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HC 506-II Published on 4 February 2005

by authority of the House of Commons London: The Stationery Office Limited

House of Commons

Trade and Industry

The Work of the Export Credit Guarantees Department

Sixth Report of Session 2003–04

Volume II

Oral and Written evidence

Ordered by the House of Commons to be printed 8 June 2004

£20.50

The Trade and Industry Committee

The Trade and Industry Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department of Trade and Industry.

Current membership

Mr Martin O’Neill MP (Labour, Ochil) (Chairman) Mr Roger Berry MP (Labour, Kingswood) Richard Burden MP (Labour, Birmingham Northfield) Mr Michael Clapham MP (Labour, Barnsley West and Penistone) Mr Jonathan Djanogly MP (Conservative, Huntingdon) Mr Nigel Evans MP (Conservative, Ribble Valley) Mr Lindsay Hoyle MP (Labour, Chorley) Miss Julie Kirkbride (Conservative, Bromsgrove) Judy Mallaber MP (Labour, Amber Valley) Linda Perham MP (Labour, Ilford North) Sir Robert Smith MP (Liberal Democrat, West Aberdeenshire and Kincardine) The following Member was also a member of the Committee for part of this inquiry: Mr Andrew Lansley MP (Conservative, Cambridgeshire South)

Powers

The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk.

Publications

The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at http://www.parliament.uk/parliamentary_committees/trade_and_industry.cfm.

Committee staff

The current staff of the Committee are Elizabeth Flood (Clerk), David Lees (Second Clerk), Philip Larkin (Committee Specialist), Grahame Allen (Inquiry Manager), Clare Genis (Committee Assistant) and Joanne Larcombe (Secretary).

Contacts

All correspondence should be addressed to the Clerks of the Trade and Industry Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5777; the Committee’s email address is [email protected].

Witnesses

Tuesday 30 March 2004

Mr Colin Adams, British Consultants and Construction Bureau Ev 1Mr John Tyler, Ms Maria Malinowska and Mr Richard Hill, British Exporters Association Ev 8

Tuesday 20 April 2004 (morning)

Mr Laurence Cockcroft, Mr Graham Rodmell and Mr Neill Stansbury, Transparency International (UK) Ev 16Ms Ann Feltham, Campaign Against the Arms Trade Ev 24Ms Sue Walton, Mr James Caldwell and Mr Nigel Taylor, Society of British Aerospace Companies Ev 30

Tuesday 20 April 2004 (afternoon)

Mr Pau Ingram and Mr Mark Ingram, British American Security Information Council Ev 39Mr Nicholas Hildyard and Ms Sue Hawley, The Corner House Ev 47Mr Digby Jones, Mr James Larkin and Mr Andy Scott, Confederation of British Industry Ev 53

Tuesday 11 May 2004

Ms Hannah Griffiths, Ms Hannah Ellis and Ms Naomi Kanzaki, Friends of the Earth Ev 60Mr John Weiss, Mr Tom Jaffray and Mr John Ormerod, Export Credits Guarantee Department Ev 68

List of written evidence

1 Airbus Ev 79

2 British Consultants and Construction Bureau Ev 81

3 British American Security Information Council (BASIC) Ev 83

4 BASIC supplementary memorandum Ev 88

5 British Exporters Association (BExA) Ev 90

6 BExA supplementary memorandum Ev 99

7 Campaign Against the Arms Trade Ev 106

8 Confederation of British Industry Ev 109

9 The Corner House Ev 112

10 Export Credits Guarantee Department (ECGD) Ev 124

11 ECGD first supplementary memorandum Ev 135

12 ECGD second supplementary memorandum Ev 136

13 ECGD Trade Union Side Ev 137

14 Friends of the Earth Ev 140

15 Rolls Royce plc Ev 146

16 Society of British Aerospace Companies (SBAC) Ev 150

17 SBAC supplementary memorandum Ev 154

18 Transparency International (UK) Ev 155

19 WWF-UK Ev 169

20 WWF-UK supplementary memorandum Ev 174

21 Transparency International (UK) supplementary memorandum Ev 205

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Trade and Industry Committee: Evidence Ev 1

Oral evidence

Taken before the Trade and Industry Committee

on Tuesday 30 March 2004

Members present

Mr Martin O’Neill, in the Chair

Mr Roger Berry Mr Nigel EvansRichard Burden Mr Lindsay HoyleMr Michael Clapham Judy MallaberMr Jonathan Djanogly Sir Robert Smith

Witness: Mr Colin Adams, Chief Executive, British Consultants and Construction Bureau (BCCB),examined.

Q1 Chairman: Mr Adams, perhaps you could just where we have seen support disappearing. I am notgoing to refer in any detail to things like aid andidentify yourself and your organisation for the

record and then we will begin. trade, the untying of bilateral aid, because it wasquite right to take the moral high ground and,Mr Adams: Yes, certainly. The British Consultants

and Construction Bureau, colloquially known as indeed, despite all our fears, we have not lost outon the latter. But things like the Overseas ProjectsBCCB, is an organisation that helps all areas of

British professional services and consultancy win Fund have gone from UK Trade and Investmentand the reduction of any ECGD cover is perhapswork throughout the world and we have a separate

pillar for international contractors who joined us the biggest milestone to us in the lack of this directsupport. One of the most important things aboutsome three years ago. There are only about three

countries in the world where members of my these developing markets is that the people have aculture, in most of these countries, of aidorganisation of some 300 members are not

working. They all have some sort of French dependence: they are working with the IFIs, withthe EC and on a country-to-country basis in gettingconnection but that is totally a coincidence—but

three of them this last year. We cover 18 diVerent aid. When we come along to try to win projectswhich are directly commercial as opposed to Worldsectors of consultancy, that is some 300 disciplines,

so we are virtually represented right across the Bank covered and that sort of thing, this culturereally comes into its own and almost the firstspectrum of professional services, and, as I say, our

international contractors, of whom we have some question we are asked is: Does your governmentsupport this project? and if there is no ECGD12 to 14, are also working internationally, some in

the most hostile geographic and political cover, that is an immediate damper to this: “Clearlyyour country is not supporting you, therefore whyenvironments throughout the world.is there any point in us looking at you to do thisproject?” That is probably oversimplifying it, butQ2 Chairman: How long has your organisationthat is the crux of it.been in existence?

Mr Adams: The consultancy side—BCB, as itoriginally was—has been going some 37 years now. Q4 Chairman: You are very careful not to specify

any countries. Do you think you could give us someexamples?Q3 Chairman: In your submission you suggest that

the Government has changed its tack somewhat Mr Adams: Most certainly. The one that is verysort of close to me is Serbia. Three months or soand is now pursuing a policy to eliminate public

financial support for exporters. On what do you after the bombing ceased, I took a team of peopleinto Serbia unoYcially—we met opposition figures,base this?

Mr Adams:We have seen a series of measures over private sector consultants—with a view to being inpartnership with them once Milosevic fell. Indeed,the last seven to eight years where the financial

support basically for exporters has tended to reduce one evening, in a smoke-filled room, we met some“consultants”, seven of whom, a year later, turnedvery markedly indeed. The point of this is not so

much in direct support but we do feel that in some out to be ministers. I am not saying it was just usbecause one or two other people were going theremarkets of the world, particularly the ones in which

we specialise, BCCB is not like the large as well, but we had a good team. When Milosevicfell, the UK were probably the first people on themanufacturers. Yes, we do work in established

markets, of course, but they tend to be more easy, spot: Richard Caborn took a team in there, DigbyJones came in as well with us, and we had somewe are the pioneers when it comes to developing

countries emerging from such things as post- money from government for some seed-cornfunding. It was absolutely brilliant. We were ableconflict, post-crisis. We are very much the pioneers

in this area. It is perhaps in that particular area to put people into the Ministry for Economic

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Ev 2 Trade and Industry Committee: Evidence

30 March 2004 British Consultants and Construction Bureau

Development—and I am sorry to go on, but I think further point I might say about Kazakhstan, if Iit is worth making this example. We had the special may. Within the next few weeks, we hope, there willadviser for energy in the ministry there. We were be the announcement of some very, very substantialdoing some of the work in one of the hospitals; we work indeed for British contractors as a result ofwere helping in Novisad, putting a pipe over a that hospital having been built. That will be thebridge—Anglia Water was doing that—and there payback. But, to take your question, we find thewas also some work on solid waste, et cetera. So a cover is patchy. It is not brave enough in mosttremendous fillip straight away. Then the big cases. I can take an example of Equatorial Guinea,problem came. Of course everybody else was (where one of our contractors has a project), whichcatching up behind us and the diYculty was that has gone from having a GDP of practically nothingECGD, for various reasons, was one of the last to to an acceleration now annually in GDP of somego on cover. One or two people, particularly in the 50%. That seems to me a country where ECGDoil and gas sector, were looking for cover very could be a lot braver. The company concerned hasurgently for some fairly good projects which would had to cover it itself. People can say, “That’s allcome on-stream later. Unfortunately, as I say, they very well, that is exactly what the private sectorhad to go to other people, to Coface in France and, should be doing,” but the element of risk in that isindeed, I believe, to the Italians. The diYculty very high indeed and most companies wouldwhenever this happens is that if you go to another actually have turned their back on it and gonecountry the first thing they say is: “Of course we away, as they do on many occasions.will give you cover. However, you must go to ourmanufacturers.” In the Serbian case, I am afraid, Ibelieve we lost out badly because ECGD cover was

Q6 Mr Clapham: The establishment of the ECGDnot available. Another example, which is a muchas a trading fund was intended to make it morebetter one in terms of a success story for ECGD,eYcient, to give flexibility. Is that your experience?is Kazakhstan—and please do not get theMr Adams: It was but unfortunately in the last fewimpression I am here to condemn the organisationyears that flexibility has gone away. I think bothtotally: far from it; we get a lot of assistance. Onefrom the consulting and construction viewpointof our companies, Fitzpatrick—and Kazakhstan inwhere we come from, and, indeed, I am sure, fromthose days, six or seven years ago, was not an easythe manufacturing side, there is a perception thatmarket to go into—got a project to build aECGD has slid down the league of being a “canhospital. This project’s base price was US $60do” organisation. Frankly, I do not think this is amillion. The cover that ECGD then had forfault of the people within the organisation, who areKazakhstan was a total of US $30 million. Thatincredibly “can do”; I think it is that they have theirwas the maximum for the country—quite fairhands tied. I do not think the fund they haveenough, given the situation in the country at theavailable is probably suYcient and one gets thetime. Fitzpatrick needed cover for US $60 million.

Unfortunately they then had to go to Coface and impression that there is perhaps too much politicalthe French gave them a comparable US $30 million interference in the way that fund is actuallycover but with the proviso that French companies developed. Iraq is an exception: there have beenhad 50% of the manufacturing action. (There were some funds given to Iraq and that is not an easydiYculties with that French part of the contract, market. Ghana, perhaps is another one. I thinkbut that is irrelevant to what we are talking about Equatorial Guinea is a classic example of wherehere.) The contract eventually ended up as $100 ECGD should be coming on cover, generally, andmillion. That contract generated 12,000 jobs for giving the impression of supporting it hard.various parts for that hospital—equipment bothconstruction and medical—12,000 jobs in theNorth East and Scotland where they were badly Q7 Mr Clapham: Given what you have just saidneeded. In our pioneering markets, this is where the about the funding, what level of capital allocationpayback does come from ECGD and unfortunately would you like to see the fund have and should itwe find there is no correlation between the be an annual amount or incremental, do you think?downstream work that is generated by ECGD and Mr Adams: This takes me into an area where I amthe actual work at the time. not particularly professionally competent but I

would have to say that I would prefer to see thatfund as a large amount, and not being varied on aQ5 Chairman: You say there is this shift away fromyear-by-year basis but something for which we canpublic finance, that the position is variable, thathave long-term support for. I think the subtlethey can move on some instances and they do notdiVerence between where my members comemove on others, but the impression I think you arefrom—which is looking for long-term cover fortrying to convey is that, although there are thefive, 10, 15 years to help rebuild the infrastructureKazakhstan instances, the general rule seems to beof countries overseas—is a totally diVerent positionto the contrary or that there is not as much moneyfrom, say, those who are looking for short-termas perhaps British exporters would like. Do youloans. So, bluntly, I would rather see a fund thathave any understanding why that is the case?we know in five or 10 years that cover will stillMr Adams: I think there would appear from ourbe available for follow-on projects and that sortperspective to be tremendous Treasury diYdence

about allowing ECGD to chance its arm. One of thing.

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Q8 Mr Clapham: Have you made that view clear Q13 Mr Berry: Could I ask why you have notraised this directly with the Treasury?to ECGD that there is a need for stability, and, if

so, what kind of response have you had? Mr Adams: The last time I had dealings with theTreasury I was part of a working team that wentMr Adams: We are constantly making the point

about the need for stability, both at the ECGD with Digby Jones this time last year, when we wentto brief both Patricia Hewitt and Paul Boateng andoYcials’ level and, indeed, at ministerial level.a group of Treasury oYcials on these topics. Iwould have to say BCCB is quite a small

Q9 Mr Djanogly: Given that other countries’ ECAs organisation and we would normally work inare only required to break even on investments, cahoots with CBI rather than perhaps trying towhat do you think the required rate of return on “ping” the Treasury direct ourselves.capital employed should be to the ECGD? Mr Berry: Okay. You might want to considerMr Adams: I can only answer that I believe it pinning them direct, as a “can do” organisation,should have parity with the other ECAs. I have no doubt.mentioned about untying of bilateral aid—in which Chairman: It should be said that we were supposedit was quite right to have the moral high ground. to have a Treasury oYcial coming with the ECGDI cannot see why at the moment we should need oYcials and the Treasury oYcial withdrew. Theyto have the moral high ground in this and have a are not the most accessible, accountable orpremium to pay on this. If we want our exporters transparent people in Whitehall. I think it is worthto succeed and to redress the adverse balance of putting that on the record at this stage. Althoughpayments, we should be fighting that corner at the we are looking to have a minister from thesame level as the other ECAs and trying, if Treasury at some stage, we had better not hold ouranything, to better them. You can take a situation, breath on that one.for example: in January ’01 the US LIBOR was 6.1 Mr Berry: I fed you that one nicely.and the ECGD equivalent was 6.3%. In December Chairman: You did, indeed.’03 the LIBOR was 1.3% but the ECGD equivalenthad a 3.5% margin on that. We cannot see why thatshould actually be necessary. We would prefer to Q14 Mr Berry: In your memorandum, in talkingsee ECGD trying to pass on those benefits to us, about the reviews, you say, “A constant series ofthe customer, to make it more competitive. reviews has created, among exporters, an

atmosphere of frustration, uncertainty and aperceived lack of commitment.” Could you say a

Q10 Mr Djanogly: Have you discussed that with little more about the way in which reviews havethe Treasury as an issue? created this sort of bad atmosphere whichMr Adams: Not directly with Treasury, no. obviously exists.

Mr Adams: Yes. I have been in BCCB nine and ahalf years and I am about to finish but I would haveQ11 Mr Djanogly: Have you discussed it with anyto say that the hardy not-even-annual but every six-government department?monthly appears to be a piece of paper comingMr Adams: We have discussed it with such as theround saying, “Could you ask your members whatCBI with whom we work and this sort of thing.their views are on this or that aspect of ECGD?”So it has not been totally all-the-time, the formal

Q12 Mr Djanogly: But you think it does aVect reviews; it has been customer survey after customercompetitiveness. survey. Certainly in the last three years we seem toMr Adams: It certainly aVects competitiveness. have been constantly getting these requests forAnother area where it aVects particularly our reviewing ECGD and you get the impression, if youcontractors is when you have mobilisation—and really speak your mind about this, that we arethis of course does not come into it in the actually somehow kicking cotton wool becausemanufacturing area. Contractors typically try to what we are saying is not somehow taken intoget something in the order of a payment of 15% of account at all. There was a survey last year, forthe contract to mobilise—and sometimes that example, which was a very usefully producedmobilisation will take up to six months, if it is in document, the Customer’s Perception of the Valuea Kazakhstan situation—but often the mobilisation of ECGD, and that raised some of the fundamentalcost is absorbed in insurance premiums on day one issues that I have mentioned here about cover beingof the contract, so the mobilisation funding of, say, the most important weighting. The second one wasif it is a £100 million contract, £15 million has using government weighting to help you winalready gone in premiums and is lost. That is an leverage, to help you win projects. The third, ofexample. We understand that the irony is that the course, was the creation of jobs. We constantly,competitors invariably are cheaper—Ex-Im, from BCCB’s point of view ask, “Why do we notCoface or Hermes—so I do think that is an area measure jobs in this country?” If we were able towhere we ought to see competitiveness. The eVect measure jobs against how much ECGD cover hasit is having is that it is driving our international actually cost, we would do extraordinarily. I thinkcontractors from actually going to work it would actually crystallise people’s minds. Theinternationally. One of my greatest frustrations in way that the success is always measured is in termsBCCB is identifying projects and getting the of productivity. Hong Kong, as I said in my

example, with this creation of 50,000 man years ofcontractors to follow them up.




jobs for the UK—not for the Chinese people bring in a large number of extra checks andbalances which slowed down the procedure fairlyinvolved in the project but in this country—is a

quite phenomenal statistic. But we do not see that markedly. So it is a systemic thing rather than, ifyou like, the staV saying we are not prepared toreplicated right across the board. I think we should.

If we did that I do not think there would be a cooperate. Does that make the point, or not?contest as to the sort of money government isproviding for ECGD cover as opposed to the huge Q20 Mr Hoyle: I think the worry is that peoplerevenue that this is generating from the investment. think we should turn a blind eye in case there are

any environmental problems or corruption. I doQ15 Mr Berry: So it is not so much a criticism of not suggest that is what you said.reviews, the criticism is that there is little evidence Mr Adams: Categorically not. To reach anthat government considers the outcome of the objective, you take factors into account.review? Corruption avoidance and environmental issuesMr Adams: That is right. should not be an objective in themselves. That is

the only point I am making. They are factors thatQ16 Mr Berry: I think the point you make there is we must take into account, and they are very majora very important one. Finally, just so I am quite factors. In the same way that the World Bank nowclear about this, earlier on you talked about insist that certain environmental criteria are met onpolitical interference with ECGD. What did you all the projects they do, that is what we are arguinghave in mind there? for. But it seems to have got out of balance. As IMr Adams: Political interference . . . Perhaps say, they are not objectives in their own right.political mothering is the better expression.

Q21 Mr Hoyle: What can we do to improve theQ17 Mr Berry: The expression you used was situation?political interference. Mr Adams: For a start, we would like to see a muchMr Adams: Okay. greater involvement in business in the organisation

as a whole. That is slightly historic, because ofQ18 Mr Berry: An expression that will appear on course the new chairman is coming from the City.the record, I am sure. I do not know who the new chief executive is—ofMr Adams: Absolutely. It is more saying no than course it has not been announced. But we wouldsaying yes. That is the impression we have of the like to see a balance between people with a greatpolitical interference. For example, in the Serbia deal of experience in business being involved in thiscase we pushed and pushed against ECGD to try and others as well. As I say, the pendulum wouldto get cover for Serbia and back was coming a flat: seem to have swung a little bit too far, so that those“No. At a political level we understand we are not commercial interests are not there speaking with aprepared to give you that. There is no agreement very strong voice. Of course you have to avoid ato giving you that cover.” I somehow feel this is conflict of interest in this, and perhaps thewrong. I think it should be a straight financial composition of the last Advisory Council was toojudgment, commercial judgment over this. Yes, of close to the knuckle in this, but there are plenty ofcourse there are going to be situations where it is very senior retired business people who I thinkpolitically totally wrong to allow it and then you would do a damn good job actually as the adviserswould have a stopper in it—fancifully, somehow in this.giving an ECGD cover to North Korea at themoment or something like that—but I somehow Q22 Mr Hoyle: In fairness, you have actually statedfeel that the involvement of the private sector in that the new chairman coming from the City istrying to argue what is a very sound commercial something to be welcomed.case is often totally ignored in the face of sort of Mr Adams: Absolutely. I think that is apolitical judgments on it. tremendous thing.

Q19 Mr Hoyle: I have been looking at some of theQ23 Mr Hoyle: That is going to swing it back andevidence and there seems to be a contradiction inyou feel that that will relieve business and businessthe evidence. On the one hand, you suggest that thecan sleep more easily.ECGD management has become overlyMr Adams: That is one person, though, in theinstitutionalised. That is quite a clear statement.organisation. I still think there need to be someYet, on the other hand, you have no criticism ofmore.the internal management of the staV of the ECGD.

How do you reconcile this?Mr Adams: It is because some four years ago Q24 Mr Hoyle: If you have an all-powerful

chairman, like we have, you do not need anybodyECGD had a fairly large element of business peoplehelping on the Advisory Council to dictate policy. else, do you?

Mr Adams: I have to declare an interest becauseWe then had a change and the Advisory Counciltook on a character of being more interested one or two of my member firms have

representatives that are on that council who comeperhaps in other issues, which in our view arefactors like environmental issues, like corruption from the universities and things, so I am trying to

be terribly polite.issues. Somehow, because of all this, this started to




Mr Hoyle: We will not tell them! You are all right. that our international interests and potentially ourability to win orders might be damaged by the harmThank you.to our reputation of not meeting those otherpolicy goals.Q25 Judy Mallaber: Could I carry on with thisMr Adams: You are absolutely right. I am sorry,topic about political interference and whether, asI do not have an example, and you are absolutelyyou have said, the Advisory Council iscorrect, we must not ever allow the environmentalconcentrating or has concentrated too much onside and the corruption side to in any way harmenvironmental and corruption issues. Why shouldour reputation. We have a jolly good reputationthey not be goals in the provision of export creditsworldwide for this, and, indeed, many of myguarantees? We have had other witnesses saymembers spend a lot of time actually directlyexactly the opposite to you, that not enoughinvolved in giving advice on both these issues withaccount is taken of them as goals. What is thecompanies like Control Risks and other companiesproblem in using them as goals?on the environmental side. So I do understand that.Mr Adams: I do not think they are goals, I think

they are factors to be taken into account. If I maytake an analogy from my previous career in the air Q30 Judy Mallaber: Do we operate diVerently fromforce, flight safety is highly important but it is not other countries in relation to this, in your view?the objective for taking an aeroplane from A to B. Mr Adams: No. I think where the operation isThe objective of taking an aeroplane from A to B diVerent is in the procedures and the speed withis to get it there at the other end. The flight safety which these issues can be given a tick on the formcomes in to make sure it lands there safely. I do that you are metaphorically filling in to get thethink it is exactly the same with corruption and ECGD cover or the equivalent ECA cover.with environmental things: of course you take them Judy Mallaber: Thank you.into account, you take them into account in fairlylarge measure, but somehow they have become the

Q31 Mr Berry: Could I clarify something. I thinkgoal of why we are going to give this money out,the example of the objective not being theto make sure there is no corruption. And that isaeroplane arriving safely is perhaps an unfortunatenot the goal. The goal is to help British businessone, but, on the question of environment andto establish itself there without corruption and incorruption, is the problem in your view that thosea properly framed environmental way, but that isconsiderations are defined incorrectly or is it, asnot the objective.you have just suggested now, that theadministration of the scheme involves spending farQ26 Judy Mallaber: But, to be clear, you are stilltoo much time recognising that minimumconsidering that it is important that those goals arestandards are being met and so on?there in terms of having consistency withMr Adams: It is the latter.government policy?

Mr Adams: Absolutely.Q32 Mr Berry: So it is not the constraints that thepolicy objectives in relation to the environment andQ27 Judy Mallaber: In the same way as yourcorruption are wrong, it is that the powers that beexample on flight safety, surely that would be oneseem to be pretty slow at checking that. Is thatof the very first things you would be looking at inessentially it?terms of whether your aeroplane will get to theMr Adams: That is right. The implementation isother end.perhaps the most diYcult area.Mr Adams: Yes. Every time you take an aeroplane

from A to B, it is intrinsic in what you try to do,but I still do not believe it is the final objective for Q33 Chairman: If we could move on to the ECGDwhat you are trying to do. support to business. From your evidence your

members seem to be suggesting that the departmentQ28 Judy Mallaber: This obviously is of concern has become too risk averse. Do you have anyto you but do you have any examples of where UK evidence to support this? We were under theinterests have been harmed by implementation of impression that ECGD was, as it were, the backerthe policy? of last resort, that other people in the interveningMr Adams: I do not have a specific example, and period would take up lower risks or smaller sums.I tried terribly hard to find one before I came here What do you mean by risk aversion here?because I think it is important, but the impact it Mr Adams: I could go back to this Equatorialhas is in a slowdown. Procedurally ECGD was able Guinea example. We understand, for example,to clear things very quickly indeed. With this side Coface is on cover in Equatorial Guinea andof things, it has now tended to be much slower. ECGD is not. Afghanistan is not a particularlySometimes speed is of the essence: because there are good example, but certainly almost immediatelyso many competitors also going for things, you do there was a US $50 million availability for UShave to be very quick oV the mark sometimes. companies to go in there and Afghanistan still has

not got the proper ECGD cover. But that is not agood example, I suppose. There are other countriesQ29 Judy Mallaber: But if you cannot provide

specific examples where it has created a problem, in Africa. Ghana is another example. I know it isa HIPC country but certainly the Dutch and eitheryou could make the alternative argument, which is




the Belgians or one other are on cover there and Mr Adams: That is absolutely right. Indeed, theDutch, we understand, have complained fairlyour people have been having to look for some covervigorously, in a comparable way to this country,from them.that other people are not achieving parity.

Q34 Mr Evans: I actually think your memorandum Q39 Chairman: You mean they are not abiding byis quite damning of the ECGD in the main, but the undertakings that they have made?perhaps one of the important areas in which I am Mr Adams: Yes. But I do not believe necessarily weinterested is the small- to medium-sized enterprises, should again always be the ones to take the moralwhere you say they really are not giving suYcient high ground in this. You know, we should remainsupport to them, that they support the big boys all as commercial as we can.the time. Would you say that is where theycurrently are or have they changed? Q40 Chairman: It might be the case for taking theMr Adams: It has been a bit of a function of the moral low ground here. Obviously there are twocover people losing sort of faith in going there, aspects to this. One is the financial one which webecause they know it is so diYcult in some cases to have just been discussing. The other one is theget, so there has been a reduction in the number of administration, in the sense of how fast ourcompanies using it. Generally speaking, from my applications turn round. Is this a problem as well? Iorganisation, it tends to be medium to large do not think we have really touched on that today.companies as opposed to the small who will go out Mr Adams: It is not an area I have specialised inand get it. My smaller member firms tend to piggy- but I have had anecdotal comments from myback on others or to be using the international membership that things have slowed down and wefinancing institutions. The amount of cover being should try to get this speeded up. (Instructionsasked for from ECGD has decreased because of received) I am sorry, I need to correct that. I hadthis lack of confidence. So there perhaps is an area that entirely wrong. Actually ECGD now is givingwhere we would like to see more emphasis, where a good response. I do beg your pardon.there is almost a sort of general preoccupation—and perhaps rightly in terms of the size of the Q41 Chairman: So the problem is not one ofcontracts but for developing markets it is not administration or speed but a sense in which, at thegood—and concentration on the likes of Airbus international agreements, Britain tends to be, as itand the large manufacturers, at the expense of were, a little further from the edge of the envelopepeople in infrastructure, construction and than some countries.professional services who are trying to get a peck, Mr Adams: Exactly, and less brave as well in theparticularly at a new market. markets into which it is prepared to go.

Q42 Mr Evans: Which countries are better at it, inQ35 Mr Evans:While we are on small- to medium-that they are less risk averse and help the small- tosized enterprises, do you think they are losing outmedium-sized enterprises?compared to our international competitors, thatMr Adams: Ex-Im in the United States. Cofacethey are giving more support to their smallercertainly in France. And I think Hermes inbusinesses?Germany as well. Those three would appear toMr Adams: I think the rates are quite diYcult forstand out.small- and medium-sized enterprises to cope with,

with the premiums that the ECGD does have.Q43 Mr Evans: Is it the same throughout all thesectors in which you operate, that they operate

Q36 Mr Evans: What would you recommend they roughly the same?should do? Mr Adams: Let me emphasise that in giving youMr Adams: I think we should look very vigorously that answer I am talking about my sectors ofat being really competitive with the other ECAs. If professional services and, more especially, theand when there can be a multilateral change to all construction side. I cannot speak for thethis, then there should be, but until such time as manufacturing side at all and, please let methat we should not let UK firms miss out. emphasise, I am not.

Mr Evans: Thank you.

Q37 Mr Evans: So we are pricing ourselves out ofQ44 Sir Robert Smith: That would mean the bulka job?of your support would be non-defence as well,Mr Adams: We are in some cases pricing ourselvesthen?out, yes.Mr Adams: Absolutely. The nearest we have todefence in BCCB is mine clearance and security andthat sort of thing.Q38 Chairman: Surely there is a tacit understanding

or, indeed, a formal agreement amongst OECDmembers that they operate within parameters laid Q45 Sir Robert Smith: In part of your submissiondown by the OECD, so it is not as if some countries you state, “. . . there remains a great deal ofare undercutting. Are we perhaps not on the edge frustration and economic theorists rule at the

expense of export practicalities: ‘The Treasuryof the envelope?




Nanny knows best,’ and we believe firmly that Where you are looking for commercial cover, that‘Nanny has got it wrong’!” Does that mean that commercial cover in a privatised ECGD willwhere nanny knew best in the past, we got rid of probably be unobtainable.that problem by privatising the institutions thatnanny was interfering in? Would you therefore

Q50 Sir Robert Smith: Which does mean there is asupport the privatisation of the Export Creditsgovernment subsidy, in eVect, to the trade.Guarantee Department?Mr Adams: It is a government . . . Semantics, yes,Mr Adams: In the dealings I have had withit is a government subsidy—Treasury they have made it very clear indeed, with

such items as I have talked about over theidentification of how many jobs things create, that Q51 Sir Robert Smith: It is not semantics, is it?productivity is important. Indeed, in one particular Mr Adams: No, I am going to give you themeeting that I attended and asked questions and semantics, if I may. I would call it a governmentsaid nothing had been said about export, I was investment. When I take the Kazakhstan situation,told, “With a strong economy exports will if you get a good return for UK plc that is moneyautomatically follow.” This left me slightly aghast well invested.at this sort of theory, because our view is, certainlyfrom the exporters, that we are the ones who arewealth creating as vigorously as we possibly can. Q52 Sir Robert Smith: An important thing is maybe

to pin down this calculation of jobs. I suppose thediYculty is to attribute the jobs that are achievedQ46 Sir Robert Smith: So you think it should notby that subsidy against the jobs that would havebe privatised.been obtained without the subsidy. It is theMr Adams: We would like to see ECGD stay indiVerence that has to be established.government because of the support that that givesMr Adams: Absolutely.us to newly emerging countries: “Our government

is behind us in a particular project.” That is why.If it is privatised, it will be like anything else. We

Q53 Sir Robert Smith: It is the diVerence that haswill lose that leverage that HMG gives us. Noto be established. There will be contracts wonamount of assurance from an ambassador is aswithout the subsidy.good as going to a country and saying, “We haveMr Adams: In the Sectors Committee, which is aECGD cover for this project, our government isCommittee under the board of UK Trade andbehind us.”Investment, I have fought a sort of lone battle forfour to five years saying, “Please can governmentQ47 Sir Robert Smith: When you are saying itidentify the statistics for jobs created?” I think itshould take more risks and be braver, you arewill be an eye-opener to everyone. I really do.arguing that the taxpayer should be exposed to

more downside.Mr Adams: I am arguing for the taxpayer to invest Q54 Mr Evans: Are we losing out in Iraq at thein people who almost certainly are going to make moment, do you think?a very good return. Mr Adams: No. I think we have done surprisingly

well, actually. The ECGD context, in fairness, doesQ48 Sir Robert Smith: If they are going to make a not come into it at the moment. We have done verygood return, why not invest in it themselves? well in Iraq in two ways. One, I think we have doneMr Adams: I am sorry, I mean a return for UK plc. very well from the US side, as well as we could haveTypically our construction and consulting firms expected. Despite the media banging on about wehave a margin of about 5%. It is not high on this are missing out, we are not missing out. It is whatinternational work at all. It is a very, very tight was US tied aid, and, indeed, we have taken a goodbusiness. proportion of that, either in joint ventures or in

sub-contracting and that sort of thing. We are notQ49 Sir Robert Smith: But throughout the eighties missing out at all. We have something I think inand nineties, sector after sector said, “It will be a the order of nearly 2,000 people there. All right,disaster if we are privatised. We will not be about 1,000 of those are doing security, but theycompetitive. If we break away from the support of are still UK firms providing that security. Wherethe state, we will not be able to survive.” In a sense, we are working very hard indeed now is on thethere were people saying, as you have said, that if other side, on the World Bank related projects.we remove the tie between aid and trade we are Indeed, only two or three weeks ago we had agoing to damage ourselves. In a sense, if we take briefing from the World Bank in BCCB, by the Iraqthe lead will we not have the most eYcient desk, by the IFC, and that is the area in which webusinesses, that will be able to compete globally are trying to get British exporters to concentrate.when the others have to?Mr Adams: That might work extremely well in

Q55 Chairman: You have mentioned the issue ofestablished markets for manufacturing. But whereprivatisation. Of course there has been a substantialyou are talking about these leading-edge marketsamount of privatisation of the ECGD activities inthat we try to go to, we do need the sort of support,

which has been demonstrated in Iraq already. the recent past anyway, has there not?




Mr Adams: There has. going to countries at risk and so on, maybe that isone of the drags on the bureaucracy in terms of thegoals of the government. If half the money that isQ56 Chairman: We are now down to the bits thatunderwritten by the taxpayer is in eVect supportingthe markets have been very reluctant to embrace.defence, exports into troubled areas, is it not boundWould that be correct?to have a lot of red tape tied round it to try to—Mr Adams: I think that is absolutely right. I thinkMr Adams: Absolutely and I do think the twowhat I said to Sir Robert about those diYcultshould be treated entirely diVerently. Most of whatmarkets needing government support to be able towe are doing tends to be development related. Iget into them at an economic rate is the reason whywould like to see either what we do, and perhapsperhaps the markets are not prepared to takethe manufacturers do, non defence or defence, onethem up.or the other, ring-fenced and kept totallyseparately.Q57 Chairman: You say that the Iraq situation is

moving well. If your members wanted to go into Q59 Mr Berry: Would you go so far as to say thatLibya—which the events of last week might suggest export credit cover should not be provided for armsas an obvious one, given that there are a lot of exports for that reason?infrastructural improvements and expertise which Mr Adams: Coming from my background, I find itthey have been denied access to—do you think very diYcult to say that actually. No. I repeat whatECGD would be up to that challenge, in the sense I have just said: I would prefer to see them treatedthat if the resource to go into Libya has to be made as entirely separate entities. The one thing we doavailable it would probably be at the expense of feel is that the general pot, the reservoir of fundsother parts of the world, given that they have only available for ECGD could actually be greater, and,a limited budget? again, I would make a plea that if we could see howMr Adams: Gosh! It is extremely diYcult to say much job creation this was giving I think therethis. Yes. If you take Libya, we would like to see would be a justification for doing it.Libya really coming on-stream tomorrow. I wouldhave to say that several of our members are in a Q60 Chairman: I think there are one or two pointssituation where they have debts from Libya based at the end which we may have to take up with otheron infrastructural projects that went on before, but people apart from yourself. I think you have beenthat in no way is inhibiting the enthusiasm to go very frank and very helpful with us this morning.back there. We would like to see cover tomorrow. If there is anything else that we need to get back

to you on, we will do, Mr Adams, but thank youQ58 Sir Robert Smith: Your sector is not defence very much for the time and the trouble.related. Given that about half of the Export Credits Mr Adams: I was told you were going to be gentle!

Mr Berry: Who told you that!Guarantee goes on defence projects and yet it is

Witnesses: Mr John Tyler, Chairman,Ms Maria Malinowska, andMr Richard Hill, the British ExportersAssociation (BExA), examined.

Q61 Chairman: Good morning, Mr Tyler. Perhaps Committee, which inevitably represents thebanking members, and Maria is an Associateyou could introduce your colleagues and we willDirector of Credit Lyonnais, London.get started.

Mr Tyler: I am John Tyler, I am the Chairman ofthe British Exporters Association and also Director Q62 Chairman: Thank you very much. In yourof Insurance and Financing at ALSTOM. Just memorandum you seem critical of the approachbefore introducing my colleagues I would like to that has been adopted by ECGD towardssay a quick word about the British Exporters exporters. Criticisms like risk aversion; too muchAssociation. It is a trade association that takes a attention to what you seem to regard as lessparticular interest in ECGD. We have over 75 important government objectives like sustainablemembers comprising manufacturing companies, development; and insuYcient attention to the needsbanks, insurers, law firms, et cetera, but the of exports. You also make the point that itsmajority, I have to say, are really on the product range seems to be too narrow, toomanufacturing and the banking side. Our strength, bureaucratic. As an exporter, if you were going toI think, is that the members of our Association are put these complaints into a kind of hierarchy whichthe users of ECGD. That is why we feel we are well ones would you identify as the biggest pain in theequipped to opine on ECGD and give you some neck, as it were, to you and your colleagues?experiences. On my left is Richard Hill. He chairs Mr Tyler: The greatest diYculty we have at theour Industry Section, which represents the moment is the lack of confidence in ECGD, notmanufacturing members of the Association. He is particularly in the product range of ECGD,also the Vice-President, Export Finance, at BAE although there are some areas where that could beSYSTEMS. On my right is Maria Malinowska, improved but generally the product range is

excellent, but in the delivery of that product andwho chairs the Association’s Export Finance



30 March 2004 British Exporters Association

the bureaucracy that is involved in getting ECGD occasionally, and I have to say, in terms of interestrates, increasingly, charges rates which are higherto make a commitment and to provide cover tothan the international norms.take risk—which is, frankly, its job: it is an

insurance company; it is there to take risk. That iscertainly one of our big issues. Allied to that is the Q64 Mr Clapham: Mr Tyler, could I just take thatway it operates the Fixed Rate Export Finance point regarding funding that you make, in the senseScheme, which I am sure we will talk about later. that you state that ECGD’s premium rates are notBut it is not particularly that. There are all those internationally competitive, being above the OECDother issues in the background which ECGD is benchmark. How much higher are these rates andconcentrating on—and that have taken its eye oV do you have any evidence of other export agenciesthe ball, that is quite clear. They have been looking having lower rates and therefore being moreinto their own organisation. Over the last four or competitive?five years, certainly since this committee did its last Mr Tyler: Yes, we have done some research into

this.inquiry, ECGD has been very introspective. It hasMr Hill: If I may answer that. The OECD premiumbeen looking into its own organisation, into therate agreement—the Knaepen package—sets areputational aspects that were being discussedbenchmark rate as the minimum premium rate thatearlier. All of those things, and, on top of that, thean agency can charge for a market in a givenintroduction of a trading fund being discussed orcategory in a given period of risk. It does not setthe consultations, have taken up an enormousa maximum. Our experience is, broadly speaking,amount of ECGD’s time, eVort and concentration,that most other export credit agencies tend—andand that has been, in our view, to the detriment ofthere is a lot of generality there but it is quite hardits primary statutory obligation of facilitatingto pin these down—to charge at benchmark rates.exports.Our experience of ECGD—clearly because we havemore experience of ECGD than other agencies—is that they tend more commonly to charge aboveQ63 Chairman: The implication of that is that, asbenchmark rates than other agencies. We havethe group of exporters involved often in consortiasome evidence that they published in February ofand things like that, someone else takes the leadlast year that made this fairly clearly. They wereand you have a secondary role, and people whoone of only two agencies to charge more thantake the lead are from other countries whose ECAsbenchmark for sovereign risk.are that much more amenable or that much more

fleet of foot. Would that be a correct assumptionQ65 Mr Clapham: What has been their responseto make? The criticism of the ECGD on the onewhen you have raised this with them?hand is along the lines you have given us, but,Mr Hill: They have been very consistent since theequally, there seems to be better practice elsewhere.OECD benchmark package was introduced inMr Tyler: Yes. It is not just the scenario that yousaying that, “We will charge either the benchmarkhave painted. Most of manufacturing in the UKrate or our assessed premium rate if that is higherthese days is part of a global industry. A lot ofthan benchmark. If our assessed premium rate ismanufacturers are able to shop around and sourcelower, of course, we cannot charge lower thanequipment from a number of countries. They havebenchmark,” and they have been thoroughlya choice between sourcing from the UK, sourcingconsistent in that.from France, Spain, the United States, elsewhere,

and inevitably there are comparisons madeQ66 Mr Clapham: And no response regarding theinternally in that decision-making process as tocompetitiveness and the very fact that this doeswhich export credit agency is going to be the mosttake away the edge?supportive or perhaps the least diYcult to dealMr Hill: The response tends to be in terms of,with. There is an internal conflict between the“Competitiveness is measured as a whole and looksourcing once a multilateral has won a project, andat the quality of the cover you are getting fromif you layer that on top of the competitive aspectECGD,” but not a direct answer to the questionof actually winning the contract in the first place,this is making us a little less competitive.where you are competing against competitors whoMr Clapham: Thank you.have got support from other export credit agencies.

The competitiveness factor is so hugely important.Q67 Sir Robert Smith: So when they are saying theyA lot has been done over recent yearsare putting a higher mark that is because theyinternationally to introduce the level playing field.assess the risk as needing that extra cover.You, Mr Chairman, just now referred to the OECDMr Hill: If the benchmark rate is 3% and theyarrangement which has been a very good way ofcalculate three and a quarter that represents theircreating a relatively level playing field between theview of the real risk of that country for that tenor.export credit agencies. There is no longer a massive

diVerence between what the export credit agenciescan do, but that agreement, that arrangement, only Q68 Mr Hoyle: In the case of the establishment ofsets down minimum criteria for premium rates, the trading fund by the ECGD, is it your opinioninterest rates. Most export credit agencies will that it will make it more eYcient and it will have

the flexibility to help?provide support at those minimum levels. ECGD




Mr Hill: The original intention of setting up a Mr Tyler: We would like to think that.trading fund, as we understand it, was in responseto comments that were made several years ago in Q71 Mr Hoyle: Have you any evidence it is not?the mission and status review of ECGD that Mr Tyler: We have been told that the way theECGD was being held back by very heavy Treasury trading fund is going to be set up is to be set incontrol over its day-to-day activities. The concept stone for a period of time. It has not been statedof establishing a trading fund was to try and escape for how long but it was quite clear that there wasfrom that to try and make ECGD a more no enthusiasm for fiddling with it soon after it hadcommercial organisation and to that extent we were been set up, so they want to get it right andvery supportive of that process because it seemed hopefully the £1.7 billion will be enough. Obviouslya good idea. I have to say that recently we have we want it to be enough, but we have that thoughtbeen becoming somewhat cooler to the idea, not in the back of our minds that they were talkingbecause we disagree with the concept but because about higher figures and we just wonder whether itwe are now understanding some of the is all based on an assumption that the level ofconsequences of the establishment of a trading ECGD support is going to continue at a relativelyfund, the way it is being established. low level.

Q69 Mr Hoyle: And also there is a question mark Q72 Mr Berry: May we come back to theover the amount of money that the fund will have. comparisons between ECGD and other ECAs.I think in your evidence you suggest it is £1.7 Like other MPs, exporters have contacted me andbillion. In the short term you feel that is fine but I appreciate that there are real issues about howin the long term that that is not enough. How much our ECA compares with others. In yourdo you feel should be there or do you think the memorandum you say that other ECAs arerules should be changed on the money and the way required to break even on capital investments.that it is operated? Could we bottom this one out to start with? Is thisMr Tyler: The figure of £1.7 billion was one that in fact the case? Are you saying there are noemerged in the meeting that we had with the Chief subsidies involved in other ECAs?Secretary of the Treasury, Paul Boateng, and we Ms Malinowska: As you can well imagine, ourwere told that was the figure that was currently members work as part of internationalbeing considered. Previously there had been much organisations and on the banking side we also worklarger figures discussed as ECGD’s requirement to with maybe 18 or 20 diVerent export creditcarry on doing the level of business that it was agencies, so on a day-to-day basis we see thecurrently doing. Our fear is that because the level operations of those other export credit agencies, weof business that ECGD is supporting now is see the premium rates they are charging and we seesomewhat lower than it has been in previous years the response levels that they are giving to thosethe amount of capital that is being allocated is users. There are two ways that you run an exportdesigned to fit that circumstance and if there is an credit agency. The first way is to see it as part ofupturn in the market there does not seem to be a a government strategy to support your exportmechanism for increasing the amount of capital so eVorts, to create jobs, and you provide that servicethat ECGD can respond to the upturn. That is our to your exporters and premiums are paid. Is thereconcern about the level. I do not think we could say suYcient in these premiums to cover all the costswhat would be an appropriate level because, quite of running the export credit agencies? You cannotfrankly, we are not privy to the calculations that be certain. Other export credit agencies and otherECGD and the Treasury have been doing to arrive governments within Europe are not as open asat figures. All I would say is that there is a danger ECGD is in its information that is provided soin ECGD having too much capital because it can from the information that is available in the publiconly use its surplus capital by depositing it and domain you cannot be certain that the export creditearning a small return and that return that it earns agencies are covering their costs. In fact, thefrom that deposit is less than the return that it will Treasury, we know, has been meeting with otherbe required to make as a trading fund, so having treasuries in Europe to highlight the fact that, fromtoo much capital would be a severe impediment to their perception, the export credit agencies inECGD if it did not use that capital, having too little Europe are not charging suYciently high premiumswill be an impediment if there is an upturn in the to cover the real costs of running those exportmarket and ECGD needs to do more business. credit agencies. In my answer I think I would refer

you to the Treasury themselves and also theinformation that is available through ECGD.Q70 Mr Hoyle: Presumably if there is a success

story in British business and it is winning businessaround the world I would think (and I presume you Q73 Mr Berry: In your memorandum you say that

other ECAs are required simply to break even. Youwould agree) that an amiable guy like Paul Boatengwould be willing to receive a delegation that says, make that unqualified statement. That is my

concern. There is a sound economic argument for“We have had this huge success”? I am sure thatMr Boateng would respond accordingly and rather subsidising London buses, in fact there is a great

economic argument for it; and there may well be athan lose British business abroad that he wouldfund the pot more and I would have thought that sound economic argument for subsidies in ECAs as

well but it is this comparison between thedoor must be open to you?




requirements imposed on other ECAs—whether Mr Tyler:We have no idea what the basis of it was.there is no subsidy and whether it is break even—and the situation in the UK. Q79 Mr Berry: It is in your evidence to theMr Tyler: Could I possibly try and answer that Committee.point. Mr Tyler: That is what we are being told is being

considered by the Treasury as the target rate ofreturn for ECGD.Q74 Mr Berry: Please, yes?

