear to have done so. For Korea, you have two power stations listed in the guarantees, as published in the report, as simply "power stations"—in fact nuclear power stations—and classified as low impact. There may be good reasons for them being classified as low impact. Details were not given at the time of the export—it may just have been paperclips—but there was no real sense of analysis of the impact in the form that we saw. I have the form here—it was part of the evidence we put in[25]—and there is a question: "Is the project in one of the following potentially damaging business sectors, nuclear power generation and/or fuel processing?" and the box for nuclear power has been ticked. Against that, there is a remark as part of the form which says: "If `yes' to any of these then probably Medium or High impact" and you would have expected some explanation on the form somewhere as to why that has not been put as medium or high rather than low. Another one that we looked at is in the Indian market. The buyer was Jindal. A very rudimentary web search revealed there were concerns expressed about Jindal using child labour in one of its sister mines that supplies its steel mills—this particular export was for a steel mill. Was this picked up? Were there any questions asked? When we received the form, Jindal had filled in not only the questionnaire but also an impact form, and none of the questions on child labour had been answered. Again, what was going on? Why were more questions not asked about that? Another that we looked at was for export to Iran. The buyer was a client called KalaNaft. Under a very simple web search, KalaNaft comes up as being listed by the Japanese Ministry of Economy, Trade and Industry as a company suspected of involvement in procuring biological, chemical, and nuclear weapons. What is this buyer? Why is it being classed as low impact? There may be very, very good reasons. The Corner House is a small group and we do not have the resources to look into all these things in detail, but I am saying that the forms that were filled in do not show any evidence that a red flag came up at any point and, as we see here, they were classified as low impact. The second thing I would say about the questionnaires is that they are not a screening process as most people would understand a screening process. They are not screening anything out; they are only screening in terms of categorisation. I think that is problematic. If it is going to be a department that fulfils that duty that ministers have imposed on it of its activities being in accordance with Britain's sustainable development objectives, then an element of screening out is absolutely essential.

  Q22 Mr Caton: You paint a very negative picture of the process, even when it is employed. What about coverage? Are all the projects subject to the process?

  Mr Hildyard: That is, again, of concern to us. I think 71% last year was not screened at all. It was either defence equipment or aerospace. ECGD argues that one aeroplane is the same as another and there is no point going through the screening process, but one aeroplane is not the same as another. The cumulative impacts of aeroplanes are very different and that ought to be screened for. The climatic impacts should be screened for.

  Q23  Dr Turner: I am looking at schematic representation of the project appraisal process. If projects have a high environmental impact, it is possible for them to be rejected. Can you think of any single case that has been rejected?

  Mr Hildyard: No. ECGD is on record as saying that they never have rejected one. There is a project we are looking into at the moment, which is an application for category A, an application by Jindal for a steel plant in Orissa in India. It has been posted on the web site. The posting is supposed to be where concerned parties can get environmental information on the project, so that they can put in comments and alert ECGD to any problems. We wrote to the company which is listed as the source of environmental information and had no reply. We wrote to ECGD. ECGD says that they do have two assessments that—from what we have in their reply—they do not come anywhere near to meeting the World Bank's requirements, but it is not clear where those are available. Are they available in the local town? Are they available in the local language? ECGD does not seem to know that for sure. It is totally unclear where someone in Britain would be able to obtain the environmental information. Again, the system does not seem to be working. Our view would be that Jindal should be told, "Do not apply until you have an environmental impact assessment that meets the standards that we require of an environmental impact assessment; one of which is to make it publicly available in an accessible place."

  Q24  Mr Caton: Is it fair to say, given the size of the remit of ECGD, that there is a limit to the level of information gathering and analysis that it can undertake? Are we making unreasonable demands for information gathering from the Department that should be the responsibility of exporters and companies involved in the project?

  Mr Leaton: If it is a British company then you can expect certain responsibilities and that they should have environmental and social policies and undertake these processes—in which case it should not be difficult for ECGD to refer us to the right information or pass the information on. Our concern stems from the fact that if we ask ECGD a question they do not seem to have the answers at their fingertips provided by the company. It is also of concern that the level of foreign contact has been increased to 80%. We feel this increases the potential risks to ECGD because it will open up increased off-shoring of labour and materials. It could just be that you pay 20% as an arrangement fee to a UK-registered company and everything else happens overseas. One of the main reasons of ECGD is to benefit British business and develop the British economy, and yet 80% of the activities are going overseas.

