Written evidence from 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 11 years, The Corner House has
closely monitored the support given to UK industry by the UK Export
Credits Guarantee Department.1
3. The Corner House welcomes the Committee's
current inquiry into "Government Assistance to Industry"
and is grateful for the opportunity to comment on the issues that
the Committee has chosen to examine. This submission focuses on
the role of the Export Credit Guarantee Department (ECGD) in promoting
exports and the supply of credit to small- and medium-sized enterprises
(SMEs).
4. The Corner House notes that:
- Claims by ECGD that it operates at no cost to
the taxpayer are questionable. Two directorates of the European
Commission—DG Competition and DG Trade—are currently
investigating allegations that ECGD is hiding losses and placing
operating costs "off balance sheet" through the use
of a Special Purpose Vehicle known as GEFCO. Were ECGD to be required
to consolidate GEFCO's accounts with its own, it is likely that
estimates of ECGD's "value for money" would be substantially
reduced.
- In sharp contrast to other EU-based export credit
agencies, the ECGD has an extremely poor record of supporting
small- and medium-sized exporters, backing just a handful of the
4.7 million plus SMEs registered in the UK. Instead, the bulk
of support has gone to companies that are profitable enough and
big enough to buy private political risk insurance and medium-term
credit in the market.
- ECGD's recent decision to weaken its environmental,
social, human rights and anti-corruption due diligence in order
to assist exporters is short-sighted and damaging to the UK's
future export prospects. It is also likely to result in adverse
impacts on the ground. The ECGD's effective abandonment of its
absolute ban on supporting projects involving child and forced
labour is of particular concern.
- Consideration should be given to incorporating
ECGD into a dedicated Green Investment Bank as part of a wider
industrial strategy aimed at building a low-carbon economy in
the UK.
ECGD'S COST TO
THE TAXPAYER
5. The Export Credits Guarantee Department
(ECGD) is the UK's export credit agency.2 It derives
its functions and powers from the Export and Investment Guarantees
Act 1991.3 Its primary function is to facilitate the
export of goods and services by providing companies with guarantees,
credits and insurance. In carrying out its functions, the ECGD
uses a variety of financial instruments including different forms
of credit and insurance.
6. The British Exporters Association argues
that ECGD represents good value for money, stating:
"ECGD's ability to generate wealth for the UK
is clear: each £1 of ECGD operating costs helps to generate
£85 (2010) of orders for UK companies and all at no cost
to the UK taxpayer. This figure compares well with the UK Trade
& Investment ("UKTI") statistics whose export support
generates £16 for every £1 of taxpayer's money spent."4
7. In fact, the claim that ECGD operates
at no cost to the taxpayer is questionable. Two directorates of
the European Commission—DG Competition5 and DG
Trade6—are currently investigating allegations
that ECGD is hiding losses and placing its operating costs "off
balance sheet" through the use of a Special Purpose Vehicle
known as GEFCO (Guaranteed Export Finance Corporation).7
8. The allegations arise from analysis by
The Corner House and Campaign Against Arms Trade of ECGD's and
GEFCO's accounts.8 The analysis found that the UK Treasury
had provided GEFCO, through ECGD, with some £3.7 billion
in loans to purchase loans made under ECGD's Fixed Rate Export
Financing (FREF) from ECGD. GEFCO then refinances the loans. FREF,
which enables UK exporters to offer finance at a fixed interest
rate to potential buyers of its goods and services, has made massive
losses in the past.9
9. In The Corner House and CAAT's view,
ECGD's use of GEFCO circumvents and subverts the UK's legally-binding
obligations under the export subsidy provisions of the World Trade
Organisation's Agreement on Subsidies and Countervailing Measures.
10. These obligations require ECGD to charge
its corporate customers insurance premiums that are adequate to
cover the Department's long-term operating costs and losses. The
premiums must cover the costs of any refinancing of ECGD loans,
whether undertaken directly by ECGD or by GEFCO with ECGD support.