Mr Tyler: There is an overarching agreement in theQ80 Mr Berry: How will that aVect theWTO Subsidies Code which requires export creditcompetitiveness of UK exports?agencies to break even, which is why we say thatMr Tyler: If that rate of return were met bythat is the baseline, everyone breaks even. You canECGD’s premium rates having to be increased thendebate how they measure this break even but thatit would be devastating for British industry. Theis another matter.suggestion at the moment is that that gap will notbe bridged by increasing premium rates but will bebridged by voted funds which will have to be votedQ75 Mr Berry: There is no point having a code thatevery year, and it seems to us to be creating thesays break even without defining what breakmyth that there is a subsidy because those votedeven means.funds quite clearly will be regarded as a form ofMr Tyler: That is a WTO issue perhaps. The issuesubsidy whereas all they are doing is actuallyI wanted to come back on really is the concept thattopping up a rate of return of 4°%, say, up toECGD involves a subsidy. We do not agree thatwhatever level the Treasury chooses to set as thethere is a subsidy involved. The NERA Report ontarget.the workings of ECGD recognised that ECGD

makes a return to the Exchequer. Most years overtime it has made a return to the Exchequer. That Q81 Mr Berry: I appreciate it confirms the fact thatdoes not strike me as being a subsidy. Indeed, I government finance is being used here simplythink that there was something in the NERA because the private market cannot provide it onReport which referred to overcharging, the those terms. I notice that you have certain concernsimplication being that ECGD’s premiums are about increased parliamentary scrutiny of thisactually higher than they need to be. This whole thing but it is public money that we are talkingquestion of whether ECGD is a subsidy has taken about. Are you not being a bit unreasonable in ona life of its own and the Treasury are now looking the one hand making a powerful case for support

for our exporters on the same basis that otherat whether ECGD should be required to make acountries’ exporters get it but on the other handreturn on the capital that it is using and that wouldtrying to deny somehow this is a matter of publicbe a measure of whether ECGD is really breakingpolicy and does not require proper scrutiny?even or not, and that is taking things a bit too farMr Hill: One of our concerns about the disparityfor our liking.between, let us call it for argument’s sake, thereasonable current rate of return of 4–4°% per

Q76 Mr Berry: Set aside the subsidy argument annum return real and the Treasury’s stated 18%because we may have diVerent definitions of what real is that the voted funds each year will be seenwe mean by that. What do you think would be a very publicly by ECGD’s competitors as, “That isreasonable required rate of return on capital the measure of the UK subsidy,” without perhapsemployed by ECGD? looking at their own performance where we cannotMr Tyler: According to what we are told by ECGD provide any evidence of any other export creditoYcials, the premium rates that ECGD currently agency having to produce a return. “Level playingcharge can generate a return on capital of about field” is a phrase we often use. We really are digging4–4°% real above inflation. That seems to us to be one end very low down indeed if that is the wayquite a reasonable return on capital for something that we go.which is in the national interest, to encourage Mr Berry: I can see the issue about that 18%.exports, to promote jobs, and all of that. We hear,however, that the Treasury is determined to set Q82 Chairman: Just on this 18%, I think what youECGD a target return on capital which is are telling us is what the court would call a “carriedconsiderably higher than that and that will create story” insofar as you have no substance for it ina gap which will have to be filled somehow or other. the sense that you have no means of identifying the

source of it. It is a merely a rumour.Mr Tyler: It is a bit more than that, Chairman. TheQ77 Mr Berry: You refer to a rumour of 18%?assumptions used in the NERA Report includedMr Tyler: Yes.some relatively high levels of return. I cannotremember what they were, 14% I think.

Q78 Mr Berry: Even I would concede that would Mr Hill: 14%.remove all other subsidy, let me just say that, Mr Tyler: Since then we have had discussions withwhether it is a good thing or a bad thing. What is ministers, oYcials, Treasury oYcials, and thatthe basis of this 18% figure? What would the number has been creeping upwards. It is not

rumour, it is not innuendo, it is a number that haseVect be?




been disclosed to us as something that is being support exports. In its assessment of what it wasgoing to do obviously it took into account itsdiscussed, not set in stone but it is a number that

is certainly on the table and being discussed. reputational risk: it looked at environmentalaspects, it looked at social aspects, it looked at anti-Sir Robert Smith: It reinforces why the Treasurycorruption measures. All those things have alwaysshould maybe come here.been taken into account in the background. OurMr Berry: It certainly does.only point—and it is not a major point, it is notChairman: The only point I would make is yousomething we would put at the top of our list—ismade reference to voted funds. Are you aware thatthat all of those aspects instead of being in theall aspects of government expenditure have to bebackground are now very much in the foregroundvoted on and sometimes the estimates are quitebut I do not suppose for one moment it has lostexplicit so that even at the moment, if you had theany particular piece of business.will and the determination and the time, you would

probably be able to find out what was there. Oneof our responsibilities is to look at estimates and to Q84 Judy Mallaber: So is your point, as with ourlook at supplementary estimates—that is the bit last witness, primarily that it adds greaterthat has not been calculated and has to be lobbed complexity and diYculty to the process rather thanin later in the year to put it rather simplistically— of itself it creates an impediment to us gettingand I am not sure we need to get hung up on the export orders?idea of voted funds because all funds are voted by Mr Tyler: Yes, and at the periphery it may be thatone means or another. an SME which was trying to get ECGD support

would be put oV by the complexity of goingthrough all of that process. I have to say from theQ83 Judy Mallaber:Mr Tyler, can we return to one point of view of larger companies it is daunting; itof the issues you touched on in your answer to the must be doubly daunting for a small company thatfirst question and which is also within your has never been through the process before.memorandum which is about the potential for

conflict between government policies on promotingQ85 Judy Mallaber: But you are not saying thatsustainable development, human rights, anti-those are factors which they should not take intocorruption, environmental issues, et cetera, etaccount?cetera and the ECGD’s role in facilitating exports.Mr Tyler: Of course not, no, we would never sayI think in your first answer you said that wasthat, and they have always been taken into accountamongst the factors that was operating to thein the reputational risk that ECGD was assessing,detriment of the primary role of facilitatingbut it has always been in the background; it is nowexports. Can I ask you whether you can providevery much in the foreground with sheets of formsany examples of cases where those criteria andto fill in, questions that you have got to askgoals have actually interfered with the goal ofcustomers, and it is time-consuming and it is oV-facilitating exports?putting but I would not want to make too big aMr Tyler: No and the reason is because ofthing of it.timescales to a degree. The OECD has now set a

set of criteria that all export credit agencies haveQ86 Sir Robert Smith: You mentioned there theto meet and there is therefore a degree of parityimpact on SMEs and yet in your own evidence inbetween what the export credit agencies are doing.paragraph 13 you suggest that in reality SMEs areECGD introduced its environmental surveysnot really the main users of export creditsomewhat sooner than the other export creditguarantees because the nature of the risks theyagencies and during that period there was a degreewant to take on does not need export creditof disparity between the rigour with which ECGDguarantees and you go on to suggest that resourceswas looking at these things and the rigour withspent on publicising facilities to SMEs is a waste ofwhich other export agencies were looking at them.resources and could be better spent elsewhere, soThat has largely gone away. There are still somehow sensitive should we be to the impact on SMEs?diVerences around the edges in that the OECDMr Tyler: I think the issue there is when an SMErules, for example, require environmental screeningis emerging from SME status and is venturing intoof projects above 10 million SDRs whereas ECGDthe big wide world: at that stage it needs support;looks at contracts below 10 million SDRs evenbut for the majority of SMEs, in our experience,though they tend to be contracts for the supply ofthe main interests of our SME members are short-goods and relatively uncontroversial. That is anterm credit insurance which ECGD used to do butillustration of the way that ECGD gold-plates thesewhich was privatised in 1991, working capitalrules, but I do not suppose for one moment that itfinance which ECGD used to do once but certainlyhas made a real diVerence in any particular case.steers away from, and bonds. Those are the sortsIt is just an accumulation of the bureaucracy thatof things that SMEs find diYculty with. Not manyECGD puts in the face of applicants for supportof them actually require export finance for largeand, frankly, it is an attitude that comes across thatprojects by their nature.ECGD is trying to find ways of not supporting

exports whereas ECGD used to be very much adepartment which had a “can-do” attitude—that Q87 Mr Djanogly: The environmental and socialphrase was used earlier—and it was determined to tests that we have been discussing were introduced

in advance of the general agreement of OECDdo everything it could within its guidelines to




guidelines that all ECAs now follow. How far in take. The process now is that there has been aadvance were the ECGD’s tests introduced? Do reorganisation, the people you talk to on theyou think there was any eVect of that happening in ground, the underwriters, do not have the delegatedadvance? authority that they used to have, so they have toMr Tyler: I cannot recall, it seemed a long time but go to committee. The committee only meets ait was probably only a year. couple of times a week so they cannot tell what theMr Hill: A year or 18 months. outcome of that committee is, so there is a delay

there. The reorganisation was to move away fromgeographically-based underwriting, so you talkedQ88 Mr Djanogly: Did that have an impact for us?to the underwriter for Brazil or you talked to theMr Tyler: The nature of the projects that ECGDunderwriter for Mexico or whatever, to anis dealing with and the fact that the lead times areindustry-based focus so you have to talk to theso long meant it probably did not have muchperson who has responsibility for water projects orimpact really.power projects, but they do not know anythingabout Brazil, and they have no idea of what isQ89 Mr Djanogly: Do you think it is having anhappening in Vietnam, they just read it oV theimpact now? Is there a diVerence in approach?screen. This is at the service level and theMr Tyler: It is a perception. There is absolutely noperception has changed. I can understand the ideaway that we could stand here and say that it makeswas to get closer to customers, which is a positivea real diVerence. It is a lot of paperwork to wadefactor by moving away from geographical andthrough. There is a perception that it is diYcult tomoving towards industry based but it means thatget ECGD support.you have less conversation with the people atECGD. They have less country expertise. We areQ90 Mr Djanogly: And you think other peopleinterested to know what sort of documentationhave it easier in relation to social andthey have in that country and they do not knowenvironmental tests?because that person has not done a deal in thatMr Tyler: Certainly they do.country. It is a question of at the point of sale, atthe point of doing the business and how user-Q91 Mr Djanogly: Is that verifiable, do you think?friendly has the export credit agency become? TheMr Tyler: Yes.Italians have done very, very well, they have wonMr Hill: There is ECGD’s report of a year ago onmore orders in the capital goods areas over the lastthis particular area. It was only ECGD andcouple of years, and we have seen ECGD has lostCESCE, the Spanish insurer who applied thethe perception of being the export credit agencyimpact assessment criteria to contracts of all valuesthat is most flexible, most understanding andregardless of the 10 million special drawing rightscould deliver.minimum value. ECGD did not go along with the

French, Germans and Italians in exemptingtelecoms businesses from impact assessments, and Q93 Mr Evans: It is damning stuV.I am not arguing whether it is a good thing or not, Ms Malinowska: It is sad because we are talking tojust to make the point. Indeed, I think it is only the same individuals, the projects are very much theECGD and NEXI in Japan who consider the wider same, so the exporters have not changed, the bankshuman rights’ impacts rather than environmental have not changed and the people have not changed,impacts. Again, I am not arguing one way or but the nature of the conversation has changed.another but there is a tendency always to try andgold-plate, as it were.

Q94 Mr Evans:What is morale like? Do they knowthat they are not giving the service theirQ92 Mr Evans: ECGD is getting a bit of a pasting

this morning, is it not? In your memorandum you customers want?say that it has dropped out of the top ten and you Ms Malinowska: If you are talking to theclearly think it ought to be doing better and you underwriters themselves, they are very professionalmake reference to the Italians as an example of individuals and very willing to help, but they havewhere they have done really well. If you could new rules under which they have to operate and ifpinpoint it down to getting us back to the forefront you work for a company you operate to the rules.again, along with some of the other ECAs what doyou think we ought to be doing?

Q95 Mr Evans: So when did the rot set in?Ms Malinowska: If you look back to the 1980s andMs Malinowska: I would say that it really goes1990s ECGD was the pre-eminent export creditback about four years. The trading fund is not aagency, it was the leading export credit agency, itnew concept, it has been around for three yearswas the most flexible, it could handle the mostnow. The pilot was launched three years ago andcomplex transactions. A lot of these skill sets arethen it was stopped and then it was reviewed andstill there so what has changed? When you look atreviewed. The trading fund was brought in as anthe conversations you had with ECGD, you wentidea because there was 12 months of the Treasuryto talk to ECGD for 15 minutes, you told them thebeing involved in all the decisions that ECGD wasoutline of the project and you walked awaymaking, so it probably goes back I would say aboutknowing if you would get support or you would not

get support and you knew exactly the next step to four years.




Q96 Mr Evans: Is there anybody other than us that most countries. For the very best risk they mightyou can complain to who will listen to you? stretch to ten years, but with the sort of projectsMs Malinowska: We talk to ECGD on a regular that ECGD is involved in you are very oftenbasis, that is the individual companies, individual talking about a requirement for a three or four-yearbanks and associations, we have regular meetings manufacturing period followed by a 10 or 12-yearwith the Treasury, Paul Boateng, and we meet credit period, so it is that step change really thatregularly with ministers, so we spread the word. the private market just will not venture into.

Q97 Mr Evans: But this must be a bit soul-Q100 Sir Robert Smith: Prior to 1991 the state wasdestroying because we want to see Britishinvolved in the shorter term risks as well. How havecompanies do well and export wherever theyyour members found the transition since 1991 topossibly can, and to see an organisation that isbeing reliant on the private sector?supposed to be there to promote that not doing itsMr Hill: If I may pick that up, it has been reallyjob properly and then, even worse, seeing a numberquite successful. Many people felt it was a mistake.of other ECAs doing the job properly means thatOn the whole it has worked quite well. One aspectwe are exporting jobs: that is the only thing we areof it where it does leave ECGD weakened to aexporting.degree is we hosted a dinner recently forMs Malinowska: It is a very sad state of aVairs.representatives of various European export creditagencies and during the conversation a seniorQ98 Sir Robert Smith: Pursuing the thrust ofoYcial from ECGD asked the chief executive ofparagraph 19, in eVect you are saying that theHERMES in Germany, “Roughly what percentageECGD has become too conservative and riskof your medium-term finance support is given foraverse in its approach to business, or that is the sortSME exports?” The German reply was about 75%.of impression given, but in some ways, given thatSurprise in ECGD, they verified it, yes, about 75%.it is in the end the taxpayer at the bottom line, isThere is a diVerence in definition between Germanit not really a prudent approach to the use of publicand UK SMEs, and theirs is slightly wider, but itmoney that is the problem?does not account for the diVerence between 75%Mr Tyler: Prudent underwriting, of course, is at theand 5%. Coming back to the privatisation point,heart of ECGD. We are not expecting ECGD tohaving lost the short-term business ECGD havetake risks which are too risky. The premiums thatlost easy access to a vast range of 10,000 exportingECGD charge are designed to reflect the amountcompanies with whom they used to deal and theyof risk that they are taking and in some cases thoseare suVering because of that. The privatisationpremium rates that ECGD are charging run intogenerally has been a success.double figures. So on a £100 million loan there

could be over £10 million-worth of premium topay. So there is recognition there that there is a

Q101 Sir Robert Smith: I am just wonderingrisk. Obviously ECGD’s skill is in recognising thosetherefore is it really insurmountable to privatise therisks and ameliorating as many of those risks as itlonger-term risk?can, but it is taking a risk for possibly 10, 12 or 15Mr Hill: Without the agreement of the Bank ofyears in a country which may be relatively unstable.England it could not be and there is no benefit fromSo it does not surprise us that they are chargingprivatisation. Bank of England weights lending,relatively high premium rates. If that is awhich the London banks do for ECGD exportcompetitive premium rate with the other exportcreditors, at zero weighting and it makes it a verycredit agencies we have got no quarrel with that atattractive proposition to the banks, and good luckall. The issue really is that ECGD needs to beto them, but that is fed back into supporting thecompetitive with those other export credit agencies

and part of that is taking risk. One of the areas commercial terms of the bid. Private insurance iswhere it seems more reluctant to take risk than a not available and would not be zero weighted bynumber of other export credit agencies is in the Bank of England.underwriting commercial risks. It is very good atwriting sovereign risk, public sector companies it

Q102 Mr Hoyle: Can I just take you on. Part of itcan deal with, but when it gets down to commercialis about UK jobs and UK exports, but you statecompanies we have seen them being a bit more riskthat it is the failure of the ECGD to introduce aaverse than, for example, their German equivalent.bond support facility. You state quite clearly thatso many other countries have got this bond supportQ99 Sir Robert Smith: When it comes to thefacility in place. Could you give me a feel for thecommercial risks there is no private sector providercountries? Who are the main rivals?that can better judge the commercial risks?Mr Tyler: We can provide you with a list of whichMr Tyler: There are private sector providers.countries provide bond support. We did a studyObviously the banks take risks on loans themselvesabout six months or a year ago but it is theon their own books, the private market insurersScandinavian countries, I am struggling, Francetake political risks, but the tendency is for thedoes to a degree, Germany does, Italy I think does.banks and the insurance companies in the privateWe can provide you with a list as I would rathermarket to be somewhat limited in the period of

their exposure. Five years is probably the norm for not speculate.




Q103 Mr Hoyle: I think that would be important Q107 Mr Hoyle: I think it is important, Chairman,if we can have that extra evidence because it will bebecause in your evidence you say all the other

countries have got this in place. useful.Mr Tyler:We will provide a copy of the paper thatMr Tyler: No, I do not think we said all the other

countries. I hope we did not say that because that is we have circulated to ministers and attached to thatis the list of countries. If you can bear with us notnot true, but there are a significant number of other

countries which provide that support. updating it because it was produced about ninemonths ago, I think.Mr Hoyle: Of course. If you have got any moreQ104 Mr Hoyle: In fact you say “many other

countries”. It would be interesting to know what prime examples of where British manufacturing ismissing out or where they are not competing becausemany means and who is the many.

Mr Tyler:We can provide you with that list and we there is no system in place that would be useful.will do that immediately afterwards.MrHill: That list was provided to ECGD and it was Q108 Mr Berry: You criticise ECGD for its

reluctance to underwrite exports to rich markets.provided to the Treasury.Given that there is only a limited pot of publicmoney available to support exporters, does thisQ105Mr Hoyle: If we could have a look at that that

would be useful, but why do you believe you have mean that you would like money to be taken awayfrom the less rich, more politically unstablenot been able to convince the Government of the

need for the bond facility? countries around the world?Mr Hill: To a degree the view that we received fromMr Tyler: The oYcial reason that we have been

given by ministers is that we have not suYciently ECGD that they do not want to provide cover forbusiness in rich markets seems to be counter-demonstrated that there is a market failure.We have

produced a very comprehensive paper which again intuitive. If there is a requirement on the part of thecustomer there is a requirement on the part of thewe can give you a copy of, which illustrated that

there was a very demonstrable market failure in customer. If there is support available it is almost the“first come first served” argument; it is either neededwhat is called the surety market which is where

insurance companies are providing bonds. There in a rich market or it is needed in a developingmarket. Given that ECGD are trying to build awas a complete collapse of that market and we have

got graphs that we can illustrate that with. It is more balanced portfolio, given that they have had very,very little success so far in generating an activediYcult to provide real evidence of the market

failure in the banking sector and, frankly, most of portfolio system of selling oV or swapping debts, onewould have thought they would welcome a degree ofthe bonds that we are talking about are provided by

banks, and the reason for that is that banks regard good market business to balance concentrations intheir traditional areas—China, South East Asia,their bonding facilities as part of an overall lending

facility to its customer, so it is diYcult to separate South Africa for example.out how much the bonding market has reduced andit is certainly not possible to get any evidence that Q109 Mr Berry: Earlier you declined to take the

opportunity of arguing for a larger pot of publicwill convince ministers. We have not been able to dothat so far. money for this purpose, therefore it must follow that

if you are suggesting that more should go to richmarkets that less should be provided for the moreQ106 Mr Hoyle: I notice you state that DTI

ministers feel it is the lack of hard evidence that stops politically dodgy high risk markets?Mr Hill: One of the diYculties we have is thatthem pursuing the bonding system, in which case I

think we do need to see some evidence in order to although a figure £1.7 billion capital is on the tablewe do not know what is behind that figure, forback up your claims. I do not know if there is any

more you can achieve and if you can state howmuch example how much capital is allocated for five yearcredit inMalaysia. It is very diYcult to see how closeBritish business is losing because of the failure of the

introduction of a bond system. to the end of that £1.7 billion it is and when it will hitthe buVers and have to say, “No, we cannot supportMr Tyler: No, I do not think I can, but I did bring

with me a quote from an SME which I received just that job,” be it in one country or another.Mr Tyler: It might be worth adding that byyesterday: “As a small exporter with zero banking

facilities we automatically bin all inquiries which definition business in a rich market would attractless of a weighting for capital purposes so you wouldrequire any sort of guarantee or bond.” I thought

that was quite illustrative. It is probably not the sort expect the premium rate to be lower because it is lessrisky. There is hardly any political risk and youof company that ECGD would regard as a good bet

for providing a bonding facility, but I think it would also expect there to be little or no weightingfor the usage of capital.illustrates the fact that a number of companies just

cannot provide bonds and if they get a piece of Mr Berry: Thank you.Chairman: I think we have covered all the areas webusiness coming across their desks, if there is a bond

requirement, they cannot even look at that piece of wanted to talk to you about. If we need to follow upwe will do and we will be grateful if you could sendbusiness. I think that inevitably aVects SMEs more

thanmost but it can apply to quite sizable companies us the additional information that you have. That isfine. The Committee now stands adjourned.as well.



Tuesday 20 April 2004(Morning)

Members present:


Mr Roger Berry Mr Lindsay HoyleMr Michael Clapham Judy MallaberMr Jonathan Djanogly Sir Robert SmithMr Nigel Evans

Witnesses:MrLaurence Cockcroft,Chairman,MrGrahamRodmell,Director of Corporate andRegulatoryAVairs, and Mr Neill Stansbury, Project Director, Construction and Engineering, TransparencyInternational (UK), examined

Q110 Chairman: Mr Cockcroft, I am right in and 21% thought they were getting worse, with theassuming you are going to introduce your remainder taking a neutral position. So thatcolleagues and say a couple of words about indicates that this question is very much in theTransparency International? balance and that the position adopted by individualMr Cockcroft: Thank you very much. It is a exporters really can make a diVerence to thepleasure to be here. Thank you very much for outcome. I wanted to say those few words as aninviting us; we much appreciate that. I will explanation of why in TI we believe this issue to beintroduce my colleagues very briefly. On my left is so critical.Graham Rodmell, who is our Director ofCorporate and Regulatory AVairs and focuses very

Q111 Chairman: I think it is the extent to whichmuch on legal issues and the internationalyou might say the ECGD is involved in this thatregulatory environment in relation to corruption,we have invited you here, as it were, observers ofand on my right is Neill Stansbury, who is a lawyerinternational business and trade. Some of thewho has worked in the international constructionNGOs who have provided us with evidence andand engineering industry for 20 years or and so haswho will be perhaps participating this morningparticularly focused on issues arising fromhave questioned the need for the ECGD; on thequestions of arbitration. In relation toother hand industry has stressed that it providesTransparency International, I would simply like tovital support to exporters. Do you agree that thesay that, as I am sure you are basically aware, TI,ECGD’s function of supporting exporters in theas we call it, was formed rather more than 10 yearsway that it does is a function that is valid forago in order to focus on the impact of corruptiongovernment or should it be the responsibility of theglobally. In a nutshell, I would say that ourprivate sector?perception is that corruption generally takes two or

three partners and that those partners are most Mr Cockcroft: We are quite happy to comment onfrequently between the developed world and the that informally, as it were. It is not our concern todeveloping world and the former Soviet States. So take a position institutionally on ECGD but moreour perception is that corruption will not be rolled on its modus operandi, given the fact that it is anback in the developing world without some form organisation that exists and is doing business. Weof international collaboration. Putting the UK role have no business to question the concept thatin that in context, we conduct every two years a ECGD is providing a necessary and usefulBribe Payers Index, which is a survey conducted in function. The question of whether or not it should19 developing countries of the propensity of be fully privatised is obviously quite diYcult. Weexporting countries to pay bribes. The would share a general government concern, or amethodology of this survey has not been seriously general business concern, that that might make itchallenged. It is conducted by Gallup and is based more diYcult for some UK companies to doon interviews with more than 800 people in those business in very diYcult states, which is not ourcountries. In 1999, which was the first time this objective. Our concern is that they should dosurvey was conducted, it was established that the business in a non-corrupt way in those states, whichUK score out of 10, where 10 is good and one is we believe to be feasible.bad, was 7.2. In the year 2002 it was 6.8 and of the19 exporting states, well, 21 exporting states in the

Q112 Sir Robert Smith: As you say, it is not reallysurvey in 2002, the position of only two hadyour core area in giving evidence here today, but Ideclined, and those two were the UK and the US.suppose a counter argument from businesses thatAll other countries improved their position anddo business without any support would be shouldtheir score. I would like to make one other pointthe state be intervening to support some businessesbased on the same survey, which is that in thoseand not others in terms of where they export andimporting countries, 23% of those surveyedwhether it would be better if the whole thing wasthought that things were getting better in terms of

the propensity of international companies to bribe, in the private sector?



20 April 2004 Transparency International (UK)

Mr Cockcroft: Well, we would not argue in favour Mr Rodmell: ---it works.of the principle of national champions. I think that Chairman: ---6.8 becomes 7.3 or something likeis a position which has now been rather debunked, that.and we certainly would not argue for it in those Sir Robert Smith: We would be less concernedsectors where it tends to be argued for, such as the about seeing new objectives as long as thedefence industry, but the principle, not of providing practice is—quasi subsidies to individual UK companies as a Chairman: That is what matters throughout: thekind of strategic goal, but the principle of enabling reality of the thing rather than the form.British companies to do business in diYcultcountries is one which we would support, in

Q118 Mr Evans: In section 4 of the memorandumgeneral terms.that you have submitted, the section right at theend where you talk about corruption and briberyQ113 Sir Robert Smith: In that context, do you seebeing bad for business, bad for exports, you say,it as part of the way of tackling corruption that“There also needs to be a coherent policy acrossthere should be anti-corruption policies in both thedepartments for tackling corruption.” That is 4.4.business principles in which ECGD works and inWhat do you mean by that? Right at the very end.the activities of the Export Guarantees AdvisoryMr Rodmell: Well, I think that in the context ofCouncil? You are suggesting in section 3 of yourour more general work in dealing with anti-memorandum that it should be higher up. Howcorruption and our meetings with variouswould you like to see that achieved?government departments there is not always aMr Cockcroft: I think I would like to ask mycoherent view as to how one should be dealing withcolleague, Graham Rodmell, to deal with thatanti-corruption issues, and, in fact, when you arequestion.dealing with issues like investigation, prosecution,Mr Rodmell: I am not quite sure I understand the

question? and so on, there is considerable confusion as towho should be responsible for dealing withinternational bribery, for example. That has nowQ114 Sir Robert Smith: In section 3 of yourbeen criminalised. It became eVective in Februarymemorandum you argue for greater emphasis on2002, I think it was, and you have to have aanti-corruption policies in both business principlesmemorandum between about 13 diVerentto which ECGD works and in the activities oforganisations to decide how you deal with anythe export?allegations that come through the system as to anyMr Rodmell: I think it was an observation based

on the way that it was drafted, but, to be honest, particular event of bribery. It can come through theI think what matters much more than what is listed Embassies and the High Commissions, through thein the objectives is what the ECGD actually does. Foreign OYce and then it has to be referred to theIt has, since we put in that submission, greatly National Criminal Intelligence Service. Then theyimproved its anti-corruption procedures and, decide whether it goes to the Serious Fraud OYceprovided those translate in turn into real action, or whether it goes to one of 43 constabularies, andconcern and due diligence, then I think that that is the whole thing is very confused. So one needs amuch more important than what is actually written: much more coherent view of how you deal with thisbecause what you have here is a hierarchy of a and make enforcing this very important crime amission statement, then you have objectives, then reality.you have business principles, then you havepolicies, and corruption comes in in a big way in

Q119 Mr Evans: In the perhaps confusion andpolicies where it talks about integrity andbuck-passing that may be going on, do you have atransparency. So it could have been worded in theresolution to that particular problem or do you havewith sustainable development, but I am not surea recommendation as to how you could make itthat much rests on it.more eVective?Mr Rodmell: Well, we do. I had not anticipatedQ115 Sir Robert Smith: We just want to test that.that this Committee would be that concernedOthers will be coming on to the stuV that wasdirectly with it. We have proposed that thereannounced in April and questioning you on that.should be a body which is an amalgam of the mostSo in a sense when you wrote this memorandum it

was a way of highlighting the need for them to— eVective bits of the enforcement machinery whichMr Rodmell: --- to emphasise the anti-corruption would embrace the National Criminal Intelligenceissue, which has been a concern of the ECGD for Service, it would embrace the National Crimesome time, but they have clearly taken another Squad, it would embrace, in fact, the SFO andmajor step forward in their latest procedures. probably the most eVective bits of the Crown

Prosecution Service. However, very recently theQ116 Chairman: So what you are saying is that they Government, through the Home OYce, hashave gone from the implicit to the explicit? announced the intention of setting up a SeriousMr Rodmell: In terms of the procedures, yes. Organised Crime Agency, and they have left the

Serious Fraud OYce out of that. We shallobviously be inquiring into that and makingQ117 Chairman: We have yet to see whether or

not— representations, because we think that they have




probably missed an opportunity here to get this hypothetical examples about how bribery and othercorrupt practices can aVect the outcome of a bidwhole question of how you deal with international

economic crime sorted out. for overseas contracts. How much of thesehypothetical examples are based on what you haveobserved in real life?Q120 Mr Evans: So if they included the SeriousMr Stansbury: Basically, I have worked in theFraud OYce in it, you think that could be the bodyindustry for 20 years, and I have probably workedthat would be make—on about 75 major infrastructure projects in 20Mr Rodmell: Very much so, yes.countries probably for clients from 12 diVerentMr Cockcroft:With the slight caveat, which is thatnationalities. In that 20 years I have seen anthe Serious Fraud OYce itself has said it does notenormous amount of bribery and fraud onwish to deal with corruption, it wishes to deal onlyconstruction projects, and so to some degree thewith fraud. So we would like to see that mandateexamples I have taken have been adapted from myextended.personal experience, but, for obvious reasons,Mr Rodmell: Can I just comment on that? Theyfirstly my own duty of confidentiality and,have said that they do not need an express powersecondly, because TI does not investigate, we are anbecause they already do it. If there is an element ofadvocate of future change, I have changed variousfraud they can do it; but if there is not an elementelements of the examples. Secondly, in that time Iof fraud it follows they cannot do it. It is probablyhave spoken very widely to practitioners in thediYcult to imagine too many cases where there isindustry—I have always been interested in fraudnot some element of fraud. However, they haveand corruption—and they have told me theirtaken express powers to deal with cartels under thepersonal experiences. Thirdly, in this last year IEnterprise Act, and if they need express powers tohave been working full-time in the anti-corruptiondeal with cartels it begs the question: why do theyfield and I have been working with contractors andnot need express powers to deal with internationalconsultants from around the world interviewingbribery, which is now under the Anti-Terrorismthem confidentially and finding out theirAct?experiences. Fourthly, there are a lot of cases nowin the public domain: for example the IndonesianQ121 Chairman: You could do it rather vaguely, inpower station projects, the Lesotho Highlands case,the sense that you could say, “We will take the bestthe Dabhol Project, from where I have drawnbits of this organisation and the best bits of thatexamples. What I have done is merged all theseand the appropriate bits of this one and put thempractices together into hypothetical examples, buttogether.” Do you think you will have a lot ofI would say that every one of those elements isdiYculty in finding the best bits of the Seriousbased on fact; and I have, which I could give toFraud OYce?the Committee, if they are interested, a report fromMr Rodmell: No, I think the Serious Fraud OYce,Peter Waldman in the Wall Street Journal datedbecause—February 2004 where he exposes a lot of thepractices on the Indonesian power station projectsQ122 Chairman: Given their success rate?which are absolutely along the same lines as I wasMr Rodmell: What I see is a much widerdescribing in report number four. So hypothetical;jurisdiction to deal with serious internationalyes. True; yes.economic crime which embraces fraud, embraces

corruption, money-laundering, probablyinternational securities oVences, cartels and so on, Q126 Mr Berry: On how many occasions have suchbecause they need the same body of skills of practices involving UK firms been reported to thecomplex mutual legal assistance internationally, for appropriate authorities?cross-border crime. It makes no sense to refer that Mr Stansbury: It is very diYcult to say because wekind of crime to a constabulary which has very little do not know what has been reported to theexperience and very little staV, and does not even authorities. The fact that corruption ishave a fraud squad. acknowledged in the international construction

industry as being very widespread, the fact that theQ123 Chairman: Really what I was meaning was Bribe Payers Index produced by TI puts thethat the Serious Fraud OYce does not seem to be construction industry as the most corrupt sector inone of the most successful arms of our policing the world, the fact that the most common methodprocess, if I can put it like that. of paying bribes internationally is well-known to beMr Rodmell:Well, the Director may not altogether using agents, the fact that the Export Creditsagree with you. Guarantee Department and other ECAs allow

agents’ commissions to be covered as part of theQ124 Chairman: No, he may not, but the general export credits, all would lead you to suspect thereperception is of some relevance! had been numerous cases out there in internationalMr Rodmell: I understand that. markets where bribery has procured projects. In

fact in some markets it is acknowledged that youcannot win a project without paying a bribe and,Q125 Mr Berry: We have had sight of reports fourtherefore, either the contractor withdraws fromand five of your anti-corruption initiative inthat market or it participates in bribes. Thereforeconstruction and engineering that Mr Stansbury

wrote. The obvious question here is that you give the fact there appear to be no prosecutions which




have taken place in the UK or in most of the other investigate? I think the appropriate measures arenot adequate if it is merely a box-ticking exercise.OECD jurisdictions is astonishing, and we do not

know to this day if there have been any referrals For example, it is very important that a non-bribery warranty is made by the applicant for coverwhich involve UK contractors.

Mr Rodmell: Can I comment on that, Chairman? to ECGD where they say, “We will not bribe, andto the best of our knowledge nor will any associatedOne reason why there may have been few reports

to the authorities in this country is that it actually company.” But, of course, that is to a degree self-serving because if a company is not in any eventonly became a crime in February 2002. Now, from

that time on, even if every element of the oVence going to pay a bribe, the declaration that they havenot paid a bribe is worthless. Secondly, if ais committed outside of this country, it is still an

oVence in this country for a UK National or for a company is willing to risk the huge criminalpenalties and sanctions which are involved if theyUK corporation, so we do not know; but it has

been reported—I think some five cases have are caught for bribing, they are not going to say tothe ECGD, “Yes, we paid a bribe.” So clearly aactually been reported by the ECGD to NCIS (the

National Criminal Intelligence Service) which is, company which is willing to bribe will also bewilling to declare falsely to ECGD. So an anti-under that arrangement that I was talking about,

the body for collecting all these reports. bribery declaration is an important insurancewarranty, but it is not an eVective anti-corruptiontool. Secondly, the questions they are asking on dueQ127 Mr Berry: Before I forget it, Mr Stansburydiligence at the moment are very, very welcomereferred to agents’ commissions. I seem to recall onbecause I think it is absolutely critical they find outa number of occasions the MoD making a robustthe extent of the agent’s commission, the name andresponse to media allegations that company X wasaddress of the agent, where the agent is located, theinvolved in bribery and corruption by saying, “No,currency of the payment. All these are veryno, no, no, they pay agents’ commissions.” Do youimportant points, but the answers in themselvesthink there is a valid distinction between the two,that they will get on this form are not suYcient. Forand, if so, what is it?example, in the Acres and Lahmeyer prosecutionsMr Stansbury: I would say agents do play, in somein Lesotho, where the appeals have just been turnedcases, a valid commercial role in internationaldown, both of those companies have beenbusiness. You do often need a local agent to oVerconvicted of paying bribes. I imagine if thoseservices, introductory services, et cetera, and therecompanies had filled in this form, on the face of it itis a market rate to be paid; but numerous agentswould have looked fine because it would have said,are used to pay bribes and I think it is a relatively“Yes, we have appointed an agent. We are payingsimple process to distinguish the two because thehim commission of, say, CAN$750,000”, I think,amounts of commission paid on some of thesein the case of Acres. “His services are to provideprojects, the currency of the payment and theassistance to Acres in doing business in Lesotho, etdestination of the payment show that there is nocetera, et cetera.”. Although having a payment inlink whatsoever with the value of the local servicesan oV-shore bank account in a foreign currencybeing provided and the commission. So I think, yes,would have rung a few alarm bells, that would havethere are genuine agents, yes, there are corruptnecessitated the ECGD following up, and if theyagents and I think ECGD has to take steps tohad followed up they would have found out in thatdistinguish the two.case that Mr Bam, the agent, did not even live inLesotho, he lived in Botswana, he had no oYce, he

Q128 Mr Berry: Is it possible that ECGD is had no organisation whatsoever, and 60% of all hisunaware of the extent of bribery and corruption to commissions were going straight to the Chiefwhich you refer? Executive of the Lesotho Highlands DevelopmentMr Stansbury: No. Authority. So you have to do this due diligence to

ascertain what the agency commission is being usedQ129 Mr Berry: To your knowledge have they for. So my point is they have the power, ECGD,taken any action to deal with it? to find out, they have the knowledge to be able toMr Stansbury: I think their proposals are very find out, but it is critical when the applicants’ formswelcome. They are now in their new procedures come in that they take suYcient steps to try tomaking it explicit that bribery is a criminal oVence ascertain whether these agency commissions areand they are saying that they are going to ensure, bribes or legitimate. Some are legitimate.as far as is practicable, that all transactions andECGD supports are in compliance with the laws,

Q130 Sir Robert Smith: A lot of the concern ofand the due diligence procedures they areother evidence we are getting from businesses is theempowered to put in place are very, very welcome.level of bureaucracy already they perceive from theI think, as Graham and Laurence said earlier, theECGD. How much more would that add to thekey is what they are going to do about it. I amsort of processes?convinced it is so well-known in the industry whatMr Stansbury: Absolutely minimal, because if youhappens, it is so well-known in the industry whatthink that a contractor working overseas under thehas to be done to stop it that ECGD has the powernew regime faces the risk, if he is caught bribing,and the knowledge to do something. So the criticalof imprisonment of the directors, black-listing forissue now is, with the new procedures in place, are

they going to take appropriate measures to the company, the contract being terminated for




illegality—which is the law virtually throughout the Mr Rodmell: I think, as Neill said just now, theyhave given themselves the capacity to deal with theworld now—and having to compensate all banksproblem in a much more focused way than theyand other parties, the contractor faces potentialhad under their previous practice. This is not newruin. This is the case even if he did not know a bribeentirely new practice. They have at all times hadhad been paid. For example, if an agent hesome information required, and so on, at least sinceappoints in good faith pays a bribe to win the main2000 when they began to take these issues morecontract, the client could terminate that mainseriously, so that they have made definite stridescontract and the contractor would be left facingforward. The question will now be how seriouslydevastation. So any contractor who wants to makethe procedures will be taken and, if it reveals thesure he is protected will, as matter of course, dokinds of information that Neill has illustrated, willpractical due diligence. The questions we arethey do something about it rather than ignore it,suggesting in our report should be asked of thebecause it is all part of their whole riskcontractor are no more than you would expect themanagement strategy, it seems to me. Talkingcontractor to have already asked; and when writingabout risk management, you have to identify thethat due diligence proposal, I put myself in my ownrisk and you have to measure it and you have toposition, my own experience, of saying, “If I hadreport it. Just quoting from the KPMG report thatknown of a bribe on a project and I was answeringthey had themselves in 1999, at the end of the daythese questions, would I be in diYculty?” “Yes.” “Ifyou have to manage it. You cannot manage it ifI knew the agent was legitimate would I be inyou ignore it. If you once know that thediYculty?” “No.” So we have honed our questions circumstances are such that they ought to bespecifically to be genuine, reasonable and logical. ringing all the alarm bells—those payments being

Mr Clapham: Can I ask some further questions made oV-shore, it is 5% of a massive contract sum,regarding the new guidance. As you know, the new it is being paid in a diVerent currency in a diVerentguidance was published on 1st April. Some of the place, there are no real services being provided—ifforms have already been made, and I hear what Mr all those alarm bells are ringing, I would expectStansbury had to say about what he thinks to be ECGD in future to take that very seriously, becauseinvolved in the forms. I know from your they do not want to be supporting criminal activity,submission that you feel that you were not which is what it is today. That is the majorconsulted as well as you would have liked to have distinction between now and 2000 when you lastbeen consulted. Given that Mr Stansbury’s had your review, that this is criminal activity, and,examples would have been made available to the if it is found to be so, that could invalidate theECGD, do you feel that the lack of consultation contractual arrangements on which their wholehas resulted from an antipathy held by the ECGD security depends and I think they also have atowards you, or is it because they are aware of your reputation to safeguard in the same way thatposition, given that some of the examples that you banks, contractors and others have reputations torefer to, Mr Stansbury, will have been made safeguard. It is very important that ECGDavailable to them? safeguards itself. I see over a period of time, if they

manage that risk properly, the actual cost of theMr Cockcroft: I would like to ask Graham tocover will decline because it will be lower risk, andanswer that.that is for the good of business. It is easier to doMr Rodmell: Let me say straightaway that in all mygood business than, at the end of the day, to dodealings with the ECGD I have never experiencedbad business, and it is much cheaper too.any antipathy or sensed any antipathy, and I

suspect that this was simply a procedure where,possibly given the circumstances of claims comingout of Dabhol Power, I do not know why, but theydid not feel as able to consult us on this occasion asthey have in the past. When I wrote that particular Q132 Mr Clapham: So it would be fair to say fromparagraph about lack of consultation, it was your point of view and what you have just said, Mrcertainly felt, because we genuinely felt we had Rodmell, that you feel that the ECGD has takenpositive a contribution to make and we at all stages on board much of what you have had to saytried to be sensitive to the needs of business, so we previously, and particularly the examples that Mrwere not going to be scoring points unnecessarily Stansbury has given, and that they have comeas an NGO. What matters is what is actually in the forward in a very positive way to meet most of yournew procedures, and the new elements there are so concerns?positive that whether or not they consulted us really Mr Rodmell: Mostly, yes. In an ideal world, webecomes of little importance. might have proposed rather diVerent wording,

say, on the warranties, or something of thatnature, but I think we have to recognise where the

Q131 Mr Clapham: That is good to hear, that you ECGD is and where it has come from and it triesdo feel that the measures are positive. Given that to be, I think, to some extent, in step with otheryou say you feel they are positive, is it possible to export credit agencies, but I think in some areasgo a little further and say how significant you feel that they are setting an example and this will bethe changes might be with regards to being able to good for business and good for ECGD over the

longer term.contain corruption?




Q133 Mr Djanogly: Mr Stansbury mentioned due specifically in terms of agency agreements. I thinkthat if that amount of project risk is being takendiligence. I was wondering if you could go a little

further into what your note talks about. In on by an organisation you would always docomprehensive due diligence before it starts.paragraph 62 you recommend a tiered approach.

Could you explain what you mean by that?Mr Stansbury: Yes. ECGD obviously has a Q136 Mr Djanogly: You do not think that thiscriminal risk and it has a civil risk. It has a criminal would have an impact on the premiums thatrisk in the sense that if it could be accused of ECGD cover.intentionally aiding and abetting a bribe through Mr Stansbury: I cannot believe it would have asupporting a bribe on an export credit or could be material impact, no, but I cannot really commentwilfully blind to that, it is a criminal risk. It has a on the cost.civil risk if a bribe is paid regardless of knowledge, Mr Cockcroft: The concept of the sliding-scale tobecause if a bribe is paid and the contract is some extent addresses that, because this proposalterminated, ECGD will have a civil risk, as has is being made in relation to the very large-scalebeen shown in the Dabhol project which is going projects and obviously the premiums associatedto litigation now. Therefore ECGD must assess, in with larger projects are, by definition, larger. So weall projects, how to deal with those two risks. are talking about three person-days at work—Therefore it is obvious it cannot do a huge due somebody carrying out an investigation in a headdiligence on a very, very small project. It may take oYce—that is not going to be that significant in thethe view that the risk on a small project would be context of a project costing several tens of millionslimited, whereas on a major project it could be or obviously several hundreds of millions.catastrophic to ECGD. So what we were proposing Mr Stansbury: That is certainly correct. What I hadwas on projects where the risk to ECGD is over a in mind was that someone would fly up or go to thecertain amount of value, or the agency commission contractor’s oYce and would speak to the projectperhaps is also as a separate issue over a certain director and say, “Who is this agent? Have you metamount, ECGD would do full due diligence; they him? Did you do due diligence on him? Who metwould ask very searching questions; they would him? Who is drawing up the agency commissionsend a representative up to the contractor’s oYce agreement? Can I meet the lawyer? Who isto speak to various people in the contractor’s oYce processing their payment? Where is the paymentto ascertain the validity of the commission; they going? Can I meet the accountant?” You can focuswould possibly ask the local trade representative in very specifically on these questions if you knowthe country where the project is being carried out what you are looking for; and it may only take oneto make inquiries of the local agent to check on his day, or it may take three days, as Laurencereputation and his ability to carry out the services. suggested, but I am not envisaging any huge dueThat will obviously be time-consuming and diligence.expensive, but if there is a huge risk at stake it hasto be done. Then, we would say, below that tier you

Q137 Mr Hoyle: Obviously, with due diligence youwould have a lesser form of due diligence wherehave mentioned there could be a cost to theonly some of those activities would be carried out,company, but is there not an added burden, and itbut also, I would suggest, there would be randomis a burden that could be put on companies, byfull due diligence, because the contractor mustslowing down decision-making, because it must doknow that there is a danger of a full investigation,that. Do you then put British business at aand all the people in the contractor’s oYce—thedisadvantage: because in some cases, as you wellaccountants, the lawyers, the project managers whoknow, there is a penalty clause and it is aboutare involved in this—must be aware that theytimescale, the delivery of decisions that can matterpersonally could be questioned; and so there mustto a contract. Do you think it has an eVect inalways be the spectre of an investigation.that way?Therefore, within the next tier you could haveMr Stansbury: I would not say so, because therandom due diligence: ask certain questions to takepenalties you are talking about are during projectaccount of the risk.execution.

Q134 Mr Djanogly: Who would pay for the Q138 Mr Hoyle: Let me rephrase it. If you have toinvestigations: ECGD? get the information in in a set time because theyMr Stansbury: I presume that to be the case. I want to get on, they may have a budget to spec,cannot really comment on that. I am not talking you cannot say, “Well, unfortunately we have gotabout pointing the— agency due diligence upon us and before we can

complete the contract details we need an extramonth”, and that country says, “Well, I am sorry,Q135 Mr Djanogly: A full due diligence exercise is

not a cheap operation? we need to spend the budget. We want to get thisproject underway.” What happens then?Mr Stansbury: No. I am not talking about a four-

week full due diligence by five accountants. I am Mr Stansbury: A lot would depend on how fastECGD could react. Normally cover, I believe, istalking about a very focused due diligence by

people who are very specialist in the area who have given as an indicative cover initially; and certainlyon major projects you do not have just a few weeksa very detailed knowledge of construction projects.

