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The World Bank and the International Monetary Fund jointly administer the initiative and monitor each country's progress. When a country meets the conditions for decision point on the initiative, those organisations
assess the country's total external debts and calculate the percentage reduction required from all creditors to reduce the debts to an economically sustainable level. The HIPC initiative expects that all creditors-bilateral, multilateral and commercial-will provide this percentage reduction fairly and equally, doing what is financially necessary.
At decision point, the World Bank and the IMF also agree with the country a set of reforms that it will undertake to direct the extra resources, from which it benefits through debt relief, towards tackling poverty and catalysing economic growth. Once the country achieves those triggers, it reaches completion point-the point at which all creditors are expected to have reduced their debts to the set level. With sustainable debt levels, a track record of macro-economic stability and a strategy being implemented to reduce poverty, countries completing the HIPC initiative are much better placed to continue their development.
The HIPC initiative is providing considerable success. Countries that have completed it have achieved higher rates of economic growth, maintained lower inflation and fiscal deficits and similarly improved their relative performance compared with other low-income countries. It is sustained economic growth that offers the surest underpinning for lifting people out of the poverty that continues to affect much of the countries' populations. Of course, development is never a simple story, but the recent progress of, for example, Tanzania, Ghana and Rwanda shows the real contribution that debt relief can make.
Completing the HIPC initiative also triggers additional debt relief that goes beyond the aim of reducing debts to a sustainable level and further increases the resources freed up for the development. The UK is one of several countries that completely cancel all debts owed to the Government at completion point. At Gleneagles, in 2005, the UK won international agreement for the multilateral debt relief initiative that completely cancels debts owed to the IMF and the main multinational development banks. Together those initiatives are so far worth $117 billion in debt relief for the 40 heavily indebted poor countries. It is an achievement that the UK has led the world in bringing about, and all of us in the House should feel proud of it.
The benefits of debt relief, however, could, and should, be even greater. Most commercial creditors recognise that, aside from considerations of tackling poverty, the heavily indebted poor countries are unable to repay debts in excess of the percentage reduction expected under the HIPC initiative, and they agree voluntarily to reduce their debts accordingly. However, a small minority of creditors instead seize on the opportunity presented by the debt relief provided by others and sue the Government of the country for debts often contracted decades ago, and which have accumulated interest and arrears.
If a company cannot meet all its obligations to creditors, insolvency law brings about a fair and efficient resolution by requiring that all creditors receive repayment of an equal proportion of their debt. No analogous system exists for countries, as the hon. Member for South-West Hertfordshire (Mr. Gauke) noted when he said that there was no sovereign system of liquidation or insolvency. I do not think that we would want a system of liquidation for a country, but it is important that we have something
comparable to an insolvency regime for countries that get into massive debt. That is what we are trying to do with the Bill.
It is currently legally possible for a creditor to free-ride on the debt relief that others provide, enforce its claim for full repayment and siphon off for commercial gain some of the resources that would have been used for poverty reduction. Hon. Members have spoken of how they see this practice as morally unjustifiable, and I agree with them, but I would also like to emphasise that allowing this free-riding to continue would perpetuate an economically unjustified and inefficient market failure. As the money that is diverted includes the development assistance funded by UK taxpayers, I have another strong reason, as a Treasury Minister, to support action in this area. That is an important point that I would want Members in all parts of the House to recognise.
For those reasons, the Government have already taken a range of steps to limit the problem. Many commercial creditors are happy to be repaid whatever proportion of their debt they remain entitled to, consistent with providing relief under the HIPC initiative. The World Bank's debt reduction facility organises operations to buy back debts eligible for relief at the deep discount corresponding to HIPC initiative terms, and then to cancel them. The UK supports and, with other donors, funds such operations, which can be very effective. Last April the facility brought back and cancelled 97.5 per cent. of Liberia's eligible commercial debt, for only 3 per cent. of its face value of $1.2 billion. I want to say something more about Liberia in a minute, because it was referred to by a number of hon. Members.
High-quality legal advice for heavily indebted poor countries is also important, to help them defend claims and avoid problematic terms in new borrowing. For that reason the Department for International Development has committed £5 million to fund the new African legal support facility. The value of good legal advice was illustrated by the case of Donegal International Ltd v. Zambia, where our funding for legal advice helped Zambia reduce its liability by around $40 million. Also, a number of claims brought by litigating creditors can be reduced if fewer responsible creditors sell on their claims. We have won support for commitments not to sell on claims, from 19 members of the Paris Club of creditor Governments, the European Union and signatories to the UN's Doha declaration on financing for development.
Despite the success of all those measures, a problem remains. It is a problem of a small minority of commercial creditors that continue to litigate and recover sums greatly in excess of that which is compatible with the debt relief that heavily indebted poor countries can expect. The best information on the scale of the problem comes from the World Bank's annual survey of heavily indebted poor country Governments. The most recent survey, in 2009, reported 14 active or unresolved law suits worldwide, with a total value of $1.2 billion. More new cases continue to be brought. Rates of litigation since 2002 indicate that around a fifth of such cases are heard here in the United Kingdom.