11. The requirement's intention is undermined,
however, if ECGD "hides" or effectively reduces its
reported losses and operating costs. Because ECGD's and GEFCO's
accounts are not consolidated, the operating costs of GEFCO's
refinancing activities do not appear on ECGD's balance sheet,
meaning that ECGD's accounts do not reflect its actual operating
costs.
12. Moreover, the mechanism used to refinance
GEFCO's loans may be obscuring the true extent of ECGD's losses.
Any default on a refinanced loan is covered by yet another additional
loan to GEFCO from ECGD; this is not accounted for separately
by either GEFCO or ECGD but is simply lumped together in GEFCO's
accounts with other borrowings received. As a result, it is difficult,
if not impossible, to assess how much of the money given to ECGD
by the Treasury for GEFCO is for refinancing ECGD's loans and
how much for writing off bad debt. The full extent of ECGD's losses
is thus hidden.
13. Were ECGD to consolidate GEFCO's accounts
with its own, it is likely that its "wealth generating"
ratio would be substantially reduced.
14. The Corner House believes that the extent
of subsidy involved in ECGD's operations has been substantially
underestimated and should be investigated. An informed view of
the extent of ECGD's support for UK exporters and its effectiveness
requires that such subsidies are transparent and not hidden through
off balance sheet vehicles such as GEFCO.
ECGD'S FAILURE
TO SUPPORT
SMES
15. The Corner House supports the use of taxpayer-supported
funds to assist exporters, particularly at a time of economic
recession. But it is firmly of the view that such support should
not be provided to companies that are able to finance their insurance
and export finance needs through the commercial market.
16. According to ECGD's accounts, the Department
has issued some £31.6 billion worth of guarantees and insurance
policies, including renewals, since 1999, covering some 1,756
contracts. ECGD has not disclosed details of all the companies
that received this support—its latest accounts, for example,
record 198 policies being issued, of which only 47 were made public.
From the publicly disclosed information, however, it is clear
that only a handful of the 4.7 million small and medium-sized
enterprises (SMEs) in Britain10 received support. By
contrast, SMEs account for some 68.7% of applications for support
from Germany's export credit agency, Hermes.11
17. In the UK, the majority of ECGD support has
gone-and continues to go-to major multinationals, notably Airbus.
In 2009-10, Airbus accounted for over 90 per cent of the value
of business underwritten and 83% of the policies issued.12
Such near-monopoly support for Airbus came at a time when SMEs
were in desperate need of ECGD-backed finance because of the credit
crisis and when other European export credit agencies were taking
measures to ensure such support, for example, by obtaining exemptions
from the European Union's state aid rules by allowing support
for exports within the European Union.
18. Whilst ECGD has recently tailored a new bond
facility that would benefit Airbus and Rolls Royce,13
it has yet to respond in any substantive way to calls by SMEs
for special facilities that would meet their needs. Moreover,
ECGD records just one deal under the sole substantive new measure
taken by ECGD explicitly to support UK exporters during the credit
crisis—its 2009 Letter of Credit Guarantee Scheme. The deal
involves just one million Euros' worth of support14
being approved. No other deal has been made public by ECGD in
the ten months since the Scheme was introduced (the Scheme runs
only to 31 March 2011).15
19. The Corner House agrees with the British
Exporters' Association (BExA)16 (and Vince Cable, the
Secretary of State for Business Innovation and Skills, prior to
his entry into government17) that many of the large
multinationals that currently dominate ECGD's portfolio are in
a position buy private political risk insurance and medium-term
credit in the market.
20. The Corner House supports BExA's proposal
that ECGD "move on from its concentration in servicing large
business". In addition, it would propose that ECGD be required
to disclose the difference in the premiums it charges on individual
contracts against commercial rates available for the same contract.
WEAKENING DUE
DILIGENCE PROCEDURES
21. The Corner House believes that, as a taxpayer-backed
and subsidised institution, ECGD should condition its support
for companies on their adhering to strict anti-corruption, environmental,
social and human rights standards.
22. The Corner House is therefore extremely concerned
by ECGD's decision in May 2010 to weaken its environmental and
social due diligence procedures on the grounds that these procedures
had placed UK exporters at an international competitive disadvantage.