If you know what to look for you can focus tendering. You are normally alerted well in




advance for a major international infrastructure very strong. Some of our competitor OECDcountries have stronger legislation. So to someproject. Sometimes they take months to tender for

and negotiate. So the ECGD would need to be extent it has to be seen in a slightly wider context.I think one needs to position it very firmly in theresponsive to those concerns. Perhaps again that

could be tiered, in the sense that the initial framework of the general revision of ECAprocesses which we are confident is moving forwardindicative due diligence could be undertaken on the

understanding that if the project is awarded, in a very substantive way.further due diligence would be taken up at projectexecution stage. That would put a certain caution Q141 Mr Hoyle: So when do you expect everybodyon the contractor because they know that, if they to be using due diligence in the way that we do?win the project, ECGD investigators will be in and Mr Cockcroft: If one had to hazard a guess, Ithat would certainly deal with the problem of delay would say in two years’ time.by treating it in that way. There are many ways ofhandling this concern. Q142 Mr Hoyle: So at the moment we are leading

the way and the others are following?Mr Cockcroft: That is eVectively so, yes. If oneQ139 Mr Hoyle: In recognising the due diligencewants to look at this in a diVerent context and lookthat can be used and will be used, how many otherat the reasons why this is, as it were, the case, orcountries operate the same system in the samewhy the progress is uneven, then we get into theeVective manner?areas of political persuasion where some countries,Mr Stansbury: I am not aware of what othernotably the US, are in a position to be much morecountries’ due diligence practices are. Graham, dopolitically persuasive than European countries,you want to come in?including this one.Mr Rodmell: I do not have knowledge about what

the other ECAs are doing, but what I do feel, andI am sure this is what is driving the Export Credit Q143 Mr Hoyle: So it would be fair to say we haveGroup at the OECD, is that now there is the all introduced 30-mile per hour speed limits but weOECD Convention, now it is criminal in all the are the only one operating speed cameras at theOECD states, you cannot aVord to ignore it, moment?because it goes to the root of the contracts on Mr Rodmell: I do not think we can say that, no,which the security of all the ECAs depend. So it is because we do not know what all the other ECAsnot an option to ignore it. The question then is how are doing, but, as Laurence says, it is really part offar can you rely on what you are given by the a process. ECGD is one of the last ECAs to haveapplicant? Frankly, I think as soon as the applicant introduced the statement in their forms pointingrealises that the issue is taken seriously, the out that this is a crime, and it will only come in onapplicant who wants to do dirty business will not 1st May. Overall, due diligence aside, I know thatcome to ECGD. If that is regarded as a competitive you are most interested in that because that looksdisadvantage, I am sorry, but I do not see it that like the most threatening one, but in other areas,way. I see over the quite short, or medium-term ECGD has been a little behind and it is nowanyway, that the fact that ECGD becomes catching up with others. It is part of a processassociated with doing good and clean business will where they are all going forward. What I wouldactually be a competitive advantage. suggest, though, is that one should not assume a

competitive disadvantage, because the kind ofbusiness that ECGD will want to do is the kind ofQ140 Mr Hoyle: Once you put British businessbusiness that would merit this additional and moreaside for tendering, because it is a bit like therobust approach to due diligence.argument you are using, if you have 30 miles per

hour, we all have 30 miles per hour round Europe,Q144 Mr Hoyle: Lastly, obviously you have not gotbut only one has speed cameras, it is not quite asthe information to hand, but if you have anyeVective as it should be. What I would like to knowinformation that you could send the Committeefrom you—you did not quite answer the question—about the state of the play of how other countriesis we operate a robust system. Fine. Nobody arguesare operating at what stage—about that. But is the same robust system beingMr Cockcroft:We would be glad to put in a memoendorsed by other countries in competing projects?on that.Mr Cockcroft: Can I come in there? I think one

needs to put this in the context of a whole processof reform of ECA arrangements being triggered by Q145 Mr Hoyle: Please.

Mr Cockcroft: And we can judge whether the speedOECD. TI as an organisation has had an input intothat during the last two years, and we are pretty cameras are operating.

Mr Stansbury: One point is that the assumption isconfident that the other ECAs associated withmajor exporting countries within OECD will be that business will not welcome extra due diligence.

I am not sure that is correct. Many contractors inputting in or are putting in already equallysignificant measures, so that the issue of Britain, consultants in Britain, have had to

withdraw from various markets overseas becausecompetitive disadvantage, if it occurs in the next sixmonths, will not be there in a year’s time; and one they are not willing to bribe. Therefore, their

turnover has dropped. It has hit their profitability,may contrast that with the adequacy of our ownanti-corruption legislation, which is, frankly, not but they have made the decision, “We are not going




to bribe”. But many of their competitors have not relevant facts before making decisions”, and so on,and I would not for one moment quarrel with themade that decision, so many companies,

contractors and consultants in Britain continue to general principle of administrative law. But if youtake it ad absurdum, in a way, it stops you makingbribe, and this is being repeated in many countries

around Europe. Therefore there is a perception, a decision, because each decision to some extentfetters the discretion of your successor from“We should be rewarded for ethical conduct”. We

would like to go back into those markets but we making subsequent decisions. So, again, I am surethat ECGD has had the benefit of learned counsel’scannot until it is cleaned up. Therefore if ECGD’s

due diligence makes sure that the corrupt opinion and I do not pitch my opinion against hisor hers, but, generally speaking, if one looks at thecontractors cannot get export credit and that

ethical contractors can, surely it is assisting you to Act under which the ECGD operates, which is theExport and Investment Guarantees Act 1991, it isget the business, not deterring you.

Mr Hoyle: Unless you are not operating the diYcult to imagine an attempt that could be madeto use wider wording in terms of powers. It says,speed camera.“The Secretary of State may make arrangementsunder this section with a view to facilitating theQ146 Chairman: Apart from the analogy aboutexport . . . The Secretary of State may makespeed cameras, you could say there is also thearrangements . . . with a view to facilitatingdimension of volume, in the sense that in someperformance of obligations created or arising,countries it might be quite easy to introduce thedirectly or indirectly”, and he “can makemost rigorous procedures because at the end of thearrangements . . . for the reduction or avoidance ofday it does not matter because they do not havelosses arising in connection with any failure tomuch trade. As one of the major trading nations,perform such obligations.” It is extremely wideis it the case that because of the number of dealswording. Under “financial management”, which is,that are struck by British-led consortia theI think, where you start to think about riskpropensity to have corruption is that much greater,management and so on, “The Secretary of Statethe opportunity is that much greater?may make any arrangements which, in his opinion,Mr Cockcroft: One can, as it were, if I might say so,are in the interests of the proper financialChairman, exaggerate the force of that argument.management of the ECGD portfolio, and, inGermany is the largest single exporter in the world.pursuance of those arrangements, he may alter anyGerman procedures are being changed as we speakarrangements he has already made and he canand German legislation introduced after the OECD“make further arrangements in connection withAnti-bribery Convention has been rather morearrangements so made”. It is very wide wording. IteVective than ours; so I think one has to put thisseems curious to me that, as part of thosein the context of what countries are doing generallyarrangements, the Secretary of State could not, inin the anti-corruption field. For example, it wasfact, require a procedure for sanctions where it issaid that our anti-corruption legislation wasfound that an applicant has engaged in corruptparticularly tough because it banned facilitationactivity. That is basically what the World Bank haspayments, but that is equally true of the Frenchdone, which is why I mentioned that example, andlegislation. So the traditional British argument thattheir criteria are not where corruption has beenother people are not doing what we are doing andadmitted or where there has been an actualwe are ahead of the game is extremely dubious inconviction, it is simply where it has been found bythis area of anti-corruption measures.the World Bank or by its sanctions committee thatChairman: That is very helpful. I wanted to get thatthere has been fraud or corruption in thepoint either on the record or denied, but you haveprocurement of goods or services. They have agiven your opinion and we will take it up withprocedure which is all set out; it is ostensibly a veryothers. That is very helpful.fair procedure allowing the person against whomcorruption is alleged the opportunity of putting in

Q147 Judy Mallaber: Moving on from that, you written submissions and being heard with legaladvocate the proportionate use of legal powers to representation, because the sanction is a verydeny support for applications for assistance in powerful one. If you are blacklisted by the Worldparent and subsidiary companies which have been Bank and all its aYliates, that is a very powerfulfound to have been involved in the payment of sanction. Those companies in Lesotho who havebribes, and you say in your evidence that that is the been found guilty on appeal stand the risk now ofpractice of World Bank institutions and is being blacklisted. I do not know if they have been.recommended best practice of the OECD Group Not yet, but it is coming up for consideration.but that ECGD does not feel it has suYcient legal What I am suggesting is that if learned counselcover for such an action. Would you like to consulted by ECGD is right, and this principle ofcomment on the logic of the argument made by administrative law precludes it, it would be theECGD? simplest thing to legislate to correct that, becauseMr Rodmell: Yes. I have not seen the legal opinion the ECGD should not be denied this very powerfulwhich ECGD rely on, but they do kindly tool in its own risk management.summarise it for me, and it is all based on a generalprinciple of administrative law pursuant to which Q148 Judy Mallaber: Do you have that statementit is said: “The Secretary of State may not fetter his about the legal opinion, the summary from ECGD?

Do you have that in writing?future discretion; he must in each case, evaluate all




Mr Rodmell: Yes. action statement, or that may go to the nextmeeting. So it is a current issue. It is a process. AsLaurence says, it is improving all the time.

Q149 Judy Mallaber: Would it be possible to havea copy of the statement? Q153 Judy Mallaber: Do you know of otherMr Rodmell: I do not see any reason why not. If countries that are currently operating that legalit has been given to me I am sure it can be given provision that you are suggesting we shouldto the Committee. I am sure, if they wanted to, they operate here?could see the actual legal opinion, but this one I Mr Rodmell: I do not know the actual countries,am very happy to provide. no. They are in the minority at the moment.

Q154 Judy Mallaber: Thank you very much. If weQ150 Judy Mallaber: Do you feel that would be a could have copies of that advice that you had fromvery powerful tool for ECGD? ECGD I would be grateful.Mr Rodmell: Yes. Mr Cockcroft: May I add two points to that. First

of all, the process by which the World Bankreached a view that it would be prepared to exercise

Q151 Judy Mallaber: More powerful than what a power of debarment was gradual, and initially, asthey are able to do at present? recently as 1997, the World Bank’s position wasMr Rodmell: Yes and it is seen as best practice; but that they would only debar companies that wereI would say that if a recommendation went from found to have behaved corruptly by a court, athis Committee that consideration be given to successful prosecution. At the 1998 AGM in Hongintroducing this sanction, it should follow more the Kong, Wolfensohn announced that this wouldWorld Bank style than resting on actual change and the World Bank would now debarconvictions. companies on the basis of its own investigation. If

I may slightly respond to the second part of yourquestion: although I am well aware that it is not aQ152 Judy Mallaber: You also said it is wholly adequate answer, blacklisting within statesrecommended best practice of the OECD Group. in Germany is now quite standard practice. It was

Do you have any information about the legal pioneered in Bavaria and a number of Germanpowers used in other OECD countries? states now operate a debarment system in relationMr Rodmell: Yes, and it is true to say, again, that particularly to public sector contracting.a number of the other ECAs are not using this Judy Mallaber: Thank you very much.power, but it is their recommended best practice. Chairman: Thank you very much, gentlemen. IThe Export Credit Group of the OECD have think that is very helpful. It is only one aspect ofsomething called an “action statement”, the current what we are concerned with, but I think we haveone is from 2000, which actually says what they mined fairly deeply this morning in that area. Weshould all do. Beyond that they have some are grateful for the information you have given usrecommended best practices which get modified and, if you can give us any more by way of writtenand are considered. I believe the Group is meeting submission, we would be very happy to receive it.

Thank you very much.this week and may well be looking at another

Witness: Ms Ann Feltham, Parliamentary Co-ordinator, Campaign Against the Arms Trade, examined.

Q155 Chairman: Good morning, Miss Feltham. those credits stopped for arms. We have no opinionon whether or not they should continue for otherYou have been before this Committee before, I

think. goods.Ms Feltham: No.

Q156 Chairman: You have given us evidence butQ158 Mr Evans: I have read your submission withyou have never appeared?growing incredulity, I hasten to add. You sayMs Feltham: Only written before.things like you seek an immediate end togovernment assistance for the export of militaryequipment—this would include cover for theQ157 Chairman: That is right. Maybe we could try

and establish where you come from. Would it be construction of military bases—and you would likethe UK Government to set an example to itsright to say that your view is that the British

taxpayer should not subsidise the export of arms overseas counterparts by taking this actionunilaterally. Can you imagine what would happenand other military equipment and therefore the

ECGD should not provide services in this sector? if we were to do this unilaterally. Would you notexpect that the ones that would really love thatMs Feltham: That is absolutely true. We certainly

do not believe the taxpayer should be subsidising would be the French, the Germans and variousother countries who would be giving support for itsthe export of arms, and one of the big subsidies is

export credits, so we would very much like to see manufacturers and Britain simply would not?



20 April 2004 Campaign Against the Arms Trade

Ms Feltham: Obviously we would like to see the equipment with our company, we are going to layexport credits stopped by other Governments too. oV people at Brough”, or whatever. If that moneyIn fact we worked through ECA Watch with our was put into a proper defence diversification,French and German counterparts and others there, whatever you call it—arms conversion—policy;but there are several good reasons why the UK then you probably could have more secure jobs forshould take a lead and obviously it would be better your constituents.if it was not unilateral, it was multilateral, but Mr Clapham: Probably. Very interesting.unilaterally Britain is exposed, the United Chairman: I do not think we are going to resolveKingdom is exposed to huge risks for its military the question this morning.equipment, export credits. For instance, if—and itis certainly not entirely out of the question—theSaudi Arabian Government was overthrown, there Q161 Mr Hoyle: In fairness, I should say that I alsois about one thousand millions worth of export represent a Lancashire constituency.credits supporting military goods to Saudi Arabia Ms Feltham: I notice your name frequently.that would end up being paid for by the Britishtaxpayer. So that is a bad risk. Then, I think, rather

Q162 Mr Hoyle: We have obviously got 40,000than taking the lead in ending export credits onpeople who are dependent on contracts like this,arms exports, the UK Government is almost takingand it is not simply that you can turn the tap oVthe lead in the other direction. We know, becauseand they can find something else; it just does notthe South African finance minister had an aYdavitwork like that.to a court there where somebody is challenging aMs Feltham: No, I appreciate that.huge arms deal with South Africa—we know from

his evidence to that court—that hugely favourableterms were oVered by the ECGD and the Swedish

Q163 Mr Hoyle: Unfortunately, we have got theexport credit department to underwrite the exportproblem that we are always up against thepackage—hugely favourable terms—and he saidAmericans, the French or whoever, who will stepmarkedly preferential rates. Research in the Unitedinto our shoes the moment that we vacate them. ItStates says that that deal led the US to give betteris not the fact that suddenly these arms will not beexport credit deals for proposed military exports tosupplied; the fact is that they will be supplied byPoland than would have been the case. They weresomebody else, which must be a worry for yourself.so afraid of the British ECGD pushing more andYou try to compare the Poland contract with themore and giving better rates for military exportsSouth African contract, but we all know that thethat the others followed suit.Americans were determined, not because of SouthAfrica but because they believed that the F16—Q159 Mr Evans: But these are legal items. Basicallyabout NATO using them, and the Americansit does not matter that you say you prefer for it tosetting up business there was the real reason whybe multilateral, you are prepared to go unilaterally,they bought the F16, nothing to do with the Southbut it does put British companies at an enormousAfrican contract whatsoever. We have to be carefulcompetitive disadvantage?that we do not put smokescreens up and are quiteMs Feltham:Well, so be it. We are basically againsthonest in what we say. Can I take you on to anarms exports.important part of your evidence. Can you say inwhat way civil export is subsidising military

Q160 Mr Clapham: You say, “so be it” and you exports, as you imply in paragraph 9 of youralso say these things tend to be in areas of low submission?employment, so you can shut it and there will be Ms Feltham: The whole thing is about the subsidyother jobs, but in Lancashire there are thousands overall. Everyone has accepted that export creditsof jobs literally dependent on arms manufacturing. are subsidised, even the Secretary of State. OthersWe have just had a thousand redundancies made

are going to give evidence on this later. Militaryat British Aerospace and that has had a hugeexports account for less than 3% of Britain’s visibleoutcry. There are thousands of other jobsexports, so a very small percentage of the UK’sdependent on the fact that they are there, and youexports are military; and yet they get between ajust want to throw them all on the scrap heap. Ithird and a half in most years of export creditthink that is incredible.support. That is hugely disproportionate. They areMs Feltham: If the subsidies that were given tosupposed with the subsidy to break-even within thesupporting the export credits were put intoECGD, and yet there were parliamentary questionsplanning for alternative careers for your Lancashireasked in 2000 and 2002. The premiums paid wereconstituents, that would make a vast diVerence.far less than the amount of claims or the amountsThere would not then be a thousand on the scraprecovered. It was done over a 10-year periodheap, as has just happened. BAe Systems hasbecause we thought that obviously an export creditconstantly been laying oV people, here there andis granted in one year and it does not usually goeverywhere. They have also been asking constantlybelly-up in the same year. So there seems to befor more and more subsidies from thissomething wrong there. They are getting a huge,Government, and sometimes getting them. Theydisproportionate amount of support; and then theyhave almost been blackmailing them about it:

“Unless you place your order for UK military do not seem to be paying their way within that.




Q164 Mr Hoyle: I think you will agree that if you hidden super-gun being developed, pretending tobe some kind of petroleum chimney. You arehave very hi-tech, high-price goods such as military

hardware—whatever you think of its use—that saying that rather than have the transparency andopenness we have got now, we would end up withwould always make it disproportionate. If you are

supplying so many sewing machines, it hardly another Saddam Hussein contract, which is donein smoke-filled rooms in some wealthy hotel downcompares in cost to a military contract. You are

trying to be fair, but I believe it is slightly the road, with an agenda to create a super-gun,without putting the true information down ondisingenuous because you agree that there will

always be a lag behind in payments. paper. At least this way, if we do not agree with it,we know what is being exported; it is transparent.Ms Feltham: Yes.You are saying that we could end up with anotherSaddam Hussein. Let us hope not; I would soonerQ165 Mr Hoyle: Governments will say, “let us putsee transparency, and I am sure you would agree.this back a bit to help your balance of payments”Ms Feltham: I am not absolutely certain about theand claim it somewhere down the line; so it nevertransparency either. It is quite recently that we evengives a true reflection of monies claimed.got the small amount of transparency from theMs Feltham: No. That is why we looked at theseECGD that we have got. That is very welcome, andfigures over a 10-year period and not just on onethere have been huge improvements recently fromyear. It is totally disproportionate.the ECGD. We now get a list of some of theirbigger contracts. I looked at the last annual reportQ166 Mr Hoyle: As you point out, the biggestwe have, which is 2002–03, and less than 30% ofcontract would be Saudi Arabia, which is BAethe cover there was detailed in projects; the rest ofSystems contract, and there has never been ait was virtually confidential, or categories ofproblem in payment there.insurance that were not spelt out. I would queryMs Feltham: No, but there easily could be, couldthat it was that transparent.there not? The Saudi Government is very

vulnerable.Q170 Mr Hoyle: But we do agree that transparencyis important.Q167 Mr Hoyle: Surely we deal with facts? You areMs Feltham: Yes.saying to me on the one hand that you are trying

to prove it with facts; now you are saying you willtry and do it through speculation. If we were to do Q171 Mr Hoyle:We might not agree on how muchit through facts—and quite rightly you have put the subsidy there should be or whether there should befacts before us—the biggest contract being Saudi any, but do you not feel the danger—and you haveArabia, there has never been a problem in payment. highlighted the danger—is that people will try andAnywhere could be a problem—we would all agree beat the system—and it was the contract to Iraq onon that. We can say that the Saudi Arabian super-gun, pretending it was not a military weaponcontract is always paid on time, so therefore there by pretending it was something for the petro-has not been a subsidy, and that has been the chemical industry. That is the danger if you dobiggest part of it. away with the subsidy. People will hide militaryMs Feltham: But the Indonesian contract, which contracts in a diVerent way to get subsidy. Wouldwas also very big and hugely controversial did have that not worry you?to be re-scheduled—the payment for the Hawk Ms Feltham: I do not know. I am not aware—youaircraft. may be, but I am not aware whether or not the

super-gun got any export credits, military or not.Q168 Mr Hoyle: Absolutely. We could always go We do not have detail from that period certainlyback in time, and no doubt we could talk about the to tell us. I agree with you they had more civil—war debt of the Second World War or First WorldWar, if we wanted. What I would say is that you

Q172 Mr Hoyle:We thought the licence was a civilare quite right to point out the Indonesian problem.licence, not military.I think there is a learning curve for everybody inMs Feltham: More civil was written oV thanthe Indonesian contract, and you rightly point outmilitary, but there was still substantial militarythat it has been re-scheduled and not written oV;written oV. However, we do not have enough detailand I think it is a fair assumption to say that thefrom that period to tell what falls into what, ormoney is not coming tomorrow, but it may comewhether the super-gun got any at all.next week.

Ms Feltham: It is historical, but the amounts thatwere lent to Saddam Hussein to build up his Q173 Mr Hoyle: On this, I will leave it: do you notmilitary arsenal in the 1980s were written oV. Any agree with me that there would be such a dangerof these could be written oV. where somebody could apply for a civil licence, not

a military licence, for export to that regime; andonly afterwards do we find out that it was actuallyQ169 Mr Hoyle: If you look at Saddam Hussein,

the export was not guaranteed on military, was it? a military weapon that was being exported?Ms Feltham: I think you are straying, with respect,I think you have picked an interesting one, which

proves a bigger danger: if we are not transparent into the export licensing here, where, if it was trulycivil, it would need a licence at all. As I understandand up-front in military contracts—there we saw a




it, they do not make a huge distinction when people Q179 Chairman: They tend to be small batches.Ms Feltham: Yes, that sort of thing. But then allare applying for ECGD cover. I do not think there

is a separate military pot. of those industries that do not benefit could arguethat it is a subsidy to the few industries that doMr Hoyle: The point is that people may describebenefit, of which the one that concerns myan export—and I do not think it is deliberate butorganisation is the military. Why should those fewyou did not want to answer the point—asindustries get this benefit, this government subsidy,something civil when it is actually military, if youthat the other industries do not, particularly whenare not careful; and we have seen that in the past.the government seems to be quite anti-subsidyThat is all I am saying.generally.

Q174 Mr Berry: I take your point that theQ180 Chairman: The point I was really getting atinformation here relates to a 10-year period, andwas that the volumes involved are of such an orderthat there are time lags in the system; some thingsin relation to military construction and things likehappen before and some things happen afterwards.that, that they will get the lion’s share of it becauseTo be absolutely clear about the meaning ofof the size of it.paragraph 9, on the basis of these figures, over thatMs Feltham: Yes.10-year period presumably if we take the premiumsChairman: I just wanted to clarify that point.earned and the claims recovered as money comingMr Berry: My maths have gone skew-whiV today!in, and the export credits as money going out, thatThe claims paid, less the claims recovered, less thewould be £970 million. Have I read those figurespremiums earned, is in fact £497 million. Thecorrectly?subsidy over the 10-year period, which is a perfectlyMs Feltham: I think so, yes.reasonable period to take, is actually half a billion,not a billion. The point is still valid. Over that 10-year period something like half a billion was theQ175 Mr Berry: So you are saying that over thatnet cost.10-year period, looking at export credits for

military goods—to take Lindsay’s point it ismilitary goods—£970 million is coming from Q181 Mr Clapham: Ms Feltham, could I take yousomewhere else to subsidise military exports. to paragraph 18? My objective here is to try andMs Feltham: Yes. clear up a couple of technical issues. In paragraph

18, which is on case impact analysis, you make thepoint that the ECGD does not require a caseQ176 Mr Berry: That is what paragraph 9 says.impact analysis for applications for which anMs Feltham: On those figures.export licence is needed.Ms Feltham: Yes.

Q177 Chairman: On the point that 3% of tradeaccounts for between 33–50% of the money, I think

Q182 Mr Clapham: Presumably, this is because thatyou would qualify that by saying that the size ofassessment would be required by the Exportthe deal is the issue. If it were a relatively small Control Organisation.amount, then the national ECA here, the ECGD, Ms Feltham: Yes.would not actually be involved.

Ms Feltham: Yes, true.Q183 Mr Clapham: That being the case, is it not asensible way of avoiding duplication?

Q178 Chairman: The kind of military deals that are Ms Feltham: We do not have huge faith in thethe biggest are the kind that fit into this rather more Export Control Organisation and the systemsneatly than the kind of concerns that Roger Berry, there, but even leaving that aside, the Exportmyself and one or two others who are on the Control Organisation and the export licensingQuadripartite Committee have, looking at licences process does not cover either environmentaland other things. It would never come into it. The impact—which I would argue in military goods isfigures you are quoting are not necessarily usually highly negative—and certainly does notmisleading, but they are not quite apples and cover the corruption aspects that Transparencyapples, are they. The size of military deals are such International have given evidence on. Those are notthat they are more likely to be eligible for ECGD covered by the export licensing process, but theysupport than a lot of civilian deals in any kind of are by the ECGD’s new processes.goods and services that would appear as visibleexports.

Q184 Mr Clapham: You are saying that the impactMs Feltham: It is certainly true to say that exportanalysis is not covered by the Export Controlcredits are sought by a fairly small number ofOrganisation. I thought that it was.industries that tend to do very large jobs forMs Feltham: In those two aspects it is not.governments or whatever, so it is construction

industries, the military industry, et cetera. I do notthink pharmaceuticals, for instance, which I believe Q185 Mr Clapham: Returning to your point on theis a big export industry, get much in the way of environmental analysis, which is not part of the

licensing consideration, could that not be added forexport credits.




example by the ECGD as a licensing consideration, Q188 Mr Berry: In paragraph 21 you say that theCampaign against the Arms Trade has estimatedif it was felt appropriate to do so? Have you putthat the subsidy to arms exports amounts to aboutthat argument to the ECGD?£750 million a year. Can you communicate to theMs Feltham: They are well aware of the fact thatCommittee how you arrive at that figure?both civil airliners and military goods are notMsFeltham:Weused quite a lot of research that wasgetting their case impact analysis. As we aredone by other organisations, in particular thearguing that they should not be giving any coverOxford Research Group and Saferworld, but wefor military goods, we are not particularly pushingalso added some of our information to that.We haveon this one. It also would seem somewhat odd toused things such as the Defence Export Servicesbe pushing hard on the environmental side, whenOrganisation, the Armed Forces defence attachesmilitary airliners are chasing around and areand we have looked at various fixed costs; then weobviously not great for the environment. Certainlyhave taken from that the monies that go back tothe whole of the corruption side does feature. Armsgovernment—the commercial exploitation levy—cases are mentioned quite frequently on thatfrom arms exports. We came up with that sort ofground, and that is what we have looked atfigure. Research and development is one of the hugerather more.things which perhaps the other organisations did notuse. One of the big problems is the lack oftransparency and lack of figures. In some ways, this

Q186 Sir Robert Smith: Listening to your earlier was trying to get the debate pushed. Other groupsexchanges, you are very much focused on the arms were publishing their own information at the sametrade. Would you see any merit, as a first step, in time, and for the Defence Committee the MoDseparating the export credit guarantees into economists, working with the University of York,separate funds for arms and defence trade, and a published their report; and they felt that the cost ofseparate fund for civil and construction, so that at a 50% cut in arms exports would be comparativelyleast you could see the transparency? modest and short-term, and after that it was fairlyMs Feltham: It could be a first step, yes. From the economically neutral. Therefore, decisions about thetransparency point of view and getting the whole arms trade and exporting arms ought to be taken on

grounds other than economic grounds. Althoughdebate properly out into the open, then that wouldpeople are talking about jobs, and it obviously doesbe a step in the right direction. Although we areaVect individuals at least in the short-term, overall itagainst all arms exports, we also see that the tradewas economically neutral to the economy.is not going to end overnight, and steps do need to

be taken. Maybe that would be a step, combinedwith transparency and a commitment to trying to Q189 Mr Berry: I recall some of the studies. Wouldget all the ECAs to stop supporting military goods. it be possible for you to provide the Committee withThere has been some movement: Gordon Brown the document that explains how that £750 milliondid stop export credits, for unproductive figurewas arrived at? I suspect I have seen it, frankly,expenditure, to the very poorest countries. Not but I have forgotten. From the Committee’s point ofmany of them did have any export credits for view, we would like to see how robust we think thosemilitary goods, but that sort of thing could be estimates are.What proportion of that figure do youextended. There is a great case—and the old head estimate comes from the activities of the ECGD?of the IMF supported it—for pushing on that front Ms Feltham: At that time, a couple of years ago, itin these international fora, and for taking these was about £230 million, so about a third or justincremental steps. under.

Q190 Mr Berry: Taking your 10-year period, theQ187 Sir Robert Smith: You also say in your average would be something like £50 million a yearsubmission, “the transparency of the ECGD has ECGD. It would suggest that the subsidy is rising, ifimproved for its export guarantees, but regret that that is the case.this has not been the case for its insurance business”. Ms Feltham: There are other subsidies on top. TheHow significant is the lack of transparency on the breakdown on loss of premiums, for example, haveinsurance side?Ms Feltham: It looks as if they are terribly

Q190 Mr Berry: Taking your 10-year period, thetransparent now because, as I said, you get this longlist of deals; but when you look at it, that is onlyabout a third of the cover, so there is a lot there that Q191 Mr Berry: Yes.is hidden. Even with the kind of cover with which Ms Feltham: I think you have the Ingram brothersthey list contracts, companies are permitted to say, coming this afternoon, who will explain.“no, that is commercial in confidence”, and they areexcluded; so you do not get the full picture.Probably, some of the least savoury deals—and I Q192 Mr Berry: Any further clarification on thosedo not know whether they are military or not— two issues about the total subsidy and thewould be the ones that the people have asked to contribution of ECGD to that would be gratefully

received.keep quiet.




Ms Feltham: Yes. in civil practice, so there are a lot of spin-oV

benefits, and those ought to go into some of theestimates as well. Nobody has worked out what theQ193 Sir Robert Smith: You said that the MoDvalue of that is and how many jobs are beingperson said it was economically neutral, but youcreated through technology transfer. That is veryrecognise there is an impact on individuals in areasimportant, and I think we both agree on that. Thewith large defence businesses.more that we can use technology transfer, the betterMs Feltham: Certainly.it is.Ms Feltham: It could be that it is the other way

Q194 Sir Robert Smith: Do you have a response to round: military uses civil technologies as well. Ifthe other argument in favour of export credit those jobs were freed up, the people couldguarantees for military use, which is the MoD’s immediately be looking to develop for a civilargument that we need weapons at the moment as market, so you would not have to transfer it; itpart of our defences and need to be able to buy them would be being developed for that straightaway.and therefore need them manufactured? Wetherefore need a viable supply base.Whilst they may

Q196 Mr Hoyle: Have you any evidence of that,be economically neutral, they are still verybecause I have not?important to the national interest because theyMs Feltham: No, because that is what the economyprovide us with the kind of technology that we canis at, at the moment. I think, though, if you satcontrol.down and thought about it, those jobs could beMs Walton: I do not think there is any longer athought of straightaway. There is a lot ofnational arms industry. Certainly, BAe systemspossibility there. I think you have to free the mindsupplies more to the Pentagon, and Lockheeda bit from this idea that defence equals the militaryMartin employs people in the UK, so it is very muchaircraft produced in the north-west. Youra global industry. For many of the products it seemsconstituents could be making something a lot moreas though the export potential is being looked atworthwhile than they are at the present. As forbefore what the Government would consider for thebuying from the Americans, I am not suggestingUK, so it is being led the other way round. Youthat we just buy F16s; I am suggesting that actuallycannot get Hawk exports to India unless the UKI do not feel much safer because Britain has vastbuys its Hawks, rather than something that might beattack aircraft that were actually designed for amore appropriate. There is a whole question aboutEuropean war which is not likely to happen.whether military defence is what is needed in the 21st

century when the challenges are other than that—Q197 Mr Djanogly: What is your view on theterrorism and world threats, and you end up withECGD’s new policies on bribery and corruption?Eurofighter. I think there is a whole lot of questionsMs Feltham:A great advance. We largely work withlike that that need to be addressed, and yet theother groups for comment on this, and particularlyGovernment only seems to address them throughThe Corner House, which you are taking evidencecommittees such as the Aerospace Innovation andfrom this afternoon. We were pretty pleased whenGrowth team, for instance, or at European level thewe saw the announcement at the beginning of April.Group of Personalities, which seem to be veryIt does look like a step forward. I think there shouldheavily loaded with arms manufacturers rather thanbe a means for not giving any more cover to abringing in alternative viewpoints. There is a greatcompany if there is evidence that they have beendiscussion along those lines. There is a lot moreinvolved in corrupt practices; but it certainly is a stepdiscussion to have with constituents—yourin the right direction.Lancashire constituents—and others as well about

whether or not job security and the economicviability of those areas is best served by having a big Q198 Mr Djanogly: Presumably they do not go tocompany employer which is constantly going to the address your wider concerns at all.Government for subsidies and feels constantly under Ms Feltham: No, but on the bright side, we werepressure to export weaponry into troublesome areas pleased, as was mentioned earlier, about the fiveof the world. cases to the National Criminal Intelligence Service.

We do not know what companies are involved. Wedo know that several of the contracts underwrittenQ195 Mr Hoyle: I recognise the point you areby the ECGD have been the subject of articles in themaking that if we did not supply Hawks to India,Guardian and elsewhere suggesting that there hadthe money would be spent elsewhere. The fact isbeen improper practices; but it would be interestingthat they would have bought either MiGs or F16s;to see what comes out.they would have bought something else. What

worries me is that you are saying, “if we do nothave a defence aerospace industry in the north- Q199 Judy Mallaber: In paragraph 15 of your

evidence you set out five further actions that youwest, do not worry; if you have got to defendyourself, buy it oV the shelf from the Americans” would like ECGD to take against corruption. You

heard the exchange earlier with Transparencyand all we are doing is transferring the jobssomewhere else. That is the danger of the argument International on what ECGD regard as the

limitations on their legal powers. In your view, doyou are putting forward. In fairness, you have notmentioned that there is a lot of technology transfer the five additional actions that you are suggesting

require new legislation?that comes out of the defence industry that is used




Ms Feltham: I would bow to Transparency Q201 JudyMallaber:Howmuch extra value do youthink you would get from these extra actions. AreInternational expertise in this area. I took it fromthere some that you regard as being particularlywhat they were saying that it would not, and in factimportant amongst those areas?the ECGD’s new cover covers at least the A–D, andMs Feltham: As has been said more generally bythe only thing that is outstanding to some largeTransparency International, there is the questiondegree was not giving any further cover toabout what agents are up to. We do know that theycompanies that were found to have been makinghave been heavily involved in some of the armsillegal payments.deals, using agents. It is only information that dripsout, from the press usually, occasionally, and we

Q200 Judy Mallaber: You think that most of those would like to see that really highlighted and lookedadditional actions could be covered by a change in at; but it does seem to be being taken on board rathertheir current policy and practice, rather than more now.changes to the law. Chairman: Ms Feltham, we would be very gratefulMs Feltham: Yes, and I think they certainly seem to for the additional memo. Thank you for your time

this morning.be moving in the right direction on this.

Witnesses: Ms Sue Walton, General Manager, Rolls-Royce Capital, Mr James Caldwell, Executive Vice-President for Export Finance, BAE SYSTEMS, and Mr Nigel Taylor, Vice-President Customer Finance,Airbus Industries, Society of British Aerospace Companies, examined.

Q202 Chairman: Ms Walton, would you like to customers in paragraph 5. What evidence do youhave to support this? If things are so good, why areintroduce yourself and your colleagues?they so bad?Ms Walton: There are three of us here representingMs Walton: I think we should try and separate thethe SBAC, which itself represents over 180two issues because ECGD’s people have done acompanies throughout the UK, and 80% by valuevery good job, we think, over the past very diYcultof UK aerospace industry; all of the leadingtimes; but you are quite right to say we highlightedaerospace companies and over a hundred supplythe uncertainty that has been hanging over ECGDcompanies—many of those SMEs—being memberssince the original status review in 1999. Clearly,of the SBAC. The SBAC’s role is to promote thethat has served to the detriment of ECGD and itsinterests of UK aerospace and to develop—we personnel, and morale has plummeted there.hope anyway—government practice in relation to During those diYcult times however they still

the UK aerospace industry. I am the General managed to run ECGD with the best practice of aManager for Rolls-Royce Capital, dealing with good financial institution. Again, the NERAissues relating almost exclusively in the past few report, the KPMG reports and so forth highlightedyears to ECGD; on my left is James Caldwell, all of this. If you have uncertainty hanging overrepresenting BAe Systems, and on my right Nigel your organisation for such a long period of time,Taylor, representing Airbus. Between us, we have it is bound to aVect the way that you behave.a huge amount of experience with ECGD. We are ECGD has done the best that it can within the

constraints that have been imposed upon it by thecertainly very pleased to be here to be able toTreasury. The trading fund has been heralded asdiscuss ECGD issues with the Committee,the saviour of ECGD. We have been veryparticularly because we have seen ECGD gosupportive of that, seeing it as freeing ECGD fromthrough some pretty diYcult times. It was verythe daily oversight of the Treasury, which we doheartening to us to see from the NERA report onnot think has been particularly positive.ECGD that during the most diYcult period of itsUnfortunately, the trading fund has moved oVhistory, probably 1992 through to 2002, when itfurther into the future again, and the uncertaintywas facing the crisis post-September 11, the crisisremains. One very clear piece of evidence from afrom the first Gulf War, and the crisis in Asia, the Rolls-Royce perspective that this uncertainty isECGD managed throughout all of that very, very damaging is that during the very recent campaign

diYcult time to produce a return to the Exchequer we entered into with the 7E7 at Boeing, whereof somewhere between £4.1 and £23.1 million. We Rolls-Royce was competing with two USthink that that is a huge feather in ECGD’s cap, manufacturers of engines, Pratt & Whitney andand we would like to start from that very GE. A major consideration in that campaign frompositive point. Boeing’s perspective was whether or not export

credit support would be available from our exportcredit agency for that aircraft. We had a lot of very

Q203 Chairman: It is interesting that you are diYcult negotiations with Boeing on that issue, toprepared to give credit. On the other hand, I do not the point where Boeing was asking for a backstopthink that your memorandum is wholly praising of for that. That probably is a very good illustrationthe work of ECGD. You criticise it over the of the concerns that we have seen. Nigel might haveuncertainty of its future operational status. You say others from an Airbus perspective, where

backstops have been an issue.that this has undermined confidence amongst



20 April 2004 Society of British Aerospace Companies

Mr Taylor: If I may, I will backtrack a little to relatively small country and therefore it willprobably not order lots of aircraft over a shortrecall what Airbus has done over the last 20 years,

to a large extent with ECGD support. As Sue was period of time, so if you miss that one opportunitythere probably will not be another one for 10–12saying, looking back ECGD has been extremely

helpful, and we are more fearful of the years. Aircraft have been operated in the Lebanonfor the last 40 years and there has been no defaultdevelopments into the future at a time when Airbus

is now a single competitor to Boeing, so it is a clear situation. In the Airbus context in particular, wehave ECGD working with the French and Germanduopoly. Going forward we have the major A380

project for which the UK is a major lender to the export credit agencies, who in this instance wereready to support that export; so it was a verytune of £530 million, and a major project

industrially in the UK in terms of jobs in North obvious example where it was a particular ECGDissue. The second issue is resources. We have to beWales and in terms of all the ancillary related

supply chain for the landing gear and engines. clear when we are talking about resources. We donot believe—and I think this will be endorsed byFrom that perspective, one of our major concerns

going forward with ECGD is the volcanic my colleagues—that we are using the resources ofthe United Kingdom, or of the French and Germanrumblings that have been going on about the

support that ECGD may or may not get from the ECAs, in terms of drawing on cash or taking awayfrom budget, because we are using the creditTreasury, and where we have therefore been in

major competition with Boeing. Ex-Im bank has strength of the economy by way of guarantee, andit is a guarantee which is issued. The resources arebeen giving greater support, and to allay the fears

of customers we have likewise been needing to cash-funding coming in from banks in thecommercial sector which are being guaranteed.backstop the form of support that finance would

be available at the time you take an aircraft from Therefore, I would not say we are drainingresources. We have had ECGD itself saying thatAirbus.there are limited levels of support they can give us,providing we can meet the criteria they set. ThereQ204 Mr Djanogly: What does “backstop” meanis a concern that the criteria are going to be higherexactly?and higher.Mr Taylor: It is when we, as a commercial

institution, would have to say that if there were nosupport from the export credit agency, we would Q206 Mr Hoyle: In the case of the ECGD, shouldhave to step in and replace that as a funding the main role not be one of last-chance saloon?vehicle. To give you one concrete example we had Ms Walton: That is a very interesting question, andlast year, deliveries to Middle East Airlines in the one that I think probably ECGD has a little bit ofLebanon, where we had to backstop because the schizophrenia about as well. “Lender of last resort”Lebanon was unsure of ECGD’s position to is probably the term that we are looking for here.support that delivery. We had to end up financing There are two ways of looking at it. It could be theall five A321s to the Lebanon with IAE engines, lender of last resort, but then you are always goingwhich are partly Rolls, because of ECGD’s to end up with the Middle Eastern Airlinesreluctance to support that particular campaign. If situation, so if ECGD cannot provide support toyou magnify that by the campaigns on the scale we airlines like MEA, it will be doing very littlehave on the A380, it could look a very worrying business. As a trading fund, though, do you wantsituation and one which industry cannot alone to have a portfolio that is dominated by thosesupport when, on the other side, supporting either poorer credits; or do you want to have a more7E7 or 777, you have a very politically driven balanced portfolio that includes the likes ofsupportive Ex-Im bank. Emirates or Singapore Airlines or Qantas? Our

view is very much the latter, that you need abalanced portfolio in order to enable ECGD as aQ205 Chairman: Taking the Lebanon as antrading fund to ride through the cycles of thisexample, the UK is a country of 60 millionindustry, which is a very cyclical industry. It ispopulation against the US population of 260interesting that on the A380 campaigns that wemillion. That is a very crude way of looking at it,have looked at, 100% of our customers have askedbut American resource is that much greater, so youfor export credit support, and that includescan understand why they are prepared to put morecountries like Australia and Singapore. It is notbehind it. Lebanon is not one of the countries thatbecause they have any doubts about their credit—you would necessarily want to bet on, and in somenot at all; but they do have concerns about the veryrespects that is what an ECA has to do, and onefickle nature of the commercial lending markets,with more limited resources than the US mightwhen you are talking about orders that are placedtherefore be more conservative. Is it the case thatmany years ahead of delivery, and for substantialthe backstop diminishes as time goes on? If thevolumes of financing, because the A380 is a bigLebanon becomes a better bet, would theaircraft, and it is no surprise that the price tagsignificance of the backstop be quite so great, andmatches that. Airlines like Singapore Airlines andwould the ECGD be prepared to come in, once theQantas are looking for this umbrella that will coverLebanon is less risky?them when aircraft are delivered three, four or fiveMr Taylor: There are two issues there. ECGDyears down the road, and ECGD is the provider oftends not to come in after there has been an export,

and, as you rightly point out, Lebanon is a that umbrella. We had a look at the history of the




Trent campaigns to see how many customers had programme is launched, people are comfortablethat the aircraft can fly and that it is selling well.asked for export credit support and how many had

actually taken it up at the time when the aircraft Then it is borne into the market and the marketcan step in a lot more, but that initial support fordelivered. I think the numbers surprised us, but

they were subsequently confirmed by Airbus’s a major programme is essential to assure themarkets.experience as well. Eighty% of our customers who

were eligible asked for export credit support, butwhen it came to delivery only 25–30% of those

Q208 Mr Berry: ECGD support for civil aerospacecustomers were taking it up, because the marketexports is by no means as controversial as forwas there for them to be able to finance themselvesmilitary exports, and when the British Consultantsfor the balance of those deliveries in theand Construction Bureau gave evidence, theycommercial markets. That is exactly how I thinkargued that ECGD activity in relation to militaryECGD should be behaving. It should be there toand non-military exports should be dealt withprovide the backstop for these very long lead-timeseparately and transparently in that respect. Dodeliveries, when customers are taking a view ofyou have a view about that?being able to finance equipment in six or sevenMr Caldwell: The first point to make probably isyears time, but that the customers will then dothat if you look at ECGD’s latest annual report, itwhatever they can to finance themselves in theis clear that in terms of their portfolio defencecommercial market at the point when delivery takesaccounts for about 20%, so it is a significant partplace. Export credit availability is key to winningbut it is not an overwhelming part of their business.those orders. When ECGD says it has supported XThe second point is that if you look at the annualbillion dollars worth of aerospace exports, that isreport you will find that it does report overallonly a very small part of the story, because weresults, but also it splits the results down by sectorwould not have won the whole order if that exportvery, very transparently and very clearly. You cancredit had not been available to our customers fromsee aerospace, defence, oil and gas and otherthe outset.projects. At the moment therefore you have a veryclear, very transparent reporting by ECGD of all

Q207 Mr Hoyle:Would it be fair to say that people the sectors of British industry that it supports.were buying an aircraft and an engine oV-plan and There is really an issue here for ECGD’s ownwere not sure whether it would take oV? I am not economists about whether they would really wantbeing funny, and I believe there are success stories to de-merge one particular part of their businessthere, but is that why people are nervous, and the from all the rest. Given that defence exports are, Ibanking industry is more nervous as well? would say, 100% made to sovereign customers, itMsWalton: There is certainly some element of that. does give a balance to their total business, whereIf you are looking to purchase an aircraft that is they are obviously dealing with airlines that areoV-plan, has not flown and got oV the drawing- both sovereign and commercial organisations, andboard yet, then clearly there is some element of other parts of their business which may beneeding to have an umbrella of support from your substantially with commercial organisations. Theyexport credit agency because the financial have a balanced portfolio of both sovereign andcommunity is not going to share in that risk. There commercial risk at the moment, but it is reportedis also a role for the manufacturers in that, and we by sector. As far as I can tell, there is a great deal ofdo stand side-by-side with our export credit agency transparency there already, and I am not absolutelyin providing support for the asset value on a certain what benefit would be served by making anumber of these deals, particularly in new further division.programmes. That is the right split ofresponsibility. ECGD is there to provide the

Q209 Mr Berry: The argument might be that thereguarantee for a proportion of the financing, and theare additional issues raised by arms exports thanmanufacturer is there to provide support for thenon-arms exports, although we could take theasset value at the end of that financing. We are very

happy to continue to do that and to underwrite our perfectly reasonable view that you are talkingasset values. My colleague is smiling wryly! about legal exports, period, and therefore ECGD

criteria should be the same. But others would argueMr Taylor: There are a couple of issues there.First, please remember that ECGD would help us that there are separate issues. In relation to military

exports, we do not have the view in governmentin certain markets which are eligible, but we asmanufacturers are having to bear the burdens that the DTI should look after all exports; there is

DESO (the Defence Export Services Organisation),notably of any financings in the US, or locally,which in the context of Airbus means in Spain, a quite distinct, independent organisation

operating in the MoD which, in terms of militaryFrance, Germany and the UK. We have a fairdegree of burden therefore that we are taking away exports, is therefore in a very unique and special

category in relation to other areas of work. I guessfrom the ECGD. Secondly, for a programme suchas an A380, like the Boeing 747 at its launch, the that some might say that logically perhaps it should

apply to ECGD as well. From your point of viewsupport of the export credit agencies at the outsetis an assurance given to the market; so a lender of is it purely an operational matter, and you do not

really mind one way or the other, as long as thelast resort would mean there would be havoc in themarket at the start of a programme. Once a system responds speedily to your demands upon it?




Mr Caldwell: I suppose it depends upon what form aggressive, but we do not see them doing deals thatshould not be done. We do see them pricing dealsof separation you are envisaging. At the moment,

we deal with a team at ECGD which is not very diVerently.exclusively devoted to defence and deals with otherthings as well; but that team deals with all defence Q212 Chairman: What is the significance thereforesubmissions, so we already have a specialist team. of the OECD parameters within which people areWhen we look at the report and accounts, we can supposed to operate?see what defence business has been done, and that Ms Walton: The OECD provides a floor belowis separated out. To that extent, we are catered for. which the export credit agencies cannot go. WhatIndeed, anyone who is interested to see to what we see is most of them operating to that floor, soextent ECGD is supporting the UK defence they are charging the minimum that is allowable bybusiness can see that very clearly from the current the OECD, whereas ECGD is charging above that.evidence.

Q213 Chairman: What about Ex-Im?Ms Walton: Ex-Im is complying with the OECDQ210 Sir Robert Smith: In paragraphs 10 and 11guidelines. It is not doing anything at all in breachyou give examples of situations where the ECGDof those guidelines.has requested higher premiums than other ECAs.

Are these isolated incidents or do they reflect agenerally more cautious approach from the Q214 Chairman: You are saying that ECGD is

charging twice what the minimum should be.ECGD?Ms Walton: Unfortunately, they are not isolated Ms Walton: We have seen that, yes.