I cited Liberia as an example of the success of voluntary buy-backs, but as hon. Members have recognised, in November the High Court gave judgment for $20 million against Liberia, in a claim brought by two commercial
creditors against the country, allowing them to seek to enforce full repayment in the United Kingdom. In Liberia, a country with an average income per person of just $170 and where 13 per cent. of children die before their fifth birthday, all the resources that its Government should expect are vital. I find the actions of commercial creditors morally repugnant. Only legislation, in the Bill before us today, can prevent such free-riding under UK laws and in UK courts by a small minority of unscrupulous commercial creditors. By passing the Bill, I believe that we can help to protect Liberia, Ethiopia, Sierra Leone, the Democratic Republic of the Congo and the other heavily indebted poor countries facing litigation.
I want to address some of the comments made by the hon. Member for South-West Hertfordshire about the Bill. He principally raised the issues of contractual rights and whether the Bill would actually benefit developing countries. There is certainly an interference with contractual rights, as he notes, but we believe that this is morally and economically justified. I shall say something about the compelling reasons for that in a moment. I strongly believe that the Bill will benefit developing countries. Indeed, if one asks developing countries, they, too, will say that the Bill will be helpful to them. The hon. Gentleman also raised what might be called the "thin end of the wedge" argument, which is that the Bill might set a precedent and that people might go further. I want to address that too, as well as commenting on the position of original creditors, to which he also referred.
Mr. Nigel Dodds (Belfast, North) (DUP): Will the Minister also address the point raised by both the hon. Member for Hazel Grove (Andrew Stunell), the Front-Bench spokesman for the Liberal Democrats, and the Conservative party spokesman about the effect of other countries not following suit? That is an important issue if the money is being transferred elsewhere.
Ian Pearson: I will indeed address that point, as well as the sovereign debt work-out mechanism, which the hon. Member for South-West Hertfordshire also raised. On that issue first, as I think he is aware, the Government supported the IMF's original proposal for a sovereign debt work-out mechanism in the early part of this decade. The proposal did not receive international consensus at that time. As a result, there has not been a renewed international proposal following the Doha declaration. That is why the Government have instead prioritised consulting on and supporting measures through legislation, which is why we are pleased to support the Bill before us today. We believe that it can build on the successful HIPC initiative and be implemented quickly.
The hon. Gentleman raised some specific points about contractual rights. I understand that some people take the view that the Bill is an unjustified interference with property rights. I recognise that that was not what the hon. Gentleman, who speaks for the Opposition, was saying, but he raised that point as an issue and a matter of principle. I hope that I have made clear the economic arguments for all creditors to provide the relief assessed as necessary in the HIPC initiative, and explained why free-riding is inefficient and inequitable. It is important to recognise that the vast majority of commercial creditors already voluntarily reduce debts in line with the initiative, so they will be completely unaffected by the legislation.
As the hon. Gentleman said, the Bill is carefully targeted and calibrated. It includes a clause that specifically provides an incentive to debtors to negotiate settlements of their debts on terms compatible with the HIPC initiative, thereby helping the process. It is also worth noting that the typical market value of the debts that will be affected is around or below the level to which creditors will remain entitled under the Bill.
On contracts, as the House will be aware, the Government have already taken what steps we can, within the existing legal framework, to help developing countries with debt relief. What is proposed in the Bill is limited to a tightly defined stock of existing debts of the poorest countries in the world. It balances preventing creditors from extracting excessive repayment with an incentive to help them to recover the part of their debt that they can expect to be repaid. In this case, the need to stop the resources that the UK and others provide through debt relief being diverted from poor countries justifies reducing contractual rights. It is not the case that contracts would be torn up; rather, creditors will not be able to pursue payment beyond the level assessed as sustainable by the IMF and the World Bank.
Legislation not infrequently has some effect on the value of existing contracts. Although this is more unusual, there are precedents for legislation that changes existing contractual and other property rights. For example, I was responsible for leading on the Banking (Special Provisions) Act 2008 and the Banking Act 2009, both of which provide, in limited and defined circumstances, for powers to transfer the shares in, or property of, a bank to another person. Such a step should be taken only if there is a compelling public policy case for doing so, which we believe there to be in this instance. I hope that the Bill will receive its Second Reading today and that we can accelerate it through Committee, but I do not expect passing it into law to result in any significant impact on the UK's competitiveness for financial services.
The commercial debt relief expected under the HIPC initiative is less than 0.1 per cent. of the total debts of developing countries. The proposal is limited to a fixed stock of debt that has already been contracted, and it is clear that it will have no impact on new lending.
Mr. Chope: So what does the Minister say about the comments of the Alternative Investment Management Association, which states:
"The proposed legislation would damage the reputation of English law and make the City of London less hospitable to investors"?
Does he discount that as irrelevant?