In future, ECGD will restrict its anti-corruption, social and
environmental screening and assessment procedures only to those
standards agreed internationally by the Export Credit Group of
the Organisation for Economic Co-operation and Development (OECD).
23. As a result, ECGD will no longer assess the
environmental and social impacts of projects whose repayment term
is under two years or in which the UK exporter's share of total
project costs is less than SDR 10 million (equivalent to £10
million).
24. The new rules mean that ECGD's absolute ban
on supporting child and forced labour is now ineffective, since
a range of projects will no longer be assessed for the potential
involvement of such practices. As a result, there is a high risk
that ECGD will support child and forced labour. Moreover, applicants
will no longer even be informed that ECGD has such a ban, rendering
it hard, if not impossible, for ECGD to seek recourse in the event
that child or forced labour is discovered after a project has
been approved.
25. ECGD's claim that UK exporters would be at
a disadvantage if it maintained its previous procedures, under
which all projects (other than aerospace and defence contracts)
were screened for environmental and social impacts regardless
of value or repayment terms, is highly misleading. As the OECD's
own figures reveal, the majority of ECGD's main competitor ECAs
have stricter procedures than those of ECGD. The OECD records,
for example, that 20 out of 31 member state ECAs conduct some
form of review of projects with repayment terms less than two
years18 and that 15 ECAs screen projects regardless
of value.19 The OECD's assessment also reveals that
the majority of member ECAs apply a range of standards that are
additional to those required under agreed OECD rules.20
26. The Corner House believes that the ECGD's
current policy is short-sighted and damaging to the UK's future
export prospects. Not only does it disadvantage those firms, including
many SMEs, that have introduced procedures for ensuring compliance
with international environmental, social and human rights standards,
but, by permitting lower standards, it also will leave many companies
ill-equipped to take advantage of the rapidly growing markets
for "green" goods and services.
27. In addition, poor due diligence can lead
to companies breaking the law, with potentially adverse consequences
for jobs. Three companies supported in the past decade by ECGD
have recently been convicted in the UK: Mabey and Johnson and
M. W. Kellogg for corruption offences; and BAE Systems for false
accounting. Such convictions have the potential to deny companies
future contracts in the US and in the EU.
28. Despite such impacts, the ECGD's recently
introduced Letter of Credit Guarantees Scheme was exempted from
ECGD's standard anti-corruption procedures, in favour of "outsourced"
due diligence by the participating banks. It is thus of grave
concern that one Nigerian bank-Intercontinental Bank-named by
ECGD as an "issuing bank"21 in the Scheme22
recently had to be bailed out by the Central Bank of Nigeria as
a result of its allegedly corrupt practices.23
29. The Corner House believes that the ECGD's
current policy of stripping back its due diligence in order to
attract a wider exporter base is misplaced and recommends that
ECGD should reinstate its previous screening and assessment procedures
for all projects, regardless of value and repayment terms.
INCORPORATING ECGD
INTO A
GREEN INVESTMENT
BANK
30. Despite a decade or more of government ministers
directing ECGD to broaden its customer base and to support more
SMEs, ECGD has failed to deliver.
31. The Corner House believes that consideration
should be given to restructuring ECGD as part of a wider industrial
strategy aimed at building a low-carbon economy in the UK. This
would mean abandoning the ECGD's current business model of supporting
all exporters regardless of their size or activity and focusing
instead on support for exporters developing low-carbon technologies.
32. A
recent report by Platform and the World Development Movement (WDM)
warns that the UK's low carbon manufacturing sector is currently
lagging far behind both its continental European counterparts
and newly industrialising countries. According to the report,
investment in this sector—including support for exporters—has
the potential to generate some 50,000 jobs a year.24
33. Platform and WDM note that there is already
wide political support for a Green Investment Bank to promote
a low-carbon economy. The two groups recommend that the Royal
Bank of Scotland (RBS), now owned by UK taxpayers, should be transformed
into such a bank, providing investment to create a sustainable
economy.