Mr Caldwell: There is the paper that has beenincidents. You could say that these are reflectinga more cautious approach by ECGD to the risks recently published, the most recent ECGD report

on the comparison of export credit agencies, whichinvolved. However, the pricing of particularlycommercial aerospace deals, is pretty transparent we can provide you copies of, if that would be

useful. They look at pricing for sovereign loans andto our customers, particularly where, for example,we are putting a UK-manufactured engine on to a for commercial credits. On the sovereign analysis,

ECGD is the only export credit agency to chargeUS-manufactured airframe. So the customer cansee precisely what the US export credit agency is above benchmark. Obviously, when it comes to

corporate pricing there is a much wider range, butcharging them, and precisely what the UK’s exportcredit agency is charging them. We have had ECGD typically is significantly higher, certainly

than Ex-Im, in most cases more than double; andinstances where there has been dramatic diVerencebetween the two, where ECGD has charged double significantly higher than most of the European

export credit agencies. It is worth having a look atthe premium being required by Ex-Im. We have aninstance where a customer of ours for Rolls engines that data, I would suggest.on to a 747 was charged an increased premium byECGD despite the fact that the customer’s credit Q215 Sir Robert Smith: What would you put thehad improved over time. They could not see what conservatism down to?ECGD’s justification was for that increase in Ms Walton: We have asked the question on apremium, and we had a very interesting number of occasions, as to why their pricing is whatconversation with the customer, who said: “I am it is. The response has always been, “that is whatgoing to be in the market for more 747s in the very the model throws out”. Their risk managementnear future; if I know that I am going to get the model is providing more conservative pricing.3% premium from Ex-Im, why would I ever choosea UK engine again?” This customer operates Q216 Sir Robert Smith: Do you think it is anythingengines of both types in its fleet, so it was not an to do with the move towards a trading fund statusidle threat; this was something which could have approach?a severe impact on our business. From the Airbus Ms Walton: Our suspicion is that that is probablyperspective, clearly Airbus sees a number of the case.diVerent agencies in every one of its deals and canvery clearly demonstrate who is at the higher end Q217 Mr Clapham: You have made it quite clear inof the premium. I am sure that Nigel can give you your submission that you would like to have moresome examples of that. ECGD’s own certainty regarding the future of ECGD, but it doesbenchmarking exercise showed very clearly that not appear as though we are going to get tradingacross the board it was charging higher premiums, fund status for at least not another year, if it comesgiving lower cover rates, and was available in fewer then. Is that delay going to be significant for thecountries. It is not just our examples. operation of the department?

Ms Walton: It is clearly a concern, but I wouldhope that the appointment of a new chairman andQ211 Sir Robert Smith: You described the

American approach as “aggressive commercial”. Is chief executive at ECGD will do a lot to boost themorale at ECGD to get things back on track andit aggressive uncommercial or aggressive

commercial? to ensure that the trading fund does come in on itsnew timetable. We have been hearing about theMs Walton: The proof of that will be in the

performance of their portfolio; but their portfolio trading fund for a very long time, and ourcustomers have been hearing about it, as have ouris not doing too badly at all at the moment. It is




competitors. The market perception is that ECGD there is an opportunity for the subsidy not to bevoted or for ECGD to be challenged again as ais foundering, and that there is not wholehearted

support for ECGD from the Government. That is subsidy to big business, to the people that you seesitting here at this table, and clearly it is not truethe market perception, and it has been very

damaging. on two counts. Firstly, it is not a subsidy. ECGDhas been providing a positive return to theExchequer. Secondly, ECGD’s products areQ218 Mr Clapham: Has that view been made plainsupporting thousands of jobs within the UK, notto ministers?just the headline-grabbing companies but theMs Walton: Yes, it has by individuals and by thesmaller ones, our supply chain, the thousands ofSBAC.companies that support us and without whom wecould not export. Many of them are SMEs andQ219 Chairman: Ministers in which departments—ECGD is providing support indirectly to them. So,we will not necessarily go for personalities?this is an issue of jobs as well and one that hasMs Walton: DTI and Treasury, and indeed toactually been picked up by our unions as being athe PM.real concern to them. They have looked at thisreturn on capital issue as well and I think they are

Q220 Chairman: A full hand. horrified at the thought that, every year, theMs Walton: We have tried hard. Treasury will get the opportunity to cut ECGD oV,

if you like.Q221 Mr Djanogly: Can you explain in a little moredetail your concerns with the ECGD future return

Q222 Mr Djanogly: Is it realistic that they will beon capital employed requirements? In your note itable to increase their return on capital withoutwas seen that the industry has been oVeredputting up premiums?assurances that this will not significantly increaseMs Walton: No, it is not.the premiums payable. How does that all tie in?Mr Caldwell: The frustrating thing for us is thatMs Walton: It depends on the benchmark they aretrying to reconcile this target, 11%, 18%, whateverusing to decide whether or not it is going to increaseit is, which we know at the outset and indeed thepremiums. We are not very happy with where theypeople who are setting the target know at the outsetare today, I have to say. So, any increase at allis wholly unrealistic. So, I suppose you could putwould certainly be unwelcome. ECGD, it should bethe premiums up enough to achieve theoreticallypointed out, is the only export credit agency thatthose levels of return, but then no one would buyis required or will be required to provide this kindthe cover and so the business would not get done.of return on capital. Every other credit exportI think there is a certain amount of bewildermentagency is required to break even under the WTOamongst the exporting community as to why thisand the OECD guidelines. There are two potentialartificial voted payment is being created when itexceptions to that and both of those are actuallydoes not actually really need, in our view, to existbanks that also serve an export credit agencyat all.function: one is EDC in Canada and the other isMs Walton: It is not a question of the business notKFW in Germany. Both of those have commercialbeing done full stop, it is just a question of thefunding available and actually lend money atbusiness not being done in the UK because we haveattractive rates to exporters, to the customers ofthe opportunity to manufacture outside of the UK.their exporting companies, but they can also lendCertainly, Rolls-Royce has not yet made thedomestically, so they are able to spread their risksdecision as to where it manufactures the Trent 1000more appropriately across a broader portfolio. Thefor the 7e7. This may seem to be a small part of alevel of return on capital that ECGD has beendecision-making process but we all have the abilityworking towards has increased steadily from theto source outside of the UK.very first mission and status review. We were

talking about 6% originally and we have heardmost recently a figure closer to 18% from Treasury Q223 Chairman: How big, in percentage terms,

does this feature in your costings? Say on the TrentoYcials. We have never seen anything in writing inrelation to this target return on capital. A lot of project, how much would you save by going from

the UK as prices currently are to, let us say,these discussions are going on behind closed doors,so it is very diYcult for us to get a real feel for it, Canada?

Ms Walton: I could not give you an absolute dollarbut what we have been told in mitigation is thatthis is not a real return, it is a target return. The figure for that, firstly because I do not have it and

secondly because I suspect that would be somethingunderlying return will be what ECGD producestoday, which is around 4%. So already, ECGD is that is commercially confidential. However, what

we did look at was how much of an impact this hadable to return a profit to the Exchequer as theNERA Report stated very clearly. So, what we are on our customers as to whether or not export credit

was available when they are taking a view onlooking at is an artificial institutionalisation of asubsidy that does not exist between that 4% and whether or not they place an order and the

availability of export credit to them actuallywhatever target it is that the Treasury decides isappropriate. Okay, if it is artificial, maybe that is translated into a substantial overhead cost. When

they are trying to make decisions in relation tonot a problem, but what is a problem clearly is thatthis is an annual voted subsidy. So, every year, purchases and comparing an Airbus product, for




example, with a Boeing product, 0.1 of a % will corporate taxation. That is all derived from acertain level of work created by a domestic UKmake a big diVerence to their decision-making

process. I forget the precise figures—and we can let requirement from that shipyard. If we aresuccessful, with ECGD support, in winning, say,you have those later on—but the numbers were an

order of magnitude higher than the level at which four export ship orders and those ships are built atScotstown, there will need to be a greater numbera customer would make a decision to purchase or

not and we have some very good analysis of that of people employed, there will need to be a greatervolume of work passed down through the supplyand we can provide that to you.chain, more corporation tax will be paid and morepersonal taxation will be paid. Those areQ224 Chairman: If you could, that would beincremental economic benefits as a direct result ofhelpful because I think there is a sense in which wethe first link in that chain which is ECGD supportare likely to get from the Treasury or from the DTIand it is that argument which at the moment weor from the ECGD the response, “Well,believe Treasury does not accept, but that does notmanufacturers would say that, would they not?”mean that we are going to stop trying toThe fact is that you are pretty good as anpersuade them.organisation in pleading poverty and getting

assistance from government and, if you do not getQ226 Mr Evans: Relating to the fairly thinly-veiledit one way, you get it another and you try forthreat that you could all go elsewhere if theeverything, which is fair enough, I mean that issituation deteriorates suYciently for yourwhat you are in business for, but you squeezecustomers that they are going to be very unhappy,everything and, sooner or later, people becomedo you already have examples of where you havecynical. So, if you diminish our cynicism, it woulddone that, where customers have been thatbe perhaps . . .unhappy that you have decided to go elsewhereMs Walton: We can certainly provide you with thebased on just ECGD?evidence you have asked for and hopefully we willMs Walton: We have examples not on theall continue to repay the investment that the UKcommercial aerospace side of our business buthas made in us!certainly on the industrial power side of ourbusiness where we have actually actively sourced

Q225 Mr Evans: Of course, a number of us outside of the UK because there was not coverrepresent areas where manufacturing is taking available from ECGD for a specific project.place: I have BAe Systems in Samlesbury directlyin my constituency and of course Rolls-Royce

Q227 Mr Evans: It is not just on the premiums, itwhich is not too far away. So, I have workers therewas just that there was no cover at all?as well and of course Airbus is very important too.Ms Walton: I think it was actually a combinationDo you not think that we all realise that anyway?of two things: cover for the country involved andYou are very concerned about this voted payment,the premium level had that cover been madebut do you not appreciate that, irrespective ofavailable.whether it seems a subsidy or not, nobody in their

right minds would want to see the export of jobs,we want to see the export of manufactured goods. Q228 Mr Clapham: You have obviously objections

to subsidies being provided, yet I note in paragraphMs Walton: I think we would all hope that that isthe case. Jobs are important. However, in the 12 that you request that ECGD should also be able

to oVer facilities not available from the commercialanalysis that has been done by Treasury of ECGD,they do not take into account jobs outside of market such as the fixed rate export finance. Could

that not be seen as a kind of overt subsidy?ECGD when they do their calculations. They areonly focused on premium generation and the value Mr Caldwell: Fixed rate export finance is available

within that sector of the market which is occupiedof the jobs actually within ECGD. They are nottaking account of the value of the jobs both directly by the export credit agencies. If you look at

ECGD’s latest comparison document, you will seethrough the exporting manufacturers and indirectlythrough the supply chain and the support network that the majority of the international export credit

agencies will provide fixed rate export finance onfor those exports.Mr Caldwell: We have had a number of meetings internationally recognised terms, that is the

commercial interest reference rate, and these termswith Treasury on this issue and, if we understandtheir argument correctly, as Sue says, the economic apply for all exports other than large aircraft and

there was a separate agreement on those which hasbenefit which they attribute to ECGD is solely thetrading profit and the salaries paid to ECGD now, by mutual agreement between the relevant

agencies, been withdrawn. Other than for largeemployees. We can put various examples beforeyou but one which I think is a good one is that, aircraft, the commercial interest reference rate rules

are applied by the majority of other agencies in thatif you look at the shipyard in Scotstown which iscurrently engaged in making type 45s for the UK sector of the market in which they operate. ECGD

has progressively been withdrawing its support forGovernment, to do that it needs a certain level ofworkforce, there is a certain level of subcontractor fixed rate export finance and our concern is—and

we are hearing rumours but there has been noand supplier infrastructure required and there is acertain amount of salary being paid trickling down oYcial statement or consultation on this—that

their support will become even more restricted thaninto both personal and of course the higher level




it currently is. So, yes, it is a matter of concern to true cost and benefits and it is really weird.However, that is the Treasury! You then point outus that, while our competitors can call upon this

support, we cannot. If fixed rate export finance quite rightly that a proper economic appraisalwould actually look wider than the immediatewere to be abolished overnight amongst all export

credit agencies, then that would be fine. A eVects on the books of ECGD. My question is,have you ever attempted to quantify the benefits ofmultilateral approach is fine, a unilateral approach

is not. ECGD support for the aerospace sector? Do youhave the real economic appraisal of ECGD supportfor aerospace?Q229 Mr Clapham: Again, is this an issue that hasMs Walton: Certainly, the SBAC has a wealth ofbeen discussed with ministers and, if so, what hasinformation relating to the benefits of the aerospacebeen the response?industry to the UK but I think there is one veryMr Caldwell: Yes, it has been and I think that wegood example that indicates just how importantare struggling to make headway on this issue. AtECGD is to this industry. We do not have athe risk of straying into some financialrepresentative of Bombardier here today but thetechnicalities, one of the reasons why ECGD hasavailability of export credit support to Bombardiersuch a problem with fixed rate export finance is thewas a very key issue in keeping jobs in Northernway in which it is compelled to report its activitiesIreland rather than seeing them head back toand the way it is required to break even on a deal-Canada where EDC was providing them withby-deal basis. These constraints are not imposed onsignificant levels of support. That was a very hard-other agencies. Other agencies will report theirfought case by Bombardier with ECGD. ECGDfixed rate finance business on a cash basis year byeventually came through and those jobs were keptyear. So, if they have won some years and lost somein Northern Ireland rather than heading back toyears, that is how they report it. ECGD is required,Canada. I could not put a figure on it, I do notunder its current rules, to report to market everyhave it. I wonder whether Bombardier might.fixed rate financing which it supports. So, if rates

which it is obliged to hedge against in the future Q231 Mr Berry: Obviously there are two issues: onemean that there is a loss against that deal today, is the contribution of the aerospace sector to ourthen that is the loss that is crystallized on ECGD’s economy and, like a number of my colleagues, Ibooks. If in fact, over the next five to 10 years, rates have constituents who work in Rolls-Royce,go up and down and had they accounted for it on Aerospace, Airbus and so on, so I appreciate thosea cash basis they would have broken even, that arguments. I was asking the more narrow question.opportunity is lost forever. So, part of their Presumably somebody at some stage has attemptedproblem is the way in which they have to account to assess the contribution that ECGD itself makeswhich is, as I say, not a requirement on other to the economy via support for aerospace. That isagencies. the nub of the argument in terms of you are sayingMr Taylor: If I can come back on an issue to which to us that this is a very important activity and itJames alluded, Airbus benefited from something needs to be sorted, it needs to work eYciently andcalled the large aircraft sector understanding which so on, and, if there is any analysis of the estimateswas the interest rate fixing mechanism, which was of the benefits of ECGD support for aerospacenot something that was actually provided from Ex- specifically, I am sure the Committee would be veryIm Bank but, at ECGD’s suggestion, that was pleased to receive it.dismantled and we persuaded the French and Ms Walton: We could go back to the example thatGermans to come on board with a new product and we quoted before in relation to the A380 which wasbasically we have retained the level playing field that every customer for the A380 who is eligible forthat we need for exports with Ex-Im Bank in that support has required that we confirm that thatparticular context. So, any ideas that there was a support would be available to them. So, it is clearsubsidy on interest rates for Airbus has now been from that that ECGD and COFACE and Hermesdropped I would say since 1990–2000, but that is in this case are also very important to those ordersclearly very diVerent from the threat because Ex- and indeed, looking at the history of our TrentIm Bank did not have that. Therefore, we were campaigns where, of our eligible customers, 80%levelling the playing field and that is now achieved asked about the availability of support whereasbut where there is a unilateral decision such as the only 25 to 30% of them actually took it up onincrease in premiums that we are seeing, that is delivery. So, I think the impact of ECGD is ratherwhere it hurts in terms of making purchase broader than simply looking at the figures relatingdecisions from an airline. So, there is a diVerence to support for actual deliveries. The actualreally between them and us. guarantees out of the door are only a very smallMr Caldwell: Yes. part of the story. I am not sure that we have dugdown deep enough into that to be able to give you

Q230 Mr Berry: You criticised, and indeed Mr some hard and fast pounds and pence numbers.Caldwell did earlier, the Treasury’s approach to theeconomic benefits of ECGD support and I have to Q232 Mr Berry: When you say to the Treasury,

“Look, hang on, guys. This is not a very clever waysay that I entirely agree with you. It is actuallyquite bizarre that, given that the ECGD exist to of totting up the economic benefits of ECGD

support and certainly not in our sector”, what replydeal with market failure, they measure theeconomic benefit by pursuing prices always telling do you get?




Mr Caldwell: It is a continuing discussion. I am not Ms Walton: I think it would be diYcult for this endof ECGD’s business to be privatised because it issaying that this is a Treasury view but there are

Treasury representatives who have said to us, “We very long term and it is very long lead time and itis not something that commercial markets areare not convinced that your industry needs to exist

at all because, if it did not, then jobs for your particularly able to deal with. They are very ficklemarkets. We need certainty and consistency fromemployees would be found elsewhere” and then

particularly pointing at the defence sector “and we our export credit agency. The short-term businesswas successfully privatised.could then buy our defence requirements from

other suppliers overseas.” So, we are starting froma diVerent perspective, shall we say, quite far apart. Q237 Sir Robert Smith: Despite people being

frightened that it would not be.Ms Walton: Yes. It was privatised in a way thatQ233 Mr Berry: It is a labour free market.enabled the purchaser of the business to take someMr Caldwell: I thought earlier on you werecomfort from the UK. It has been doing very wellsuggesting that defence was a special case, sosubsequently. Unfortunately, it also means thatperhaps not a free market.ECGD does not have that short-term business tofall back on. It is now only looking at long-termQ234 Mr Berry: I think aerospace is a special case. business. There is not a consistent market for thisMs Walton: But we have had reassurances that it type of long-term support that we see in the privateis not the Treasury’s intention to do away with our commercial markets.export credit agency and I am sure we all sleep Mr Caldwell: It is very important to be clear aboutmuch easier in our beds knowing that. what one means when you speak of privatising anChairman: The Treasury often speak with forked export credit agency. There are export credittongue! agencies where the work is done by a commercialorganisation but guarantees that are issued are fully

Q235 Sir Robert Smith: You are concerned about supported by the Ministry of Finance or relevantthe conflict between the Government’s policies to equivalent body in that country.grant sustainable development, human rights, et Mr Taylor: In the Airbus example, the France andcetera and the ECGD’s role in facilitating exports German agencies are technically privatised, theyor that being part of their business statement. Can are part of the Alliance group or part of a bankingyou provide examples of where the former has group and the people working there are thereforeinterfered with the latter? privately employed, but the guarantees have to beMs Walton: I think our concern is really that issued by a triple A sovereign credit so that we haveECGD’s role is one of supporting exports rather a similar credit backing to the Boeing exports.than necessarily being there to promote sustainable Mr Caldwell: The unique selling proposition ofdevelopment. I think the two things are very ECGD is its government guarantee which allowsdiVerent. I do not think we can point to examples commercial banks to make zero weighted loans.where a sustainable development issue has stopped Mr Taylor: There is a big diVerence in subsidy andone of our transactions from going ahead because saying it can be privatised.we can very clearly demonstrate on the commercialaerospace side that these pieces of equipment are Q238 Judy Mallaber: In paragraph 23, you creditgenerally generators of foreign currency for the ECGD with negotiating a good internationalcountries that they are being delivered to. So, you agreement on environmental standards as helpingare able to, if you like, tick the box on the level the playing field but are then concerned aboutsustainable development question. It is not that new regime being imposed with thosesomething that we face on a regular basis because environmental standards 12 months ahead in thisthe sustainable development issue has only come up country of the international obligation. Do youin relation to ECGD’s list of highly indebted have any evidence that this actually harmed UKpoorer countries, although their list is some 20-odd exports or any examples that you can give us?countries longer than everybody else’s list. We have Ms Walton: It just made it a little more diYcult forhad an issue on Sri Lanka, for example, where the ECGD applications to be processed. It is oftencustomer was due to take delivery of a Rolls- diYcult for us to say that a specific deal has beenpowered Airbus aircraft and Sri Lanka was added harmed, it is more did this influence the way thatto ECGD’s list and suddenly we found that we a customer will behave in the future because, at thewere having to ask the customer to fill in a few stage where they are taking delivery of an aircraft,more forms before they were able to take delivery they are doing everything that they possibly can toof their aircraft, but they were able to demonstrate ensure that the financing is available for thatvery clearly that this was going to be a generator aircraft but, if they have had to jump throughof foreign currency for the economy, so it was not rather more hoops than they would have beena real issue, it was more a timing problem. expected to by Ex-Im, for example, then, next time

around, that is going to form part of their decision-making process in that they will want to be sureQ236 Sir Robert Smith: Given that your view is

that the ECGD is not subsidised and given that you that they have a process which is easilyunderstandable and easy for them to know thatwould prefer it to have less interference, do you

have any objections to it being privatised? they have complied with it appropriately. So, I do




not think we can demonstrate that there has been than was ultimately applied by the OECD but, asI have said, we are already working within a veryany loss of business but I think that our customers

will think very carefully next time they place an highly regulated environment in terms of emissionsand noise, so that did not cause us any particularorder.problem. I think it is more a perception that ECGDMr Taylor: Generally, any harmful factors will notis a more diYcult agency to deal with across thebe necessarily revealed in concrete example untilboard not just the environmental issues but whenlater when there is another order being discussedyou add all of these things together, there is just aand they say that the ECGD experience was prettyperception that ECGD is making life a little morerough going compared to what they might havediYcult for our customers.had in the Ex-Im Bank and therefore there will be

people in the critical department, which is theQ240 Judy Mallaber: Are there no advantages infinancial department of an airline, who will bethis case of ECGD being involved in negotiatingrecommending that they go for something whichthat international agreement? Surely it can behas the support of a lot more tolerant exporter.helpful that, in a situation like that, we are inMs Walton: It is worth mentioning that ouradvance because it can mean that our ECGD is incommercial aviation business is probably one of thea position to try to level the playing field over issuesmost highly regulated in terms of its environmentallike those standards.impact and in terms of emissions and noise in anyMs Walton: We have always been very supportiveevent, so anything we are doing additionally forof a multilateral and multinational approach toECGD is likely not to have a significant impact onthese issues. What we find a little more diYcult towhat we are already doing because of thedeal with is when ECGD is leading by example andinternational regulations that we are workingleaving UK industry at a disadvantage for a periodwithin in developing more fuel eYcient and lessof time. We are absolutely supportive ofnoisy engines and aircraft in any event.multilateral and multinational change butunilateral disarmament, if you like, is not

Q239 Judy Mallaber: Surely you are concerned that something that is going to win a lot of support fromit might put people oV in the future because of this industry nor indeed from our customers.experience which will not happen if that is nowmeant to be implemented internationally, so that Q241 Judy Mallaber: Does not someone have towill not apply in relation to environmental take the lead?standards. Are you satisfied that all ECAs are now Ms Walton: We would like to see everybody holdfollowing the OECD guidelines on an equal basis hands and move together!and so therefore that diVerential should not exist? Chairman: Thank you very much for your evidenceMs Walton: We are not privy to all of the ECA’s today. I think you are going to send us somecompliance I suspect but ECGD’s original additional information and we would be gratefulimplementation, as we said, was 12 months ahead for that. The Committee will resume again at 3.15

this afternoon.of time. It was probably a more stringent standard



Tuesday 20 April 2004(Afternoon)

Members present


Richard Burden Mr Lindsay HoyleMr Michael Clapham Judy MallaberMr Jonathan Djanogly Linda PerhamMr Nigel Evans Sir Robert Smith

Witnesses: Mr Paul Ingram, Senior Analyst andMr Mark Ingram, Consultant, British American SecurityInformation Council (BASIC), examined.

Q243 Chairman: Good afternoon gentlemen. We Q246 Mr Hoyle: Presumably, if we were to isolateit down to between civil aircraft and militaryshould like to start oV by looking at the whole issue

of the rationale for ECGD support. Your paper aircraft, if you look at the number of civil aircraftwhich are exported with the guarantee system onraises a number of questions regarding the

justification for the policy of providing support to the engines which are now a part of Airbus, do younot feel that may be greater than military, if youexporters via the ECGD. May I just make one

point to start with? I presume that we are talking were just to take those two?Mr Paul Ingram: Just to take those two sectors,primarily about military questions here. How

would you summarise your position in relation to again for the same reason, it would be very diYcultto come to a clear conclusion one way or another.military markets?

Mr Paul Ingram: The first thing to say is that the To be honest, in our research, we have not focusedon that comparison, so I find it diYcult to give youreason why we sit before you today historically is

very much focused on the defence sector. Our a definitive answer one way or the other.project began a few years back to look at thegeneral subsidies by the government towards Q247 Mr Hoyle: Obviously from your point of viewdefence exports in the round, including Ministry of you feel that it is not needed and could give anDefence subsidies and subsidies from other unfair advantage.government departments. It was in that work that Mr Paul Ingram: The way it is provided at presentwe came across the Export Credits Guarantee by the ECGD implies that there is quite aDepartment and saw the scale of subsidies which significant subsidy. There may be good reasons forwe believe, according to our method, are given to that. The impact is that the way it is applied at thedefence export sales. That is our motivation. moment does distort the market and there areHowever, the argument we put before you today negative implications arising from that.applies equally well to the civilian sector as to thedefence sector. In terms of many of the questions, Q248 Chairman: Which market does it distort?we are as open to answering them on the civilian Mr Paul Ingram: It leads to more exports from thissector as on defence. country in that particular sector than would

otherwise be the case. On the surface of it, thatlooks to be an advantage. The problem is that otherQ244 Mr Hoyle: You have answered part of myexporters, other markets within this country maypoint. You treat civil and military exactly the same.suVer as a result.Mr Paul Ingram: Yes.

Q249 Chairman: You make the point that an areaQ245 Mr Hoyle: In your view does one benefitwhich accounts for something like two to three%more than the other?of our export market attracts in a good year forMr Paul Ingram: We do not have the figuresthat industry as much as 50% of ECGD spending.suYciently in detail in the public round to make aIs it not a bit disingenuous to take our exportjudgment as to whether there is a greater benefit toaccount as a whole, because in fact there is only aone sector than the other. My only observationsmall part of exports which would actually benefitwould be that while defence accounts for less thanfrom ECGD, in the sense that you are talking2% of the exports from this country, it received inabout big batches rather than the kind of smallthe last year 50% of the support from ECGD. Thatgoods which you might have in the export business.would suggest to us a disproportionate advantageMr Paul Ingram: There are certainly many diVerentto that particular sector. As regards individualvarieties of export, large numbers of which wouldexports supported by ECGD, it is very diYcult fornot benefit from insurance in the long-termus, working on figures in the public round to comemarkets. Yes, that is true.to a clear conclusion on individual contracts as to

whether the subsidy is greater to the defence sectorthan it is to the civilian sector which receives Q250 Chairman: So that statistic is really not

relevant. That is the point I am coming to.support from ECGD.



20 April 2004 BASIC

Mr Paul Ingram: It is relevant inasmuch as what for the purposes of this argument—we had theCampaign Against the Arms Trade who probablywe are talking about and what the mission

statement of the Export Credits Guarantee take the view that the arms trade in itself is not alegitimate object of assistance or support—but letDepartment states quite clearly at the beginning is

that it is there to benefit the British economy by us take it that it is a legitimate object of support.To what extent do you think, in the light of that,supporting British exports.there is an element of subsidy and how much doyou think it is, either in real terms or in percentageQ251 Chairman: Yes, but you are defining Britishterms, of the budget of ECGD?exports in a way which ECGD does not. It wouldMr Mark Ingram: We do not have direct access.not help small export operations. It only helps largeThere is insuYcient information in the publicones. It is the lender of last resort is it not?domain for us to be able to quantify thatMr Paul Ingram: It is the lender of last resort.accurately. We have given a figure in oursubmission which is arrived at through theQ252 Chairman: It is the lender of last resort onlymethodology outlined in our submission that wefor big, large volume export orders.would estimate it to be somewhere between £150Mr Paul Ingram: The way it is set up at the momentand £200 million, maybe £240 million a year. Wethat is right.think it is a significant amount of money. Whatconcerns us primarily is that the methodologyQ253 Chairman: It comes back to the pointwhich we outline has not been used by ECGD totherefore that to talk in terms of 3% of our exportscheck their calculations of subsidy in theiraccounting for 50% of the assistance is a ratherapproach. We believe that the approach they havesimplistic and probably misleading correlation toused or chosen to adopt to estimate the subsidymake. Do you agree with that?implicit in the ECGD has within it so manyMr Mark Ingram: No, I do not.uncertain parameters as to be subject to extensivenegotiation where there is actually a clear privateQ254 Chairman: Why not?sector market already in existence against whichMr Mark Ingram: The reason I do not is becauseECGD cover can be benchmarked, which gives athere is a choice here. The first thing I should likevery much easier to arrive at and therefore moreto say is that the emphasis of the ECGD is on long-robust estimate of subsidy.term contracts rather than necessarily large

contracts, although the fact of the matter is thatQ258 Sir Robert Smith: In your submission youthey do—made the point that there is a case for the ECGDto be privatised on the basis that the private sectorQ255 Chairman: Either/or. It could be both; it isis best placed to provide such help to industry. Hownot necessarily one or the other.do you respond though to the sort of claims weMr Mark Ingram: Right. So there is a conscioushave had from other witnesses that there is a rolefocus by the ECGD on this particular sector of thefor government to act as a lender of last resortmarket which happens to be disproportionatelywhere the market will not provide the cover?dominated by defence. We believe we demonstrateMr Paul Ingram: It is important to say that we saythat there is a large subsidy through the ECGD tothere is a case. We do not necessarily say that it isthat particular sector, then, by accident or design,definitely watertight in the sense that what we arethe end result is that this subsidy is directed whollyhere today stating is that we believe there is aor significantly towards that sector of our economy.significant subsidy and that most importantly theECGD should charge a real rate to eliminate thatQ256 Chairman: You say “wholly or significantly”.subsidy. There may well be a case for maintainingYou are talking in a good year about 50%, in a badthe Export Credits Guarantee Department foryear 35%. We are trying to take evidence hereother reasons. A previous witness on 23 Marchwhich stands up. You are being rather loose, aresuggested to you that one reason for ECGD’syou not, with your definitions?existence was to demonstrate commitment from theMr Mark Ingram: The reason I would say “whollygovernment. That demonstration of commitmentor significantly” is that we do not have evidence ofneed not necessarily be done with a subsidy. If the“wholly”, I agree, but we do have an indicationECGD were charging high enough premium rates,that it is significantly greater towards defence thansuch that they were charging the market rate, thatelsewhere because of the fact that defence appearswould be perfectly acceptable.to take, or one particular company appears to take,

a large proportion of ECGD support. We havewhat is eVectively a rationed subsidy through the Q259 Sir Robert Smith: Others are going to comeECGD. Now, because of the way ECGD has been onto the detailed cost benefit side of things but todesigned, that rationed subsidy appears to go get my head round this, you think there would stilltowards one particular area. be an endorsement factor, even though there was

no commercial risk being taken by the government,if the premium were high enough.Q257 Chairman: Perhaps you could explain to us

either between 33% or 50%, how much of that is a Mr Paul Ingram: I am only taking the evidence ofexporters who have appeared before you. Oursubsidy and how much of that is legitimate

insurance cover? I am working on the assumption, argument is not necessarily based upon the need to



20 April 2004 BASIC

abolish or privatise the Export Credits Guarantee the more expensive the cover eVectively. Banks willfrequently only estimate a value at risk over theDepartment, it is to make the subsidies transparent

and then to eliminate those subsidies. It may course of three or four days, because they assumethat they can lay the risk oV in the market verybe that the end point means that the Export

Credits Guarantee Department remains within quickly. That option is not today open to theECGD. Finally, what should be the cost of capital?government hands.I believe you have already heard debate on whatthe cost of capital should be for the ECGD, butQ260 Chairman: If you were looking at militarythis is rather like putting the cart before the horse.equipment which was going to be sold, surely theThe cost of capital will depend on the level of riskgreatest government endorsement is the fact thatthe ECGD is running. We already know thatthe British forces use it.ECGD is in a very high risk area and therefore theMr Paul Ingram: Fair enough, yes, exactly, whichcost of capital is likely to be extremely high. To talkwould militate against leaving ECGD as it is.about using 4.5% as the cost of capital is, in myview, very unfortunate. I do not believe that if I

Q261 Chairman: It tends to be the case that it is asked for £1 million the bank would only charge mevery diYcult to sell kit the British Army does not 4.5%. I think they would charge me substantially inwant. excess of that. I am not a millionaire. There areMr Paul Ingram: This is not the purpose of today many uncertainties associated with that.but that may also mean subsidies elsewhere byother government departments. That is not for

Q263 Mr Djanogly: People before us this morningtoday’s evidence.were saying that the implication of these proposedchanges was that return on capital employed will

Q262 Mr Djanogly: You criticise the NERA report be pushed up from 8% to a rumoured 18%.and the basis on which it has calculated the value Presumably you should be delighted about that.of ECGD support to exporters. How would you Mr Mark Ingram: I am delighted that at long lastsummarise your main concerns? the ECGD has accepted that there is a method ofMr Mark Ingram: We have given you a handout benchmarking their operations against the marketwhich hopefully you have before you now. Our and therefore arriving at something which equatesmain concern is the NERA report and indeed we to a market subsidy. I am delighted by that. Therebelieve the proposals for the Trading Fund of are still so many variables in this method as toECGD propose the use of a value at risk (VAR) make it in my view very diYcult to use.approach. We have summarised value at risk on thefirst page of our handout and basically it attempts

Q264 Mr Djanogly: You are saying that evento quantify to a proposed or defined level ofthough they are going to have such a massiveconfidence the likely maximum loss over a definedincrease in return, which of course the companiesperiod and then say that is the amount of capitalare very concerned about, as far as you arewhich has to be given to ECGD. That capital hasconcerned it is still totally unrealistic.within it a level of risk. If we combine the requiredMr Mark Ingram: I would not say that. It islevel of capital with the required rate of returnmoving in the right direction. If I were ECGD andjustified by that level of risk, we end up with a cost,I wanted to minimise the impact of such changesan annual cost of providing that cover. What I havein my business methodology, I would simply shrinkthen shown in paragraph 3 of that handout—the probability of future losses. If someone is goingparagraph 2 got lost somewhere—is that there areto put up the cost of capital in one area, I canvarious uncertainties associated with the VARmanipulate my equation in such a way that it doesapproach. First of all we need to estimate thenot have a significant impact on my premiums byprobabilities associated with each of these possiblemanipulating some of these other uncertainties.outcomes for insurance. Some of those possibilities

will represent profits, some will be losses. That isQ265 Mr Djanogly: So less risky deals.the first thing. It is very diYcult to forecast theMr Mark Ingram: Pretending the deals are lessfuture, which is what this method eVectivelyrisky. They have suYcient latitude within their riskrequires NERA or the ECGD to do. We have hadassessment models to be able to use diVerent Kmany criticisms of the ECGD’s currentvalues, which then will allow them to believe thatmethodology for forecasting likely losses. Thesethe risk is less risky.criticisms came up through KPMG back in 1999

and they have actually been implicit in most of thereports on ECGD ever since then. There is a large Q266 Mr Clapham: Would it be fair to say that in

developing your alternative approach you havedegree of subjectivity in the estimates which ECGDuses to predict future losses. That is the first used a whole number of assumptions? Does the

very fact that you have used assumptions leave youproblem. The second problem is what level ofconfidence should be used. To what level of open to criticism?

Mr Mark Ingram: Our method is verycertainty do we want to say the maximum losses?If you wanted 100% certainty, the maximum loss straightforward and hopefully would address those

issues. Most of the guarantees that the ECGD giveswould be the whole value of the contract you wereguaranteeing. Thirdly, over what period should this are guarantees because the borrowing is being

directly or indirectly made by an overseasvalue at risk be calculated? The longer the period,



20 April 2004 BASIC

government. I have some numbers on the second Guarantee Department are not public, so it isactually very diYcult for us to come to conclusions,side of that handout which perhaps would be

helpful. This is a hypothetical example. It looks particularly on a contract by contract basis, tocompare what the Export Credits Guaranteerather scary but hopefully we will keep it fairly

straightforward. If we assume that we are Department oVers and what the subsidy would beusing our method. That is where the weakness is;guaranteeing a principal amount of £300 million

which will be repaid over a relatively short time of not in our approach but in coming to clear figureswhich represent the subsidy because we do not havefive years in a single sum at the end of the five

years—to keep the example simple—if we assume the information in the public round.that ECGD is going to charge a £4 millionpremium—we are going to assume it is an annual Q268 Mr Clapham: When you said economistspremium, again to keep it simple—if we assume the have welcomed it, are these people from the Oxfordforeign government can borrow on the Research Group or are there others?international debt market at 3.5% and the UK Mr Mark Ingram: We have spoken to severalGovernment can borrow at 3.2% and if we further people. My day job is training corporate treasurersassume that the ECGD is confident to a 99% and investment bankers. I have yet to find a singleconfidence level that losses will not exceed £40 person who has any problem with the methodologymillion and that the cost of capital is 20%—using behind these numbers.round numbers to keep things simple—if we Mr Paul Ingram: As far as government economistsassume all those things, then under ECGD’s are concerned, we have talked to governmentcurrent methodology, if there are no losses on that economists in ECGD and in MoD and in Treasurycontract, the contract will generate a £20 million and they do not fault the logic behind our method.surplus, which is the premium times five years. This Chairman: The Clerk and I have just beenis the method currently mandated by the OECD. discussing the matter and we shall send thisIf we use a value at risk approach, we need to factor document to ECGD for their comments prior toin the cost of capital. The cost of capital will be their appearance before us. It may take some of the20% on the value at risk, so it is £8 million per year. time which we would otherwise devote to it, if weLess the £20 million premium received upfront can get it done beforehand. So we may actually getmeans that this contract will make a deficit of £20 something in writing. That may be a little hopeful,million over its life, even though no claim has been but we shall try to put them behind the proverbialpaid out on. If you take our approach, you will eight ball and see what happens on that one.simply say that the guarantee is paying for thediVerence in the borrowing rates of the two

Q269 Mr Evans: This morning we heard that ifgovernments. So there is a diVerence in theanything there was a criticism of ECGD for beingborrowing rates of 30 base points, 0.3%. Pointmore expensive on their premiums than others andthree% on the amount which would otherwise haveindeed three companies, in particular Airbus,been borrowed, £300 million, is a £9 million perRolls-Royce and BAe, can all source elsewhereannum subsidy, just as if I borrow some money andthan the United Kingdom. Do you not see that ifsomebody guarantees my debts, the value of thatyou made what you were calling for earlier on,guarantee is the diVerence between what I wouldwhich was to make it more transparent and thenhave paid, if I had borrowed under my own crediteliminate it, you would actually be forcing Britishrating, compared with borrowing using somebodycompanies to export jobs abroad?else’s guarantee. It is a very straightforwardMr Paul Ingram: I believe it was Samuel Brittan,approach. We can see that there, allowing for theanother economist, who used the phrase in thisupfront subsidy, there is a deficit of £25 million.regard “If all our friends are banging their headsYou can see that with our approach the variablesagainst the brick wall, it does not mean to say weare a lot easier to get to. These borrowing rates areshould do the same”. In a situation where you haveeasily available in the long-term government debtmarkets which are distorted by subsidiesmarkets. You have heard on various occasions thatworldwide, which is often the case, particularlythere is no long-term equivalent commercial marketwith the defence sector I might say, it does notto ECGD. That is simply not true. The creditmean to say that it is beneficial to the UK economyderivatives market goes out just as far as ECGDto compete in a similar way. When you talk aboutdoes and it is more liquid if anything.eYcient markets, you are not talking aboutgovernments competing with each other to oVer the

Q267 Mr Clapham:What has been the feedback on same or more subsidies. This is why we have theyour alternative approach? OECD agreement: to try to minimise the subsidies.Mr Mark Ingram: The feedback has been that Unfortunately from our perspective and theevery economist I have spoken to is very happy method we are putting, that benchmark which iswith the methodology. Nobody is happy with the created by OECD is faulty. You may thereforeconclusion. think there is a tragedy of commons here, such thatMr Paul Ingram: You mentioned that we make if everybody else subsidises then we need toassumptions. It is correct to say that we make quite subsidise as well in order to reap the benefit.courageous assumptions when it comes to the Actually it would make far more sense, if we arefigures and the reason for that is that many of the going to subsidise exporters, to subsidise in markets

which are not already subsidised by otherfigures of the actual operations of Export Credits



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governments in order to maximise the jobs and the Q274 Mr Hoyle: I think the danger is that wewould have everybody flipping burgers atexports we reap from those subsidies. If we

compete with other governments on the same level McDonald’s if we are not careful and that is theline you follow because unfortunately we have toin the same area to out-subsidise them, then

everybody loses because the markets which are compete in the world, compete with the Americans.Whether the rules are right or not, what you aresubsidised are overblown and other markets which

are not subsidised are contracted as a result. saying is that we should play cricket and everybodyelse is playing football. That is the great worryabout the future of jobs. What we are talking aboutQ270 Mr Evans: What we were hearing thisis one of the last few industries in the UK wheremorning was that if anything the premiums in somewe are a world leader, high-tech, high skills, highcases were twice as high as other ECAs.value paid jobs being put at risk by the rulesMr Paul Ingram: Yes. We have no problem withchanging, with everybody else having diVerentthe statement that other ECAs are just as bad if notrules. What you are not also taking into account isworse than Export Credits Guarantee Department.that there is technology transfer in there whichThe point is that just because other ECAs are bad,creates jobs in other ways. You are putting all thatdoes not actually mean that it is beneficial to theat risk with what you believe is your remedy.UK economy for us to engage in the same practice.Mr Paul Ingram: If we have subsidies to high-techindustries—and we are not arguing againstQ271 Mr Evans: But it does seem to be beneficial,subsidies to high-tech industries—there are moredoes it not, because there is a good return to theeYcient ways of supporting those jobs and theexchequer from the fact that we have a vibrantassociated technology transfer than by paying theaerospace industry, particularly in Lancashire andbanks to support exports; much of that subsidy isthe North West.lost, such that the jobs we are looking to supportMr Paul Ingram: And our retort to that is that theare not supported in such an eYcient manner.number of jobs which would be supported by

applying that subsidy elsewhere would almostQ275 Mr Hoyle: If I have got it right, we producedefinitely be quite significantly greater.and build a product but do not bother with themarket because we have already created a productQ272 Mr Evans: Do you not recognise that thereso we already have the technology transfer.is a huge diVerence between manufacturing aircraftMr Mark Ingram: That is currently what we do.or engines and kettles?We have eVectively subsidised a market whichMr Paul Ingram: There is a diVerence.would not otherwise exist in order to take productsMrMark Ingram: Absolutely, yes there is and therewhich would not otherwise be built if there weremay well be social reasons for supportingno subsidy.engineering jobs with high skills. I would put to you

that if you are going to subsidise such jobs, it isQ276 Mr Hoyle: The market is there. What you arebetter for the UK economy to benefit than tonot getting around is the fact that somebodysubsidise those products going overseas at less thanelse . . . Let us take aerospace. More often than notcost. For instance, if you believe that you want toit is us against the Americans or the French.subsidise high-technology engineering jobs, there isSingapore are going to buy either Rafale or F17scurrently massive demand for the development ofagainst Eurofighter. If we follow the logic, what wethe technologies in wind farms elsewhere, and soare saying is that they go in with both hands freeon, where you could oVer such a subsidy toto negotiate, but you want us to put one armtranslate those jobs, to translate the current defencebehind our back and not even compete to win thator aerospace industry into supporting those sortscontract.of jobs rather than leaving things as they are.Mr Mark Ingram: By going in and negotiating onthe current basis, we know that we have to pay aQ273 Mr Evans: If we went down the route you aresubsidy of a certain amount before we can evensuggesting, it is great news for Boeing andbegin to become competitive in that market.Lockheed Martin, is it not?

Mr Mark Ingram: No, I do not believe it is. It isnot, because they are currently being subsidised by Q277 Mr Hoyle: You have still not answered the

question. How would we win the contract if wethe government in order to exist. It would still leavelots of competition between the existing ECAs who followed the rules you wish to apply unilaterally

rather than multilaterally?would continue to subsidise these areas.Mr Paul Ingram: Do bear in mind that a lot of this Mr Mark Ingram: If you want to maintain an

industry in this country which manufacturessubsidy is lost, because it does not go to thecompany concerned; much is lost to the banks who products for which the only demand is from

governments which expect to receive a subsidy,are the financing middleman, some of it goes to thecustomer, the importing government. There must then you are quite correct, the only way you can

continue to export goods at such subsidies is bybe much more eYcient ways of applying thatsubsidy. If our objective is to support BAe Systems giving a subsidy somehow, whether it is through

ECGD or others. Paul has a point that that subsidyjobs, then why do we not just give the money directto BAe Systems in their plant, wherever it is? At is currently split between three diVerent

participants in that market, but nevertheless we doleast it would make it transparent.



20 April 2004 BASIC

not know how it is split. If you want to continue Q279 Mr Djanogly: May I add to Richard’s initialcaveat, which is that I do not think we have decidedmanufacturing of a particular product and sell ityet whether we are talking about subsidy here, butinto a particular market which requires a subsidy,for the purpose of this debate, let us assume thatthen yes, you have to keep paying the subsidy.we are. Then we get onto the question that if thereWhat I am saying is that by doing that you areis subsidy, how do you pay it? You are saying thatrigidifying that industry. Those high-technologyshould be transparent and be paid direct to theindustrial jobs will only ever be devoted towardscompany rather than having it come throughmaking defence products because the subsidy youexport guarantees. I do not actually see how thatare oVering is rigidified into that market. If, on theis beneficial. If you give the money direct to theother hand, ECGD subsidies were also availablecompanies, you are encouraging them to befor manufacturing high-technology engineeringineYcient. Companies are not coming here andproducts which were for use domestically, then weasking us to make them eYcient; they are comingmay see that industry evolving into producinghere and asking us to provide a backdrop whensomething else, because it would be more eYcientthey are trying to compete in very dangerous placesfor them to use that subsidy to manufacture otherwhere there is a high level of risk. That is a totallyproducts.diVerent concept, is it not?Mr Paul Ingram: Yes, it was probably a bit of ared herring. What I was trying to say was that thisQ278 Richard Burden: Let us assume for theis not the most eYcient way of providing yourmoment that you are correct in your analysis aboutsubsidy. Let us take for the sake of argument thatthe way you should calculate subsidies and so on. the objective is to maintain the high-techThe logic from that would be the multilateral manufacturing base of this country. There are more

approach, to get international agreement to reduce eYcient ways of providing the subsidy which wouldoverall the levels of subsidies and the weird achieve that government objective thansituation you describe. That is not what you are maintaining the Export Credits Guaranteesaying, you are saying the extent to which that is Department.happening is not happening fast enough orcomprehensively enough and therefore you are

Q280 Mr Djanogly: But not to give statesuggesting a more unilateral approach. If thathandouts surely?unilateral approach were adopted, how would youMr Paul Ingram: No, that was just an oVhandsuggest the transition is managed, whereby comment, saying that at the moment we are giving

companies actually lose out on the markets, albeit a subsidy through the Export Credits Guaranteeslightly illogical, which they are currently Department and it is an ineYcient way of doing so.exploiting, but you have not yet got to the situation I was not suggesting for one moment that it wouldof re-allocating, re-directing subsidies to the direct actually be eVective just to give BAe Systems £50way you want to see? How would that transition million to go home and do nothing. That was notbe managed other than cushioning it through some the point I was making, but it probably camekind of unilateral approach? across that way.Mr Mark Ingram: This is a very diYcult economic Mr Mark Ingram: The issue is what incentivequestion which frankly I do not feel qualified to eVects are created by providing a subsidy in aanswer directly. How you change one industry to particular form. Currently the subsidy, if there beanother is something economists have always such a thing, which we strongly believe there is,struggled with. There are arguments for gradual creates an incentive to export arms predominantly,transition, there are arguments otherwise. I am not but certainly to export under long-term contractsan expert in that area, so I would not want to give to risky areas of the world products which areyou a direct answer. What I would say is that currently manufactured in the UK. That is themeasuring subsidy is wholly diVerent from incentive eVect of the current subsidy regime. There

is no incentive eVective for technology transfer intoremoving that subsidy. Whilst in the long term, ifcivilian areas which I could identify, because thatwe crave solely economic eYciency—and of coursedoes not seem to fit the requirements of the subsidy.we do not, there are many other things which weThere is no incentive even to maintain high-are looking for—but if we were to crave solelytechnology jobs. It may be that there is an incentiveeconomic eYciency, we would want to see theto go down market.removal of those subsidies. That is a long-term

issue, it is not necessarily a short-term issue.Mr Paul Ingram: The immediate question is Q281 Mr Djanogly: Let us say switch production

to the general public.transparency of the subsidies and there is no reasonMr Mark Ingram: There may be an incentive towhy we could not do that tomorrow.switch production to factories overseas. We have aMr Mark Ingram: And there is good governance.problem here in terms of local content which isThe fact that we currently have a department ofbeing insured by ECGD.government which is incurring massive

expenditure, does not know how much it isspending, does not know what benefits are accruing Q282 Chairman: You made the point aboutfrom the expenditure, does not seem like good alternative industrial activities like promoting wind

technology, for example. I just ask you this as angovernment to me.



