Written evidence from Jubilee Debt Campaign
ABOUT JUBILEE
DEBT CAMPAIGN
1. Jubilee Debt Campaign (JDC) is part of a global
movement working for full cancellation of unpayable and unjust
developing country debts, by fair and transparent means. As such
it is also interested in advocating for financial reforms which
would make for a more responsible and pro-development lending
system. It is a company limited by guarantee (number 3201959)
and a charity registered in England and Wales (number 1055675).
See www.jubileedebtcampaign.org.uk for more details.
INTRODUCTION
2. We WELCOME
the Committee's focus on the UK government's assistance to industry,
though we would like to confine our evidence to one aspect of
the inquiry - the performance and role of the Export Credits Guarantee
Department (ECGD). We would particularly like to focus on the
impact of the ECGD on the British economy, international development,
environmental sustainability and human rights. We believe the
ECGD must be radically overhauled in order that support to British
industry does not come at the expense of development, human rights
or environmental sustainability in recipient countries. We also
believe these changes would allow ECGD to support a more balanced
and sustainable economic base here in the UK.
3. The vast majority of the ECGD's support is
extended to large corporations, usually working in the arms trade,
aerospace or fossil fuel-related industries. Arms and carbon-intensive
industries have typically made up over 75% of ECGD's custom. Even
more surprising, in 2009-10, 89% of support went to a single company,
Airbus.
4. ECGD projects have involved corruption, human
rights abuses and environmental destruction. That's why, over
many years, the ECGD and other export credit agencies (ECA) developed
a set of standards to guide their work. In the UK, standards were
known as the "Business Principles". Although the "Business
Principles" were voluntary in their application and, we maintain,
much too weak, the Government repealed even these basic standards
earlier in 2010. These changes mean that the ECGD will not go
further than the Organisation for Economic Co-operation and Development's
minimum standards (known as the "Common Approaches")
in terms of social or environmental standards. We believe this
is a step back - indeed smaller projects will now receive no screening
at all, in effect making a mockery of the ECGD's prohibitions
on child and forced labour.
5. ECAs are currently developing new products
to more easily offer support to industry. In 2009, the ECGD opened
a new scheme - the Letter of Credit Guarantee Scheme - by which
it can insure short-term sales and projects that it is not directly
involved in. The ECGD provides a master guarantee to UK banks
that insure letters of credit from overseas banks in favour of
UK exporters. We are concerned that such products might mean that
the ECGD is yet another step removed from the projects it is guaranteeing
- making monitoring mechanisms even less effective in ensuring
projects are responsible internationally and well targeted at
UK business. Indeed the scheme effectively "contracts out"
due diligence to the banks providing the primary insurance.
6. Listed as a potential beneficiary of the Letter
of Credit Guarantee Scheme is Nigeria's Intercontinental Bank.
This is concerning as the Economic and Financial Crimes Commission
(EFCC) of Nigeria is currently charging former Managing Director
Erastus Akingbola with corruption, along with other members of
senior management, accused of transferring funds to companies
connected to Mr Akinbola. Mr Akingbola was dismissed along with
his management team after the Central Bank of Nigeria (CBN) had
to bail the bank out owing to "poor corporate governance
practices, lax credit administration processes and the absence
or non-adherence to the bank's credit risk management practices".
ECGD'S ROLE
IN DEVELOPING
COUNTRY DEBT
7. Of particular concern to JDC, ECGD projects
have created large quantities of developing country debt. When
export recipients default, the ECGD often uses sovereign guarantees
to pass the costs of the default onto the recipient country government.
In effect, it becomes public debt. This has made the ECGD the
biggest public holder of developing country debt in the UK - currently
amounting to around £2billion (£1.3 billion if poor
countries theoretically eligible for debt cancellation are removed).
In addition, since 2000, ECGD has gained £3.4 billion in
recoveries - £2.3 billion of which is from developing countries.
We believe that some of these countries, such as Kenya, Ecuador,
Indonesia and Vietnam, need debt cancellation if they are to reduce
poverty and meet the Millennium Development goals.
8. Moreover, much of this debt is severely unjust.
For instance, Indonesia owes £500 million to the ECGD, and
has repaid £400 million since 2000. The majority of this
can be attributed to arms sales made by the UK Government to the
brutal military dictatorship of General Suharto. Weapons manufactured
and supplied by the UK, including Hawk aircraft, Scorpion tanks
and water cannons, were sighted in use against civilians, including
when suppressing protest through Indonesia, during a violent assault
on a university, and when attacking resistance in Aceh. Some of
these deals were corrupt according to a Guardian report of 2004,
and if they had taken place today would have been open to criminal
prosecution. We do not believe it is just in any way for Indonesia's
successor governments to be repaying this money.