34. Incorporating ECGD into a new Green Investment
Bank would give the ECGD direct access to the exporters it needs
to support if it is to deliver the Coalition Government's stated
aim of transforming the Department into a champion "for British
companies that develop and export innovative green technologies
around the world, instead of supporting investment in dirty fossil-fuel
energy production."25
35. Such direct, daily contact with green exporters
would also provide a strong stimulus for ECGD to develop the sort
of bespoke export finance packages, such as guarantees on bonds,
that would assist UK green exporters in winning business abroad.
Such guarantees should be conditional on the companies issuing
them being under a legally-binding contract to have management
systems in place that ensure adherence to international environmental,
social anti-corruption and human rights standards in their operations
at home and abroad.
24 September 2010
REFERENCES
1 The Corner House
has participated in nine field missions to assess the social and
environmental impacts of several projects for which ECGD support
has been sought. It has undertaken in-depth research into a number
of ECGD-backed projects that have been tainted by allegations
of bribery. See, for example:
—The Ilisu Dam, the World Commission on Dams
and Export Credit Reform: The Final Report of a Fact-Finding
Mission to the Ilisu Dam Region, October 2000
http://www.thecornerhouse.org.uk/resource/ilisu-dam-world-commission-dams-and-export-credit-reform.
—Turning a Blind Eye: Corruption and the
UK Export Credits Guarantee Department, June 2003 http://www.thecornerhouse.org.uk/resource/turning-blind-eye.
2 Export credit
agencies (ECAs) are public, quasi-public or private agencies that
provide loans, guarantees, credits and insurance to private corporations
from their home country to assist them doing business overseas.
Such support is particularly requested for projects in the developing
world because of the perceived financial and political risks involved
in such projects. The support requested would be more expensive
if obtained through the private sector. Where the ECA is public
or quasi-public, the loans are backed by the agency's national
government.
3 Under the Export
and Investment Guarantees Act 1991, ECGD, acting on behalf of
the Secretary of State for Business, Enterprise and Regulatory
Reform, is required to " facilitat[e], directly or indirectly"
the supply of British exports.
4 British Exporters
Association, "Export Credit Agencies: Export support available
to British exporters, ECGD benchmarking", July 2010, http://www.bexa.co.uk/docs/Final%20-%202010-07-26%20bexa%20research%20-%20eca%20benchmarking%20report%20(final)1.pdf
5 DG Competition,
"CP 80/2010: Complaint against the UK export credit scheme",
Letter to The Corner House and Campaign Against Arms Trade, 12
July 2010, http://www.thecornerhouse.org.uk/sites/thecornerhouse.org.uk/files/8152-545%20CP80-10%20UK.pdf.
6 DG Trade, Letter
to Campaign Against Arms Trade, 29 July 2010, http://www.thecornerhouse.org.uk/sites/thecornerhouse.org.uk/files/Complaint%20CHAP%282010%2902320.pdf.
7 "Complaint
to EU concerning alleged unlawful state aid to UK's export credit
agency: Refinancing through GEFCO raises questions about ECGD's
financial losses", 23 March 2010 and subsequent,
http://www.thecornerhouse.org.uk/resource/complaint-eu-concerning-alleged-unlawful-state-aid-uks-export-credit-agency.
8 The Corner House
and Campaign Against Arms Trade, "Complaint to EC concerning
alleged unlawful state aid to UK's export credit agency",
22 March 2010, http://www.thecornerhouse.org.uk/sites/thecornerhouse.org.uk/files/Complaint%20FormFINAL.pdf.
9 The Treasury
describes the losses under FREF as "massive" and estimated
in 2004 that the scheme had cost the taxpayer more than £15
billion since 1972.
See:
"The Future of ECGD", Treasury briefing
for Non-Governmental Organisation, 2004 (copy available on request).
10 British Exporters
Association, "Export Credit Agencies: Export support available
to British exporters, ECGD benchmarking", July 2010, http://www.bexa.co.uk/docs/Final%20-%202010-07-26%20bexa%20research%20-%20eca%20benchmarking%20report%20(final)1.pdf.
11 British Exporters
Association, "Export Credit Agencies: Export support available
to British exporters, ECGD benchmarking", July 2010, http://www.bexa.co.uk/docs/Final%20-%202010-07-26%20bexa%20research%20-%20eca%20benchmarking%20report%20(final)1.pdf.