20 April 2004 BASIC

oV-the-wall question. At the present moment one relatively minor catastrophic risk, which led tosignificant losses, even on a cash basis, for Exportof the most highly subsidised areas of industrial

production in the UK is wind farm technology. Are Credits Guarantee Department. These are eventswhich happen as time passes. What we have notyou telling us that in your view some forms of

subsidy are desirable and others are not? seen is a major catastrophic event. We are nottalking nuclear war here, we are talking significantMr Mark Ingram: I am no expert in that industrial

area; I am not even an expert on subsidies in economic disturbance which leads to an inability orunwillingness by sovereign governments to paygeneral, so my opinion is probably not even

worth stating. their debts.

Q283 Chairman: That was really what I was trying Q286 Judy Mallaber: The events to which you areto establish. referring historically had a very severe eVect onMr Mark Ingram: As a general principle, I would institutions across both public and private sector.assume that you want to subsidise industries which Are you saying that in an even more catastrophicare likely to grow in the future and therefore economic situation globally it is feasible to be ablegenerate jobs in the future and industries which are to put that threat into these calculations of risk?not subsidised elsewhere, so one pound of subsidy Mr Paul Ingram: No; that is the problem. If wegenerates the maximum incremental impact on that were to have a catastrophic event, it would be theindustry. government which had to pick up the pieces at aChairman: The only problem therefore is that wind time when it is probably least able to do so, becausefarm technology may not be the best one and at the it is also likely to have suVered economically frompresent moment. Sad to say, there is an inexorable, that event. Even our method does not take intonot necessarily increasing but sustainable demand account severe catastrophic risk, because in thefor weapons of war. I merely make that point. One end, the British Government also guarantees theof the things we have to do here is to assess the private banks. Mark may like to talk more aboutquality of the evidence and your arguments might that. It is inconceivable that this government wouldbe good, but your asides might be misleading. I am allow NatWest, Barclays and such banks to gotrying to strip away some of that. under; it is just politically unacceptable. Even with

our method, we are still not able to priceQ284 Judy Mallaber: I note that in paragraph 6.1 catastrophic risk because we still end up as theyou do say “We believe it to be economically government being the lender of last resort or theaxiomatic that subsidies can be justified when they insurer of last resort on the finance markets.eVectively negate market failure . . . or for social orpolitical reasons”. Presumably on the wind

Q287 Judy Mallaber: Is this not true for anytechnology example you would argue that wasorganisation? They cannot draw up all their plansenvironmentally and therefore politically andbased on the assumption that they can cover anysocially justifiable. Would that be your argument?catastrophic risk, wherever in the market they are.Mr Paul Ingram: It is of course the government’sMr Paul Ingram: Yes, we are just trying to priceprerogative to determine what is a social andthe subsidy and in pricing the subsidy we are notpolitical objective. What we are trying to separatetaking into account catastrophic risk. We thoughtout from that is an economic objective. Thewe should identify that as an issue.problem is that when you bring in something which

is an economic objective, you very quickly get intoa situation where market intervention distorts the Q288 Judy Mallaber: That would apply to publicmarket, which is not necessarily a bad thing, but it policy generally outside the financial markets. Onis only a positive thing if it is to address market that basis you might say we could not possibly costfailure or for political or social reasons. If it is for out the costs of our health service because howpurely economic reasons, then it is more likely to would it cope with some dramatic epidemic evendo more harm than good and that is a generally worse than those we have seen? It is almost a recipeestablished economic position. for inaction of any kind and just saying we might

as well not even try.Mr Mark Ingram: The diVerence here is that we areQ285 Judy Mallaber: Going back a few paragraphs

in your evidence to paragraph 5.3 you are moving not seeking to provide a benefit in suchcircumstances for the UK economy. EVectively weon there from talking about issues of eYciency in

terms of subsidies, to getting quite scary. You are are insuring catastrophic risk for other countries.Therefore there is a question as to whether or nottalking about the possibility of catastrophic events

exposing ECGD to massive losses. How real is we want to be in the market of providingcatastrophic risk insurance for other countries,this threat?

Mr Paul Ingram: You only have to look back in which is eVectively what this is doing, as opposedto risks within the health service which arehistory to see some what I would call minor

catastrophic events, the first being the debt crisis of domestic. Of course it is the role of government toprovide support for catastrophic risk domestically;the early 1980s which still, even today 20 years

later, accounts for somewhere in the region of 85% that is what the British Government is about, butI wonder whether it is about providing catastrophicof ECGD’s losses. You can look at the crisis in

South East Asia in 1999 which again was a risk insurance internationally.



20 April 2004 BASIC

Q289 Judy Mallaber: In eVect what you are saying Mr Mark Ingram: The direction in which you aregoing is very much the value at risk methodology.is that this adds a very substantial amount more toIt is whether we can assign a probability to this £20the calculation you would make of the subsidy.billion loss, which is possibly 0.0001% or somethingMr Mark Ingram: It is very diYcult to quantifyvery small. What probability can we assign to a £19how much more it adds. The one thing I would saybillion loss, £18m, £17 and so on? Can we end upis that we do know the British Government pays awith a distribution of probabilities associated withhigher risk premium than other governments inlikely loss levels? Actuarially you are looking intoterms of borrowing. I would say that the fact thatthe future, you are gazing into your crystal ball,we are prepared to act as insurer for internationalwhich is exactly what the ECGD is proposing tocatastrophic risk to the extent we are may be ado in order to cost its operations. It is quitefactor in the fact that we pay more interest thanunsatisfactory.other sovereign borrowers.

Q294 Chairman: Just in the grand scheme of things,we are in a building here which cost £200 million.Q290 Judy Mallaber: Because indeed theThere is a Parliament building in Scotland whichcompanies we saw this morning were saying to usstarted oV at £39 million and is about £410 millionthat the Department was currently too cautious inthis week; it will be £420 million next week. Sinceits assessment of risk in comparison with otherthe war we have had the AGR programme and wecountries.have had Concord, both of which have been publicMr Mark Ingram: In comparison with other ECAs.expenditure projects, but in some respects it seemsWe do not challenge the fact that all ECAs areto be within the risk elements of government tosubsidising currently.handle this.MrMark Ingram: I would agree with you, if it werenot for the fact that the private sector has alreadyQ291 Linda Perham: Do you think that theanswered your question. The private sector hasECGD’s new business principles represent progressalready said how much they believe the cost of suchas far as you are concerned?risk should be and that is the risk premium theyMr Paul Ingram: To be absolutely frank with you,apply to government debt overseas.it is beyond the scope of our evidence to look at

the business principles because they were moreQ295 Chairman: I think the point we would beassociated with environmental and corruptionmaking here is that the Committee has yet to findissues. We do think that when considering theevidence which suggests that the lender of lastmission and the principles it is important that theresort argument is not relevant in so far as evensubsidy is taken into account and the premiums where there are private cover facilities in other

reflect that in terms of raising those premiums. We countries, the guarantor for that facility is thethink that needs to be reflected in the mission and government of the country.principles, but in order to keep our evidence Mr Paul Ingram: In a sense we are not challengingfocused on the issue we have brought before you, that. Even with our method, when it comes towe have not actually looked in detail at the business catastrophic risk, the buck stops with theprinciples. government. What we are trying to do is cost

everything but the catastrophic risk in a moreappropriate manner.Q292 Chairman: We have just about covered all of

the points. I just want to get a handle on things Q296 Sir Robert Smith: Are you saying that therehere, get a sense of proportion. Let us assume that is private long term money available which is notthere is a major catastrophic situation—and I am underwritten by government?not quite sure of the diVerence between a major Mr Mark Ingram: No, sorry; no, we are not sayingcatastrophe and a minor catastrophe, it is a bit like that. All the international bond markets aresomething being partially unique. How much eVectively underwritten by one government ortaxpayers’ money is at risk in respect of this scheme another.in relation to a major catastrophe?Mr Paul Ingram: I am trying to remember. Q297 Chairman: We have covered pretty well all

the ground and more. Thank you very much forMr Mark Ingram: About £20 billion.your evidence; it has been very stimulating. WeMr Paul Ingram: It is about £20 billion. In essenceshall certainly direct the attention of ECGDit is the value of all the contracts which Exporttowards the paper you have given us and seeCredits Guarantee Department is insuring as ofwhether we can get anything more than a Delphictoday.response from them.Mr Paul Ingram: We should be very interested.

Q293 Chairman: To what extent do actuaries take Chairman:Watch this space. Thank you very muchfor coming; we appreciate it.account of a total collapse in their thinking?



Witnesses: Mr Nicholas Hildyard and Ms Susan Hawley, The Corner House, examined.

Q298 Chairman: Good afternoon, Ms Hawley and on which we submitted evidence to yourCommittee, it does not appear to be ECGD whichMr Hildyard. Your memorandum gives a cautious

welcome to ECGD’s new mission statement and picked up on that particular set of briberyallegations; it was actually other governmentbusiness principles. I know one of the pieces of

your evidence Turning a Blind Eye: Corruption and departments.the UK’s Export Credits Guarantee Department.Have you shot your fox? Q300 Chairman: On the other side, now that weMs Hawley: No. We have moved straight on to have legislation and we have due warning given tocorruption procedures because, as you are companies which could defy the rules, would youprobably aware, they have just, literally on 1 April, say that we have a situation where the threat ofbrought in new procedures which were not an April punishment is now quite severe? Do you think thereFool’s joke. There are lots of things to welcome will be a deterrent eVect there, or do you think thatabout them, but the main problem with them is that the agent in some obscure city in China or in Newthey focus very much on getting more and better Delhi will not be susceptible to the blandishmentspaper signing out of companies. There is a problem which were previously oVered?with that underlying approach, which is that Ms Hawley: It certainly has changed the businessbasically the philosophy is that you take the environment and it is a very big wake-up call. Thecompany’s word for it and that becomes an excuse threat of punishment is undermined by the fact thatin a way for not undertaking greater due diligence, there is not that much of a threat of prosecutionwhich is what we should like to see. It is also or detection. We have not seen a single prosecutionmeaningless, unless there is real enforcement of so far in this country and the fact is that as longthat paper signing exercise. In terms of due as companies can continue to pay bribes throughdiligence, we definitely feel that ECGD still has agents, they can continue to say that they knewvery much what you might call a downstream absolutely nothing about it. That is why ECGD isapproach. It will only deal with problems once they absolutely critical to anti-corruption eVorts,have arisen and it does not have so much because it actually underwrites agents’preventive approach. In order to do that, what they commissions. That means eVectively that if therewould really need to be doing is looking very are bribes within the agent’s commission, ECGD iscarefully at credible suspicion of corruption. At the actually underwriting those bribes.moment their definition of “suYcient evidence ofcorruption and bribery” for instance, is steps Q301 Chairman: We heard evidence this morningtowards legal action and we know from bribery from Transparency International and they gave us,that it can take very many years for real evidence you might say, painted scenarios where the auditto emerge. If the ECGD is going to protect its function could identify some of the inconsistenciesreputation and also protect the reputation of the which might well in turn alert even the doziest civilbusinesses it supports, it needs to act much further servant to the possibility of some form ofup the line in terms of due diligence. I do not know malfeasance. Do you envisage a section of ECGDwhether you have all seen the new procedures being suYciently electrified to carry out duewhich they brought out; presumably you have. One diligence or an audit function in this way?of the things is that they say they are going to Ms Hawley: They are certainly taking it moreexpand their audit clause and that would be very seriously, there is no doubt about that and that isgood if they are going to use it and there are clear very important. What we should like to see, inguidelines about what conditions they are going to order to bring in this further up the line approach,use it under and how often they are going to use is corruption being incorporated in mainstream riskit. We are not clear that audit clause is actually new analysis and my understanding is that it is not atto start with. It still gives the companies five days the moment. That is something which has beennotice. It is not spot checks. I am not sure that it recommended by OECD’s round table onis enough and that the ECGD is actually using its corporate responsibility. If you had itfull investigatory powers. Most of the report was mainstreamed in risk analysis, it would be beholdencase studies prior to their first set of new procedures on all underwriters to take it very seriously.and the ECGD’s initial response to us was thattheir procedures were enough and there would not

Q302 Chairman: These things tend to be somewhatbe any new cases now. We always said that it takesglacial in the speed at which they move, sad to say.time for these allegations to emerge and certainlyMs Hawley: They certainly are.the evidence we have put before the Committee isChairman: My colleagues want to come in, but Ithat we are now getting new bribery cases emergingtake your point. I think there is a view in thesince the new procedures were brought into being. Committee that there is more rejoicing in heavenwhen one sinner repents and the ECGD might wellbe repenting at the moment. We shall wait and see.Q299 Chairman: Could it be that because of the

new procedures it is easier to find the bribery cases?Ms Hawley: I am not sure, because it is not the Q303 Sir Robert Smith: You go on to say on theECGD which appears to be finding them. It issue of business principles on the first page of yourappears either to be coming out in the press or memorandum that “. . . in order to meet its newsome of it from NGOs in developing countries. mission statement to the full, the ECGD

proactively seek business that accords with theCertainly in one of the cases in Papua New Guinea,



20 April 2004 The Corner House

Government’s international objectives rather than of changing direction. If government were to takea lead in promoting sustainable development it hasreactively trying to make the business it supports

fit, often rather uncomfortably, with these to make some hard choices here. It has to be seento be taking a lead and be seen to be saying this isobjectives”. How do you suggest they proactively

seek out business? the direction in which it thinks industry should begoing, this is where it sees a future for its exporters,Mr Hildyard: There are two ways in which it can

do this. The first is something we have been calling this is where it sees a future for exporters who arepromoting sustainable development and it isfor for some time which is to follow what the

government itself says and make some hard choices prepared to put public support behind those eVorts.There are some hard choices.about what sort of business it is going to support

and send a very clear message to the businesscommunity about which industries it is going to Q306 Sir Robert Smith: You do not think that theysupport. I relate this back to a more general point have been so successful in getting the messagethat the ECGD is a public institution, there is across that people are not applying; they meet thestrong evidence that it does receive a subsidy in one criteria at the screening stage.form or another and in our view that subsidy Mr Hildyard: No.should be used for the public good and given thesustainable development objectives of the Q307 Chairman: The last time you appeared heregovernment, it should be used to promote was when we were discussing Turkish dams andsustainable development, or at least be in what happened there was that, as a consequence ofaccordance with that. We should seek as a first-oV our eVorts and others and your own in no smallthe introduction of an exclusion list which would measure, the application was withdrawn. It did notstipulate what sorts of industries it is not going to have to be rejected, it was withdrawn.be backing in the future and along with that a list, Mr Hildyard: It would have been a much morewhich was a positive list of the sort of industries it significant message to the public and to industry ifwill be seeking actively to support. I should say that the ECGD had made a statement saying they couldECGD’s position on this, and indeed on other not support this dam and they could not supportmeasures such as debarring companies for it for the following reasons: it does not meetcorruption, is that it is forbidden to do so under international development standards, there is nothe terms of its binding Act of Parliament. I looked resettlement plan to speak of, it is in conflict withat that and legal friends have looked at that and our international obligations on internationalthere is scope within that Act for a minister to be waterways, it has major human rights implicationsable to make recommendations, in the interests of which do not fit with what was then the ethicalprotecting ECGD’s reputation, for a positive foreign policy. That would have been much braverexclusion list. and much more decisive and have had longer-term

consequences.Q304 Sir Robert Smith: If it were to go down thatroute would it really need a change? Is it not their Q308 Chairman: I do not want to go over the meritsconcern that they are subject to judicial review and of that. I was merely postulating that. As I recall,if they are shown not to have judged the what happened was that there was anapplication on its merits but to have prejudiced environmental report due out and in advance of itthemselves beforehand, is that not the problem? coming out the application was withdrawn, thatMr Hildyard: That may well be a problem. If that is such was the degree of public interest and concerna stumbling block to the ECGD moving to embrace and anxiety that the players from the UK, whosustainable development, then it is a problem were going to lead the project, decided that they nogovernment needs to address. It should not hide longer wished to be associated with it. Sometimesbehind it. you get the results which are desired by other

means, but the fact was that there was a great dealof public concern at that time. I am merelyQ305 Sir Robert Smith: Do you not think they canqualifying what you are saying, that okay, it wasaddress it when they do get the applications bynot rejected; you would have preferred it to bemaking sure they stick to those principles inrejected. On their basis they withdrew it beforeassessing the application, albeit they assess eachrejection was finally an option. In order forone on its merits?government to deal with it, maybe it went a littleMr Hildyard: It just fails to send the right messageslowly, they did in fact allow for these otherto both industry and to the public. It is veryexaminations and that report to be produced andsignificant that not one single application has beenthey said that the government would hold backturned down on the basis of business principlesuntil the report came out, but before the reportsince the introduction of the business principles,came out the people withdrew.despite the introduction of an environmentalMr Hildyard: I take your point and concede it. Iscreening process. Most people would understandwas addressing my remarks to the question abouta screening process to be a process by which youbeing proactive.screen out bad projects. ECGD looks at many,

many projects over a year and you would expectsome of them to have been screened out. The fact Q309 Chairman: Sometimes there is more than one

way to skin the cat.that it does not sends a very poor message in terms




Mr Hildyard: In this case, to be proactive means Mr Hildyard: Let us note then the language of theguidelines which we have in the UK is always indoing a little more than skinning the cat.terms of “should”.Ms Hawley: There is no space to have that kind of

public pressure on lots of cases. That case did notgo through, but it does not mean that other cases, Q312 Chairman: On this issue.where there is public pressure, do not go through. Mr Hildyard: Yes.Having public pressure cannot be a substitute forproper institutional safeguards. May I make one Q313 Mr Clapham: May I just stay on theother point about the Act, which is that according sustainable development issue? I notice in yourto our reading it leaves a lot of discretion to the memorandum (towards the end of Section A) youSecretary of State? I think it would be interesting to do make the point that at the present time theask ECGD what the legal interpretation is, whether ECGD falls well short of having what you mightthey would make it available; I am sure they will call a clear sustainable development policy. Whatnot. do you think the real obstacles are to getting some

clarity with regard to sustainable development?Mr Hildyard: I should repeat very much in someQ310 Chairman: I am not sure we will get a legalways what I have just said. I think that the firstinterpretation, but we may well get a ministerialabsolute priority is that there should be clear-cutone.guidelines, mandatory standards, in which hardMr Hildyard: May I make a couple of otherchoices are made and which lay down, for thecomments relating to this and to the question ofbenefit of industry, clear guidance for the future,being proactive. There are two other areas where Iwhat industry has to do for particular projects tothink they could be a good deal more proactive.get credit. Those guidelines and clear-cut rules,One is that they could be much clearer in what theirwhich amount to a policy, which the ECGD doespolicy is. They do not actually have a sustainablenot have at the moment, should be backed up bydevelopment policy as such at the moment. Whatvery clear internal rules as to how they should bethey have is a series of aspirational statements andimplemented and those rules should be transparentsome very legally unclear guidelines which are openand their operation should be transparent. Thirdly,to a good deal of interpretation and wherethere is absolute priority that there must be far, farenormous discretion is given to the minister andbetter due diligence and risk assessment. It is verywhere the interpretation of those guidelines, wherestriking that where we looked at projects whichdiscretion is exercised, is almost invariablyhave been backed, we invariably find that on theexercised in favour of the client rather than inground what is going on does not come remotelyfavour of the aVected people, or the environment, close to what is being said on paper. Bonny Islandor indeed on issues of corruption. The diVerent is held by ECGD as a showcase project and weinterpretations given by ECGD always amuse and have just found out that it emerges the EIA for italarm me, for example to the word “should”. The is still conditional. It has not been properly

UK has just signed the OECD Common approved, it has not been finally approved. WhatApproaches which it says it is going to implement. is the British Government doing backing a projectArticle 4 of that Common Approaches on the which does not have an EIA which has been finallyEnvironment says that all applications should be approved? The case I have been particularlyscreened. As a member of the public, common involved in over the last few years is the Baku-English, I would read that as meaning you should Ceyhan campaign. There are major problems herescreen all your applications including arms, with due diligence. If I may just go through someaerospace and so on. The ECGD in reference to its of them, first of all there has been what I shouldapplication of World Bank guidelines says that all say is an over-reliance on paper compliance.projects should meet World Bank guidelines. Inother statements it interprets that “should” as

Q314 Chairman: Could you send us a copy of yourmeaning that all projects are required to meetpaper rather than go through it in detail?World Bank guidelines. On this side of the ChannelMr Hildyard:We can certainly send you additional“should” means “required”, but when we arecomments.talking about an agreement which was reached inChairman: On that issue. Rather than you readingParis “should” means “we can take it or leave it”.out from the document, we shall take it as read thatClarity is very, very important and I should sayyou have given it to us and we shall move on. I dothat we need mandatory standards. not want to curtail your evidence.

Q311 Chairman: It is very diYcult on issues such Q315 Mr Clapham: When you have raised theseas that. I just oVer this as an old soldier in this points with ECGD, as you obviously have, whatgame. When it comes to dealing with legislation the has the feedback been, particularly around thisamount of parliamentary time which is taken up by issue of sustainable development?“may” or “shall” or “should” or “shall” is of such Mr Hildyard: If I may give an explicit examplean order that the number of person hours is here, because it is very fresh and it is very new, welimitless. If a government wants nothing to happen have raised questions about recent allegations onthey say “should”. If they want something to the BTC pipeline that the wrong coating was used

on the pipeline. We raised a question. We said thathappen they say “shall”.




in our view this was a material threat which should Q317 Linda Perham: No other country has an idealway of operating.have been disclosed to the government, that BP

failed to do so and that was grounds for suspending Mr Hildyard: The ECAs of virtually all the OECDcountries are coming under increasing scrutiny bythe loan pending a full investigation. The reactionnon-governmental organisations and we arehas been extremely curious and alarming frankly.learning a lot as we go along about what theThe first reaction was yes, they admitted they wereprocedures are and what gaps there are in thenot told by BP, but they said it was not a materialprocedures. We can certainly find out fromthreat. This is an allegation about the wholecolleagues what the procedures are in otherpipeline in Georgia and Azerbaijan leaking as acountries and let you know.result of the wrong coating being used. To describe

that as not being a material threat I find franklybizarre. They say it was a routine decision and that Q318 Richard Burden: A lot of the evidence youBP did not need to inform them about it. But BP have given us so far has concerned lack of scrutinyhad informed them on other occasions about on specific projects, in more general terms yourroutine problems as the pipe was being built. They advocacy of government and as a result ofsay they were relying on a report by a firm called government policy ECGD adopting a moreParsons, which had scrutinised the types of coating proactive approach to discriminate in favour ofbeing used and other materials being used in the certain types of activities, sustainable developmentpipeline. My understanding from conversations and so on, which I understand. May I just take youwith colleagues is that the Parsons report does not to section C of your memorandum where you haveamount to scrutiny at all. The contract involved no the list of things which the government should doon-site inspection, the reviewer who did the report to promote sustainable development? I am just awas not based in Azerbaijan or Georgia, he was not little concerned about the fourth one of those abouta corrosion expert. It was a paper exercise again. the exclusion criteria. I just want to be clear whatIt was not a quality assurance exercise and so on. you are saying there. The way I read that is that it isIt also emerges, from what we can gather, that it saying that in any event anything which is an armsis not even certain that ECGD has a copy of the project should be excluded, anything whichoriginal internal consultant’s report which raised involves nuclear or new fossil fuel power stations,issues about the paint, which is again extremely any oil exploration projects and any project in aalarming. What sort of due diligence was being country with poor human rights records. There isdone? I should say that the reliance on this paper a semi-colon in the wrong place there or are youcompliance, where you just tick the box and do not saying that there is no need for any scrutiny of anylook at what is going on on the ground is a major arms project, any oil exploration project and so on,block to them achieving sustainable development. that you are advocating they would all be ruled outThere is an institutional lesson here, which extends by virtue of the fact that they are those kinds ofbeyond just having a proper investigative body projects.which can go out to the field and do the Ms Hawley: Our position would be—and I do notinvestigations, it is also that the business principles think this is just a fringe NGO position, Iunit should not be subject to the underwriting understand it was very much DFID’s position atcommittee, but that its decisions and the last mission statement and review—that there

is very rarely good reason for arms exports torecommendations should not merely be taken intodeveloping countries. You could argue that aaccount, they should be binding.public government department supporting armsexports to rich countries when there could be

Q316 Linda Perham: May I just take you up on private sector insurance for that does suggest thatsomething you mentioned under your corporate there is quite a good argument for removinggovernance paragraphs, section (iii) Public defence altogether from ECGD’s portfolio. InOversight of the ECGD? You are talking there terms of arms, we would actually suggest that. Itabout encouraging us “to consider the case for represents a very large slice of ECGD’s portfolioParliament establishing a sub-committee with the and one has to question whether that is really anspecific remit to examine the ECGD’s annual adequate reflection of UK exports. Let usaccounts”. You also mention the US system of remember that ECGD only underwrites aboutrequiring category A projects to go through a three% of UK exports. Between one third and oneprocess of parliamentary approval. Are there any half of that is going every year to defence projectsother examples you know of in other countries and a lot of that is going to one particularwhere the first thing is done, the sub-committee company. In the US for a long time they called Ex-examining annual accounts of the equivalent of the Im Boeing’s bank. You could argue that in the UKECGD, or indeed any other countries following the ECGD has been BAe’s bank. You have to askUS’s example? whether that is a reflection of exporters. You haveMs Hawley: I understand in Australia the budget already heard evidence from the BCCB that smallof EFIC also has to pass through Parliament, but exporters are getting squeezed out. Other sectorsI do not think they have a sub-committee feel that they are losing out and that is a questionexamining the accounts. which has to be answered: are arms taking up aMr Hildyard: I do not know. We could certainly disproportionate amount? Aside from that there

are all sorts of issues about human rights, whetherlook into that for you and find out fairly speedily.




we should be exporting to particular countries. guidelines there are certain things they are nowTake the South Africa case. I do not know whether going to have for highly indebted poor countries,you heard evidence on this this morning. The idea which include value for money on contracts andbehind the South Africa case was that it was for competitive tender. I do not see why you cannotpeacekeeping, that there was a legitimate role for get a consensus for that to be on all contracts. I doSouth African peacekeeping in the region. If you not see why we should be exporting not at valuelook at the arms they received it was frigates and for money to any country frankly. It is not in thesubmarines and Hawks. You do wonder whether interests of any country, whether they are rich orthat is what you need for peacekeeping in the DRC. poor, to get an over-priced product.

Q319 Richard Burden: You are quite right DFIDQ322 Mr Hoyle: What I am concerned about is ifand indeed government would wish to promotewe were to follow the view that South Africanon-arms exports. There has been a shift towardsbought Hawks—which you quite rightly used as andiscrimination in favour of other things. I was justexample—the danger if we took a unilateraltrying to establish that what you are arguing forapproach would be that we find other competitors,here is not greater scrutiny of those things, it iswhether the Russians with MiGs or the Frenchactually ruling it out. It is diVerent.with Rafale or the Americans with F16s, supportMs Hawley: On defence it would be ruling it out.their companies so they would get the contract.Mr Hildyard: On fossil fuels and oil exploration,Nobody has gained, in fact the only losers wouldhere we take the line basically taken by the recentbe the people employed in this country. The SouthWorld Bank extractive industries review which onAfricans would benefit because, in fairness, youclimate grounds has recommended that the Worldquite rightly point out that BAe spent £1.7 billion.Bank withdraw from funding fossil fuel and gasBut you do not mention the oVsetting jobs createdprojects by 2008.in South Africa, the South Africans being able toexport into the UK market through munitionsQ320 Mr Hoyle: Would it be fair to say that youexports and a lot more behind the contract whichwould like to discriminate completely in favour ofcould easily have gone to the Russians whosustainable and environmentally friendly exporters?provided nothing but cheaper aircraft.Ms Hawley: That would be a preference, but it isMs Hawley: You say that, but if the UKnot just that, it is also other sectors which are losingGovernment said they were not going to supportout: education, health, those kinds of sectors arethis, or we do not want to be involved in exportingnot very well represented in the ECGD portfolio.arms on this particular project where there areWe would not want only renewable andclearly massive local concerns in Parliament,environmentally friendly projects to be supported.among the NGO community, among the churches;The project which the ECGD supported, which wasif ECGD and the UK Government said they didone of its kind, of a UK exporter exporting anot believe this was necessarily something theyparticular kind of technology to a Costa Ricanwanted to support in a new South Africa, wherecoVee co-op, was a tiny export, but it was a verythere were enormous problems with poverty, yes,good example of the kind of creative exports whichyou have to create jobs in industry, whether thewe could be sending round the world. We would

not say “only” environmentally friendly, would we? arms industry is the right one to do it in, is a very,Mr Hildyard: No. There is a lot on health and very big question. If ECGD had said no, then thateducation and other sectors. would have sent a very powerful message. You say

unilateral and other companies will just come in.Sometimes if the ECGD and the UK GovernmentQ321 Mr Hoyle: I was interested to hear you usesay no to a project it can have the eVect of makingthe South African example. Do you believe that ifthat project diYcult to bring about in the firstwe were to go down this line it ought to be aplace. Do you see what I am saying? You use it asunilateral approach or a multilateral approach?a leverage.Ms Hawley: It is a very, very diYcult question. A

consensus has already emerged on productiveexpenditure to the various countries. I have to say

Q323 Mr Hoyle: We both have to look at realitythat the new productive expenditure guidelines ofand the reality was that you had a choice of fourECGD are actually a step back from their oldaircraft and South Africa being a newly electedproductive expenditure guidelines. They hardlydemocracy were determined to have the rightmention sustainable development now. Even underaircraft for training their pilots. Rightly or wronglythose they can still export defence equipment to thethat is the government’s decision. They were goinghighly indebted poor countries and low incometo buy some aircraft. What I am saying to you iscountries. A consensus did emerge about whatthat I do not believe it would be right to goconstituted productive expenditure and I guess ourunilateral because the only poor loser is the peopleargument would be that you could expand thatin the UK whose skills and jobs would be lost atconsensus to include all developing countries andthe expense of creating a bigger American marketat least IDA-blend countries, which includes India,and ensuring Americans had a sustained market.Pakistan, Papua New Guinea, Bolivia, a wholeAll I am asking you is whether we go unilateral orseries of middle income countries which it could

include. In the new productive expenditure multilateral?




Ms Hawley: The South African air force wanted Q328 Judy Mallaber: Is that demand led? Is thatjust who asks for support and what other waysthe Italian aircraft. It was a lot cheaper and it was

tested by RAF pilots who said it was a very would there be of going around their business?Ms Hawley: That is a really interesting question.good product.

Chairman: We are not going to resolve or rewrite Maybe we do not know. We know that ECGDoperates on a first come, first served basis, or Ihistory to date. We have only a limited amount of

time because we have other witnesses to take. presume it still does, it certainly has done. Thequestion is whether that basis actually gives anadvantage to those customers who have a veryQ324 Mr Evans: We all want to see this levellong-standing relationship with ECGD, who knowplaying field and the reality is where we are. Youthe ropes, who know the markets, know how to getsay that ECGD ought to look at whether the armsin there quickly and whether actually what wetrade is the right one they ought to be supporting.should be seeing is ECGD developing moreI can understand why you want to see a lot of othersectoral targets to make sure there is a much widersectors being supported, but the reality is that BAerange of sectors represented.Systems employs thousands of people. You have to

remember that the small- to medium-enterprisesQ329 Judy Mallaber: Are you suggesting theywithin Lancashire as well rely on a healthy BAeshould go out and seek business rather thanSystems. Is it not right therefore that an industryorganisations and companies coming to them?which is really a very specialised industry, it is aMs Hawley: Yes.very particular sort of industry, does get the sortMr Hildyard: Yes; definitely. That is absolutelyof support that other countries are oVering to theirnecessary if one is going to take a proactivearms exporters?approach to sustainable development. I should alsoMs Hawley:We have to ask ourselves at whose coststress, which we do stress in the evidence, that weat the end of the day? Should we only be concernedare extremely worried by the cosy relationshipwith UK jobs?which has been developed over the years, many,many years of BAe in this case getting vastQ325 Mr Evans: You are just anti the arms trade, subsidies, an extremely cosy relationship whichare you not? seems to have led to rules being flouted, BAe prettyMs Hawley: Well, it is not so much— much dictating to ECGD how it is going to complywith new rules on agents and so on and so forth.

Q326 Mr Evans: Nothing wrong in saying yes. Go This is an extremely worrying position to be in. Ion, say it. You just do not like arms. have every sympathy for the people in LancashireMs Hawley: Arms do a lot of damage. As we said who rely on BAe for their jobs, but I do think thatwe think peacekeeping equipment would be a the public has a right to expect that the agencieslegitimate use. There might be small Land Rovers, which help subsidise whatever industry are notsmall arms, which might be useful for peacekeeping captured by certain companies, that there is a moreequipment. open process and because of the government’s

commitment to sustainable development that thatagency is used or the subsidy is used to re-directQ327 Judy Mallaber: May I just ask a bit more

about your memorandum? You talk about the industries towards sustainable development.Ms Hawley: We know from the York report thatECGD being captured by a small handful of

particular interests and imply that their support is the analysis of defence economists and experts isthat if arms exports were halved, the one-oV costtailored very much to those particular interests of

a few companies. Can you say something about the would be quite minimal and new alternative jobswould be created in diVerent industries and thatevidence you have to support that position?

Ms Hawley: That comes from the minutes of the could be reflected in support from ECGD.Export Credits Advisory Council, that the varietiesof capitalism approach suggests that that is the Q330 Chairman: We will leave it at that point. We

have covered all the ground we want to today.nature of the demand they are currently dealingwith and ECGD are therefore thinking of Thank you for your evidence. We have two

members from Lancashire, who, though ondeveloping new products to suit that small range ofcustomers. That is evidence which is coming out diVerent sides of the political divide, are as one

voice on these issues, as you may have gathered.from the ECGD itself. You can ask ECGD, but Ido not think ECGD would deny it. It has also come We are very grateful to you for the trouble you

have taken. If there is anything else you wish toout in Parliamentary Questions. In the last 10 yearsBAe Systems and Airbus Industries have send us, we should be very grateful.

Mr Hildyard: We shall send you the furtherconsistently been in the top five to 10 exporters byvalue of contracts which have been supported information you have requested.

Chairman: Thank you very much.every year.



Witnesses:Mr Digby Jones,Director General, Confederation of British Industry (CBI),Mr James Larkin,Chairman, CBI Export Finance Committee and Managing Director Aon Trade Finance and Mr AndyScott, CBI Director of Competitiveness, examined.

Q331 Good afternoon gentlemen. We have been to compete on equal terms with their globalcompetitors. If you are in Canada, it would be to betaking evidence all day. Some people are saying

that industry gets too much; others are saying that the recognised leader in providing ground-breakingcommercial financial solutions. In Germany theyit does not get enough; some who disagree with

giving it anything say that probably ECGD charges actually sat and told me “It is industrial policy.Why wouldn’t we do it?”. They all come at it fromjust about the right rate if you are going to have it

anyway. It would seem that your submission a diVerent philosophy. We, I believe rightly, comeat it from “There’s a market failure. Private sectorsuggests that export credit agencies in other

countries do it better than ECGD. Is that a can’t provide. Government should step in”. If wedo not, it is not just about the jobs in Lancashirereasonable summation?

Mr Jones: I think you know who Andy and I are, or indeed anywhere else in Britain, it is actually theoverall competitiveness and attractiveness ofbut James is my Chairman on my CBI Export

Finance Committee and he is also the MD of Aon Britain as a place to invest, because it is part of thesuite of available support, where an overseasTrade Finance. When I get into any diYculty in the

next few minutes, I shall look that way. That is a investor decides where to put down his tent.good summation. ECGD used to have a reputationas a “can-do” organisation years ago. It has been in Q334 Mr Hoyle: In your report you say that thereexistence for 80 years and now the attribute which is a “. . . disinclination of the ECGD to cover somewould be more frequently given to it by my constructional infrastructure and contracting workmembers would be “can’t-do” and that other in developing countries”. Obviously you feel that itorganisations in other countries are more flexible, is deeply regretted. Do you have any examples, ortheir response times are quicker, less bureaucratic which examples do you have in mind here?and probably less opaque. As a result, at the Mr Scott:What that referred to was when we weremoment the activity level of ECGD amongst our looking at the priority areas which ECGD wasprincipal competitors is the lowest it has been for identifying, which were defence related, civila long, long time. In fact when I was gathering aerospace related, power and energy related, a lotevidence for this, one of my members said to me of our members in the construction related areas—that what he actually does is use ECGD to market which historically have been areas which have beentest. He rings them up and if they will cover it, he supported by ECGD—felt that whilst that was notknows it does not need cover. That is the absolute excluding them automatically from being covered,truth and that is not where we would want to see they were important areas where the UK hadit. I guess it is also true to say that if only we lived strong expertise, where the UK was well respectedin a perfect world, none of it would be necessary around the world and therefore they ought to beanywhere, but we do not, so we live in a included within those key areas which will becompetitive environment where we as a nation have covered by ECGD. It was more a question of whento be competitive. That is not just my members ECGD had identified priorities, whilst they werehaving to be competitive; it is the facilitation not specifically being excluded, they had notsupport in the nation having to be competitive identified that as being a key sector, which they feltagainst its rivals in other countries, because that is was one which warranted more priority.the way the world works. If we did not do it, believe Mr Larkin: One of the reasons why constructionme another country would. overall was not made a priority was because there

had been fewer applications from the constructionindustry in the UK. The reason for that wasQ332 Chairman:Which countries would you regardbecause in that particular area ECGD wasas examples of the best practice?increasingly seen as uncompetitive and thereforeMr Jones: In this area?people were sourcing their construction projectsfrom other countries.

Q333 Chairman: Yes. Your members areinternational companies, they operate with other

Q335 Mr Hoyle: Yet we hear when we go abroadECAs.that British companies are doing well and areMr Jones: If you asked the average exporter thatwinning contracts.question, they would say America, Germany,Mr Larkin: As consultants perhaps.France and the Netherlands. It is interesting,

because we rightly address the philosophy behind itin terms of market failure: where the market cannot Q336 Mr Hoyle: Absolutely. Is that not fair of the

construction industry in this country? The big boysprovide, this is where we see this stepping in.Therefore it is very important that it is seen as now are consultants and they employ everybody in.

Is that not the way the construction industry hasproviding something at a rate of return wherecommercial availability does not exist. That is the now gone?

Mr Larkin: I accept that; it is an internationalphilosophy behind it here. I do not think we woulddisagree with that. If you look at the philosophy in business.

Mr Jones: In the consultancy side of constructionAmerica, they say “It is to support US exports andUS jobs. That is why, period”. If you are in the we cannot even say we are doing well: we are

probably world class. Wherever you go we are theNetherlands, it is to create conditions for exporters



20 April 2004 Confederation of British Industry

best in the world. It is on the delivery of the risk countries would tend not to take such a gold-platedat the end of the day; that is what this is about and look at delivery as they would in the Unitedin that we have to fight every day and we are no Kingdom. I am not talking of Third World nations,better or worse. I am talking of serious major developed nation

players. They would not be as draconian in the waythey interpret the route to the project, whatever itQ337 Mr Hoyle: That is reflected in the answer. Inmay be.the UK what the big boys have done is become

consultants and they just buy in whoever they needto do the job. Q341 Judy Mallaber: So you are not objecting, forMr Jones: On a local basis. example, to environmental requirements; you are

just saying that they are interpreted by the ECGDQ338 Mr Hoyle: Absolutely and that is just more strictly and severely than in other countriesreflected abroad and in fairness I think the report which have environmental requirements.is a little disingenuous in the way it is put across Mr Jones: Yes. I do not believe that businesswhen that takes place here as well. should come to the table in the twenty-first centuryMr Jones: If you move one up from provision of in the developed world and expect to get a hearinglabour to the provision of management, which is if it does not want to set an example and if it doeswhere the inherent risk takes place, I think we are not want to say it wants to be a good neighbour,not being disingenuous. There you are seeing the good employer and ethical and honest in the wayrisk aspect of project management being an issue, it deals. I do not think that any company, anywherebut talking of the bottom level of it I think you in the developed world should be entitled to aare right. hearing unless it has that as its stand-up ethic. So

I am agreeing with you. The problem is that we doQ339 Mr Hoyle: Wherever we go we seem to be compete every day around the world withhearing we win water treatment contracts, new companies from other nations in the developedroads infrastructure, airports, you name it; we are world who do not have the same method ofinvolved everywhere. We are doing really well and implementing that ideal. They tend to turn blindit is a great success story and let us hope it eyes and they tend to take short-cuts andcontinues. sometimes they tend to ignore it.Mr Jones: I would just say that there is oneproblem when aid has been untied here and it has

Q342 Judy Mallaber: Would that, for example, benot been untied in some of our competitor nations,your analysis of why the French ECA is allowed toso UK taxpayers’ money is often used to create jobsgive commitments earlier and more readily and hasin France. But that is for another day.a can-do approach? Is it that they are ignoring theMr Hoyle: We have to fight that, we always have

done and must continue. requirements on them or what is it? You tell me.Mr Larkin: There is a simpler explanation. As wehave said in our memorandum, ECGD hasQ340 Judy Mallaber: You complain about red tapeundergone an unprecedented level of investigationin your memorandum and the slow reaction toand change over the last few years. At the sameapplications by ECGD compared for example withtime as with the OECD, they have imposed orCOFACE in France. I am not quite clear, but youencouraged people to bring in things likeseem to attribute those disadvantages to the need toenvironmental and anti-corruption rules. ECGDensure that government policies on human rights,has also changed its structure from concentratingenvironmental protection and so on are taken into

account. Is that the case? Is it the objectives which on country risk underwriting to sector riskare the problem, or the means the ECGD uses to underwriting and that has meant that many of theachieve them? underwriters in ECGD are rather uncertain, bothMr Jones: There are two sides to this. The first is about what they should be doing and, I supposethat we are heartened by the changes at ECGD realistically, about their jobs and what their statusright now; we are heartened by that. Therefore will be in the future. All that has contributedthere is one aspect of the new way going forward towards this problem with red tape, rather than thewhich is whether the way they are going to do it is fact that we now have to fill in forms to getacceptable as policy and secondly, how they are environmental approvals which we did not have togoing to execute whatever it is. In the past, the do in the past. COFACE has not been subject tomethod of execution has become more regulatory, all those changes; it is as simple as that.more bureaucratic of its own. I would hope very Mr Jones: I would also add to that, that many ofmuch that will get better in the new regime. my members, when I ask them, would say yes toWhether we approve or do not approve of what your question.they are going to try to execute, it is the methodwhich has caused the problem. We are hopeful the

Q343 Mr Djanogly: Could you explain yournew appointments are going to sort that out to aconcern, please, that the trading fund might becertain extent. Where they come up againstsubject to parliamentary scrutiny, if an annualproblems which others do not, which comes backpayment is required to top it up? Could you expandto the competitive element rather than the delivery

on the ground to our members, is that other on the concerns expressed in your memorandum?