9. Similar cases exist in several developing
countries. Kenya is repaying money which is, we believe, related
to the Turkwel Gorge Hydro-Electric Power Station. The Turkwel
Gorge project was first conceived in the 1960s and concerns about
the project's viability existed from the beginning because the
power station was to be situated on a known earthquake fault and
because the seasonal flow of the Turkwel river is unreliable.
In August 1986, the ECGD issued a guarantee of £17.5 million
to a British consulting company. In March 1986, an internal memorandum
written by Achim Kratz, then European Commission delegate to Kenya,
noted that that the contract price was "more than double
the amount Kenya's government would have had to pay for the project
based on an international competitive tender."
10. When the Turkwel Gorge Dam was eventually
completed in October 1993, it had cost nearly twice the contract
price. The Kenyan press described the dam as "the whitest
of white elephants" and a "stinking scandal." Regional
Red Cross chairman John Nakara has said the Turkwell project "has
done more harm than good". The British government has recognised
that Kenya should receive some degree of debt relief, even though
it is not eligible for current IMF and World Bank schemes. However,
the UK claims it cannot currently grant relief because of the
unstable political situation.
11. Many other cases exist which underline the
way the ECGD creates unjust debts through lax lending standards.
We would be happy to share examples of irresponsible projects
in India, Lesotho, Brazil and the Philippines. These cases not
only lead to a detrimental outcome for developing countries -
they also risk supporting irresponsible business behaviour on
the part of British industry.
12. We firmly believe that ECGD needs to make
its lending standards far more robust if we are to avert cases
of irresponsible debt in the future. Moreover, the ECGD must audit
past debts - including the ones mentioned here - to ensure countries
are not repaying debts in cases where those debts are proving
detrimental to development and poverty alleviation, or where those
debts are patently unjust. Finally, the principal must be enshrined
that future risks cannot only fall on countries in receipt of
ECGD project guarantees. As with all financial decisions, risk
must be shared between actors if rational decisions are to be
made. The use of sovereign guarantees should be reconsidered.
At the least, this means developing countries should not bear
more than half of the financial risk for a project. There are
alternative methods of off-setting risk - such as transferring
defaults into equity shares of the concerned project.
13. The government of Norway has led the way
in addressing some of these issues. In 1988-89 the Norwegian Parliament
produced a white paper on the "Ship Export Campaign",
conducted in the 1970s, which described the campaign as having
"had limited importance as development aid". In 2006,
the Government of Norway announced that it would unilaterally
and unconditionally cancel the official debts of around US$ 80
million incurred under the Ship Export Campaign by five countries:
Ecuador, Egypt, Jamaica, Peru and Sierra Leone - and that these
cancelled debts would not be taken out of the development assistance
budget. According to the Norwegian Ministry of Foreign Affairs,
the Ship Export Campaign had "represented a development policy
failure".
LACK OF
TRANSPARENCY AND
ACCOUNTABILITY
14. Our work on this issue is severely hampered
by the serious lack of transparency which continues to characterise
ECGD. For instance, the ECGD claims it does not hold records as
to which projects its debt portfolio relates, even when that debt
is being recovered. This is an extraordinary state of affairs
- countries are repaying debts with no certainty as to what they
are repaying those debts for. We would like to suggest the ECGD
follows the lead of the Spanish ECA which, since 2006, has had
the obligation, through the relevant ministry, to present an annual
report to the Spanish parliament containing all data on debt owed
to Spain.
15. Problems with transparency and accountability
are not confined to debt. The ECGD, for instance, should allow
proper consultation on projects, in order to make them as responsible
as possible. This should include a complaints mechanism for civil
society groups likely to be impacted by ECGD-supported projects,
so that ECGD maintains responsibility for projects beyond its
affirmation of support. We believe the ECGD requires a transparency
and accountability revolution, and make suggestions to that end
in our recommendations.
16. In addition, it is clear that significant
amounts of ECGD support is given to large companies, which could
potentially find insurance privately (albeit possibly more expensively)
rather than supporting small and medium industries that desperately
require assistance. We have no doubt that ECGD could play a positive
and socially responsible role in promoting responsible British
industry. This would require re-orienting the department, however,
positively encouraging applications from new and green industries
for example. We don"t see how the ECGD's current mandate
and structures would allow this, however, and suggested a major
re-think is needed. This might tie in with plans for a Green Investment
Bank, which could incorporate an export component. We have not
undertaken enough work on this area to give concrete recommendations,
but would welcome the opportunity to work with the Committee on
developing such proposals.
17. Clearly a radical change in standards would
be needed to effect the type of ECGD we believe is necessary.
In February 2008, the European Network on Debt and Development,
of which JDC is a member, launched their Charter on Responsible
Financing. The Charter gives a comprehensive guide as to how governments
and companies could lend responsibly to other governments - outlining
the essential components of a responsible loan. These aim to ensure
that terms and conditions are fair, that the loan contraction
process is transparent, that human rights and the environments
of recipient nations are respected and repayment difficulties
or disputes are resolved fairly and efficiently. This agenda is
being taken forward at an international level by institutions
like the UN Conference on Trade and Development (UNCTAD), which
is working on a three-year programme to improve lending standards.