12 ECGD, Annual
Review and Resource Accounts 2009-10, p.8, http://www.ecgd.gov.uk/assets/bispartners/ecgd/files/publications/ann-reps/ecgd-annual-review-and-resource-accounts-2009-10.pdf.
13 "Deal
Analysis: AerCap's ECA bond", Airfinance Journal,
8 September 2010, http://www.airfinancejournal.com/Article.aspx?ArticleID=2663612.
14 ECGD, "ECGD
helps Spooner Industries deliver Euro 5 million order", 20
August 2010, http://www.ecgd.gov.uk/news-and-events/news/ecgd-helps-spooner-industries-5mil-euro-order.
15 ECGD, "New
Letter of Credit Guarantee Scheme to provide short-term export
finance", 20 October 2009, http://www.ecgd.gov.uk/news-and-events/news/new-let-cred-short-term.
16 The British
Exporters' Association states:
"the commercial reality is that a large company
which already pays substantial annual premium for a well-spread
portfolio of risk and is able to take a high level of risk share
can generally secure cover on insurable risk, even for the more
economically challenging contract structures, credit risks, horizons
or destination customers and/or countries"
See:
British Exporters Association, "Export Credit
Agencies: Export support available to British exporters, ECGD
benchmarking", July 2010, p.7,
http://www.bexa.co.uk/docs/Final%20-%202010-07-26%20bexa%20research%20-%20eca%20benchmarking%20report%20(final)1.pdf
17 In February
2004, the Rt Hon Vince Cable MP stated:
"When my former colleagues in the oil industry
and others approach the Minister for help, why cannot they be
told that it is possible to buy private political risk insurance
and medium-term credit in the market? Why does the taxpayer have
to underwrite it?"
See:
Hansard, 26 Feb 2004:
Column 407, http://www.publications.parliament.uk/pa/cm200304/cmhansrd/vo040226/debtext/40226-04.htm.
18 OECD Working
Party on Export Credits and Credit Guarantees, "Export Credits
and the Environment: 2009 Review of Members' Responses to the
Survey on the environment and officially supported export credits",
29 April 2010, http://www.olis.oecd.org/olis/2009doc.nsf/LinkTo/NT000098F2/$FILE/JT03282654.PDF
Para 88 of the OECD report, which was based on a
survey conducted prior to ECGD stripping back its procedures,
states:
"Short-term business is reviewed for potential
environmental impacts on a case-by-case basis: nine Members/ECAs,
i.e. Austria, Canada, Denmark, Finland, France, Hungary
Eximbank and MEHIB, New Zealand and Sweden.
"Short-term business subject to separate environmental
review procedure: three Members/ECAs, ie Germany, Mexico
and Switzerland (if the value is over CHF 10 million)."
"Short-term business is treated in the same
way as other business under the 2007 Recommendation: eight Members/ECAs,
ie Australia, Belgium, Japan JBIC, Luxembourg, Netherlands,
Norway, Slovak Republic and United Kingdom."
19 OECD Working
Party on Export Credits and Credit Guarantees, "Export Credits
and the Environment: 2009 Review of Members' Responses to the
Survey on the environment and officially supported export credits",
29 April 2010, http://www.olis.oecd.org/olis/2009doc.nsf/LinkTo/NT000098F2/$FILE/JT03282654.PDF
Paragraph 21 of the OECD Report shows that 15 ECAs
(out of 31 from 30 countries) classify all projects regardless
of value, 15 impose a SDR 10 million limit and one sets a SDR
20 million limit
20 OECD Working
Party on Export Credits and Credit Guarantees, "Export Credits
and the Environment: 2009 Review of Members' Responses to the
Survey on the environment and officially supported export credits",
29 April 2010, http://www.olis.oecd.org/olis/2009doc.nsf/LinkTo/NT000098F2/$FILE/JT03282654.PDF
Para 38 of the OECD assessment records, for example,
that:
"20 ECAs use such international standards on
a case-by-case basis when such standards "are more stringent
than or not addressed by World Bank Group standards."