Mr Jones: One thing we should very much like to give your shareholders return for their risk, whichyou do in the private sector. So there are some verysee is almost a suck-it-and-see approach to this overgood reasons as to why the rate of return whichthe first two or three years. I do not think we couldParliament could expect out of this wouldsit here—and by the way neither could Treasury—legitimately be less than they would get in theand say this is how much we need. Nobody actuallyprivate sector.knows. It would be very useful if we could assess

and appraise it on a pilot basis over a couple ofyears, on the understanding that if it did prove to Q344 Mr Clapham: At the beginning of the sessionneed more, then more was available. If it proved to you described the four countries, America,need less, then why and was it working or not, was Germany, France and the Netherlands which areit a function of the market or a function of better at it than we are and then you said youineYciency? On that basis, I would not want to say thought in terms of policy that we had got it right;X is enough today and we need more tomorrow. I although their objectives may home in on theirwould rather Parliament understands on day one industries, we had got it right.that for two or three years it is going to be suck- Mr Jones: As policy; the philosophy behind theit-and-see. policy.Mr Scott: In no way in our evidence are wesuggesting that ECGD should not be subject to Q345 Mr Clapham: Given that we are likely to bepublic, to parliamentary, to very open scrutiny. In moving next year to a trading fund and afact I think ECGD, amongst all the ECAs is as capitalisation which we were just discussing, do youtransparent as any of them. Part of the issue to feel, with the new guidelines which have come in aswhich you may be alluding is that we have a from April and given the connection with thenumber of concerns which are around the rate of trading fund as it becomes operative say from nextreturn, which has been mooted as being the target year and the very fact that we have got it right byrate as opposed to the achievable rate. If there were concentrating on areas where there is marketa significant diVerence, as indeed from what we failure, that there is going to be a noticeableunderstand at the moment there could well be, then improvement?might there have to be a requirement to go back to Mr Jones: Where we have got it right is behind thelook for extra funds? Might there be a requirement reason why we do it. As you rightly said, it isto interpret that diVerence between a target rate because of market failure. If the Americans say itmentioned—anywhere between 11, 16, even 18% is to create jobs and that is its primary function insome would suggest—compared with the more America, then eventually you are going down abenchmark rate or the appropriate rate which we path of protectionism, whereas here we are sayingbelieve would be about 4–4°%? Any diVerence that business will stand up and be counted on itsbetween those could mean that year on year there own to create the jobs, add the value and train thewould then be a scrutiny to see where those funds people and where it cannot then do it in acome from. All that creates is not that there should particular market, can you please come in withnot be parliamentary scrutiny, but uncertainty. support. The philosophy of provision is where IThat would be the concern which our members think we have got it right. Where we have got it

wrong in the past is in the eYciency, productivity,would have. What they are looking for out of thistransparency and eVectiveness of delivery. There Icurrent review, having had so many reviews ofhave every hope—to answer the specific secondECGD, is a period with a degree of certainty sopart of your question—that the new regime, newthat they can then go to their customer base andguidelines and, I like to think, everybody puttingsay yes, we believe we are likely to be able to getthis more on the map, everybody is more interestedthis sort of support and we are not going to havein this than they were four or five years ago, thatto justify the existence of a fund of whatever sizehas to be a good thing. Am I hopeful that we willyear on year. That is the issue which isget a better result and my members saying they didfundamentally underpinning our concern.a better job than they used to? Yes, I am hopeful.Mr Jones: And, if Parliament rightly thenThe philosophy has been right for a long time,scrutinises why there is a discrepancy between aalthough the delivery has been poor.return of 4–4°%, which we would think advisable,

and greater, then you would suddenly haveopponents saying it is due to a diVerent treatment Q346 Mr Clapham: Returning to capitalisation ofof export support. I would say to that, that there the trading fund, you said earlier that you thought

we might have to suck it and see for two orare two aspects to the support which you do notthree years.find in the private sector: one is that the rate ofMr Jones: As to whether it is suYcient capacity.recovery of indemnified loss is far greater at

ECGD, up at 70% recovery rates, whereas in theprivate sector you are under half, mainly because Q347 Mr Clapham: As to whether there is going tothey provide and move on and the taxpayers do not be suYcient capacity there. Given the fact that ifaccept, nor should they accept, such a degree of we have got it wrong and, for example, if the £1.7write-oV. Eventually you get more of your money billion which has been talked about wasback with ECGD, but eventually. Secondly, there insuYcient, it is going to tilt the playing fieldis not the premium to shareholder value, so you do against British industry because there is going to be

insuYcient support for exports. We therefore mustnot actually have to build in your rate of return to




get it right and that seems to me to come back to I talk to these businesses frequently—that they arelosing confidence in the system. That takes a longthe question of scrutiny, so that we can ensure thattime to bring back.fund is topped up. Given your discussions withMr Scott: To reinforce that point, they are losingministers, with the Department of Trade andconfidence in the system, they are losing confidenceIndustry, what has been the feedback on thatbecause they have seen what they would regard asparticular issue, because I would think it isfairly endless reviews over the last four, five, sixsomething you have raised?years, which have undermined their confidence thatMr Jones: The worry I have, because at the end ofthe government broadly is committed to this as athe day you are all politicians, is if you plumped forlong-term means of supporting key parts of our£1.7 billion—you said £1.7 billion, I am not sayingexporting and manufacturing sector in thewhether that is right or wrong, but we have all beeninternational marketplace. Whilst in the ideal worldtalking about it—and basically there were a crythey would say yes, we should like to believe thatafter 18 months for it to be £2.1, I bet a fair fewif there is a flexible approach, we could then seepeople would be making political capital out ofwhatever the figure was, £1.7 billion or whatever,what they would see as a mistake and others wouldincreased over a period of time to meet that marketbe digging in and trying to justify why they weredemand, their fear at the moment is, because theyright. Welcome to politics. What I am saying is thathave seen this more as a constraining factor, theyI wish at that moment the political dynamic coulddo not believe and do not have the confidence, thatbe taken out of it, with a recognition today thatit would be looked at positively as a means of£1.7 billion might well be wrong; it might be £2.1responding to a pilot period. They fear that itbillion to start with, but if you plumped for £2.1would be used as a means of constraining ratherbillion it might be £1.7 billion. For just two or threethan the means of saying that we have to pitch ityears, can we have some stability and can wesomewhere, let us see how the marketplaceunderstand that no-one is going to start screamingdevelops. As yet I do not think they haveabout whether the figure was right or wrong? Thatconfidence that they have that responsive attitudedoes mean that Treasury has to acknowledge thator responsive nature coming through fromthere might need to be more here and it will not begovernment or from ECGD.because a mistake has been made, it will be because

we are being empirical in the way we are assessingthe adequacy of the capitalisation of funding. Q349 Sir Robert Smith: You are saying in yourMr Larkin: Exporters would feel much happier. submission that you are concerned that supportWhen this was originally proposed a couple of provided through ECGD should not be regardedyears ago, we were talking in terms of £4 billion as as a subsidy. Yet just now you were saying that if

it was not there, people would pay over the oddsbeing the necessary size of the fund. It is true thatin the private sector.since then demand on ECGD’s facilities hasMr Jones: No, I said they might do; they probablydropped, but that is largely due to what happenedwould not go there at all.with world trade over that period. It is clearly on

the increase again now and exporters would feelmuch happier if there were something there which Q350 Sir Robert Smith: If the state is intervening,said that it is going to be set at £1.7 billion, but we why not just recognise it as in eVect a subsidy?envisage it could rise to £4 billion. So you do not Mr Jones: It is not a subsidy. In America it is ahave to provide it all at once, but at least there subsidy.would be some wording there to give some comfort.Mr Jones: What worries me is that if there is not

Q351 Sir Robert Smith: You do not accept thatthat wording and if there is no understanding fromthere is any element of subsidy in this.all sides of the House that this figure might not beMr Jones: If it were a subsidy, I should like to thinkright, then business will say it is not going to useit would be making a great deal more of athis service because nobody knows where theydiVerence to exports in this country than it is today.really are and business is going to go oV and eitherIt is driven from a philosophy of market failure.not do it at all, or pay over the odds in the private

sector, which means they will be uncompetitive,which means they will not create the jobs. In that Q352 Sir Robert Smith: If it is not a subsidy—respect, I would want business to have confidence Mr Jones: Well it is not.in the system from day one and that does not meanthat the figure is right, it means that business

Q353 Sir Robert Smith:—then presumably it couldunderstands that if the figure turns out to bebe provided in the private sector?inadequate, there will not be an enormous row andMr Jones: Except where the private sector will nota load of lobbying to get to where it needs it to be.go. Usually they will not go for two reasons: eitherWe have to keep business confidence in this system.because they do not think they will get their moneyback, in other words the risk is so enormous that

Q348 Mr Clapham: Presumably that issue of the premium would be so enormous you would notconfidence has been made clear to ministers? do it; secondly, they will not go because of trackMr Jones: Definitely and I can promise you, from record, in other words it might be all right now, but

it was not in the past.my personal experience—I get around the country,




Q354 Sir Robert Smith: My taxpayers in the Mr Jones: It is not a subsidy, is it? Americabasically is subsidising its exports. We live in aconstituency I represent are expected to take the

risk for my dividend in Shell to be protected if they world where, for instance, if we were not involvedin any form of manufacturing export—and defencewant to build a pipeline somewhere. There is this

problem. If, as you say, the other export credit equipment has been mentioned today—if we saidwe were not going to do it any more, if anybodyagencies are doing more and doing it more cheaply

and chasing other markets, for job creation as well, actually believes that a country buying it wouldstop and say “That’s all right. If Britain won’t sellshould we not be looking to be a leaner and fitter

UK PLC? it to us we won’t do it” . . . well I wish I lived inthat paradise, but I do not.Mr Jones: Oh, you mean do not do it at all.

Q355 Sir Robert Smith: Yes. Q359 Sir Robert Smith: What economists wouldMr Jones: I see. Then what do you do with the argue is that because of the British Government’shundreds of thousands of people who are currently intervention resources are no longer available topaying tax to build schools and hospitals out of the other businesses which do not rely on export creditmoney they earn from the exports which happen in subsidies.this country? Mr Larkin: First of all, ECGD specialises in long

risk and diYcult markets. One of the things weQ356 Sir Robert Smith: A lot of people suspect that have perhaps not discussed is the key fact thatthe Treasury would be better oV if it were not because it is government, from the banks’ point ofdoing it. view who actually make the money available to theMr Scott: We would also argue that over a exporters it is sovereign risk and therefore is zeroconsistent period of time, certainly over the last 10 weighted. They are therefore able to make moneyyears, ECGD has made a return to the Treasury. available which would not otherwise be available

and that is why the private sector as such cannotQ357 Sir Robert Smith: If it has made a return, why compete on this, because the private sectorcan it not be done by private enterprise? insurance or guarantee does not achieve thatMr Scott: It has made a return, but it is not a return objective. The true marketplace for ECGD is notwhich would be a return which the private sector the marketplace as a whole, it is other export creditwould be able to go in and generate for a long term. agencies. That is something which was being missedAll our competitor countries would see value in in evidence I listened to earlier today. It may notsupport of this nature in order to encourage those be ideal, but that is the practical world we live in.exporting businesses—sometimes quite overtly for If we want to have these industries, these high-techthe reasons which say the Americans have stated, industries, engineering industries in this country atwhich are to support export and to support jobs. all, we have to provide the infrastructure: road,We are living and working in a globally competitive railways, education, but also export credit agencies,environment. If we want to see successful because every OECD country has an export creditbusinesses operating around the world, we have to agency which gives sovereign guarantees on itsrecognise that in order to support some of those major exports.successful businesses, in areas where, because the Mr Jones: An example of how it has a knock-onmarket is imperfect, it is not able to provide that eVect on return would be a multinational Britishlong-term support, this is a legitimate way in which manufacturing company and it manufacturesa pot of government money can be used. That pot in America, Britain and Germany and itof money is achieving a return to the taxpayer. manufactures basically the same thing in all three,Mr Jones: Let us say it would achieve a rate of so this is not to go oV to China or India to doreturn of 4%—I am not saying it will, but let us say a job, these are three developed nationit did—why the private sector might say they were manufacturing environments and they sell to thenot interested in that would be because they could developing world. They can choose which one ofuse the same pound and get 8% somewhere else, those three they manufacture in. If America andwhereas government probably cannot. So a rate of Germany are going to support their exports to areturn at all is very much better than most of our greater extent than we are, they will go and makecompetitor nations are ever going to get for their them in America or Germany. The particular thingtaxpayer: your constituent is going to see a 4% they are making might be the subject of exportreturn on taxpayers’ money in an environment support in America or ECGD in Britain or mightwhere actually they are addressing market failure be something where you could persuade me I amand going to safeguard the jobs of hundreds of wrong—it might be—and someone who is going tothousands of people. campaign against the fact that it should not be

made anyway will move on in their fluVy way.However, the big worry is that if you do that tooQ358 Sir Robert Smith: Are you confident that theyoften, the capability, the facility, the training, theare making that return, depending how youinvestment, the skills base to make anything in thatmeasure it? A lot of the evidence we have had todaysector will disappear from that country. Thereforefrom other economic analysis is suggesting that ifsomething which will never be subject to ECGD,you look at the risks and the exposure of thenever be subject to export support will never betaxpayer and measure it against what is out there,

there is in eVect a subsidy. made in Britain again, which is utterly unrelated on




day one to the subject matter of the debate but CBI and its members to be a very important factordown the line means that one day, one of your because most foreign buyers like to know exactlyconstituents will ask why we do not make things in what their costs are going to be over these longBritain anymore. It will not be the subject of the periods of time. So being able to provide fixed ratesame thing. Just for the record, when I used the finance for 10 or 15 years is extremely importantword “fluVy” I meant fluVy argument, I did not to being competitive internationally. That ismean anything derogatory. something which will be coming out of the

capitalisation fund. It will be one of the costs thatQ360 Mr Evans: We have had a number of fund will have.witnesses before us today who referred to the Mr Scott: You were also asking what it is that oursupport as a subsidy. Are they just completely members are finding when they go to try to getwrong? competitive cover from diVerent ECAs. There willMr Jones: Yes, in Britain; in Britain. They are not be a variety of diVerent factors. You probablycompletely wrong if they are talking about heard this morning when the aerospace and civilanother country. aviation witnesses were giving evidence that

sometimes it would be that the premium is higher.Q361 Mr Evans: They were referring to Britain. I An example would be Ex-Im in the US, where thereget equally irritated if that is not what it is. You are clear examples, and I am sure people from bothwere very critical about ECGD right at the very Rolls-Royce and Airbus would have cited this thisbeginning and that a number of your members morning because they made these points veryhave said to you that they are a “can’t-do” group clearly to us that when you are comparing thethese days. Does that mean that we are losing out support you can get for either Airbus vis-a-visto other countries who are supporting their Boeing out of ECGD or indeed other Europeanindustries? ECAs for that matter, but certainly out of ECGDMr Jones: Yes. compared with what they can get out the US at Ex-

Im bank, there will be a diVerence in premium rate.Q362 Mr Evans: In any particular sector? Today we Other companies would cite the fact that what theyhave really concentrated on defence; it seems that are really looking for is an early indication whendefence is the one which gets most of the cover, but they first approach an ECA that this is likely to beare any other sectors losing out? a project which is going to get cover; that is whyMr Jones: In anecdotal evidence to me, they are looking for flexibility. What they need,construction, pharmaceuticals. That is on when they are still at that negotiating stage, is toanecdotal evidence, but the big major one would be able to say yes, this is a project for which theybe on aerospace, which does not necessarily mean are likely to get cover. If there is a slow responsedefence, in fact for two or three of the big rate, as indeed many of them have found over theaerospace players it is not about defence.

last three of four years out of ECGD, partlybecause of all the uncertainty, and they get a more

Q363 Mr Evans:No, no. Do your members tell you rapid response rate and turnaround time at thatwhy ECGD will not cover them? initial stage, then they are more likely to go throughMr Jones: Yes. Sometimes they tell us specifically, and continue to work with that ECA and thereforebut in confidence. Sometimes it is just that it is too also put the business into that particular country.diYcult, don’t go there, too many forms to fill in,

It is a mixture: sometimes absolutely down to theI don’t get an answer quickly enough, I know thatpremium rate, one ECA vis-a-vis another;the Americans will do it better, I’ll go there, I won’tsometimes it is down to the rapid response time ateven start here, which comes back to the confidencean early enough stage, sometimes it is down to thequestion. What we must do—and the CBI willactual process itself which it then has to go throughdefinitely put its weight behind this—now there iswith a particular ECA to get the approval. It is aa new regime there and new capitalisation is to getmixture of those factors. One of the key thingsthe British business community to trust it again andwhich our members have been saying to us is thatto say—I will explore whether you will cover itthey are very frustrated because some of them whophilosophically in a minute—it knows that thethen go back five, 10 years or more will be able tosystem for applying for this will be better and moresay they used to and have been working with aneYcient. At the moment they have no confidenceECGD which was very responsive. Particularlyin that part.over these last three or four or five years, they havebeen frustrated, they have seen morale droppingQ364 Mr Evans: Do you think it would be betterwithin ECGD itself, they have seen this cannot-doif there were fixed rate export finance as opposedattitude in the UK, not because the individuals areto the way they are currently doing it?not capable of doing it, but because they feelMr Larkin: We do have a fixed rate export financeconstrained and that is what they find hugelyscheme which is done through the commercialfrustrating. When that frustration builds up, theybanks who are supported by ECGD. They are notare then in danger of turning their back on ECGDonly guaranteeing the payment by the ECGD ofand not even making the approaches to them,bank loans but they are actually guaranteeing thatbecause they have been used to getting a morerates can be fixed over a period of time according

to international agreement. That is thought by the positive response when they have approached other




ECAs. It builds on itself and that is the sort of Q366 Richard Burden: I was not going to ask youexactly that.YoudonotknowtheanswerandIdonotvicious circle and that is what we would argue we

have desperately got to break out of. knowtheansweron thatone.What Iwasgoing toaskis, if there is going to be a re-injection of the “can-do”attitude, more of a pro-business approach in the

Q365 Richard Burden: In paragraph 16 of your ECGD, less red tape and the rest of it, where do youmemorandumyourefer to theportfoliomanagement see the backstop comingwhich prevents that slippingwhich ECGD is seeking to develop. You say you too fardowntheroadofdownplaying environmentalwould like it to evolve in a more pro-business issues, downplaying sustainable development issuesdirection.Howwouldyou like to see it dothat? Is that and increasing corruption? What would be thein a sense what you have just been saying, or do you backstop you would like to see in there in the activehave something else inmind? portfolio management which could guard againstMr Jones: Firstly, it is exactly what Andy has just that?been saying, a more pro-business, eYcient, we-are- Mr Jones:Whopolices the policeman?on-the-same-side-here approach to an application.Secondly, an understanding of the way the world Q367Richard Burden:Yes.works and an understanding that the multinational Mr Jones: I suppose the ultimate answer is you guys,companies in thisworld do have to operate in the real is it not? The ultimate answer is Parliament.world,not in theworldyouandIwould likebut in the Mr Larkin: The exporters’ concern is to deal withreal world, and a greater understanding. these things eYciently; the gold-plating argument.Mr Larkin: I agree with that. This is a delicate area Wedo seem tohave slightly longer questionnaires onbecause it involves not just environmental things but environmental issues than other export creditalso elements of corruptionandall the rest of it.Asall agencies, although they are all governed by OECDBritish businesses do, we totally support all these agreement.Weenforce themat slightly lower levels inmoves which OECD has brought in to make these terms of contractual value. It is that sort of thing. It isthings clearer. The CBI has always made the point, not that the questions cannot be asked, they must betalking about bribery, that there is also extortion and asked, but the procedure should be simplified.in certain territories you have to be realistic and Mr Jones:And transparent.certain thingsare expected.This isaverydiYcultarea MrLarkin:Andtransparent; absolutely.As longas itfor international businesses to copewith. is transparent it can be simple.Mr Jones: The CBI is the UKmember of BIAC (the Mr Jones: I would have no problem with a form ofBusiness and Industry Advisory Committee), which public reporting on a regular basis; instead of everyis the business side of OECD and we have been very three yearswith a great hiatus, just regular reporting.forceful in pushing through an approach which is You would hope, of course, that if companies camesaying we will not participate in or support any back to this because they hadmore confidence in thepolicies which facilitate corruption. I feel very way itworkedand the pressurewason the companiesstrongly about that and we do as an organisation. to help make it work and therefore they knew whatHowever,whatdoyoudoabout theareaswhere there was expected of them, there would be self-regulationare facilitation payments, what do you do in essentially.countrieswhereeverysinglepieceofbusinesswhich is Mr Larkin: In one way from the insurance point ofever done involves a degree of facilitation payment? view it should be self-policing because the policiesDoes Britain just never ever trade there, when every contain a clause which says that if there is any breachother developed nation is? What do you do? If of law, either in the buyer’s or seller’s country orsomebody could give me a specific answer to that . . . international law the policy is invalid. The risk isI am not talking about huge extortion and borne by the exporter.corruption, I am talking about minor facilitationpayments, like taking people out to lunch in other Q368 Chairman: On that point, we are very gratefulcountries. What do you do? We have been very for your evidence. We are also conscious of theforceful insayingata levelwearenotgoingtogothere fact, Mr Jones, that you had indicated you wouldat all and we feel very strongly about this. It is about have preferred to have left a little earlier. We aresetting an example, it is about a code of ethics, but grateful to you for hanging on.there will be many of my members who will say that Mr Jones: I am cutting the tape on the opening ofthere is a level at which the world works this way in a member’s facility at six o’clock elsewhere, but Icertaincountriesandwhatdoyouwantustodo?That thought this was very important, so I am gratefulis a sense of business realism and then you might to you all for your time.rightly askmeatwhatpoint that ceases tobe that and Chairman: Thank you very much and thank you forbecomes corruption? If we all knew the answer to your trouble. If there is anything else we need, we

know we can come back to you. Thank you.that, it would be a better world.



Tuesday 11 May 2004

Members present


Mr Michael Clapham Judy MallaberMr Nigel Evans Linda PerhamMr Lindsay Hoyle Sir Robert Smith

Witnesses: Ms Hannah GriYths, Corporates Campaigner, Friends of the Earth, Ms Hannah Ellis,International Financial Institutions Campaigner, Friends of the Earth International, Ms Naomi Kanzaki,Campaigner, Friends of the Earth Japan, examined.

Q369 Chairman: Good afternoon. Miss GriYths, said, “I do not think we can really come to this tablesince you are in the middle, you have been elected as with this scheme”? You have said not so manythe person who introduces your two colleagues, and schemes have been screened out. Could it be thatthen we will get started. they were never going to be screened in as aMs GriYths: I am Hannah GriYths. I am consequence of the business principles?Corporates Campaigner for Friends of the Earth Ms GriYths: Again, I would be interested to seeEngland, Wales and Northern Ireland. The other some analysis of whether the business principlesHannah, Hannah Ellis, is Financial Institutions have made a diVerence in terms of the applicationsCampaigner for Friends of the Earth International ECGD is receiving, but my guess, the answer to thatand Naomi Kazaki, a campaigner for Friends of the question, would be, no, it has not put any businessesEarth, Japan. oV. The business principles, frankly, are not so

radical that they would be likely to put most BritishQ370 Chairman: It must be about four or five years companies oV. I think they are probably weakersince you last gave evidence to us on related matters. than some companies’ own environmental andThe impression we get is that plus ca change in the social standards. I cannot see that it would putECGB has not made an awful lot of diVerence. This anyone oV, but I do not have any evidence on that.would seem to be the gist of yourmemorandum. AmI being unfair to you when I say that or am I being

Q372 Chairman: So the horse frightening qualitiesunfair to ECGD? Do you think that after theare not very apparent?overhaul very much has changed?Ms GriYths: I am sorry?Ms GriYths: I think the overhaul was significant in

that ECGD recognised the importance of takingenvironmental and social factors into consideration, Q373 Chairman: The horse frightening--and I think it would be slightly unfair to say that Ms GriYths: No, I would not say so.nothing has changed since then. The businessprinciples have been a good first step in the rightdirection, but I think it is important to separate what Q374 Sir Robert Smith: On the issue of what hashas changed in theory and what may or may not changed and what has not in terms of transparency,have changed in practice on the ground. Since the in section 3 of your submission, 3.1 to 3.3, you talkintroduction of the business principles I am fairly about the problems you had in the run up to 2002 incertain in saying that no projects have been screened terms of obtaining information. You go on to say,out; so no projects have been rejected on the basis of “The department’s attitude has not changed sincethe business principles. Support for the defence then.” Have you any more recent examples ofsector, for example, has remained the same, obstructive behaviour?proportional support for fossil fuels has remained Ms GriYths: Of obstructive behaviour?about the same since we were last here and I am sureECGD will argue that some projects will have been

Q375 Sir Robert Smith: Yes?improved as a result of the business principles. IMs GriYths: Not to hand, I do not, no. Thewould be interested to hear from them what specificenvironmental impact assessment for the Bakuconcrete improvements they think have been madepipeline, we were able to obtain a copy, although Ias a result of the business principles. I think, indo not think that was directly from ECGD, and wesummary, I would say we have seen a good first stephave not had an example as fundamental as thein the right direction, but it is very much a first step

and we need to now translate that into concrete Yusufeli example since then, although I do knowtangible changes on the ground in terms of the from my colleagues at the Corner House that theyprojects we are supporting. have requested some information relating to the

specificity of the Baku pipeline, and this is an issue Iwould like to come back to later. A report byQ371 Chairman: Do you think that the businessParsons was turned down by ECGD. I will go backprinciples have had a deterrent eVect in the senseto my colleagues, if you will allow me, and submitthat some consortia who might have approached

ECGD have looked at the business principles and anything else in writing.



11 May 2004 Friends of the Earth

Q376 Sir Robert Smith: This may be something else Q384 Mr Clapham: I am just reading yourparagraph 5.3. You say the ECGD should not oVeryou will have to write about, but have you

experienced diYculty obtaining impact assessments support for any projects which have nodemonstrable development benefits. Why shouldafter a project has been approved for support rather

than during the approval process? that be? Would it not put British industry in anuncompetitive position, particularly in areas whereMsGriYths: I do not think there have been any cases

where we have asked for impact assessments after a British industry has been successful?Ms GriYths: It is our view that public subsidiesproject has been approved.should be used in areas where industry cannotmanage alone and that the British GovernmentQ377 Sir Robert Smith:Okay, but if you can write toshould be supporting those areas of UK industry,us on the others?such as those that might be involved in sustainableMs GriYths: I will.development, that do not necessarily have thecompetitive advantage of more establishedQ378 Mr Evans:May I stick with the BTC pipelineindustries; and we think that the ECGD would befor a second. It is an area you have put a submissionthe ideal place to do this to enable the Britishin, other people have referred to it also and we areGovernment to promote sustainable Britishgoing to talk to others as well about it. You say thatIndustry abroad.with this the Government ignore their own

international policies that they have set down forQ385MrClapham:Have you put that view to them?themselves. You have clearly talked to ECGDaboutMs GriYths: To?this. What sort of response have you had from them

to your concerns?MsGriYths:ECGDare obviously satisfied that they Q386 Mr Clapham: To the ECGD?are meeting government policy and that the MsGriYths:Yes, we have. ECGD’s response to thatstandards of the World Bank, for example, have has been that it is their defining Act that is thebeen met by the pipeline, whereas our evidence and limiting factor in them absolutely pursuing aour view is opposite to that. sustainable development mandate or, indeed, in

screening out any projects which do not contributeto sustainable development. Initial conversationsQ379 Mr Evans:What sort of things are you sayingwith some of our legal friends would take a diVerentto them then where they are not listening?view of what that Act is, but, either way, we do notMs GriYths:What sort of things are we saying?think the Government should be hiding behind thatas a reason to not move this issue forward.Q380 Mr Evans: Yes.

Ms GriYths:We are raising . . . For example--Q387 Mr Clapham: In developing that view haveyou discussed it all with British industry that doesQ381 Mr Evans: Are you doing this all throughexport its skills, such as, for example, power stationwritten submission, by the way, or do you go and sitbuilding, the Malaysian project? Have you talked atdown with them at any stage?all with any of the contractors on those projects?Ms GriYths:Mostly through written submissions. IMs GriYths: No, we have not talked withpersonally have not sat down with them.contractors on that project. We have not beenUnfortunately, the campaigner who has was notinvolved in that project. I think that is a “no” to thatable to come today. I am sorry; I have lost the threadquestion.of the question.

Q388 Mr Clapham: So you have not discussed theseQ382 Mr Evans: Basically, when you write to themideas with British industry?about your concerns, what do you say and are theyMs GriYths:No. I very much think this is a role forable to rebut each point individually and say, “No,the British Government to be helping the newerwe think you are wrong on this, we think you aresustainable British industries rather than for existingwrong on that”?industries, such as the fossil fuel industry or theMs GriYths: No, the typical format is that we writenuclear industry. I think this is a matter for thewith very detailed concerns and they respond in aGovernment to take in hand, not industry.relatively generic way to those concerns.

Q383Mr Evans: So it has not changed at all over the Q389 Mr Clapham: It would be good if you couldcultivate a view with British industry. Certainly itperiod. They have not warmed to anything, they

have not conceded anything that you have put up on would be helpful?Ms GriYths: It would.the points that you have raised?

Ms GriYths: No, I cannot think of any examples MsEllis: Just on that point, I think that most Britishindustry when they are operating overseas wouldwhere they have conceded. I think perhaps what has

changed is that we have had more constructive claim to have development benefits to that localeconomy, i.e. local employment or providing somedialogue with the ECGD since we last met you in

terms of things like consultation on the business service to the local economy. This point at 5.3 whichyou were referring to is about ensuring that theprinciples. So we are meeting with them more

regularly, but we have not got to the stage of ECGD is investing in projects which are promotingdevelopment. That does not mean screening out alldiscussing detailed matters.




projects, unless they are windmills; it is screening in form the basis of projects if they were to besustainable projects, and I could go through those ifprojects which ensure sustainable development and

are not harmful to local and regional economies. you wanted.Mr Clapham: I understand that.

Q393 Chairman: Quickly?Ms GriYths: The first point would have to be aboutQ390 Chairman: How do you draw a distinctionmandatory standards. What we are seeing in thebetween what is a legitimate project in respect ofbusiness principles at the moment is that they aresustainable development? I ask this because themore aspirational statements rather thanmandatorymajor function of the ECGD is, you might say, tostandards and guidelines that companies would havedeal with issues and projects above a certain size andto follow, and we would need to see a clear andthe value of the project is very often the reason whytransparent internal process for implementing theseit gets on to the ECGD’s agenda, because they are,standards. I think, fundamentally, this has to beas it were, the credit and insurers of last resort. Thebacked up by a compliance and monitoringkind of projects you are talking about, would theymechanism, making sure that ECGD is followingnot fall within the purview of a department like thethrough projects throughout the duration of the life-Department for International Development?cycle of the project and picking up problems andMs GriYths: I see no reason why large projectsresponding to problems when and where they arise.cannot contribute to sustainable development.If I can just give one very recent example where wethink ECGD is failing to do this. It is about theQ391 Chairman: That is not the point I am making.Baku-Tblisi-Ceyhan pipeline. I assume that theI am saying that the ones that you think should beCommittee has seen the report of 1st May in Redsupported, by and large, are usually of a smaller size,Pepper Magazine. If you have not we could pointand to the extent to which they do get governmentyou in the direction of that, but I am sure you have.backing it is often through DFID. So it is the onesI will not go toomuch into the details, but this reportthat are left. I think, with respect, what you arerefers to allegations that BP has kept somealmost suggesting is that ECGD just packs up itsinformation about this pipeline from ECGD. Thisbags and goes: because there are not very manyinformation on first glance sounds like a technicalsustainable development projects of the kind thatmatter, but actually it relates fundamentally to theyou are hinting at that seem to be around at thesafety of the pipeline. To cut a long story short, it ispresent moment?about the choice of anti-corrosion paint used on theMs GriYths: For one, I would not like to see theBTC pipeline.Department for International Development and the

ECGD working at cross-purposes on this issue; it isQ394 Chairman:We are going to raise that subject.very important that they work together in the sameMs GriYths: You are going to raise that with us?direction. I think the key point here is that a shift in

ECGD’s portfolio is needed in order for the UK tobe supporting the sustainable development, and it is Q395 Chairman: No, with them.not satisfactory, in our view, to just sit back andwait Ms GriYths: Okay. We have had somefor those projects to come along, ECGD needs to correspondence with ECGD about this which wetake a much more proactive role in seeking out think has been very unsatisfactory. Their response toprojects and understanding what factors would our very detailed points was that the impact of thismake those companies oVering sustainable solutions paint not being adequate is that it will not cause amore able to expand their projects and apply, with materially adverse eVect yet, and so it is not a matterconfidence, to the ECGD. that concerns them. We will be very interested to seeMs Ellis: Sustainable development is not seen as your response and ECGD’s response on this.something by Friends of the Earth that can be done Chairman: Thank you. We are not here to passby financing from the Department for International judgment today on the BTC pipeline, although it isDevelopment and then all the nasty economic a factor. I make the point that we will be looking atprojects done by ECGD. That is not how we view it. it in the way that we did other things on previousAll developmentmust be sustainable and all projects occasions.financed by the ECGDmust fit under that mandate.

Q396MrHoyle: In the case of ECGD’s approach tothe impact assessment, I think it would be fair to sayQ392 Chairman: It was just the question of science.

I am not disputing the point you are making, but it you are not a great supporter, to say the least, fromyour paperwork. I just wonder: what would yourtends to be the case that the size and the scale of the

project is much a determining factor of arriving at strategic environmental impact assessment entail?Ms GriYths: Our strategic environmental impactthe desk of an export credit agency in the first

instance and then, after that, the relevant assessment would entail a much more hands-on andrigorous approach. I think it is fair to say thatconsiderations can be—

MsGriYths:Can I add one point to that? I think this ECGD has still got a tick-box, bureaucratic,paperwork approach to impact assessment and, asis where the role of ECGD comes in, in terms of

going beyond just screening out or screening in far as I know, does not carry out strategicenvironmental impact assessment at all. I do notprojects but improving projects or ensuring that

projects do contribute to sustainable development. know if Naomi Kanzaki wants to talk about theSakhalin project at all.There are several key things which we think would




Ms Kanzaki: Yes, I would like to make some points that cannot be screened out, but essentiallyenvironmental impact assessments are designed tofor Sakhalin. Do you know Sakhalin? Oil and gasbe public documents.development is going on in Sakhalin, and this would

be a very good example why strategic environmentalassessment is necessary to consider. For example, in Q400 Mr Hoyle: Which UK companies andSakhalin—this is Sakhalin Island—they have exporters have you been speaking to, so we get a feelSakhalin I project and Sakhalin II project in the for who is backing it?northern part, but from nowon there are seven other MsGriYths: I said I have not had extensive dialogueprojects all over Sakhalin; and some British with the companies.companies are also involved in these projects andmaybe, I think, ECGD might have more Q401 Mr Hoyle:Would it be fair to say none?opportunity possibility to finance other projects in Ms GriYths: We have obviously approachedthe future. I think why the strategic environmental companies in the past to release environmentalassessment is needed is even if I see only Sakhalin I impact assessments.project and Sakhalin II project, they conducteddiVerent EIA, they have a separate project plan, like Q402MrHoyle: Imeant about your 120-day period,they are going to contract diVerent pipelines and because it is quite a long period?they have diVerent litigation plans, they have Ms GriYths: No, we have not had discussions withdiVerent responsibilities. Everything is diVerent. companies on that.

Mr Hoyle: Okay; that is fine.

Q397 Mr Hoyle: Allowing for that and recognisingQ403 Chairman: Is there any reason why you chosethat you have got some details there, in the case of120 days?your environmental impact and the way that youMs Ellis: TheWorld Bank standard, I think, is that.project your study, is it used by any other ECA?If not that, it is 90 days, and the EBRD (theMs Kanzaki: Strategic environmental impact European Bank for Reconstruction andassessment has not been done by any export credit Development) have a similar disclosure period. Oneagencies, but I think some ECAs have already other point on that: the idea of the environmental

recognised the necessity of the strategic impact assessments being disclosed and them beingenvironmental assessment. created is to ensure the long-term sustainability of

that project, including the business interest involvedin that project. It is not meant to hinder. It is notQ398 Mr Hoyle: Part of the impact assessment thatintended and it does not hinder the business.you would like to take forward, would it be fair to

say that you would have a 120-day stakeholderQ404 Mr Hoyle:Would you agree, it would not beconsultation period?good to go unilaterally because people who are nextMs GriYths: I think that would be a crucial part ofto the market would still be doing their impactthe environmental impact assessment procedure;studies when everybody else has delivered theirs andand before that, I would have to say, we have to seegot the contract; so it would have to be amultilateralan absolute precondition that the environmentalapproach and it would be one that maybe weimpact assessment will be disclosed, because, as weought to—know, at the moment the ECGD has claimed oftenMs Ellis: That is the purpose of strategicthat commercial confidentiality is a reason for notenvironmental impact assessment as opposed todisclosing environmental impact assessments.environmental impact assessment. I think there is amisunderstanding here. Strategic environmental

Q399 Mr Hoyle: In the case of this 120-day impact assessment would look, by definition, at astakeholder consultation, what do the exporters say whole area and the development opportunities andabout that idea? Do you think it would work against options of a whole region or country, whereas anUK companies if the competitors are using it or do environmental impact assessment tends to look at a

specific project in an area. So it would require—you want not a unilateral but a multilateralapproach by all competing countries?Ms GriYths: I think, yes, a multilateral approach Q405 Mr Hoyle: So that is what you have beenwould be good, and I think the reason for pushing for; that is what you are suggesting?

Ms Ellis: Yes.conducting environmental impact assessment, partof the reason, is about addressing concerns of allstakeholders, and therefore it is very important and, Q406 Chairman: I think the figure the World Bankindeed, becomes part of the discipline of doing has is 90 days, but you are asking for another 30 daysenvironmental impact assessments, that the public on top of that?and other key stakeholders are involved in the Ms GriYths: I think that the most—process and consulted on it, both throughout theprocess and after the final documents are produced. Q407 Chairman: The thing is, if I can just make theI have not had extensive conversations with industry point, it could be perceived as being yet anotherabout this, but it should not result in threats to the obstacle, an obstacle in preventing British businesscompetitiveness, and I see no reason why if there is from being able to get to the table to put in a bid if

they are being saddled with a timescale which isspecific commercially confidential information




longer than the World Bank or other international is still coordinating their response to the review interms of what it will mean for theWorld Bank. AfterECAs are requiring. If your organisation wishes to

frustrate major British projects abroad, then that is that we will expect a response from otherinternational financial institutions, like thefine; but if you do not say that, then surely it is better

to get yourself on all-fours with the other countries European Bank for Reconstruction andDevelopment and the European Investment Bank,so that you are not disabling British companies who

might be prepared to go along with the objectives as to what they think it means to them and whatimpact it will have on their project portfolio and allyou have. The idea that you can be longer than

someone else because it gives you something better: the ECAs will definitely be questioned by a range ofgroups as to how many, if any, of the Extractiveit may actually impede British business from getting

the work that would create jobs. That is the point we Industries Review recommendations they will betaking on.are trying to get to here, the number of days, and

there is a point to how many there should be, and Ithink maybe that point has to be made by us as well? Q411 Linda Perham: The review, as you listed out inMs Ellis: To go back to the 90–120-day issue, that that paragraph, it is a phase-out of funding for all oilcame from the European Bank for Reconstruction and coal projects. Quite drastic proposals, wouldandDevelopment, who at themoment have a 90-day you not say, or would you say they are ones that youperiod of consultation, but often it ends up 120 days fully agree with?due to a recent piece of US legislation, which I Ms Ellis: First of all, Friends of the Earth, yes,cannot actually refer to at the moment but I can definitely fully agree with them. With regard to thesubmit that later. Extractive IndustriesReview, this has been endorsedMs GriYths: I think in some ways— by the European Parliament, by Desmond Tutu,

hundreds of NGOs have supported this review. It isQ408 Chairman: The chances are if it is US important to consider that these recommendationslegislation it will be to beat other countries, it will be of the review were considered against the Worldnothing to do with US companies. Bank’s mission and mandate of poverty alleviation,Ms GriYths: Our intent is certainly not to impede and it came to these conclusions based on that. Inthe British companies but to make sure that we are fact, the review concluded that in the majority ofsetting higher standards.We think that is our role on cases extractive industry projects were notthe global scene. I think in some ways the discussion alleviating poverty and promoting sustainable“90 days or 120 days” is perhaps a slight side-issue. development and therefore were not suitable use ofIf ECGD came out with a statement tomorrow that World Bank funds; but in terms of the Export Creditit was going to require for all category A and all Agency, it does not have that mission of povertycategory B projects a 90-day period of consultation, alleviation. Friends of the Earth believe that thewe would be very supportive of that and we would ECGD needs to radically reposition its mission innot . . . I think what I am saying is that the more terms of sustainable development, and if its missionfundamental question is, firstly, that ECGDrequires was to be—even if it was not a primary mission,environmental impact assessments to be disclosed sustainable development, but a precursor to itsand, secondly, that there is a consultation period. investment, it could not fund oil projects because of120 days might be best practice in the field, but 90 international commitments on climate change. It isdays would probably be adequate. not a suitable use of funding. It should be financing

and helping support renewable energies, and that isan area of business which is crying out for supportQ409 Chairman: Thank you. I am conscious of the

time. I wonder, Linda, if it might make more sense and international subsidy. Just on that note, I thinkthat the ECGD has a great opportunity coming up,not to start your two questions. There is going to be

a vote and we have to get across to the Chamber to because in June there is an international renewablesconference in Bonn, which is a follow-up conferencevote and come back. Could we suspend the

proceedings now and come back immediately after from the UN sustainable conference inJohannesburg on sustainable development, and atthe vote?

Ms GriYths: That would be fine. that conference there will be a strong push byinternational governments for greater investmentsby international financial institutions, includingThe Committee suspended from 3.15 pm to 3.33 pmECAs, to be financing renewables and not oil andfor a division in the Housemining projects; and support of the renewablesindustry is one of the big things that ECAs and otherQ410 Linda Perham: In paragraph 5.5 of yourinternational finance institutions can do. It is notsubmission you are advocating the form of ECGD’sjust a question of increasing lending frominvestment policy for extracting industries and yourenewables projects, it is a shift in the projectare recommending the approach advocated by theportfolio away from extractive industries projectsWorld Bank in the Extractive Industries Review. Dofor renewable energy projects which promoteyou know if there are other ECAs that are followingsustainable development.theWorld Bank’s recommendations at the moment?

Ms Ellis: I can answer that. Not at the moment, asfar as I know, because the World Bank themselves Q412 Linda Perham: Going back to something you

were talking about before the break about thehave not responded to the Extractive IndustriesReview. I know at the moment the UKGovernment strategic impact assessments, I do not know if you




know whether any other ECAs have mechanisms in Q415 Chairman: Before we leave this question ofplace for monitoring compliance inspection. They international comparison, our understanding of thehave got sanctions against companies for non- ECGD’s international comparable role, as it were,compliance? is that it tends to be largely focused on the OECDMs Kanzaki: Yes, there are a few ECAs who have and the range of assistance that can be given, thecompliancemechanisms.Also Japanese ECA, Japan parameters of aid, and people usually complainBank for International Cooperation have their own that the ECGD is too niggardly by comparisoncompliance mechanism since October last year with some of the other OECD members. I believeunder its new guidelines, and with this mechanism, there are certain development criteria within thewhich this is, aVected people can directly claim to the OECD criteria, and I think the ECGD played somebank about their violation of its guidelines. It is very part in getting this established. Do you pay anynew, so they have not used yet, but I think it is credence to what the OECD has set down, or is thatnecessary to have this kind of same kind of not part of the—compliance mechanism in each ECAs? Ms GriYths: I think the OECD’s guidelines on

multinational enterprises provide a good startingpoint of looking at what are the appropriateQ413 Linda Perham: Is it just Japan, or are therestandards for projects. The OECD’s commonother countries?approach on export credit, I think ECGD hasMs Kanzaki: They have it in Canada, Canadianplayed a role in developing those and they againECAs, and I think OPIC and several others, butprovide a good starting point, but they are not thenot many.be-all and end-all and ECGD within that should beMs GriYths: I wanted to add to that thatworking to constantly and incrementally improvemonitoring and compliance is incredibly linked tothose.ECGD’s own due diligence procedures. Friends of

the Earth’s view is that ECGD is not carrying outproper due diligence in the after financing stage Q416 Chairman: So that I can get it clear in myperhaps as well as in the consideration for support mind, at the present moment the World Bank hasstage. Again, to take two examples from the Baku- put out for consultation, is that correct, a set ofTblisi-Ceyhan pipeline, a Turkish man called criteria which, if adopted, would be the yardstickFerhat Kaya has recently been arrested, detained for sustainability? I am using shorthand here, butand allegedly tortured in Turkey because of his the World Bank in its Extractive Industry Reviewactivities of monitoring the Baku pipeline and and in other areas is trying to lay down grounddocumenting eVective communities on the ground. rules for ECAs, but at the moment the membershipI would like to know what due diligence procedures of the World Bank has yet to underwrite it. IsECGD is invoking in investigating that case and that correct?investigating the risk to ECGD’s own reputation in Ms Ellis: Not exactly. In terms of the Extractivehaving supported a pipeline which has directly Industries Review, that was an independent reviewcontributed to a campaigner being arrested in the

commissioned by the World Bank in 2000. Thehost country, especially when one of ECGD’sWorld Bank themselves are yet to respond to thebusiness principles is to ensure that ECGD doesEIR as to how those recommendations are goingnot contribute to human rights abuses or violationsto be put in place. The World Bank regularlyin providing cover for any project or investment.review many of their policies and at the momentMy second example is again this example of theare also reviewing their indigenous people’s policy,paint used on the joints in the Azerbaijan andtheir safeguard policies and then what used to beGeorgia sections of the pipeline. I think it iscalled their structural adjustment lending; but Iimperative that ECGD looks at its due diligencethink also what is important is to draw a distinctionpolicy and looks at how it is picking up problemsbetween international financial institutions’ policiessuch as these in the first place and how it isand the practice of what is happening on theresponding to them once they have been picked up.ground. It is one thing to compare the ECGD’sIt seems to us that ECGD is overly reliant onpolicy to other ECAs or other financial institutions;NGOs and the press in documenting and findingit is another thing to compare what is happeningthese instances in these cases and then respondingon the ground. Also, if you look at World Bankto them but not responding to them properly. Ifunded projects, projects which the ECGD hasthink that is one big area of concern.additionally been involved in, again, like Baku-Ceyhan, according to our research these projects

Q414 Linda Perham: So you think they should not have contravened a lot of World Bank policies andbe responding to you and other organisations in the guidelines, I believe something like 192 in thepress, that they should be proactively investigating Turkish section alone, of the Baku-Ceyhan project.themselves? Chairman: Thank you very much. I wanted to getMs GriYths: I think they should have a policy in that clear on the record, because I think that whenplace that enables them to proactively investigate, it is a wee bit woolly it needs to be sorted out.and, secondly, to respond in a much morecomprehensive manner when NGOs and the press

Q417 Judy Mallaber: Can I return to the questiondo raise things. We will continue to raise things, butwe cannot monitor all of ECGD’s projects. of renewables.




Ms GriYths: Yes. these issues and putting that there for people toaccess, but I think it needs to go the extra mile andbe more proactive.

Q418 Judy Mallaber: In section 6 of yourmemorandum you recognise the ECGD’s eVorts

Q421 Judy Mallaber: What would that involveto promote the exports of nuclear energythem doing? Would it involve them going out andtechnology—this £50 million worth of exports thatassessing the market and then going to companies?they are talking about making cover available for,Ms GriYths: As I said, perhaps consultation withparticularly for renewable exports—but you arethe relevant companies in the relevant sectors andasking for a more proactive approach from thethen, again, looking at screening out theDepartment to encourage applications. Whatcompetition and the unsustainable fossil fuels.would such an approach involve? What exactly are

you asking ECGD to do?Q422 Chairman: Could you give us any examplesMs GriYths: The renewables industry is a newof relevant companies and relevant sectors ofstakeholder for ECGD, or would become one oncerenewable energy technology in which there is anythey started applying for export credit, and I thinkkind of proof that it works?it is incumbent upon ECGD to understand thatMs GriYths: That renewable technology works?community better than it does at the moment. I

would suggest perhaps having a consultation withthat industry and other stakeholders in terms of Q423 Chairman: Yes, on a scale that would requirelooking towards understanding what is preventing ECGD underwriting. You keep going on aboutthem at the moment from applying for export renewable energy technologies. Apart from wind-credit in order to adjust their policy or their power and bits of biomass, which you might notprocedures to make it easier for that industry to like, I am at a loss to know what energyengage with ECGD and get some money from that technologies you talking about?fund. Again, returning to this issue, I would say Ms GriYths: We are advocating a change inthat ECGD needs to think about screening out ECGD’s portfolio; so we are advocating thatfossil fuels, because they are the main competitor ECGD supports these new industries.for the renewables industry. If it truly wants tosupport the renewables industry, it has to do that Q424 Chairman: Which new industries?in an incredibly proactive way. Ms GriYths: There is huge potential for wind-

power, both on-shore and oV-shore, and solarpower.Q419 Judy Mallaber: Is it not ECGD’s job to

stimulate particular industrial sectors, as opposedto just supporting those that are seeking help? Q425 Chairman: But you cannot store the sun’sMs GriYths: We believe it should be ECGD’s job power?to stimulate sustainable development and the Ms GriYths:We are by no means under the illusionexport of sustainable development. Admittedly that that ECGD tomorrow can stop supporting fossilrequires a big shift in ECGD’s role and its fuelsandstart supportingrenewables.That iswhytheportfolio, but we think that the time has come for extractive industry’s review, for example, talks aboutECGD to stop supporting destructive industries; it aphase-outby2008. Ithas tobean incremental thing,is not an appropriate role for a developed country but it has to be undertakenmore proactively ifwe arein the 21st century. ECGD recognises it has some going to get anywhere; so we need to see some biggercommitments to sustainable development, but it is steps forward on this. This is what we are basicallynot at the moment translating those paper-based saying.commitments into reality, and the transition to Ms Ellis: If you consider climate change is a serioussustainability takes more than just words on paper; issue, then what needs to be invested in is alternativeit means a definite change in direction in what the energy and renewable energy. Maybe that energyBritish Government, and ECGD in particular in source is not perfect and is not as advanced in itsthis case, are actually doing to promote that and development as the traditional fuels like oil, miningto support it when it is in its infant stage. and gas, and yet how does it develop, how does it

improve, howdoes it becomemore eYcient? Becauseof investment and because of subsidies. The questionQ420 Judy Mallaber: The department launched this was asked earlier about is it ECGD’s—new customer service team in November 2002

which is expected to provide prospective customersQ426 Chairman: I am sorry, you are suggesting thatwith specialist advice and support about the ECGDwe sell untested technologies to other countries andand how to use them. Does that meet yourthat we use state funding to do that?requirements? Has it made any diVerence?Ms Ellis: No, we are suggesting that you invest inMs GriYths: That is a good first step. I cannot tellcompanies where technology is tested and renewableyou whether it has made any diVerence. I guess itenergy is eVective in order to, in the long-term, allowis still very new, but again I think that is quite athose companies and—reactive approach; that is still waiting for people to

come and talk to you rather than explicitly goingout and soliciting that constituent’s views. It is very Q427 Chairman: You have not been able to give me

examples?good if ECGD is developing in-house expertise on




MsEllis:TheECGDmust create amore levelplaying Q431 Judy Mallaber: My question is not whetherECGD should be prepared to support thosefield for renewable energy in the energy market

generally. If you letmefinish onmyprevious point of companies, it is whether those industries andcompanies are in a position at the moment to be ablesubsidies, it was asked if it was ECGD’s job to have a

phase-out role of oil andmining projects-- to take advantage of opportunities overseas and tofind them. It is not whether they should be supportedif theyare thereandcanbehelped. IdonotthinkthereQ428JudyMallaber:Myquestionwaswhether itwas will be any problem about that?their job to go out finding exportmarkets? Ms GriYths: I am not an expert on the UK’sMs Ellis: Exactly. I would turn that on its head and renewable industry, but it would surprise me if thereargue is it the ECGD’s job or any international were no companies ready to take advantages offinancial institution’s job to continue subsidising an overseas opportunities.Weare aworld technologicalunsustainable energy sectorwhich can findfinance in leader inmanyareasandwealsohavemanyof thebigthe private sectors. I would argue that it is up to companies living here in London. I know that all theinternational financial institutions, as a subsidy, to big oil companies are investing in looking atassist in the energy sectorswhich are slow to develop, renewables, as are companies like Amec, and I amwhich need assistance to ensure a sustainable energy sure that theywill be ready, but you need to put thosesource for the planet. questions to them.