18. We believe the EuroDad Charter gives a good
basis for instituting the sort of standards which could produce
a more useful, productive, sustainable ECGD. Of immense importance,
all standards by which the ECGD currently abides are non-binding
and explicitly allow waivers in "exceptional cases".
This must be replaced by legally binding standards. The ECGD also
fails to operate a categorical prohibitions list of activities
that are not conducive to sustainable development. We believe,
for instance, export of military equipment should be prohibited.
19. These standards must be tied to serious attempts
to measure impact. Currently, the majority of ECGD projects are
exempt from impact screenings, belonging as they do to the military
or aerospace sectors. Of the remaining projects, very few fall
into medium or high impact categories and even when they do, ECGD's
assessment remains limited and the standards discretionary. In
the case of the ECGD's decision, in 2004, to support the $20 billion
Sakhalin II oil and gas development, the ECGD gave a legally-binding
commitment to support the project in March 2004, before an adequate
environmental impact assessment had been completed. The initial
impact assessment, submitted by the Sakhalin Energy Investment
Company (SEIC), after construction had already begun, was declared
by potential lenders to be "unfit for purpose".
20. Once a project has been given the go-ahead,
the ECGD does nothing further to meet its responsibility for impacts.
In essence, it simply washes it hands. Despite many instances
where the impact of ECGD's activities have been considerable,
no formal mechanism for complaints or for performance to be routinely
and independently assessed is available to those involved. No
access to justice is available to those who might be effected.
THE INCREASED
USE OF
EXPORT CREDITS
21. In a recession, export credits come to be
seen as more important than ever. They are presented as a key
way that the British government can support struggling industry
and re-stimulate the British economy. In April 2009, all G20 leaders
agreed "to ensure $250 billion of support for trade finance",
largely, we believe, export credit funds. The new schemes and
revisions to ECGD standards should be seen in this light.
22. Longer-term, we are experiencing major resource
and environmental limitations to our economic development. For
example, it is estimated that in the next few decades there will
be a five fold increase in resource extraction in Africa, a result
of resource depletion in the developed world because of high expected
returns on investments. This also means we could see increased
use of export credits in order to protect "British interests"
in the world.
23. So changes to the ECGD are urgent. The only
way to stop ECGD support to business today becoming the unjust
debts of tomorrow is through the creation of a very different
ECGD. The ECGD's current path - of lowering standards until other
countries raise their standards - is based on poor information
about the operations of other ECAs, and will mean a race to the
bottom in terms of international lending standards. We believe
that the recommendations below provide a starting point for the
sorts of changes necessary. Only through such fundamental changes
will ECGD both have a positive impact globally and provide balanced
and productive support to the UK economy.
RECOMMENDATIONS
24. The ECGD must publicly audit all outstanding
ECGD debts and cancel those found to be unjust and stop converting
paid guarantees into Third World debt. This includes cancelling
all debts which are preventing countries meeting their human rights
obligations; scrapping the use of developing country counter-guarantees;
and adopting the principle that the creditor shares responsibility
with debtor governments for lending decisions.
25. Adopt and enforce much stronger standards
to promote a green economy, pro-poor development and human rights
incorporating environmental, human rights and anti-poverty criteria.
This includes operating a categorical prohibitions list for types
of projects that are in no way conducive to sustainable development
and human rights such as arms and fossil fuel industries; making
an impact analysis a pre-condition for all projects, and ensuring
that no guarantee is issued prior to the conclusion of that analysis;
dramatically improving the content of impact analysis to include
conflict and political risk assessment; placing a limit on the
aggregate annual GHG emissions associated with ECGD operations
and the projects it supports; improving and lengthening consultation
with local communities and other stakeholders, prior to and throughout
the lifetime of the project; imposing new standards on bribery,
including that companies previously convicted of corruption should
be debarred from receiving ECGD support for a period of five years.
26. Open up to public scrutiny and evaluate projects
to see if they were beneficial to people and environment. This
includes establishing transparent procedures for monitoring the
implementation of measures associated with impact assessments
with an appropriate sanctions framework for client companies in
breach of agreed standards; producing clear success and failure
indicators for all projects to be monitored as part of the evaluation
procedure; adopting a "duty of care" and complaints
mechanism for local communities and other stakeholders; reporting
quarterly on the details of projects under consideration by, or
receiving support from ECGD; disclosing a summary of assessments
made in ECGD's decision-making on categorisation for each project
and publication of case-specific assessment procedures that will
be undertaken in light of this categorisation; disclosing all
impact assessments and off-take agreements e.g. power purchasing
and host government agreements.
24 September 2010
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