  Ms Streatfeild: Given their capacity to investigate the meeting of environmental standards in what already goes on seems quite limited, in imagining that they have the capacity to do that for a large amount of business that is taking place overseas in a supply chain that may be difficult to monitor, we would question whether they might not end up supporting further environmental and social damage as a result of that policy.

  Q25  Colin Challen: Is this 80% a fairly recent thing? What was the figure before?

  Mr Leaton: 50% before.[26]

  Mr Hildyard: 50 plus 40% for the EU[27]. I would have to check those figures. It was last year that they brought it in. Interestingly, Corner House and WWF put in a submission to the consultation they had on this. We opposed the extension but proposed that if they were going to bring it in there should be procedures brought in to check the supply chains of companies that were being used abroad, particularly for the use of child labour but also for environmental procedures in the plants which were being used to manufacture the goods. Our understanding is that the minister picked up on this and asked ECGD to look into this specifically. We certainly met with ECGD—it was a helpful meeting—and we have supplied them with some information on the potential guidelines they can look at. I was disappointed to see in the recent ECGD Advisory Council minutes that the ECGD appear to have rejected introducing environmental supply chain standards. They might look into some labour standards, but they do not appear to have gone down that route. One of the arguments that they have used is that it might disadvantage British industry. The other argument is that it would be seen as colonialism, and I think that does pinpoint one of the problems with the culture of ECGD. It is not colonialist to impose standards on people who are asking for public money. That is a huge difference between that and Britain going out and imposing standards on other governments. If you come and ask for publicly guaranteed money, there is no reason on earth why Britain cannot impose whatever standards it wants on a company getting that money. If one of the sustainable objectives about which a minister has expressed concerns is the use of supply chains that are not properly monitored, that do not have procedures in place, then I think it is of concern that those are not then fed into the procedures of ECGD.

  Q26 Colin Challen: As you understand it, at the moment these procedures are not being made more rigorous.

  Mr Hildyard: That is my understanding, and I am sure ECGD can answer that.

  Q27  Colin Challen: Which leads to a question abut this Jindal episode. Obviously that was an incomplete application form that you are referring to. Do ECGD, to your knowledge, routinely accept incomplete application forms?

  Mr Hildyard: Perhaps I can clarify that. Because it was deemed a low-impact project, the exporter would only be required to fill in the environmental questionnaire but Jindal also filled in an environmental impact questionnaire. There are two different forms, but, because it was low impact, it was not required to fill in the impact questionnaire. It was incomplete but it would not have made any difference to the procedural requirements. My point would be that if staff in ECGD received a form on this, then it is a mystery to me why they did not pick up on these issues of child labour and Jindal—because they are widely publicised within India, they are a major concern—and if they saw the boxes on child labour were not ticked, why this did not raise a red flag. That is the issue. Whether rightly or wrongly, the allegations have been denied by Jindal, but the activists on the ground would say that they are very sure of their facts. I am not in a position to judge one way or another. The issue here is: What procedures were in place? Why was a red flag not raised? Or, if it was, what justification does ECGD have for putting it as low impact?

  Q28  Colin Challen: ECGD employs the international standards of the World Health Organisation, the World Bank, International Finance Co-operation and so on to help them assess the potential environmental and social impacts of applications. Are these the right standards to use? I think I heard earlier on in evidence that the World Bank does not really have any environmental guidelines. Are these the right things or should we have something else?

  Mr Hildyard: The World Bank does have environmental guidelines to safeguard policies, quite a number of them, and ECGD does benchmark against them. It does not have any climate policies and it does not have any human rights policies and it does not have any labour policies.[28] So there are the benchmarks that ECGD uses, but my point is that ECGD does not screen against UK development objectives. If one of those objectives is the Millennium Development Goals, with an oil and gas project I would expect ECGD to ask various questions: Is this project going to help in eradicating absolute poverty? It is a simple question. What evidence has the exporter given to justify this? Not just in terms of maybe putting in a school here or a community development project here but in terms of the macro-economic effects of oil and gas. A big issue. There is a lot of documentary evidence that oil and gas developments can skew an economy in ways which have very large impacts in exacerbating poverty through the so-called Dutch disease. These sorts of issues do not appear to be assessed in the assessments that certainly we have seen.