Ian Pearson: I do not discount it as irrelevant. The association is entitled to its view, but I do not happen to agree with it. I have a lot of time for investment management-more so than many people in this House or in the country generally. It performs a vital function in ensuring that economies can get the finance they need in order to grow. I always consider carefully the views of associations that represent such companies, but I do not believe that what they are saying in this instance reflects the true situation. We are talking about a very small number of transactions overall.
The Bill introduced by my hon. Friend the Member for Denton and Reddish has been carefully calibrated, and the Government want to ensure that English law
retains its status as a preferred choice of law for finance, and that the City retains its status as a leading financial centre. There is nothing in the Bill to jeopardise those aims in any way. I believe that the concerns about it have been overstated. Those expressing them do not necessarily object to the targeted measures in the Bill, but they say that they would not want them to go further. This point was raised by the hon. Member for South-West Hertfordshire when he spoke of the danger of setting a precedent. I do not see it in that way. In giving our support to the Bill, we have been careful to say that it needs to be carefully targeted and that we need to be cognisant of the legal position.
The best analogy that I can provide is that of the debate on the hunting ban. At the time, many people argued that if we banned hunting, the next step would be to ban shooting and fishing. The legislation that we passed, however, has not been the thin end of the wedge, and we have seen no subsequent measures to ban shooting and fishing. Those who put forward those arguments were wrong to do so and, similarly, those who say that supporting this carefully calibrated Bill will open the door to a far more extreme Bill that would jeopardise Britain's long-standing reputation as a leading financial centre have just got it wrong. It is not like that.
Mr. Chope: Is not the Minister's argument about precedent completely undermined by the fact that has just cited his own very controversial Banking Act 2009 as the precedent for what he is proposing today?
Ian Pearson: I cited the Banking Act as an example of a situation in which exceptional circumstances and compelling reasons-in that case, the need to ensure financial stability-allow contract law to be interfered with. In general, however, the presumption has always been in favour of the sanctity of contractual law. We are not tearing up contract law by supporting this Bill; far from it. We are ensuring that there will be fair treatment for all creditors when some of the debts of a HIPC country are being pursued by a small minority of unscrupulous creditors.
Ms Keeble: Does my hon. Friend accept that the arrangements relating to the wind-down of banks that were required as a result of the credit crunch-which led to criticism from Opposition Members-were necessary because the public could not continue to underwrite the UK banks' losses in an unsustainable way? There is a similar argument for initiating an orderly wind-down of the debts of developing countries. Again, this would protect the interests of British taxpayers, who are having to underwrite those losses as well.
Ian Pearson: My hon. Friend is right. She is not only an expert in debt relief but a distinguished member of the Treasury Committee, and she has followed these matters closely.
I used the Banking Act as an example in my argument about contractual law. It was exactly because there were compelling policy reasons that we enacted that legislation. That is why we acted in that instance, and I strongly believe that there is an equally compelling public policy reason to support the measures in this Bill, to which my
hon. Friend the Member for Northampton, North has spoken so eloquently today.
The hon. Member for South-West Hertfordshire raised a point about creditors. Some people argue that they should be able to choose whether to participate in the arrangements, rather than being forced to do so. That would not happen in the case of a company insolvency, as we have discussed, and I hope that I have made the case that it would be unfair if one or two creditors were able to operate as free riders when everyone else had decided to participate in the initiative.
I believe in providing debt relief, on development and moral grounds. There is also a strong economic argument for full participation. HIPC debts cannot be substantially repaid without debt relief, and the HIPC initiative aims for all creditors to provide the level of debt relief that will return those debts to sustainability. The example of insolvency law is directly relevant here. Because there is no equivalent to insolvency for countries, they are vulnerable to the small number of unscrupulous creditors who refuse to participate in the necessary reduction of debt that has been agreed by sovereign member states, as well as by all the other international lending institutions and most other commercial companies that have made loans to the country in question.
This is a classic free-rider problem in economic terms, and the situation is being exploited by vulture funds. The Bill is designed to stop that happening. Debt relief is funded by the UK taxpayer, and I am enormously proud of what we have done in the United Kingdom in that regard. Without action, however, our efforts risk being undermined by the small minority of unscrupulous commercial creditors, with that money being diverted to investors.
The hon. Member for South-West Hertfordshire is right to mention that this is not just about vulture funds, given that the legislation as drafted also refers to the original creditors. He is also right to say that roughly half the debts in question stand in the name of the original creditors.
The key aim of the Bill, as I understand it, is that all creditors provide debt relief as expected under the HIPC initiative; it does not discriminate between so-called vulture funds and more typical commercial creditors. The purpose of the legislation is to tackle unacceptable behaviour rather than certain types of fund. Once there has been wide agreement on debt relief and the necessary reductions, I think it just wrong for any creditor to be able to turn around and say, "Well, we are not having that; we do not agree to that," when everybody else has, and then to seek to pursue the full commercial debt.
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