Q432 Chairman: I have to say, with respect, it isQ429 JudyMallaber: I think we are just trying to pinincumbentonyouas theadvocateof this argument tothis down: because the theory is fine andwe can all begive us examples of thekindof companies thatwouldwith theprinciples andwhatwewant todo in termsofbenefit from it. I truly appreciate youmight not havesustainability, but where I am having some diYcultyto hand that information today, but if you couldis that the new customer service teams had 2000provide us with it, it would be of some assistance?inquiries from diVerent companies, but thoseMsGriYths:Wewill do our best.companies that might be getting into sustainable

energy in this country are not developed, surely, veryQ433 Chairman: Because we spend a fair amount offar in terms of themarket they have developed in thisour time of looking at energy issues in the round, Icountry. Realistically, are the companies there at thehave to say that we have not encountered thesemoment that will be able to take advantage of anycompanies. You may have more luck than we have,opportunities overseas, where therefore there mightbecause we are talking about companies that havebea role forECGD?That iswhat I amquestioning. Iftechnologies which are mature, or which arethey are not developed yet in this country are we a bitmaturing,whichareoperating inmarketswheretherepremature in suggesting that, whatever our principleis no element of risk at the present moment andabout where we would want to go, those companiestherefore are capable of selling into these countriesare thereavailable to takeadvantageofopportunitiesand, thirdly, having established both a market and aoverseas?technical competence, that they would be preparedMs GriYths: At the World Summit on Sustainableandwilling to take the risk, and it is the riskwhich theDevelopment in Johannesburg the UKGovernmentECA is prepared to insure against and subsidisecalled for public financing of renewables, and so it isagainst, that these companies would be prepared toincumbent upon us to findmechanisms to do that.do that in the kind of countries that you think arenecessary. If you can find these examples, I would be

Q430 Judy Mallaber: It is not a mechanism. What delighted, because I think we could then have ankindof companies arewe talking about?That iswhat expert push. I have to say, I thinkwe are going to findI amnot clear on? it rather diYcult.Ms GriYths:We are talking about a whole range of Ms GriYths: Okay. If we can, we will submit somesmaller and medium-sized enterprises, but also evidence on that in writing, but I would say that I docompanies like Amec. They invest in wind-power. I think this is somewhat getting the cart before thewould be interested to know what they say on the horse, because until ECGDand other western ECAsexporting of wind-power and how they see their show that they are going to be no longer willingportfolio changing over the next 20 years; and I think to support unsustainable power projects theit is the Government’s role to be leading that change opportunitywill not be created forBritishbusiness torather than responding to it from industry, because take advantage abroad. It is a bit of a chicken and eggindustry is showing that the change is not happening situation, but I think it is incumbent upon ECGD toenough. We all know about the whole complexity of do everything it can to start creating thosepolitical issues that are tied upwith oil andweneed to opportunities because, whilst ECGD is stillbemovingawayfromthat.Weneedtofindwaystodo supporting so much oil and fossil fuel projects thethat. I think ifECGDcannotfindawaytomoveaway opportunities for alternatives just do not come up.fromsupportingunsustainable business and towardssupporting sustainable business, including Q434 Chairman: I think on that note we will finishrenewables, but also including many other things, there. Thank you for your information. If you couldthenweneed tothinkaboutwhether there isarealistic send us that additional stuVwewould be grateful?

MsGriYths:Wewill do our best.role for ECGD in the 21st century.



Witnesses:MrJohnWeiss,ActingChief Executive,MrTomJaVray,RiskManagementGroupDirector andMr John Ormerod, Director of Strategy and Communications, Export Credits Guarantee Department,examined.

Q435 Chairman: Perhaps, Mr Weiss, in a moment three departments under the Trading Fund andother issues which have been discussed before youryou could introduce your colleagues. We have a

copy of your opening statement here.1 We try to Committee about the commercial rate of returnand the level of capitalisation are currently on theirdiscourage these because we work on the basis that

people provide us with written evidence after which agenda. We hope for some early conclusions. Infact what we are doing is working towards awe then ask questions. If you could introduce your

colleagues, without any more ado we will get on ministerial announcement about the Trading Fundbefore the summer recess.with things.

Mr Weiss: Thank you, Chairman. Introducingmyself first, I am currently Acting Chief Executive Q437 Chairman: You tantalisingly quotedof ECGD and I am in this position until probably something of the order of five times all of the otherearly July until Patrick Crawford arrives, who it Trading Funds added together.was announced at the beginning of April is the Mr Weiss: Yes.new Chief Executive of ECGD. On my right isJohn Ormerod, Director of Strategy and

Q438 Chairman: Given a couple of weeks we couldCommunications. On my left is Tom JaVray,probably find out how much that amounted to.Director for Risk Management in ECGD.Could you tell us?Mr Weiss: I cannot tell you exactly because

Q436 Chairman: Thank you very much and thank Ministers have to decide on that figure.you also for the various pieces of evidence you havealready provided us with. If we could start with the

Q439 Chairman:Would a figure of £1.7 billion be acapitalisation and progress towards the Tradingmillion miles away from what we are talking about?Fund status. This has been something of an on-Mr Weiss: Our working figure for this, betweengoing saga. You missed the original target date byourselves and our colleagues, is £1.8 billion. I knowtwo years, we have evidence already from theit has been put to you that that might be somehowSBAC who are not your greatest critics—ifan inadequate figure for British exporters. We haveanybody is called fans of yours I think it may wellto get the balance right between enough capital tobe them—but both they and the CBI have told ussupport the level of business we think we will bethat delay has created a degree of uncertaintyasked to do by British exporters, but on the otheramongst their members and customers and this hashand not having too much because if we have tomade their business more diYcult. When are youremunerate it or cannot use it and just put it in theguys going to get your act together and get the riskbank it will not produce enough return on themanagement systems into a shape which will becapital we need to achieve. So we are trying to getcapable of having the operation of a tradinga good balance between these two pressures. Wesystem? What sort of timescale are we nowthink on our best view of likely future businessthinking of?levels that something around £1.8 billion is possiblyMrWeiss: I think you are right to say it has taken amore than adequate but certainly not a constraint.long time. We did originally envisage Trading FundThere was a figure, probably two years ago, of £4status two years ago for ECGD but undoubtedlybillion which was mentioned and this has causedthe project has proved more challenging than wesome concern I think, that we have these two ratheroriginally thought. You are quite right to say thatdiVerent figures and does this imply some cuttingthe problem has been mainly in the area of settingback. The fact is that was on a completely diVerentup our risk management systems in a way whichbasis and included the ECGD pre-1991 business inwould be fit for the moment when, as intended, wethe capitalisation. This figure, which, as I say,become a Trading Fund. To explain that a little,ministers have yet to agree to and sign up to, thisECGD as a Trading Fund will be the biggestworking figure of £1.8 billion, is intended just to getGovernment Trading Fund in capital terms of all,our new account, our Account 2, businessindeed it will be five times larger than the rest putcapitalised.together. That does not mean we are the biggest

business in terms of income, but in terms of capitalthat is what we are, and that is a very, very Q440 Chairman: That is very helpful. Wechallenging and complex job, and we are very keen appreciate that, we are not asking you to write itwe should get it right and the framework is right. in blood although having given us that figure it mayThe position that we have reached at the moment well have the same eVect. Even allowing for the

disparity between £4 billion and £1.8 billion, it hasis, with our colleagues in the DTI and the Treasurybeen suggested that nevertheless the responsiblewe have now reached a very advanced stage indepartment will have to return to Parliament everydiscussing the future framework for the Tradingyear to get this figure increased and there is theFund, to a point where our Ministers are nowpossibility of Estimates Debates and things likeactively considering the emerging outcomes of thatthat. Do you foresee this as a possibility? It is forwork, and issues such as the respective roles of theothers perhaps to pass comment as to whether ornot it is a problem.1 Printed as Appendix 12



11 May 2004 Export Credits Guarantee Department

Mr Weiss: No. I think the intention is that having Obviously the higher the rate of return, the lessgenerous the terms are to those who are seekingagreed the capitalisation of the Trading Fund that

ought to be a once-and-for-all event and that cover. This is obviously something the potentialcustomers would have a view on, but maybe youcapital should suYce for ECGD for—could tell us what the thinking is within thedepartment at the moment on this question of theQ441 Chairman: Three or five years?return on capital expenditure?Mr Weiss: Yes.Mr Weiss: Again I have to preface my commentswith the statement that that is one of the items onQ442 Chairman: For a public expenditure review?which ministers are currently engaged and need toMr Weiss: Yes. So unless we have it badly wrongmake decisions. Yes, there has been a lot of concernand we are immediately into a problem, thereexpressed about some of the higher figures youshould not be any need to come back and revisitmention in your question, but we are currentlythat figure. I should perhaps qualify that by sayingworking with the Treasury and DTI to agree onthe intention is to run a pilot Trading Fund for ainitially the appropriate methodology for arrivingperiod to be agreed by ministers, but possibly oneat a figure rather than just perhaps plucking figuresto two years, ahead of the statutory Trading Fund,out of the air. That is what the current debate isand I suppose it could be that if in that periodabout, what is the appropriate methodology forproblems occurred then there could be somedetermining the commercial rate of return and thatrevisiting of that number.is yet to be agreed, and then it is likely that willproduce a range of figures and we will then haveQ443 Chairman: Would this pilot fund be for ato decide what the appropriate figure is for that.particular part of the operations, or would it be theAgain, though, the key point which ministers havewhole of the operation but done on a pilot basis?emphasised to our customers and stakeholders isMr Weiss: The whole of the operation on a pilotthat whatever that figure ultimately is, that will notbasis.actually determine ECGD’s risk or pricing policy,we will maintain the same risk-reward balance as

Q444 Chairman: So you are expecting to have a currently, and what will happen is, assuming forministerial announcement in the summer, likely to example ECGD achieves a natural 4 to 5% returnbe a figure of in the vicinity of £1.8 billion, but with on capital as it does at the moment, any gapthe possibility of it running for up to two years on between that and this commercial rate of return willa pilot basis? Would that be a reasonable be filled by means of a notional voted resource intosummation? ECGD to fill the gap. The main point is that ourMrWeiss: I think I need to be slightly careful about prices and cover risk appetite will remain as it iswhat that ministerial statement might include. at present.Ministers are working to reach agreement on theseissues as quickly as possible and I am hoping thatagreement will have been reached to make that Q446 Chairman: What you have told us is thatannouncement then. Whether it will be possible for there is going to be, hopefully, a statement beforeit to be as detailed as you implied in your question, the end of the year, that it probably will be aroundI cannot be sure. It is worth adding that the other about £1.8 billion, it is maybe going to be for twostated intention of ministers is to have a public years, there will be a consultative process, that theconsultation in advance of the pilot Trading Fund, consultative process will test the water, as it were,and we see that as the moment when all the details and you are not in a position yet to make a clearof the framework which has been agreed between statement on the return on capital expenditure, butministers for the Trading Fund will be exposed, so by and large the approach you are taking in termsin this sort of timetable that might be around the of risk and reward will be much the same as it isautumn sometime. at present. When you were telling me at the

beginning that this has been two, four years, I wasthinking about the gestation period of an elephantQ445 Chairman: If our report comes out at thebut I now begin to think that the elephant is goingright time, the ministerial response to our reportto give birth to a mouse, because there seem to becould well be this, but I think I can say on behalfso many question marks here. It must be prettyof my colleagues that in the event of the ministers,frustrating for you folk. Who is to blame? Is it theyour political masters, making an announcement ofTreasury? Is it the DTI? Which of your politicalthis proposal on the last day before the recess,masters is the one that is not providing you withwhich is the kind of time you are talking about, wethe ability to get out and do the business and enablewill give notice that we have their telephoneBritish companies to cut the deals across the globe?numbers and we know where they stay and we willMr Weiss: This has created uncertainty and thatbe after them! So far we have not had ministers buthas been worrying our customers, but the fact is—we will have them once the statement is announcedand in the statement I did not make at theand we will cross that bridge. There is one otherbeginning I have made the point in there—piece of the jigsaw which we need to look at beforenotwithstanding that we are still continuing towe go on to some of the other points, and that issupport quite high levels of business, and over thethe question of the return on capital expenditure.last three years we have done between £3 and 312This is again an area in which figures have been

kicked about, ranging from 18% down to 4 to 6%. billion of guarantees. So this work on determining




the right framework for the Trading Fund has not, where all the airline cases for Airbus come throughwith great regularity, and I am always sitting thereI would suggest, actually got in the way of us doing

our job, but it has undoubtedly created uncertainty and saying to my colleagues, “Where do the Frenchand Germans stand on this?” and almost 100% ofand I know our customers would like to have

clarity about the future of ECGD and we the time I am told, “They have not made a decisionyet.” So my practical experience of the businessunderstand that need. That is why we are trying to

reach some early conclusions on this. May I also that is advanced and we are negotiating is, I hope,quite positive and quite good.say, Chairman, that you suggested the statement

before the recess might include these figures, Icannot say that it will, I cannot say it will not.

Q449 Mr Hoyle: So besides Airbus, which areChairman: We will not hold our breath.pretty quick, everybody else suVers? Can I also sayyour customers, and that is the best way to describe

Q447 Mr Hoyle: Can I move on to customer them, claim you charge higher rates of interest thanservice. Quite a lot of the evidence we have had other ECAs. Is it true? If so, why is that?brought before us goes on to state that other ECAs Mr Weiss: I would first of all say it is not a generalreach decisions quicker. What they are worried case that we charge higher rates than the others.about is when they come to you to deal with What we do is to charge prices which accuratelyapplications, it is long-winded, bureaucratic and reflect the risk we are being asked to underwrite,time has gone and everybody else has reached the and this is something which in a sense we cannotdecisions and in some cases have got the contract compromise on if we are to meet the financialwhile you are still gesturing. Do you think that is targets which ministers have set for us. In a limitedfair? Are you guilty as charged? number of countries this can come through inMr Weiss: You will not be surprised to hear me say premium rates for us which are higher than the“not guilty”. OECD minimum benchmarks, but we have that

number of countries down now to about 17. Ishould emphasise this is for projects which areQ448 Mr Hoyle: Have you any evidence you cansovereign risk and of a medium size rather thanproduce?perhaps buyer risks, corporate risks, or large sizeMr Weiss: It may be we should look at this in twofor example. There are now only 17 countries whererespects. First of all, there is the stage at whichwe are above the benchmark. Many of ourexporters come to us, a very early stage when theycompetitor export credit agencies purport to chargehave a bit of a gleam in the eye about a project andthat benchmark, so there is a perception we arethey want to know is ECGD on cover, what wouldcharging more than them in that situation,the terms be and what would be the price be. Wealthough in practice we find as we negotiate dealsconsider that an important part of our service toalongside them—because often we are in co-exporters. It tells them quickly whether or not theyoperation with them—we find they too charge moreshould spend their money pursuing a deal. Sothan the benchmark. So it is not something whichimportant that we have made this service part ofis universal. It is interesting—and I did a little bitour customer charter and we promise to turn theseof research on this—that last year, in support ofrequests round in four days. Our ideal would be toAirbus, 84% of the guarantees we issued we diddo 100%. We have probably been scoring 70 to 80charge the minimum international 3% rate, so itover the past year. We actually reached in Februarywas 16% of the cases where we charged more. I93% but I have to confess it fell back to the upperknow that is quite a bit of business, 16%, and it is70s last month. Overall it has been an improvingquite a few, probably important, airlines for Airbustrend and we have been doing a lot to improve ourwhere we were possibly charging more than 3%, butsystems, streamline them, to get that performanceit gives you a feel for the extent to which we arebetter. The ones that fail to meet that target arepossibly, rightly or wrongly, being charged, as youvery often more complex transactions, largesay, with over-charging.transactions, ones which are under our regime are

going to be capital-hungry, and we have to spendmore time examining those and deciding how we Q450 Mr Hoyle: You use the Airbus as a strongrespond. This is the area where perhaps some of example in both cases, do we charge more thanour export credit agency equivalents may not have the French?the same issues to consider because they are not Mr Weiss: It so happens that we, I think, alwaysoperating against this capital framework, notional all charge the same but it could be that the ECGDor real in the Trading Fund, and they perhaps have has set out its stall, because as I said before we areless rigorous financial targets than we do. I think often quicker oV the mark than the others, and theit is true at that stage sometimes they can give a others say, “If ECGD is going to earn that, so willquicker and more positive response than we can, we.” We all charge the same.but as I say we are trying to get that better andbetter. In the area of our relationship with ourcustomers, once a transaction has become more Q451 Mr Hoyle: It would be a bit odd to charge a

bit more for the wings than you do for the body.advanced and we are actually negotiating the dealwith them, I would reasonably argue that we That is why it is interesting. If I can get you away

from Airbus, where the companies have putprovide a very eYcient service for our customers. Inmy normal job I chair our underwriting committee together one bid, what about if we are up against




the Americans? The Ex-Im Bank in the United Chairman: Just before we start on the next area, weanticipate there being a vote at 4.35 pm so after thisStates would charge at the minimum OECDquestion we will adjourn and we will be back toguideline level.complete the session. We will have to go over andMr Weiss: Yes.do our democratic duty in a few minutes and welike to stop before the bells start.

Q452 Mr Hoyle: Where does that leave ourcustomers?

Q454 Sir Robert Smith: You provided us with aMr Weiss: I think generally, and Airbus specificallywritten follow-up paper following the evidence. . . another point, perhaps controversial, I wouldsession we had on 20 April with the Britishwant to make is that we have seen little evidenceAmerican Security Information Council, wherethat this pricing diVerential, where it does arisethey were questioning some of the calculations onbetween us and the other agencies, is actuallyhow you assess your costings. We have your paper,damaging the competitiveness of British exporters.it has come quite close to our actual meeting butWe would like it best if we could all be chargingwe have had a chance to look through it and it willthe same and be on the famous level playing field,be on the record. Is there anything you would likebut as I have said before our financial constraintsto say to that paper?do not allow us always to do that. Where we areMr Weiss: I think we sent you a response to that.charging more, there is not in my view evidencePerhaps I could ask Mr JaVray to say a bit more.that this has lost business for our customers or forMr JaVray: The approach we use to price risk isthe UK. Indeed, the NERA Report showed therebased on best commercial practice and in our casewas a high price elasticity here and these pricewe use the so-called value at risk methodology.diVerences did not really make that muchThis is used by many enterprises in the privatediVerence. Where I have seen in my own personalfinancial services sector and it is also a cornerstoneexperience business lost to the UK—which hasof the Basle 2 Accord which is being promoted asoften been not lost to a foreign competitor but aa risk measurement tool for banks. We areBritish company choosing to source it from thecomfortable we are not reinventing the wheel, as itStates or Germany or somewhere—it is where wewere, and we are basing our practice very much onhave not had enough cover available. That is instandard Value at Risk techniques. The keyECGD’s view, and in our customers’ view throughdiVerence between the paper tabled by Mark andthe customers’ survey, the key issue, to get thePaul Ingram and our own approach is that we lookcover available, ideally the price to be the same asmuch more closely at a risk within the context ofeverybody else’s, but if it cannot be, that is less ofour own portfolio. A simple point about insurancean issue in competitive terms than the cover. So ouris that the better diversified your portfolio, thestrategy has been to make as much cover availablegreater the spread of risk, its predictability, the lesson countries and buyers, for the price to be what capital you need for each pound of risk, andthe price should be from our risk assessment therefore ECGD holding, say, £1 of Chinese risk

models, to try and be competitive but, in the end, would necessarily use more capital than, let’s say,to oVer the exporter the cover at the price we think HSBC, who would have a more diversifiedis a fair reflection of the risk; this, of course, portfolio. The thing about the value at risk is thatreflecting that balance between supporting the it focuses on your portfolio specifically, which,exporter and not being a drain on the taxpayer, given the unique nature of ECGD’s portfolio,which is what is implied by our financial targets. seems a better technique and it has been endorsed

by a number of consultants in the field workingfor us.Q453 Mr Hoyle: So you have no evidence, where

the rates are slightly higher, this actually has aneVect on contracts? Q455 Sir Robert Smith: I would put in a footnoteMr Weiss: Not in terms of seeing a transaction that there is a flaw in their arithmetic which alterswhich has been put to us lost to foreign something from 9 million to 0.9 million in yourcompetition. What I would have to say is we do favour. Maybe we will get back to them and checknot know if the fact our price is known to be that. You point out another conflict with theirpossibly higher deters companies coming to us in analysis, where you are not a direct borrowing fromthe first place. I do not have evidence of that. I the Government, you say you are a contingentthink our customers, even Rolls-Royce and Airbus, liability on them. Surely, in a sense, in economics,might say, “The fact you have been charging more a contingent liability must have some impact on thethan 3% is not damaging today’s sales but it may UK’s economic situation? If all contingenthave a long term impact as airlines think, ‘These liabilities had no cost—?people charge more’.” But having said all that, we Mr JaVray: In theory, economically there shouldare talking of diVerences in relatively small be no diVerence between if you like giving aelements in the total equation, in terms of the price guarantee and making a loan. The markets willof the equipment, we are talking of a °, 1, perceive it diVerently and I think that is the pointsometimes 2% diVerence in our rate, which when we are trying to make. We know of no empiricalyou take everything else into account is perhaps not evidence to back up the contention made in the

paper by Mark and Paul Ingram.a crucial competitive element.




Q456 Sir Robert Smith: As you say in your earlier Mr JaVray: Yes.evidence, the move to a Trading Fund and the rateof return is in a sense to try and establish for the

Q459 Linda Perham: Some witnesses we have hadTreasury what the real cost of providing exporthave commented favourably on the development ofcredit guarantees is, and therefore in a sense theyour policy on transparency with respect tocost benefit analysis will come in the politicalapplications and impact assessments, but others,climate of working out, “Is it in our interests tonotably Friends of the Earth, whom we have justspend this money for the protection of defenceinterviewed, feel you are too selective over whichsupplies or for the job creation which comes fromimpact assessments you publish. Could you notthe kind of work which comes from export creditmake it a condition of your support that all of themguarantees”.are published?Mr JaVray: The practical problem is that there isMr Weiss: On the specific point about publishingno right or wrong way to work out how muchenvironmental impact assessments, following thecapital ECGD might need. To take a theoreticalrevised OECD Common Approaches, which as youexample, you could look at ECGD within the widerknow we played quite a leading role in makingportfolio of all the Government’s holdings, all thehappen, that now requires such assessments to berisks for example on nuclear liabilities, and inpublished for high potential impact cases, so thattheory one might suppose the spread of risk wouldis now part of the rules of the game. I think theallow ECGD to be supported on a much lowermore controversial issue was in relation to a specificcapital. Calculating such a capital would obviouslyproject a year or so ago where there was a demandbe an impractical task and managing that kindfrom NGOs for the impact assessment to be madeof portfolio would also present insuperablepublic, and in that particular situation—and thischallenges. So there is a trade-oV between havingpre-dated the OECD Common Approaches—thatan ECGD in what is a very capital ineYcientassessment had been commissioned by theportfolio, because it is very narrow, highlysponsors, paid for by them, was their document,correlated and unpredictable, and that means weand they were saying to us, “This is commerciallyneed more capital per pound of exposure than weconfidential and we do not wish you to publish it.”might otherwise need, but that is oVset by theIn a legal sense we had no choice in that matter.benefits of having more coherent risk management.I think the position now under the revised OECDBut to arrive at what is the cost to the taxpayer isCommon Approaches for high impact cases is thatactually quite a diYcult thing because it dependssuch reports must be made public.on which portfolio you pick. Therefore, although

the Trading Fund will have a return on capital, tosay the gap between that and what we can aVord Q460 Linda Perham: What would be confidentialto pay from premiums at current rates is a subsidy, about an impact assessment? For the sponsors ofis a debateable point. What we are trying to do with it, the people applying for the money, what wouldcapitalisation is show transparently all the potential be confidential about it from their point of view?costs associated with the Trading Fund, not just the Mr Ormerod: I think it is an issue of wherecost of covering the claims and long-term losses environmental impact assessments were in a draftand administration, but also the cost of supporting stage and had not been considered fully by thethe capital base. But what is the cost to the

project sponsors, and where they wanted to reservetaxpayer is actually quite a diYcult thing totheir position. You have to remember that thecalculate.impact assessment is the responsibility of theChairman: We will finish there because there isproject sponsors, our job is to review that and toevery likelihood that your answer will bemake sure the procedures have been undertakeninterrupted by the bells.properly and the environmental and otherThe Committee suspended from 4.35pm to 4.46pmstandards used are the appropriate ones. Whenfor a division in the HouseCommon Approaches was revised back at the endof last year, there was an attempt by us and theAmericans to make it compulsory, to compelQ457 Sir Robert Smith: You outlined the processpublication, but a couple of jurisdictions—I thinkof establishing the Trading Fund idea and howGermany and Austria—felt they could not withinthere will be a statement and consultation, what istheir national law do that. So I think the wordingrequired to make it come about? Is there anyyou will find is something like “encourage”. We, inlegislation or regulations which have to come in?fact, in the UK encourage very strongly theMr JaVray: The plan is to set up the Trading Fundpublication of environmental impact information,under the Government Trading Fund Act. This isand when the Environmental Impact Regulationsthe piece of legislation which is being used to setcome into force, from 1 January 2005, you will findup other Trading Funds and this can be done bythat takes the force of law.means of secondary legislation using a Statutory

Instrument. It takes about two or three months.Chairman: We know the procedure!

Q461 Linda Perham: You did say, and it is in yourevidence, that high impact cases are listed on thewebsite prior to the underwriting decision beingQ458 Sir Robert Smith: That is all that is required,

is it? made.




Mr Ormerod: Yes. beyond their experience. We also conduct site visits,so we have been out to see the full length of theBaku-Tblisi-Ceyhan pipeline; we have been out toQ462 Linda Perham: First of all, how is a highlook at Sakhalin II and the impact that has had onimpact case defined? Why cannot all of them bethe environment there, and to talk not only to thepublished? Why does it have to be high impact? Isproject sponsors and the consultants doing thethat an international agreement?environmental impact assessment but also toMr Ormerod: That was the internationalconduct our own investigation on the ground.agreement. The argument is that high impact cases

are those which will attract most public interest andconcern, that is the definition of why they are high Q467 Linda Perham: When you say “we” do youimpact because of the impact on the environment. mean the people you referred to?

Mr Ormerod: Yes, within ECGD.Q463 Linda Perham:Who decides which those are?Mr Ormerod:We decide but the criteria we use are

Q468 Linda Perham: Just those two people?those in Common Approaches. We have on ourMr Ormerod: Those are the experts, yes.website a document called a case handling

procedure—in fact it is called “Case ImpactAnalysis Process”—and that tells applicants exactly Q469 Linda Perham: So are they able to keep uphow we go about assessing which projects are of with the amount of work? I think you said youhigh impact. Essentially we look at what is the would perhaps bring in other people, independentnature of the industry or the context, ie is it a consultants, if they were over-stretched?sensitive industry in the sense of likely to create Mr Ormerod: That is our reserve position, that wepollution, is it in a sensitive area of the natural have consultants.environment, et cetera, and if certain of these redflags go up then it becomes a high impact case.

Q470 Linda Perham: How often do you have todo that?

Q464 Linda Perham: Are you satisfied that your Mr Ormerod: We have not had to yet, but weimpact analysis meets the standard set by the would be ready to do so if we have three majorWorld Bank? projects. We have just completed essentially theMr Ormerod: Yes. The World Bank represents BTC one but there are two on hand at the moment.now—and this was one of the key achievements of They can cope with that, if another couple came upthe revision of Common Approaches—the base simultaneously, we would have trouble.level standards for export credit agencies whichthey apply.

Q471 Judy Mallaber: How do you verify theaccuracy and veracity of statements which areQ465 Linda Perham: So you conform to thoseprovided by the applicants? How do you make surestandards?the information you are getting is accurate?Mr Ormerod: Yes, we do.Mr Weiss: Again, I think there is a distinctionbetween low and medium impact and high impactQ466 Linda Perham: You say the impactcases. For the former category, I think it isassessments are commissioned by the sponsors,probably true to say we rely quite heavily onwho carries out the assessments? You are relyinginformation supplied by the applicant, but we doon information which is provided by the peopleother checks—internet searches, use databases—who want to carry out the work. I think you haveand of course we do have access to the Foreignforms, but would they just be a tick box thing, orOYce post to verify information and to tell us morewould you go into detail and challenge what theyabout the project if we need it. For high impactare telling you?cases, as John has just said, we may well get anMr Ormerod: The process is the project sponsorsindependent consultant to review the projectwill commission the environmental impactinformation. Again, we can consult otherassessment. Almost invariably nowadays they willgovernment departments, and indeed engage withuse a professional consultant to do that and theyNGOs and other stakeholders for an independentwill not use an in-house team. Our job is essentiallyview and again actually go there and see it forto review that impact assessment, review the actionourselves.plan which stems out of it, which is basically how

the project sponsors are intending to mitigate anyreservations raised by the impact assessment, for Q472 Judy Mallaber: Some of my colleagues will

ask more about the BTC project, but from theinstance a resettlement action plan or somethinglike that. We have a range of armoury, if you like, information we have had, there does seem to be

quite a saga of not being clear you were fullyto bring to the issue. First of all, I have two peopleon my staV who are experts in environmental informed, for example, whether you know about

the Mortimer Report on the coating, and a wholeassessment and project engineering, and they areassisted by another person if we reach case range of factors in the information you have been

provided with. We will come on to that in moreoverload. They are my in-house team. We may alsouse external consultants ourselves, particularly in detail. How can you be sure you are being given

the right information? You can easily get taken fortricky or sensitive cases or which may extend




a ride in a huge project and we have no way of jurisdiction of bribery and corruption, that couldbe the case where we could actually pull coverknowing what steps you have taken and whethercompletely.you do have the full information.

Mr Ormerod: Essentially, we are relying on the skilland expertise of our people. One thing I should Q475 Judy Mallaber: Do you feel confident youmention is that most of these very large projects are have the necessary expertise to be able to makeconsortia, so for instance for BTC the total value those inquiries and be able to assess projects whichof the project is about 3, 3° billion dollars, we are come to you for funding or for cover?supporting about $150 million-worth of UK Mr Ormerod: We believe so, yes. Again, over the

years since I have joined ECGD, which is sinceexports, so it is a relatively small fraction. The rest2000, we have quite dramatically enhanced ouris made up of financing from the World Bank,procedures for considering environmental impacts,EBRD, other export credit agencies, commercialhuman rights aspects, social impacts, and it is abanks, et cetera. What we tend to do in the exportquestion of building up the knowledge-base.credit world is act together in respect of theSimilarly we have recently announced in April weenvironmental assessments. The reason for that is,were revising and enhancing our procedures forthere is no point in competing against nations oncombating bribery and corruption, again in thethe quality of the environmental assessment and welight of experience, international best practice andmay as well pool our resources where we can, soworking closely with NGOs such as Transparencywe will be using a common consultant to act onInternational who recently, last autumn, reviewedbehalf of the ECAs. So it is not just the brains ofthe OECD export credit agencies and their overallECGD brought to bear on the issue but those ofperformance on bribery and corruption issues.our equivalent environmental specialists in other

export credit agencies.Q476 Judy Mallaber: Moving on to a relatedsubject, a number of the organisations which have

Q473 Judy Mallaber: Who would take the lead on come before us have suggested you should not evenit? Who would you be relying on to show you had consider, you should screen out, applications onit right? the basis of the record of the performance of theMr Ormerod: It tends to emerge in one of two country or the company on issues likeways. It can be that ECA which has more the environmental protection, respect for humandeveloped expertise and, if you like, becomes first rights, corruption and so on. You have a clear setamong equals. Or it could be structured as in some of basic principles which we have in front of us, isprojects where other ECAs are in the role of re- there any reason why you cannot just screen theminsuring a lead ECA, and then the lead ECA would out where they do have a bad record rather thanobviously take the lead in all respects. take a chance on a company or country?

Mr Ormerod: We have to be careful of theterminology we use because our lawyers love this

Q474 Judy Mallaber:What happens when you find area. Basically we are here to provide a service toyou have been misled and, say, it has some support exports from companies based in the UK,environmental impact you were not told about, or so we do not draw distinctions ab initio betweensome corruption or bribery or whatever else? What diVerent types of companies. What we would lookhappens when you discover that is the case? for and what we say in our legal terminology is thatMr Ormerod: There is a broad distinction between if a company, for instance, had been convicted ofthe diVerent events. In the case of environmental bribery or corruption or appeared on a Worldinformation, obviously that is moving at all times, Bank blacklist for instance, that would be a primavery often new information comes to light, new facie case why we would not provide support, butallegations et cetera made in the press. Essentially, we have to be very careful about the language wewe have to make an assessment up to the point at use, so we consider applicants before we turn themwhich we provide cover, that is if you like the down, if you like.critical point for us. So our evaluation proceduresare designed to reach a decision at that point. Q477 Judy Mallaber: Even if they have beenThereafter, we are examining the project in a convicted, you would still have to consider them?monitoring role, and basically saying, “Is there Mr Ormerod: Relatively briefly.anything coming to light that would cast somedoubt on that original decision?” The action we Q478 Judy Mallaber: Why?would take in those circumstances is that we would Mr Ormerod: Because that is the way the law isgo back to the company and say, “This was not in written. The other issue, and this is quite anthe original mitigation plan, in the social action important one, just because a company is convictedplan, whatever, what are you doing about it?” So of—and we have an instance—or has owned up toit is bringing that kind of pressure. If it is an issue a corrupt act in a distant country, that does notof bribery and corruption, that is much more mean the whole organisation is corrupt throughserious. We refer allegations to the appropriate and through. What we would do in thoseauthority, in the UK in our case it is NCIS at the circumstances is say, “Okay, this is what happenedmoment. Where a company faces the unfortunate in X, Y, Z whenever, we are in Country Y, what

have you as an organisation done to enhance yourposition they were convicted under a competent




procedures and make sure this never happens again Mr Ormerod: Essentially, the lending group, inwhich ECGD was a relatively small proportion,and that was an isolated instance and notcommissioned consultants to provide a detailedsymptomatic of a disease running right through thereview of the environmental and social aspects oforganisation?”the project, based on the assessments done by BPand the other project sponsors. There was a long

Q479 Judy Mallaber: Briefly, in light of the earlier series of meetings then with the consultants whodiscussions you heard with Friends of the Earth, had done the project, there were meetings withturning it on its head, do you regard it as part of NGOs. One of the things we did do was log all thewhat you should be doing to positively promote allegations which were made by NGOs in respectpositive goods in those areas, such as the discussion of the project and said, “What is the answer towe had earlier relating to promoting renewables these?” That included the issue of the coatings. Werather than what I was just talking about which was have to use our judgment as to whether we arescreening out bad practice? receiving appropriate and relevant information. WeMr Weiss: We did hear the Friends of the Earth share that with the other ECAs. So, for instance,talking to you. On renewables, I think the key piece my business principles adviser is a trained chemicalof missing information there was that we have engineer and he also has qualifications inactually got a team in ECGD with responsibility environmental management, and it is that kind offor promoting that initiative and trying to get that professional expertise we rely on to do this kind£50 million used. It is quite true that ECGD is not of work.perhaps ideally organised to know all the range ofcompanies who might be interested and we too Q481 Mr Clapham: On a project the size of BTCwould be interested to see the information that there are bound to be disagreements between theFriends of the Earth provide. The key thing is, we applicants and the NGOs, but here we have somehave been working with UK Trade and Investment quite serious allegations which have been made.on something called an Outreach Programme to try Have you made any attempt to clarify those at all?and connect ECGD with those companies, and that Mr Ormerod: Very much so, yes. When theis the best route for us to get to find out if they coatings issue came up, we in the first instanceexist and, if they exist, whether they have the sort of encountered it through newspaper reports, and onebusiness which would be appropriate to the ECGD of the first things we did was to discuss it with bothguarantee. We have actually had a small number the BTC company, which is the consortiumof inquiries as a result of that programme but constructing the pipeline which has its own expertsunfortunately none of them has converted into real and press oYce, and with the principal UKbusiness yet. There is one project going round sponsor, in this case BP. But we rely on them toabout using wave power which may come to give us the answer as to what they believe thesomething but they are all at a very early stage. circumstances of the case are, and then we assess

whether their answer seems appropriate andThat is the way we have tried to be proactive aboutcorrect. When we looked at the coatings issue therethat. Of course, we cannot go to the point ofwere two views from diVerent engineers as tomaking renewables and sustainability our policywhether those particular anti-corrosive coatingsobjective. As Friends of the Earth themselves said,were appropriate or not, and you rely on technicalour job is export promotion, our mission is toexpertise to make that judgment.benefit the UK economy, and that means we mustMrWeiss:When the BTC project came forward fordeal appropriately with all applications which comefinal approval or otherwise in the ECGD forto us as long as they meet our business principlesunderwriting, the submission to the committee,for environmental, human rights and socialwhich I chair, was about 120 pages long and halfreasons, and for good sound financial reasons, butof it was addressing the environmental, social andwe are doing what we can to be proactive in thehuman rights issues. What the team had done wasrenewables area.to log every single issue that had been raised byChairman: We would like to go on now to look atstakeholders and NGOs and assess each of themthe Baku-Tblisi-Ceyhan pipeline project.independently: was there an issue, was there not anissue, if there was, what was being done about it,and in a number of them there were things beingQ480 Mr Clapham: Could I ask you somedone and we wanted to see those things done. Ourquestions on the BTC. The one thing the BTCfinal conclusion was that the project did meet ourexample gives us is the way in which the proceduresstandards quite successfully and we felt able towork through. I note that the Baku-Ceyhanunderwrite it quite comfortably. Subsequently ourCampaign has made a number of allegations, inprocess for this has been looked at by the Exportfact they allege there have been some 170 violationsGuarantees Advisory Council and I think they alsoof international standards which relate to bestfelt satisfied with the way we had handled it.practice. Given that situation in the case of BTC,

what information relevant to the impactassessment, which would have been done by BP or Q482 Mr Clapham: The Caspian Developmentcertainly would have been done for BP by their Advisory Panel was commissioned by BP toconsultants, did you consider apart from the evaluate the project. They were quite praising of

BP’s eVorts, but they made it quite plain that theassessment provided by their consultants?




Turkish pipeline company, BOTAS, just was not European Convention on Human Rights? Does theapplication to the ECHR by the Kurdish Humanmeeting the kind of standards that they would

expect. Have you taken on board that report of the Rights Project change your assessment?Caspian Development Advisory Panel? I Mr Ormerod: The way we look at social aspects,understand that a further report was provided by particularly human rights, is in consultation withMott MacDonald. Presumably you have those other government departments, this is where wereports. What has your response been to those rely particularly on the expertise in the Foreignreports? OYce. The assessment on the underwriting of BTCMr Ormerod: The precise response is a technical was that everything was satisfactory. The latestjudgment. I do not know whether my colleague can comments that Friends of the Earth have madeprovide me with precise information on that, but about a campaigner being arrested I cannotwe did look at that and again an engineering comment on, but we will look into that.judgment had to be made on the respective meritsof the two plastic coatings, both of which are used

Q487 Mr Hoyle: Do you feel that you got the rightregularly on pipelines, including in the Arctic andinformation and support from other governmentthat is a professional judgment and not one that Idepartments?am qualified to conduct. I have just been passed aMr Ormerod: Yes. We work very closely.note. Both reports were taken into account in

making that judgment.Q488 Mr Hoyle: Do you still feel confident about

Q483 Mr Clapham: Did you not feel that there was that now?suYcient in those reports for you to withhold your Mr Ormerod: Yes. We will review the evidence. Wesupport for the project? also deal constantly with embassies and highMr Ormerod: No, absolutely not. As I understand commissions overseas and periodically they willit there are diVerent ways of both laying pipelines advise us of developments and their commentaryand coating them against corrosion and, as it turns thereon, yes.out, the judgment was that both methods wereacceptable in the circumstances.

Q489 Mr Hoyle: So there is nothing you wouldchange, there are no other views you would take,

Q484 Mr Clapham: I heard what you said there, you would still come up with the same answer asMr Ormerod, about taking the advice of experts, you did back in 2003?but do you not think you ought to have Mr Ormerod: Nothing has happened since thecommissioned your own report as well? underwriting of that project which has given usMr Ormerod: In those circumstances we did not, we cause to believe that we made the wrong decisionwere confident that we were in a position to make a at that time, no.judgment. It is something we would consider andthere may be circumstances where we would haveto commission such a report. Q490 Mr Hoyle: But now, with hindsight?

Mr Ormerod: With hindsight?Q485 Mr Clapham: Given that BOTAS got such ascathing report, would you think twice about Q491 Mr Hoyle: Do you still hold that view?financing a project where BOTAS were involved, or

Mr Ormerod: Yes. John, I think if it came to theis it possible that suYcient pressure could be putunderwriting committee again you would probablyon that company to ensure that they did improvemake the same decision, would you not?their standards to meet the best practice available?Mr Weiss: I think so. Do you mean because of theMr Ormerod: The general principle we work on isinformation that Friends of the Earth gave you?that we are not in the business of trying to withhold

or disrupt the financing, we are there to make surethat the project complies with World Bank and Q492 Mr Hoyle: That is right, and the applicationother standards. So our first course of action is to the ECHR by the Kurdish Human Rightsalways to say, “Look, this isn’t good enough, better Project.procedures should be applied”. I should add that Mr Weiss: At the moment the Foreign OYce areMott MacDonald were working for the lenders and taking the lead in Government in looking at thatadvising the lenders so in that sense there was an particular issue, but at the moment we do not haveelement of independent advice. In terms of bribery an agreed Government position. We could not sayand corruption it is rather diVerent, that is where now that that is of such significance that itwe would say no, but the purpose of environmental somehow or other undermines the decision we tookscrutiny is to improve the quality of projects and in December, but clearly we are very interested inmake sure that they meet the appropriate getting to the bottom of it and understanding it.international standards. Mr Ormerod: Allegations are happening at that

project all the time. Our job is to look at thoseallegations and see, along with our colleagues inQ486 Mr Hoyle: Is it not right to say that in

December 2003 the ECGD stated that it had other departments, whether they have substanceand generally speaking on human rights issues theassessed the project’s compliance with the UK’s

international policies and obligations, including the Foreign OYce will take the lead on that.




Q493 Sir Robert Smith: You mentioned that when Mr Weiss: A piece of advice we have had is thatthe quality of the coating of the pipeline in the BTCthere is a collective project involving several ECAscase was fully assessed by Parsons, the engineers,you pool your resources in a sense in assessing itto meet the highest standards, as much of the waywhen it comes to the environmental impact. Do allin which that project was approached did andECAs operate with governments who have theclearly you can have a situation where, with asame environmental aspirations as the UKsponsor like BP, they are not going to be the sortGovernment?of institution that would be likely to accept aMr Ormerod: We are working within the contextquality of coating that was going to cause leaks inof the OECD. Yes, in the early days of negotiatingthe pipelines. The pressures within that are suchthe common approaches that was an issue thatthat we could feel confident that the rightconcerned us. By the time we came round to thetechnology was being used. The fact thatrevision of the common approaches I was verysubsequently it was found that cracks werepleasantly surprised that all governments within theappearing in the coating—and that was indeedOECD had taken very significant steps to complytrue, there is no doubt that that happened—waswith the common approaches and had broughtbecause there was a rigorous testing going on on-their procedures up to the levels of the leadingsite of the quality of that coating. That was why thegroup, being ourselves and the United States andsystem was there, to make sure it was being doneFrance, Germany et cetera.properly and reasons were found for it not beingquite right and corrected and subsequently there

Q494 Chairman: There has been a lot of dispute has not been a problem.about the coating procurement process and theunsuitability of the product. How do you satisfy

Q497 Chairman: It has been suggested that youyourselves in every sense on this one?have this faith in the good judgment and theMr Ormerod: Are you taking about procurement practice of BP. There was a consultant whooverseas or the purchase of UK goods? produced the adverse report on the coating. Didyou discuss it with him? Did you meet theseconsultants?Q495 Chairman: I am talking about the pipelineMr Ormerod: I am not aware that we met him. Weepoxy coating procurement process. This is acertainly looked at that report and compared it todetailed point, but is one that has emerged asthe evidence from both the BTC company and fromsomething of a cause celebre. Perhaps you couldBP. The finding of that was actually not that thetalk us through this because I think it would becoating was at fault, as had been alleged originally.useful to get on the record your side of the story.There are many diVerent types of plastic coatingsOne of the problems we have is that whenthat apply to pipes, but in this particular instancesomething appears in the newspapers we end upthe method of application was perhaps not exactlybeing asked what we are going to do about it.appropriate to the climate and circumstances at theMr Ormerod: Let me give you the present ECGDtime and that is why the pipelines had to be re-position on procurement. It is not for us to say howcoated, which was the rectification process that thea foreign government or a project sponsor shouldBTC company decided upon.go about procuring goods and services. What weMrWeiss:Would it help, Chairman, if we gave youlook for is evidence of whether there has been aa more detailed note explaining that?competitive procurement process because we

believe that that gives the best protection againstthere being any bribery, corruption or other undue Q498 Chairman: I think that would be helpful. We

have had a number of allegations and the alligatorsinfluence in the process. However, from time toare still swimming about! I think it would be usefultime you find that processes were conducted whereto have it on the record. I do not want to prejudgethere was a sole bidder and our job then is to makethe evidence you are going to give us in writtensure that underwriting staV, when they review theform, but there has been the suggestion that youcase, are very vigilant to make sure the righthave got a little bit of egg on your face as aquestions were asked and there was not anythingconsequence of this insofar as the whole questionuntoward about the procurement process. I am notof the coating is concerned because it was quite aactually familiar with the details of the BTC one.significant element in the project. Do you think, inJohn, did you know?retrospect, you could have conducted a dueMr Weiss: No.diligence process rather more rigorously?Mr Weiss: My understanding of this issue is that,

Q496 Chairman: Maybe we could move on from first of all, the significance of the problem wasthe process as such. I can understand that you are exaggerated. It was a problem that can arise. Asseveral stages removed, but when you are laying John said, it was to do with the application of thisdown the standards obviously the question of the coating on-site, with the ambient temperature andcoating of the pipeline must be quite critical the way this was working. The checking systembecause it will have an impact on the life of the detected it as a problem and it has been put right.maintenance costs. Safety is obviously the It is true that this was not reported to us at thatparamount consideration. How do you satisfy time probably because I do not think it was an

abnormal event and it was one that they could putyourself that the coating would be safe?




right relatively quickly. On the procurement side UK company like BP was involved. If you were tolook at a proposal of this nature again we wouldmy understanding is that although allegations were

raised, they were not substantiated. I would hope like to think that maybe due diligence might beeven more rigorous than it was at the time. Dothat the note we give you, which will try and give

all the facts as we see them, would prove that we you agree?Mr Weiss: There was a view abroad that perhapshave not got egg on our face on this particular

point and although we are always looking at we had already committed ourselves to supportingIlisu and I think we kept saying we had not. Thereprojects and willing to learn lessons from them this

perhaps does not point to a fault in our process. were four key social impact conditions to be metand we never got anywhere near deciding whetherthey were likely to be met or not by the TurkishQ499 Chairman: We will probably make the

evidence available to those who have been making authorities, we just simply did not get there becauseBalfour Beatty withdrew. I hope I am not beingsome of the allegations because an element of peer

review would not be inappropriate here before we complacent in saying that I feel comfortable thatwe underwrote BTC, it seemed to meet thecome to a conclusion. I should also say, Mr Weiss,

that this is an example of a problem, it is not a standards quite comfortably and I doubt that wecould have done any more in terms of due diligencecriticism of the Export Credit Agency that you and

your colleagues operate, although I have to say that on that. Whether this most recent event in any wayundermines that I just do not know at the moment,the last time we looked at your activities I think we

ended up getting snared, if that is the right but at this moment I do not think there are thingsthat BTC are telling me we should do diVerently.expression, in the Ilisu Dam project which

ultimately was never proceeded with by the British Indeed, I think the way we handled BTC is anindication of how it is going to be in the future, socompanies. I know that Mr Hoyle and myself

trampled round bits of Turkey looking at it. I think I am expecting more 120-page submissions to theunderwriting committee!there were problems there. It might almost be said

that, when you are talking about investmentprojects in a country like Turkey, at times there is Q500 Chairman:We have covered all of our agenda

for the moment. Your evidence will havea tendency towards carelessness or a lack ofattention in some respects certainly to human rights contributed to our report in no small measure. We

are very grateful to you for your eVorts today.considerations and the way that we would do it.One would have looked at this a little more Thank you very much.