  Mr Leaton: The World Bank and IFC do have standards that are referred to by ECGD and we would see them as the minimum requirements, but it is the discretionary nature in which they are applied that concerns us. Equally, some of those other institutions like the IFC have other facilities, like an ombudsman, through which communities can go to seek compensation or redress or resolution if they feel the project is not taking into consideration their concerns or they are being dealt with unfairly. ECGD has no such mechanism for people impacted on the ground to come and say, "We don't think you are following these policies," or "We have a concern and we would like to raise it with you."

  Q29  Colin Challen: Do you have any evidence that ECGD has provided support to projects where exports have not met the international standards, even given that these international standards are not necessarily the best that we could have?

  Mr Hildyard: ECGD has told us that at in least one project—which from memory is South Powers, a project in Iran, which I think is an oil and gas project—that there were derogations from the standards on that but they have not disclosed what those derogations were. It is of concern to us that the derogations are not publicly disclosed before the guarantee is given, in order that they can be commented on and tested by stakeholders. Certainly if it had gone ahead with Sakhalin, it would have had to have derogated big time from the listed standards very definitely.

  Q30  Mr Caton: You have already made reference to the constructive engagement approach. Do you agree that ECGD should look at projects that do not meet their standards in the original impact assessment to try to bring them up to scratch?

  Mr Leaton: I think it comes to the timing issue again. If you have already designed the project, if you have already commissioned major pieces of infrastructure, like platforms or pipelines, and half of it is already in the ground, it is very hard to change those bits of the project, so there is already a limit to what ECGD might be able to influence. If I were ECGD and I felt I had had such a positive impact, I would be shouting about it, yet I have never seen any examples of evidence provided as to what that positive outcome or constructive engagement has delivered. On the Sakhalin project, they could not find their way through the diagrams to reject the option and they had four years to try to bring it up to standard. During those four years, there was never a point at which they felt they could fund it because of the ongoing environmental problems. To us, that demonstrates that they could not bring it up to standard.

  Q31  Mr Caton: Others quoted Sakhalin as a good example of positive impact of export credit agencies and financial institutions. Even the National Audit Office seems to have found that improvements were made as a result of the export and credit agencies' involvement. What makes you think they were wrong?

  Mr Leaton: As Nick alluded to, they would not have been addressing those issues if NGOs like WWF had not raised them; if they had not taken them to the highest political level; if they had not lobbied other parts of government. My question is whether it is ECGD within that group of financial institutions and within government which took that initiative or whether it was NGOs that suggested potential solutions, and whether it was some of the other banks that did a lot more of the environmental work that ECGD maybe rode on the back of because they did not have the capacity to deliver on it. They may claim some credit for that, but I do not see how it directly ties back to them.

  Q32  Mr Caton: The National Audit Office think they should take some credit. Is it not the fact that if they and other institutions had not intervened when they did, the Sakhalin project would have gone forward and it would have been much worse?

  Mr Leaton: We raised live issues during that project. We had a monitoring team in Sakhalin, so we relayed back, for example, periods when the noise levels were excessive in the gray whale feeding area and sent that to ECGD within 24 hours of it happening, and we never even received a response of, "Yes, we are very worried about this, we will look into it," or "Yes, we'll get back to you on the action we have taken," so how do we know that they are acting on the information we provide?

  Mr Hildyard: There are two issues. One is that at the project level and one is at the broader level of portfolio and so on. At the very beginning of introducing the Business Principles there was scope for quite a lot of constructive engagement. You need to bring people on board, you need to educate people about the Business Principles and so on and so forth, but we have had 10 years and it is not a policy that has resulted in a change in the portfolio. I think that highlights a problem which needs to be addressed. At the project level, certainly on BTC, the Baku-Ceyhan pipeline, as I have said there were some contributions that the export credit agencies generally and possibly the banks also brought in changing the project. There were concerns over the host-government agreements. Under pressure from NGOs, particularly Amnesty International, and I suspect from some export credit agencies, although I cannot say for certain ECGD was one of them, BP were put under enough pressure to be able to make some changes and some concessions on these host-government agreements. They brought in a deed poll which said that they would not invoke the most egregious clauses except under very specific circumstances. So, yes, credit where credit is due, but I think James's point is essential: that most of these issues are raised by NGOs—and we are talking about constructive engagement in the context of issues having been raised outside of ECGD. I think it is very telling when you compare different assessments for projects. WWF have I think put in the Baku-Ceyhan assessment, and when you compare that to some other assessments that we have and which we can supply to the Committee, the number of issues that are dealt with by the Business Principles' Unit really does reflect the issues that are raised by NGOs. If they are not raised by NGOs, they are not dealt with. That frames the extent to which ECGD can and does make a difference.