"18 ECAs gave examples of using European Community
standards, but also, for example, those of the World Health Organisation"
Para 42 states:
"Eleven Members/ECAs reported that they might
apply additional standards for issues not adequately addressed
by the primary standards, such as unique effluent or discharge
(Canada), animal production (Denmark), social issues (Korea Eximbank)
and emissions (Sweden)."
Para 43 states:
"Twenty Members/ECAs reported that they may
use other internationally recognised sector specific or issue
specific standards where such standards are not addressed by the
World Bank, such as,
- Exporting country standards for air quality (Germany)
and animal production (Denmark)
- International Atomic Energy Agency (IAEA) standards
for nuclear projects (Canada, Italy and United States)
- International Commission on Large Dams (ICOLD)
(Hungary Eximbank and MEHIB)
- International Cyanide Management Code (Canada)
- IUCN Red list for endangered species (Italy and
Japan NEXI)
- MARPOL Convention (Canada and Japan NEXI)
- Montreal Protocol (Spain)
- Multilateral Investment Guarantee Agency standards
for investment insurance
- (Hungary MEHIB)
- World Commission on Dams and International Hydropower
Association (Austria, France, Germany, Spain and Sweden)
- World Health Organisation for water quality (Canada)".
"Three Members/ECAs, ie Belgium, Netherlands
and Turkey, reported that they may use other internationally recognised
sector specific or issue specific standards on a case-by-case
basis."
21 The issuing
bank issues a Letter of Credit, which is a long-established instrument
in trade finance. When a UK company sells goods overseas, it will
typically make it a condition of the contracts it draws up and
signs with the buyer that the buyer arranges for its own bank
to give an irrevocable undertaking—which takes the form
of a "letter of credit"—to pay for the goods exported
once documentary evidence is produced that the goods have been
shipped from the exporter. This is known as an "unconfirmed"
letter of credit. Where the UK exporter fears that the overseas
bank may default on this undertaking, the exporter arranges (upon
payment of a fee) for a UK bank to "confirm" the letter
of credit. In this instance, the exporter is paid by the UK bank
on production of the shipping documents—and it is then the
responsibility of the UK bank to obtain repayment from the overseas
bank.
22 ECGD, "Letter
of Credit Guarantee Scheme: List of Issuing Banks", http://webarchive.nationalarchives.gov.uk/tna/+/http://www.ecgd.gov.uk/ecgd_issuing_banks_pdf-2.pdf/.
23 The Governor
of the Central Bank of Nigeria, Lamido Sanusi, ascribed the collapse
of Intercontinental Bank to "poor corporate governance practices,
lax credit administration processes and the absence or non-adherence
to the bank's credit risk management practices."
The CDC Group, a company wholly owned by the UK's
Department for International Development, notes that the Nigerian
banking collapse was provoked in large part by "favourable
loans being offered to associates of many of the banks' executives".
CDC Group was itself invested in Intercontinental.
See:
Address by the Governor of the Central Bank of
Nigeria, Mallam Sanusi Lamido Sanusi, on Developments in the Banking
System in Nigeria on 14 August 2009, http://www.imoisilis.com/2009/08/full-text-of-cbn-governors-speech-on.html
CDC Group Plc, Development Review 2009, p.48,
2010, http://www.cdcgroup.com/uploads/development_review_2009.pdf.
Connor, W., "Nigeria plans $2.6 billion bank
bailout, ousts top executives", Wall Street Journal,
15 August 2009
http://online.wsj.com/article/SB125029804018633595.html
Central Bank of Nigeria Advertorial, 18 August 2009,
http://www.cenbank.org/Out/publications/pressRelease/GOV/2009/ADVERTORIAL2.pdf
24 Leaton, J,
and Reed, H, A Bank for the Future: Maximising public investment
in a low-carbon economy, Platform and World Development Movement,
2010, p.12, http://www.wdm.org.uk/clean-banks/bank-future-maximising-public-investment-low-carbon-economy.
25 Cabinet
Office, The Coalition: Our Programme for Government, 2010,
http://www.cabinetoffice.gov.uk/media/409088/pfg_coalition.pdf.
January 2011
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