  Q33  Dr Turner: ECGD tell us that they have been quite active in international fora and discussions with other export credit agencies, particularly on the current use of international standards for the wider analysis and assessment of environmental and social impacts. How would you characterise their contribution?

  Mr Hildyard: Corner House, along with a network of NGOs have been very active in monitoring the discussions within the OECD on the so-called Common Approaches. I think ECGD, along with a few other export credit agencies, have played a positive role in trying to push for, certainly initially, the adoption of the three World Bank standards and then the adoption of a broader range of World Bank standards. Indeed, I think they have pushed also for a tightening up on what is the biggest problem with the Common Approaches, which is the derogation clauses—and you can derogate from many of the standards. Also, on a particular initiative of the OECD on renewables, they did push, I believe, for inclusion of the reference to the World Commission on Dams in assessing dam projects. This is all commendable. However, that said, the OECD process and the extent to which it is making any difference internationally is extremely questionable. We, as Corner House but also ECA-Watch, are extremely alarmed by the extent to which, despite nominally committing ECAs to the 10 safeguard policies of the World Bank and so on, these are being derogated from left, right and centre. The Ilisu Dam project—which the Committee will probably be aware of because ECGD in the event did not fund it and after the applicant withdrew in 2001—is now picked up by three other ECAs; despite 150 derogations from World Bank standards, they are still going ahead and there is no process for holding these ECAs to account. The NGOs that have been monitoring this walked out of the ECGD process last December, partly because the engagement was a non-engagement. We would go along, we would express our concerns, the ECAs would sit around and say very little (and to its credit ECGD normally did say something) some of the ECAs representatives even slept during the process—and there is a limit to which one can go on spending money going along to these sorts of processes. We withdrew, saying that really we are not interested in going back into that process until there is some sort of clearer review process within the OECD. We have written to ECGD outlining the recommendations for a peer review process but have heard nothing back from them. I regret that because it was a genuine attempt to move things forward. We do know that within the OECD there have been some discussions but we do not know where they have got to. To summarise: I think ECGD does play a positive role; I do not think it uses the extent of its veto to the extent that it could; the US has refused at times to sign up to some of these agreements because they are not tough enough. I think the ECGD could do more of that. It could also do more to use its role particularly as a signatory to one of the renewables initiatives to hold the other ECAs to account. They could say, "Look, you've signed up to this agreement, you say you are going to have the safeguard policies, how come you are funding this dam with 150 derogations?" That is in the interests of UK business, because this was a project that British companies withdrew from because of the outrage over the fact that it does not come anywhere close, even now, to meeting World Bank standards. I think it could do a lot more. I really do regret that there is seemingly no movement from the UK that we have heard of or been informed of or been invited to have discussions about on this issue of a peer review process, because, without a peer review process, that OECD Export Trade Working Group is just a talking shop.

  Q34  Dr Turner: That is interesting because the OECD and the World Bank tell us that among export credit agencies ECGD is playing a leading role in helping to promote the sustainable development agenda. Should that be read as a comment rather more on the whole process and upon other export credit agencies? What is your impression?

  Ms Streatfeild: I would agree with Nick that ECGD have taken a lead, beyond some of the export credit agencies, with what they have been advocating in the international process. We are not clear about the strategy ECGD has for what they would like to see as further improvements. They have obviously made some, but we do not know if they would like to see all export credit agencies reporting on a sustainable benefit impact, for example, and it would be interesting to know, in order to be able to hold them to account, what they are trying to achieve, to know what it is they go into the meetings looking for. For future years do they have a plan for what they would like to see in the international arena? Outside of the OECD there are obviously a number of other export credit agencies operating. Increasingly developing countries have them. We understand that ECGD has recently signed a memorandum of understanding with the Chinese export credit agency Sinosure. We did ask to see this document, because the press statement alluded to the fact that they were sharing best practice and also there may be some sort of products that could provide cover for UK and Chinese businesses from the other export credit agency. We are concerned about being able to see this, that this may allow UK industries to receive support from a Chinese export credit agency which may not have equivalent standards. While the press statement did allude to ECGD and China sharing best practice, we do not know if this includes advocating particular standards to be used. As I say, we asked to see this document over two months ago now and we still have not received it. Outside of the OECD, there are also opportunities, as this may be, for influencing other export credit agencies and we would like to know what ECGD are doing in that respect to try to bring other export credit agencies up to the standards that they are advocating and have achieved in the OECD.

  Mr Leaton: In terms of performance, as well, when you look around the western ECAs there are certainly examples of other ECAs going further than ECGD does; whether it is setting a target for reducing the greenhouse emissions in their portfolios, producing a sustainable report, funding renewables. This is all going on in other ECAs but not in ECGD, so for ECGD to take a leadership position we feel they need to be demonstrating much more than they are doing that in their own institution.

  Ms Streatfeild: It has to be said that often within the OECD many of the changes that have happened have been as a result of individual export credit agencies improving their own standards, and then they are forced to try to create a level playing field and to lobby and be active in trying to achieve that. That happened with the UK productive expenditure rules. Subsequently, after they were introduced at ECGD here, similar rules were introduced at OECD level. The US had much higher environmental standards than other export credit agencies. Obviously the US fought very hard within the OECD to achieve those standards and subsequently these improvements have been made. While there is only so far that an export credit agency can go it alone, often standards are improved by one being a first mover and taking the lead, and it would be interesting to know what ECGD might be able to do in terms of taking and improving its own standards and then going to the OECD rather than just encouraging a fully multilateral agreement before making any change.

  Q35  Jo Swinson: Could I confirm that it is your view that aerospace defence exports should go through the same environmental screenings as other applications have to go through.

  Mr Leaton: Yes.

  Q36  Jo Swinson: On aerospace, in particular, the Government's view would be that they already have to satisfy internationally agreed environmental standards anyway. In your view, why are these insufficient? Why should they have to go through additional environmental screening?

  Mr Leaton: We have had a similar response, that, yes, the planes that are supported meet regulations on noise and emissions, but we would hope that the Government would not support planes that did not meet regulations. Surely that should be a given. What we are not seeing is where this supposed constructive engagement takes what is supported beyond that. We have had responses like: "We do not know what the planes are used for." We assume they are used for flying, and you could have some basic performance criteria for what is best practice and what are we going to support. I would say that some of the companies that receive support are already doing work along those lines, so you are not asking them to start from nothing and you can encourage what they are doing. There is certainly scope to demonstrate that you are requiring above just what enables planes to fly by meeting regulations.

  Q37  Jo Swinson: What types of additional screening would you carry out? What would you have in the environmental appraisal, whether for engines from Rolls Royce or planes for Airbus?

  Mr Leaton: We have not gone into that much detail. It is a question of whether that amount of support should be given to that individual industry and it should dominate the portfolio to that extent. But if it is going to, then I think the climate change issue is the big one for us that does not get addressed at all at the moment as far as we can see. There is obviously a recognition globally that aviation is a growing contributor to greenhouse gas emissions. It is not covered at the moment by international processes. We are not clear whether these planes are in addition to existing planes. Are you expanding fleets? Are you replacing older planes? There is no way of assessing if this is a benefit or just increasing the amount of emissions.

  Q38  Jo Swinson: But you would accept that in cases where a new plane is replacing an old plane that gets retired, it could have positive impacts on the environment by being more efficient.

  Mr Leaton: If there is a proper assessment done of that.

  Ms Streatfeild: It can be the case that old planes may be retired from one fleet but then sold to another fleet, so in fact the net effect is expansion. But all of these issues can and should be investigated to determine, as we have asked for, that the overall sustainable development impact and the impact on climate is assessed.

  Mr Hildyard: Just going through an environmental screening process such as the environmental screening process is at the moment, would be completely insufficient. The first tier of screening is: Does it accord with our sustainable development objectives? Does it accord with our objectives on sustainable consumption? Does it accord with our objectives on the Millennium Development Goals? Does it accord with our international obligations—indeed, international law obligations—under article 2 of the UN Climate Convention? Having asked those questions, you can screen out certain projects and then you can have your technical standards as to whether or not the noise levels are right or the emissions are better or whatever. If you do not ask those first tier questions, which are nowhere in any of the screening processes, you are never going even to begin to meet what you say you are intending to meet, which is our sustainable development objectives.

  Chairman: We are out of time, I am afraid. It has been a very useful session. Thank you very much indeed for coming in.

25   See Ev 16. Back

26   Note by Witness: The figure before was 15%, not 50%. Back

27   Note by Witness: The figures are, in fact, 15 plus 40% for the EU. Back

28   See Ev 38. Back

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