Mr Weiss: Thank you, Chairman.carefully even when you consider that a flagship

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Written evidenceAPPENDIX 1

Memorandum by Airbus

Introduction

Airbus welcomes this opportunity to give the Select Committee on Trade and Industry our views on thefuture of ECGD, as a contribution to the Committee’s review of ECGD.

Airbus wants the ECGD trading fund to be set up in a way that promotes rather than hinders Britishbusiness.

In recent years ECGD to date has helped Airbus make a major contribution to UK economy. We wantthat help to continue. It may help the Committee if we begin by summarising the commercial and economicbackground, before we address the future of ECGD, to show how important that help has been.

Airbus: A Major Contributor to the UK Economy

Airbus is a major European company that competes in the high-value market for large commercialaircraft. When Airbus was formed in 1970 twoUS companies, Boeing andMcDonnell Douglas, dominatedthe market.

However, over the last three decades Airbus has developed a product family that embodies the latesttechnologies to reduce operating costs and to cut emissions to meet environmental targets. These productshave been well received by airline operators and their customers, with Airbus gaining market share at theexpense of its American rivals. Restructuring in the US led to the removal of McDonnell Douglas aftertakeover by Boeing, with the latter company now ruling supreme in the US.

Airbus now has a successful product range that competes vigorously and successfully with the UScompetition, with Airbus in 2003 for the first time delivering more aircraft in a year than its American rival,Boeing. The provision of ECGD support has been an important factor in this market success that isproviding significant benefit to the UK economy:

— Airbus has a strong presence in the UK, with its UK-based subsidiary Airbus UK having beenresponsible for the design, development and manufacture of the wings for every Airbus aircraft.As centre of excellence for wings, Airbus UK has a high-technology work-share that provideslong-term employment for a highly-skilled workforce and in a supply chain of more than 400companies across the length and breadth of the UK. Airbus currently supports more than 64,000jobs in the UK from direct, indirect and induced employment and this is set to rise to around100,000 in the next few years as production builds up on new products.

— ECGD support is helping to generate a significant positive contribution to the UK trade balance,with Airbus UK currently providing net exports of more than £1 billion and this is set to rise tomore than £1° billion when the A380 reaches full production.

— Airbus UK is investing considerable amounts in Research, Development and Capex to providenew methods, processes and equipment that are supporting the continuous improvement inproductivity. Indeed, the company has been investing in R&D and Capex at the rate of some£2 million for every working day over the last two years.

— Aerospace is a technology-rich sector, andAirbus and its research partners in theUKare investinglarge sums in the development of cutting-edge technologies in areas such as the development ofnew materials, new structural and aerodynamic analysis techniques and new design andmanufacturing processes. Other UK firms gain benefit from the spill-over of these technologies,with a consequent upgrading of skills and technologies in other UK business sectors.

The Importance of a Competitive ECGDMechanism

Aerospace forecasters are predicting that the annual growth in revenue passenger-kilometres will averagesome 4–5% over the next two decades, which will require the production of more than 15,000 new large civilaircraft with a total value of around $1.4 trillion. Airbus is well placed to take a good share of this businessand the UK economy stands to benefit therefrom via the mechanisms described above. Therefore Airbuswants the ECGD trading fund to be set up in a way that promotes rather than hinders British business.

The market for large civil aircraft production has some characteristics that make this objective veryimportant for Airbus. The central feature is that it is not a free market. There is market failure of a profoundkind. Boeing’s only global rival is Airbus, with these two companies forming a duopoly in a market that hassignificant barriers to entry. Furthermore, both companies enjoy funding from Governments withconsequent market distortions.



Boeing receives stronger support fromEXIMBank than currently is available to Airbus fromECGDandthe other European ECAs, as will be described below. This puts Airbus at a competitive disadvantage to theUS competitor.

In addition Boeing benefits from huge financial support from the US Government, including NASAfunding of “near to market” R&D and “leakage” from US Department of Defense military R&D into civilaerospace. These two sources provide huge financial inflows to Boeing. Arnold and Porter estimated thatbetween 1976–91 some $18–22 billion was provided as a US government support to its civil aerospaceindustry. Hogan and Hartson assessed support to the US commercial aircraft industry in FY 1995 in therange $1.6–2.9 billion. Professor Lawrence estimated that these two sources alone provided an absoluteminimum of $1 billion in 1996 and 1997, with perhaps twice as much being plausible in the light of previousestimates. Furthermore, this support is non-repayable: grant funding pure and simple.

In sharp contrast UK launch investment is repayable by levies on aircraft sales designed to reimburse theGovernment’s contribution and to provide a return on its investment. In the case of the A320, HMGprovided launch investment of £249 million towards the wing development and to date as receivedreimbursements in excess of £500 million. Not only has HMGmade an excellent direct financial return butalso is securing substantial wider economic benefits from the sources described above.

Current ECGD Support to Airbus

ECGD, along with its European counterparts, is an important partner for Airbus. Each year ECGDparticipates in the financing of 20 to 25% of all Airbus deliveries and for four of the last five years Airbuswas the second largest user of ECGD supported financing. In the near future Airbus expects a growingnumber of its customers to seek ECGD support to finance their aircraft acquisitions.

For Airbus the ongoing support of a strong and competitive export credit agency is essential for its owncompetitiveness. This is why we are concerned that the changes occurring within ECGD and the proposedmove to trading fund status must be done in way that preserves Airbus competitiveness and allows benefitsto be continued to be delivered to the UK economy in the manner described above.

Furthermore, HMG has a direct financial interest in the form of launch investment on various Airbusproducts, including the £530 million committed in March 2000 towards the development of the A380 wing.A competitive ECGD scheme will help to secure aircraft sales on which levies will then be payable to HMG,thereby helping to safeguard the returns on existing HMG investments.

Competitiveness of ECGD

In overall terms in 2002 the European ECAs provided cover for $2.1 billion in comparison with $3.6billion of EXIM Bank cover for Boeing.

There are many files where we do not get immediate and full support from ECGD, whereas EXIM Bankissues a letter of commitment to potential customers, albeit non-binding, at an early stage. The fact thatECGD is not able to do so gives rise to uncertainty for our customers. Furthermore once support has beenoVered, ECGD has an increasing tendency to seek non-standard terms. Over the last two years the situationhas deteriorated and now in the majority of cases ECGD either increases the premium from the standard3%or reduces the amount covered to less than the standard 85%.As it is the accepted practice that the lowestcommon denominator shall apply, the French andGermanECAs, that would have initially quoted standardterms, then have to mirror ECGDs position. In consequence EXIM Bank support to Boeing is moreattractive than that available to Airbus.

ECGD in its own comparison report published in February 2003 states that “ECGD did generally haveless cover available than the other ECAs” and as regards pricing states that “its Buyer Credit is ‘aboveaverage’ and a slightly higher rate is charged than for the average product oVered by the European ECAs”.For us this is a clear acknowledgement of lack of competitiveness.

It is vital to Airbus that ECGD regains a competitive attitude. On several occasions last year we suVeredfrom the much more aggressive competitive stance taken by the EXIM Bank in some diYcult markets.EXIM Bank was able to issue a commitment letter, thus giving comfort to the potential customer duringthe sales campaign, whereas ECGDwas unable to. In consequence Airbus lost sales of 11 long range aircraftand three single aisle aircraft to Boeing.

On each occasion business is lost to our American competitor, with the consequent adverse impact onUK exports and high value jobs. Any potential future sales are also jeopardised. Certain deals in isolationmay appear relatively unimportant, but there can be a “snowball” eVect in the market place as customersperceive ECGD to be less willing to do business and in any case more expensive than financing through theEXIM Bank.

The following examples demonstrate the point:

— ECGD pricing for A330s for a major Asian carrier, which was necessarily matched by the otherECAs, was 33% higher than the EXIMBank’s demand for a B777 for the same customer. InitiallyECGD sought to double the standard premium, a demand it subsequently lowered. In the end the



airline still had to pay $1.1 million more for the financing on the A330 than it would have had topay for a Boeing aircraft. In addition ECGD covered only 75% rather than 85% of the net price.The EXIM Bank’s exposure to the airline is double that of the ECAs, and still the EXIM Bankmaintains standard pricing.

— For a European airline which is a live case for current deliveries, ECGD is seeking pricing whichis, once again at a premium 33% higher on a much smaller volume compared to the EXIM Bank.In 2003 Boeing had several 777 aircraft covered 80% by the EXIMBank, whereas ECGDmay endup not covering the total order of A319s, and at 70% cover only. This is a double hit of $2 millionadditional cost for the airline and up to $300 million less volume when compared to the EXIMBank’s exposure in 2003.

Trading Fund Status

The 11% level of return on capital now apparently required is that of a strong commercial institution.Such a return cannot fail to put pressure on premium levels. It may be maintained that premium levels willremain where they are today (which is higher than a few years ago) because of HMG support for ECGD.We believe that this is the biggest danger, because it will expose all of ECGD’s business (of which Airbus isgenerally one third) to public criticism, however unjustified, most likely by the United States, that Airbusand other businesses receiving ECGD cover are being subsidised.

Under the OECD rules EXIM and the other export credit agencies work on a break even basis so wecannot see why ECGD now needs to defend an aggressive ROCE of 11% in real terms. Also we stronglybelieve that ECGD should not become a “commercial institution”. ECGD is surely there to take a long termview, banks provide the short term view.

A UK requirement for a high ROCE for large civil aircraft export financing, will fundamentally damageAirbus’ competitiveness in the global market and significantly influence the other European agencies to thedetriment of the Airbus overall competitive position. A case in point today is a European airline, where theFrench and Germans have agreed standard cover for A319s, like the EXIMBank on a 737 deal in 2003, butECGD is looking for non-standard terms. The lowest common denominator would prevail on such a case,with the US competitor being better placed to win business.

In summary, Airbus considers that by supporting UK civil aerospace programmes ECGD is supportinglarge numbers of highly-skilled, well paid, long-term jobs in a sector that has generated many examples oftechnology transfer and spillovers to other parts of the UK economy. And it does so in ways that recognisethe markets ECGD’s customers operate in, rather than any abstract theory of how markets should work.These beneficial externalities should allow ECGD to have a broader view in line with other ECAs and topermit any ROCE be set at a much lower level than for a commercial enterprise that has not access tothese benefits.

26 February 2004

APPENDIX 2

Memorandum by the British Consultants and Construction Bureau (BCCB)

Introduction

This memorandum on ECGD is submitted by the Chief Executive, BCCB, at the request of its 300 plusexporting consultants and contractors who are actively involved in overseas project work in virtually everycountry of the world.

Background Note on BCCB

BCCB is an independent non-profit making organization funded by members’ subscriptions. Its objectiveis to help British consultants and contractors, and indeed British exporters as a whole, win work overseas.It has strong political and commercial links around the world and regularly liaises with foreign governmentsand the private sector to identify commercial opportunities for its members. BCCB’s expertise andreputation are fully endorsed by HM Government, and it has excellent liaison with UK Trade andInvestment, the Foreign and Commonwealth OYce, the Department for International Development, andthe Department of the Environment, Transport and the Regions. It also has an ongoing relationship withprofessional bodies such as the CBI, the Institution of Civil Engineers, the Royal Institute of BritishArchitects (RIBA) and International Financial Services, London (IFSL).

The strength of BCCB lies in its membership embracing 18 sectors of export comprising over 200 diVerentdisciplines working worldwide. It is therefore in a good position to oVer comment, based on practicalexperience among its members, on the functioning of ECGDboth in terms of its strengths and shortcomingsin the support oVered to British exporters.



ECGD

ECGD was established to help British exporters win business overseas and in general has performedadmirably over the years; indeed up until some five years ago it was considered the leading ECA and theenvy of virtually all our international competitors. But more recently, and notwithstanding recent redefiningof its role—in particular the potential establishment of a pilot Trading Fund—it would appear, as far as theprivate sector is concerned, to have lost the plot and a great deal of eVectiveness in meeting its statedobjective: the support of exporters. A constant series of reviews has created, among exporters, anatmosphere of frustration, uncertainty and a perceived lack of commitment. ECGD is no longer the pioneeror the role model among its peers either in the eyes of those it purports to serve or our internationalcollaborators and competitors. We should emphasize that our criticisms are not directed at the internalmanagement and staV of ECGD. They have a very positive attitude to briefing and assisting our members.How they have managed to maintain any semblance of morale in the face of so much uncertainty is diYcultto understand.

Of most frustration to BCCB members today, is the reluctance to go on cover in the newly emergingmarkets especially in post conflict/post crisis situations. Commercial credit guarantees proposed as analternative are too expensive or not available.

While acknowledging that ECGD, in seeking to achieve a level playing field, was instrumental in thedevelopment of the International Consensus, there is no evidence that other ECAs have followedUK’s lead.The trust or assumption that others will follow suit is both naıve and dangerous, leading, as we believe tothe detriment of UK business and an inability to compete. Closer monitoring of the principles by which ourcompetitors work is needed; all the evidence suggests that they are uniformally more aggressive insupporting the activities of their exporters.

Our members consider that there is insuYcient political support at the highest levels, stifling innovationand flexibility—ECGD has on many occasions been one of the last to go on cover in new or emergingmarkets. Serbia was a good example. Such factors have greatly undermined confidence in its capabilities.Despite protestations to the contrary there is a suspicion that senior Ministers have distanced themselvesfrom the debate. Furthermore, we have the clear impression thatGovernment is pursuing a deliberate policyto eliminate any financial support for exporters, of which perhaps ECGD is the clearest example.

ECGD management appears to have become overly institutionalised. The strategic policy direction isdictated by senior Ministers with the views of the private sector only taken into account well down theconsultative chain. That said, we welcome the appointment of a retired eminent City figure as Chairman.However, there remains a great deal of frustration that economic theorists rule at the expense of exportpracticalities: “The Treasury Nanny knows best.” We believe firmly that “Nanny has got it wrong”!

In past years the Advisory Council always had a good proportion of experienced business people onboard. While we accept the need to guard stringently against vested interests, there is surely a strong casefor utilizing the business experience of those who have retired from the private sector, with first-handknowledge of the challenges which the exporter faces. A good example of this appears to be the AdvisoryCouncil’s pre-occupation with environmental and corruption issues; these are of course essential factors tobe taken into account, but are not in themselves goals in the provision of export credit guarantees.

While we must emphasize that a number of BCCBmembers report good experience in their dealings withECGD, the main criticisms relate to ECGD having become much too risk averse. Surely the main objectiveof an ECA is to assist its exporters in the more risky markets where commercial cover is not generallyavailable nor cost eVective? Additionally, while ECGD claims also to support the smaller exportingcompanies, in reality the majority of their trading relates to the major players involved in very large projectseg defence sales or projects such as the Nigeria LNG project which between them represented around 80%of the £3.5 billion of guarantees issued in 2002–03. We fully support the principle, but ECGD should alsohelp medium-sized companies a great deal more in their exporting endeavours.

It is a sad fact that all too rarely seniorMinisters emphasize the need tomaintain or indeed improveBritishcompetitiveness, exports and jobs, but when they do, there is an unwillingness to provide the collateralfinancial support. In some markets especially for major or technical assistance projects, it has been ourexperience that a financial stake from the bidding contractor’s or consultant’s own government remainsalmost a prerequisite for winning. ECGDcover can help to demonstrate theUKgovernment’s commitment.

BCCB also has concerns at the scant recognition of the simple correlation between exports and job/wealthcreation; UK “productivity” is the obsession. A dichotomy also exists in the support given to those settingup business in theUK from overseas and the support provided for exporters. Ministers constantly underlinethe importance of attracting inward investment and its resultant job creation (eg the Nissan factory inSunderland), and we recognize the importance of this. However, there is no comparable emphasis given tothe downstream value added following the award to a British company, for example, of a majorinfrastructure project overseas. The Chep Lap LokAirport in Hong Kong created an estimated 50,000 manyears of UK jobs (equivalent to £3 billion). Such projects also stimulate many more local jobs with profitsarising to UK firms and potential tax revenue to the Exchequer. Ironically, the Treasury seriously restrictsECGD under the guise of “protecting the taxpayers’ interests”. Successful investment in export, be it inservices or goods, is also in the taxpayers’ interests!



Before any further action is taken on ECGD and its future, we would like to see the Treasury and theMinistries involved working to a common export support policy, pulling together and not seemingly yearafter year having diametrically opposed objectives.

APPENDIX 3

Memorandum by the British American Security Information Council (BASIC)

1. Summary

1.1 This is a paper that has benefited from extensive discussions with economists both inside and outsidegovernment, and reflects part of our joint ongoing work to value subsidies to arms exports with OxfordResearch Group and Saferworld. ECGD measures its subsidy using a Value at Risk model, which whileconceptually plausible, is full of uncertainties, rendering its results highly dubious.

1.2 ECGD provides insurance credit guarantees to exporters, a service available on the open moneymarkets. Our approach picks up on the government’s policy, outlined in its public-private partnerships andprivate finance initiatives, to use the highly-developed finance markets to provide financial services. If it isappropriate to involve the private sector in financing public investment such as schools, hospitals and thetube, why is it appropriate for the public sector to be engaged in guaranteeing private sector (arms trading)operations?

1.3 The answer to this question frequently given is that the UK government is in a better position toaccept the risk implied in supplying guarantees than the private money markets. But if government oYcials,through privileged information or through risk reputation, were able to provide better terms at no extracost, then there would be a strong case for HMT to engage in general bond market or credit-derivativespeculation. This clearly is not an option, and would run counter tomacro-economic theory, not tomentionevery government.

1.4 The money markets are therefore as good a pricing mechanism as government oYcials (arguably agreat deal better!). We would therefore argue that the best measure for ECGD subsidies is to compare thepremium rates oVered by ECGD with those obtainable from financial markets through tools such asgovernment bonds and credit derivatives. We have not got access to such priviledged information fromECGD, but have been able to estimate the scale of the subsidy to defence exports, and believe it to be in theorder of £150 million annually.

1.5 The beneficiaries include the overseas recipient, the UK exporter, and the UK Bank that receives aninterest rate on their loan with no risk at all. But many of these are transactions happening outside theenvelope of economic benefit (when taking account the opportunity cost). However, taken as a whole, thisis an activity does not benefit the UK economy as resources are allocated ineYciently. The costs are bornby the UK government (in a reduced credit rating), as well as in the indirect consequences of the greatertrade in arms that results.

BASIC

BASIC is an independent research organisation that analyses government policies and promotes publicawareness of defence, disarmament,military strategy and nuclear policies in order to foster informed debate.BASIC has oYces in London and in Washington and its Council includes former US Ambassadors,academics and politicians. Further information is available on our website, www.basicint.org

2. ECGD’s Activities

2.1 Put simply, ECGD insures exposures to sovereign governments. Defence companies can buyinsurance at a discounted premium fromECGDagainst non-payment by customers.We go into some detailto describe the argument as it is complex, and the subsidy amounts to more than half the total subsidy weuse in this study.

2.2 The latest figures in the ECGD’s Annual Report show a total support granted in 2002–03 of £3,532million, exactly half of which was defence-related.1

3. Difficulties with the TraditionalMethod of Valuing ECGD Subsidies

3.1 Previous studies, such as those conducted by ECGD and NERA2, have used a value at risk model toestimate the government subsidy to the UK arms exports from ECGD. The economists (MoD andindependent) whowrote theNovember 2001 “YorkReport” on the economic impact of a halving of defenceexports, also used a value at risk model to estimate the subsidy to be between £16 million and £96 million

1 ECGD, Annual Review and Resource Accounts 2002–03. pp 7&8.2 Estimating the Costs and Benefits of ECGD, National Economic Research Associates, 2003, available on the ECGD website(www.ecgd.gov.uk)



a year. We have no conceptual diYculty with the “return on capital requirement” methodology used by theauthors. However, this approach suVers from considerable uncertainties that we believe render the endresult highly unreliable. These uncertainties relate to the amount of required capital and the required returnthereon. We discuss each in turn below.

3.2 First, the value at risk (VAR) methodology used to calculate the capital requirement is predicated onan estimate of future volatility. This in turn is based upon prior historic volatility. ECGD is essentiallyexposed to sovereign, currency and interest rate risks over long contractual periods. We have considerabledoubt as to whether historic volatility can be used to infer very much about future volatility in the sovereignrisk market, even at the level of a portfolio of such exposures. Any such estimates are subject to suchconsiderable uncertainty as to render them almost useless.3

3.3 Second, the return on this required capital is estimated by ECGDand the authors of the YorkReportat around 5%. This figure, whilst supplied by the ECGD, is not justified. In the case of defence-relatedbusiness it also appears to contradict the Government’s own evidence given to parliament in 2000, whichimplies an average annual historical cash loss on such contracts of £52 million over the 10 years from 1991to 2000.4 In any case, theYorkReport compares this 5%ECGD return to the return requiredmore generallyon Government trading funds of 6%, to estimate an implicit 1% subsidy. Crucially, it is our contention thatthe rate of return should be risk adjusted. We would contend that equivalent risk adjusted returns onequivalent business written in the private sector banking markets would be substantially higher than 6%real.

3.4 The 2000 NERA Report commissioned by ECGD concluded that the ECGD’s ability to oVercompetitive premium rates could be an indication of subsidy, suggesting that there needed to be a study toidentify the costs to the Government of using its balance sheet to support ECGD activities.5 The reportstrongly suggests there was a subsidy (see appendix). In response, the Treasury and ECGD commissionedNERA to report further on such a subsidy to ECGD. This NERA report uses the VAR model to estimatethe subsidy to ECGD and was published in early 2003.6 It did not justify VAR as against alternativeapproaches, and came up with a series of results for the subsidy based upon diVering scenarios. Noneinvolved a significant annual subsidy of more than £50 million. It relies heavily upon notional “K-values”,the ratio of unexpected to expected losses on deals, to cope with risk. It accepts the weakness of theapproach:

“the robustness of the k-values is subject to a significant degree of uncertainty, which partly reflectsthe diYculties of estimating k-values at high confidence interval levels for “lumpy” exposures.”(page 27)

3.5 The report attempts to overcome the uncertainties of estimating K-values by claiming that suchuncertainties would suggest higher values within their confidence parameters (between"100% and!100%). But they have failed to justify the confidence parameters, and indeed there is no reason to suggestthat K-values could not exceed 100% (ie unexpected losses could be significantly greater than expectedlosses).

3.6 None of the reports above reconcile their conclusions to market risk premia charged in theinternational bond markets. If the UK Government is so good at managing sovereign risk then perhaps itshould consider speculation in the international bondmarkets: on the basis of the NERA report they wouldmake a killing!

4. Our Alternative Approach

4.1 It is puzzling to us is that the York Report and NERA chose to use VaR at the organisational levelto estimate the ECGD economic subsidy when they were aware of a much simpler and reliable alternative,outlined in an Oxford Research Group report released earlier in 2001.7 Reference to our paper is made inthe full study, and is dismissed as relying on “inferences from very diVerent market activities”. We shouldlike to explore this challenge below.

3 Of course estimates of volatility might be estimated from the international bond markets. However, to do so would simply beto use ourmethod indirectly. Since Chalmers et al consider that benchmarking against suchmarkets is of itself wrong, it wouldbe inconsistent for them to then derive their volatility estimates from such markets.

4 The Subsidy Trap, p 21.5 Estrin, S, Powell, S, Bagci, P, Thornton, S, Goate, P, The Economic Rationale for the Public Provision of Export CreditInsurance by ECGD, (2000, National Economic Research Associates, London) Cmd Paper 4791; available on the ECGDwebsite at: http://www.ecgd.gov.uk/nera.pdf

6 Bagci, P, Powell, S,Grayburn, J,Kvekvetsia, V, andVenebles, A,Estimating the economic costs and benefits of ECGD; aReportfor the Export Credit Guarantees Department, (2003, NERA, London); available on the ECGD website at: http://www.ecgd.gov.uk/neraiifinalreportjan2003.pdf

7 Ingram, P and Davis, I, The Subsidy Trap: British Government Financial Support for Arms Exports and the Defence Industry,(2001, Oxford Research Group/Saferworld, Oxford).



4.2 The ECGD provides finance facilities, credit insurance and overseas investment insurance to UKbased companies. The bulk of these services entail providing guarantees to banks and/or corporates againstnon-payment by an overseas buyer (usually a foreign government) on long-term loans extended to thatbuyer so as to facilitate British exports. Whilst the detail of this relationship varies, the ultimate risks beinginsured relate to interest rates, foreign exchange rates and sovereign default.

4.3 Other risks, such as contract risk (ie the possibility of a dispute over the quality of goods) are alsocovered (under the EXIP scheme), and increase the exposure of the ECGD.We have no satisfactorymethodto quantify the value of these contract risks, and therefore valued them via an arbitrary 1% additionalrequired return, or £46 million per annum.

4.4 The value of the sovereign guarantees to the supplier or commercial lendermay be readily ascertainedfrom the international debt markets. Foreign governments borrowing dollars, for instance, pay a riskpremium over the equivalent American Government bond rate. This reflects the fee levied by a commerciallender for taking on the risk of lending to that foreign government. The value of ECGD guarantees istherefore the diVerence between what the commercial lender would charge the foreign government had theloan not been guaranteed, and the equivalent rate were the loan to be made to the British Government (iesubstantially free of foreign sovereign risk). We use the American Government bond rate as a proxy for theBritish Government dollar borrowing rate, since the dollar is the most liquid sovereign debt market, and aBritish Government dollar loan rate was not immediately available (although it could be calculated). Thisrisk premium applies to the total amount guaranteed by the ECGD in respect of each foreign governmentover each year the loan is outstanding.

4.5 The total amount at risk at 31March 2003 was £20,882 million, of which 22%, or £4,594 million, wasdefence-related. We estimated an aggregate market risk premium of 3.5% by noting that typical mediumterm emerging market bond risk premia were at that time between 1% for South Africa to 6% for Brazil. Itshould be noted that ECGD credit exposure is on long term contracts to areas of high political risk, so theactual figure would be well above the middle of the range. With more information available in the latestECGD Annual Report it is now possible to make a better estimate of the market risk premium for eachguarantee, though to do this accurately would require information on the repayment profile of eachguaranteed loan—information not presently made available publicly by ECGD.

4.6 From this gross cost of £138 million we deducted the premium income received from companies of£34.6 million8, added £46million for contract risk (see above), and added an additional interest rate subsidy(averaged over last 10 years at £3 million), to arrive at a figure of £149.4 million for ECGD subsidies. In thelight of ongoing research we are convinced this estimate is conservative.

4.7 To the extent that the ECGD covers interest rate and foreign exchange rate risk, equivalentinstruments are readily available in the derivatives market. The ECGD itself now lays oV much of its riskin these areas via established derivatives markets.

4.8 There is also an additional market that is fast developing that challenges the remaining function ofthe ECGD. The credit derivatives market is a market for corporate and sovereign risk, and is growingrapidly.9 It is a highly flexible market, and though young, has many options for customers seeking to hedgetheir risks.10 The pricing of credit derivatives is based primarily on bond yield spreads—the same methodas above, though like other derivatives, credit derivatives are very flexible financial contracts in that theirpayouts can be derived from loan or bond values, default or credit events, credit spreads, or credit ratings.11

These reference assets, in turn, can be associated with single names, baskets or indices with cash settlementor physical delivery of a relevant underlying asset or portfolio of assets. Indeed in a recent article the use ofcredit derivatives to cover sovereign risk was explicitly addressed.12 Has the time come for the ECGD to re-insure its sovereign risk exposure via these markets? To do so would make explicit for all to see the truequantum of the subsidy it gives.

4.9 It has been said that ECGD is involved in supporting markets that the private financial markets areunwilling to cover. This is true, though for a minority of ECGD guarantees. The reason private financialmarkets are undeveloped in these areas is because the risk is judged too high to give a price that would bothbe acceptable to the exporter or recipient government on the one hand, and adequately cover the risk on theother. This does not in itself indicate amarket failure, somuch as amarket where demand at themarket price

8 Annual Report, p 24.9 Morgan Stanley estimate the CD market to be just under $1 trillion as at mid-2002, “Spotlight, Credit Derivatives” in TheTreasurer,May 2002, p 45. The 1999KPMG report for ECGD (para 4.7.6) andTheTreasury itself identified credit derivativesmarket as a potential method of ECGD hedging its risk in the market.

10 Frost, J, “Corporate Uses for Credit Derivatives”, in International Treasurer, 31 March 1997, http://www.intltreasurer.com/corpcder.htm. “Like other derivatives, credit derivatives are very flexible financial contracts in that their payouts can bederived from loan or bond values, default or credit events, credit spreads, or credit ratings. These reference assets, in turn,can be associated with single names, baskets or indices with cash settlement or physical delivery of a relevant underlying assetor portfolio of assets.”See alsoDavies, J, Hewer, J, Rivett, P,The Financial Jungle—AUser Guide toCredit Derivatives, (2001,PriceWaterhouseCoopers, London).

11 “Spotlight, Credit Derivatives” in The Treasurer,May 2002 p 49.12 “Spotlight, Credit Derivatives” in The Treasurer,May 2002, p 53.



is close to zero. In such circumstances, the government may be justified in intervening to create a market ifit judges there are political or social reasons for doing so; but it must be recognised that these are noteconomic reasons.

5. What is the Cost of these Guarantees to the British Government?

5.1 Can the British Government beat the international bond markets? If the Government has access toprivileged information enabling it to reduce the risk faced on such transactions below that faced by themarket, then such information would also enable it to profitably exploit such a position by speculativetrading in the international bond market (or indeed in credit derivatives). We consider this possibility to beconceptually problematic, runs counter to the prevailing economic policies pursued by this and previousgovernments, and would have far-reaching consequences for much of public sector finances (not to mentioneconomics theory). Indeed, current government policy (such as Private Finance Initiatives, Public-PrivatePartnerships and the like)13 is moving in the opposite direction, apparently based on the belief that theprivate sector is the best vehicle to finance many areas of the domestic public sector such as health, housingand transport, where government control is so much greater. If it is appropriate to involve the private sectorin these operations, why is it appropriate for the public sector to be engaged in guaranteeing private sector(arms trading) operations?

5.2 Would the removal of such implicit subsidy benefit the Government? As the ultimate guarantor ofsuch debts, the Government pays for such subsidies by an incremental deterioration in its debt rating withthe markets. This cost is currently “hidden” across the full spectrum of Government borrowing, but theprinciple is well established.14 The total cost to the exchequer of such subsidies can only be reliably estimatedusing a market benchmark approach such as the one we propose.

5.3 Neither subsidy calculation accounts for severe or catastrophic risk, presently covered by the policiesissued by ECGD and ultimately born by the Treasury. The possibility of extensive sovereign default byrecipient states is real because the ability to pay for imports is closely linked to the health of the regionaland global economy. That is, the risks are not independent. The 1999 economic crisis in south east Asiaripped through the region causing stock market crashes and extensive defaults. Debt repayments wererescheduled, but the default consequences have yet to run through the financial system. ECGD has not yetwritten oVmany of the debts that are inevitably uncollectable. A deeper crisis at a global level would presentthe sort catastrophic event that would lead to massive losses by ECGD and the Treasury.

5.4 K-values certainly do not account for catastrophic risk, but then neither does our market-basedmodel. Facing a catastrophic event, a private insurance company always has the option to declarebankruptcy. Existing subsidy calculations will therefore underestimate subsidies arising from existingpolicies, unless those policies are altered to exclude such catastrophic events.

5.5 Such an exclusion is unlikely, as the whole banking system depends upon government guaranteesagainst bankruptcy. The banking sector anticipates that the government is likely to bail out individual UKbanks rather than see them go under, allowing them to accept higher risks than they would otherwisecontemplate. This phenomenon, termed “moral hazard”, is well known. Because this moral hazard involvessupport for exports, it entails a subsidy of risk that ultimately benefits exporters and their customers. It isdiYcult to even guess at the impact, and we have not attempted to include it, further implying that ourmethod underestimates the subsidies involved.

6. Who Benefits and Loses from These Subsidies?

6.1 We believe it to be economically axiomatic that subsidies can be justified when they eVectively negatemarket failure (ie where there are externalities,15 or where themarket is ineYcient16), or for social or politicalreasons.17

6.2 Between a third and a half of ECGD guarantees are made to the defence industry.18 Most ECGDguarantees are made directly or indirectly to larger exporters in the business, in order to minimiseadministrative costs. Guarantees are generally granted to a small number of the largest companies that arewell connected and established. It would appear unlikely that the beneficiaries of ECGD guarantees areorganisations worthy of government business support on economic grounds. Of course smallersubcontractors do benefit indirectly from larger deals, but very much at the whim and control of the primecontractor, who is able to determine the terms and conditions, and achieve much of the profit.

13 It may or may not be accidental that the one common theme that the ECGD has with such schemes is that they enable theGovernment to receive monies now (whether capital sums or insurance premia) in return for a promise to return significantresources to the private sector at a later date.

14 In a similar vein, central Government restricts the capacity of local authorities and other debt issuing apparently independentorgans of government to raise debt. And finance lecturers will be well versed in responding to the old chestnut “why not usethe cost of debt to evaluate a project if the corporate chooses to use debt to finance a new project”.

15 Many externalities are of course social or political in nature.16 For example, due to inequalities in market power, market information or market depth.17 For example, as part of a regional regeneration eVort.18 See ECGD recent Annual Reports, where a breakdown is given on the proportion of business that is defence-related.



6.3 Market distortions harm other businesses and alternative industries that do not receive subsidies,through greater competition for investment, skilled labour and other inputs, and fromworse terms of trade.The overall cost to British industry in terms of reduced productivity and competitiveness from this distortioncould be considerable, but are conceptually diYcult to quantify. The market distortion implied by theGovernment using its balance sheet to guarantee overseas sovereign debt is also likely to come at aneconomic eYciency cost greater than simply the incremental borrowing rate.

6.4 Who benefits from this system other than the UK arms supplier? The overseas recipient and the UKexporter clearly receive an economic benefit. The largest winner may actually be theUKBank as they clearlyreceive a loan markup at negligible risk.

6.5 What is the impact of ECGD activities on the recipient? The eVects on the social and environmentalfabric of large construction projects or arms supply is well documented elsewhere. The economic impactsof foreign direct investment crowding out domestic investment or industry development can also besignificant. It is highly questionable whether the sorts of activity supported by ECGD helps or hinders thegovernment’s objectives pursued byDfID in trying to deliver sustainable economic development based uponthe nurturing of domestic industries. ECGD now takes into account issues of sustainable development inconsidering projects, at least partially, unless they involve defence contracts.Defence contracts only scrutinyis through the formal DTI arms export licensing system.

7. Conclusion

7.1 ECGD is pricing its products at well below the market level (as measured by market sovereign riskpremia). This may be because of competing subsidies by other ECA.However, the existence of a competitivemarket between governments in the provision of subsidies is not an argument for subsidy itself. Such asubsidy can only be justified on explicit political or social grounds.

7.2 If there were no subsidy, there would be no reason for the Government to maintain ownership of theorganisation, and proceedings ought to be commenced to privatise operations. Indeed if the prime reasonfor the continued existence of the ECGD is economic, thought could be given to providing explicit subsidiesto existing international banks to continue the role. This would at least have the benefit of transparency.

7.3 Choosing where to allocate scarce Government resources is a political decision. However, theallocation of resources is frequently based upon prejudice and lobbying by interest groups rather thaninformed advice to ministers. As numerous government statements in the House concerning the financingof the Defence Exports Services Organisation within theMoD demonstrate, Government policy to supportthe defence industry has in the past been based, at least in part, upon the assumption that this support bringsfinancial benefit to the Exchequer, largely through reduced prices for MoD procurement from Britishcompanies. Support by ECGD for exports, defence and civil, has been based on the assumption that thecost to the taxpayer is minimal, while the benefit to the defence companies concerned is significant.Why elsewould this business have been retainedwithinGovernment when the short end of the business was privatisedin the early 1990s?



APPENDIX 4

Supplementary memorandum by BASIC

WHAT IS THE SUBSIDY TO THE ECGD?

1. ECGD Propose to Use a Variant of Value At Risk Under Trading Fund Status (VAR)

1.1 VAR quantifies losses with a defined level of confidence (over a defined period).19 eg “losses areestimated to be £1 billion or less 99% of the time over the next year”. The higher the level of confidence used,the greater the maximum loss. The longer the period over which the value is “at risk”, the higher the loss.

1.2 VAR can be treated as a capital sum, and a return (cost of capital) on this sum.

3. The Uncertainties AssociatedWith the VAR Approach Are:

3.1 How are the probabilities of default calculated?19

3.2 What level of confidence should be used?

3.3 Over what period should the VAR be calculated?

3.4 What should be the cost of capital? Should it be a commercial rate, or reflect the Government’s costof debt?

A change in any one of these variables will result in significantly diVerent estimates of ECGD subsidy.

4. Our Alternative Approach is to Look atWhat theMarket Charges for Identical Risk

4.1 ECGD predominantly insures debts owed by foreign sovereign governments. Such governmentsborrow on the international debtmarkets. The international debtmarkets apply a “risk premium” (overUKsovereign debt) to such foreign sovereign debt. The ECGD guarantees take the place of this risk premium.

4.2 Our alternative approach is well established as a pricing mechanism for credit derivatives, and wasfirst suggested in the context of the ECGD by KPMG in 199920

5. Hypothetical Example (Ignoring Time Value ofMoney)

5.1 Assumptions

millionPrincipal guaranteed (assume bullet repayment after 5 years) 300Annual premium: 4Losses on the contract nilBorrowing rate of foreign government 3.5%Borrowing rate of UK Gov 3.2%99% confident losses will be less than 40 over a 5 year periodCost of capital, based on riskiness of equivalent market loan portfolio 20%

19 This might be represented on the graph to the left below by point A. The area to the left of point A would be 1% of the totalarea under the curve below:

probability

losses profits losses profits

A

Capitalmarket studies indicate capitalmarket prices are not normally distributed, but have “fat tails” as indicated in the graphto the right. The likelihood of large losses is much higher with “fat tails”. This is one facet of the risk of “catastrophic loss”.The comment of KPMG in 1999 in the context is interesting:

“The probability of default . . . is revised on the basis of a “subjective adjustment” . . . (which is) significant and theprocess is opaque, unstructured and not formalised.” Para 3.2.7.

20 KPMG ‘ECGD Risk Management Review’ para. 4.7.6“. . . it is possible to . . . hedge through the use of reinsurance or credit derivatives”.

InterestinglyKPMGassumed there were benefits accruing to theGovernmentof “Paris Clubwrap-up” (para 4.7.6). However,such benefits would imply the Government could itself profitably trade emerging market sovereign debt. This seems unlikely.



5.2 Cash surplus on contract (5 yrs # 4m pa)

million20 surplus

5.3 Value at risk approach

millionAnnual cost capital implied by VAR: 40m# 20% 8Cost over 5 years (8m# 5 years) 40Less 20 million premia received (40m# 20m) 20 deficit

5.4 Cost implied by the market (on date contract signed)

millionAnnual cost of guarantee: (3.5%–3.2%)# 300m 9Cost over 5 years: (9m# 5 years) 45Less 20 million premia received (45m# 20m) 25 deficit

6. Subsidies Our Approach Fails to Capture

6.1 ECGD oVers exporters the opportunity (but not the obligation) to enter into a contract for asignificant period. Exporters also have significant latitude as to when and whether they go on cover througha contract. These are very valuable financial options.

6.2 ECGD often guarantees transactions that contain significant risks in addition to underlyingsovereign risk—either because they are with a special purpose vehicle with limited access to foreigngovernment guarantees, or because of the nature of the underlying product.

6.3 The Bank of England acts as “lender of last resort” to the banking sector. Benchmarking overseassovereign debt against commercial rates fails to recognise that commercial rates are themselves subsidisedby central banks via this prudential system.

6.4 Fixed Rate Export Finance (FREF) has been acknowledged as a subsidised product since 1999.Subsidies via FREF, quantifiable via the hedging commonly undertaken by ECGD, are not included inour total.

7. Whose Government Budget Does this Subsidy Currently Appear Under?

7.1 Using the Government’s balance sheet to guarantee ECGD guarantees increases the Government’sborrowing rates.

7.2 The incremental increase for each pound of debt is very small. However, the total cost to theexchequer equates to the subsidy above—at least in theory. In practice it is impossible to measure whetherthe cost of more or less than indicated by theory.

7.3 It is for similar reasons local government borrowing (and borrowing in general) is constrained.

8. Who Benefits From the Subsidy, and by howMuch?

8.1 The subsidy is shared between the exporter, the banks and the overseas government. If the objectiveof the subsidy is to preserve jobs, then a “direct” subsidy would be cheaper, and could be targeted atproducing products of clearer benefit to the UK economy where market failure was a possibility.

9. What InformationMight the Committee ask the ECGD for?

What would be the cost of providing an export guarantee for a typical deal commercially? A bank(or panel of banks) marketing credit derivatives could give such a quote (or quotes)21.

This amount could then be compared with the return on capital calculated under VAR, and with thepremia payable.

21 An investment bank would use the following information, only some of which would be required from ECGD, and some ofwhich is available in the market:1. UKGovernment and foreign governmentmarket yield curves (ie interest rates), in the various currencies agreed in the loandocument for the period of the deal. Thesemight be implied using an interest rate paritywhere the data is not directly available.2. Profile of loan drawdown and loan replayment, for each currency, agreed under the contract.3. Where optionality exists on drawdown or repayment dates and amounts, the various significant combinations should bemodelled, with associated estimates of probability, in order to value this optionality.4. If choices exist as to the currency drawn down, the variables implied by currency options in the market.



10. Conclusion

Why does the ECGD not compare its operations with the private sector? Such a comparison wouldquantify, in a straightforward manner; the benefits the ECGD is providing to the exporter and foreigngovernment.

Is it legitimate to compare the commercial and ECGD values? Yes. Government has no special ability tolay oV risk in the international debt markets.

Is it legitimate to subsidise exports? Not from an economic perspective. As the York report shows, morejobs can be created by acting otherwise. There may be social or diplomatic reasons, but there are noteconomic ones.

And if there is a political decision made to subsidise exports does not plain good governance (let alonethe need for political accountability) demand that the costs of such a policy be known?

APPENDIX 5

Memorandum by the British Exporters Association (BExA)

Summary

(a) In the attached paper, we review developments since the Trade and Industry Committee presented itslast report on ECGD in 2000. Since that time, our members have witnessed a sharp decline in ECGD’sstanding and competitiveness to the extent that ECGD is no longer regarded as the foremost export creditagency (ECA) in the world.

(b) We outline below the main issues that we believe the TIC should focus on in its current review. Wealso suggest the way forward in certain vital areas.

Establishment of an ECGD Trading Fund

(c) One of the original objectives of establishing a Trading Fund was to free ECGD from HM Treasurycontrol over its day-to-day decision-making processes, which had been a strong theme in industry’s responseto theMission & Status review consultation in 1999–2000. Whilst strongly supporting that objective, BExAhas always maintained that the structure of ECGD is of less importance than the quality and internationalcompetitiveness of the service it provides. In practice, however, the process of introducing a capitalisedaccounting system has been highly disruptive to ECGD’s eVectiveness in recent years, and this has beenexacerbated by numerous reviews and changes in procedure. Moreover, HM Treasury has ensured that itmaintains a high degree of eVective control over ECGD’s activities by introducing a series of very tightconsents which can sometimes hamper ECGD’s flexibility to react to the commercial requirements ofparticular projects.

(d) As preparations for the establishment of the Trading Fund progress, we are becoming increasinglyconcerned that it will be unable to deliver adequate and competitive support to UK exporters in the longterm. For example:

— We understand that only £1.7 billion of capital is likely to be made available to the Trading Fund.Whilst this may be adequate to support current levels of ECGD business, there is concern that—in the absence of any apparent mechanism to increase the capital base of the Trading Fund—thismay become insuYcient when there is an up-turn in the cyclical global economy.

— At current premium rates, we understand ECGD would be able to make a return on capital ofabout 4.5% real, which seems to us a reasonable annual contribution to the Exchequer, especiallyas other countries simply follow the WTO stricture to break even over a period of time. However,HM Treasury is apparently insisting on a higher target rate of return (reputably as much as 18%above inflation). This could only be achieved either by a swingeing increase in ECGD’s premiumrates (which would, of course, result in ECGD becoming totally uncompetitive and has,thankfully, been ruled out by the Prime Minister in a letter to the CBI in September 2000) or byan annual injection of voted funds. We understand that such voted funds will be made available,but there must be a serious danger that Parliament (and others) will eventually object to providingsuch funds on a regular basis. Moreover, this could be misinterpreted internationally as a statesubsidy. In any event, it could create uncertainty over the long-term viability of the Trading Fund.We therefore believe that the Trading Fund’s target return should be no higher than ECGD’scurrently achievable rate of return.

Change in ECGD’s Objectives and its Role in Promoting Sustainable Development

(e) ECGD’s Mission Statement continues to refer to ECGD’s role in helping exporters to win business,but in addition now refers to the need to take account of Government’s international policies (to promotesustainable development, human rights, good governance and trade throughout the world). We applaudECGD for taking these new responsibilities seriously, although:



— in some cases it has introduced measures on a unilateral basis—thereby temporarily harming UKcompetitiveness—rather than waiting for international agreement to bring all export creditagencies into line; and

— insuYcient attention now seems to be paid to its statutory duty under the Export and InvestmentGuarantees Act 1991 to facilitate exports.

Greater Openness and Transparency

(f) ECGDhas good record of being open about its financial aVairs, having published detailed reports andaccounts for many years. Despite this, there appears to be a reluctance in the media and elsewhere torecognise the high degree of transparency that already exists. It is diYcult to see how much more openECGD could be without revealing commercially confidential information.

Benefits of ECGD-supported Trade

(g) Although the NERA report concluded that ECGD had provided a net benefit to the UK economyover the last 10 years, there still seems to be a reluctance in some quarters to recognise the true value ofECGD support, both:

— to developing countries who need vital infrastructure, and

— to the UK economy through improved balance of payments, more high-technology jobs, the so-called trickle-down eVect to sub-contractors throughout the country (many of which are SMEs),improved trading/diplomatic links etc.

Relationship Between Industry and ECGD

(h) While industry continues to enjoy a constructive relationship with ECGD’s underwriters, increasingfrustration has arisen over the last few years as a result of administrative changes that have reduced ECGD’sability to respond in a timely and flexible manner to the demands of commercial negotiations and the exportfinance marketplace. It is important that ECGD has the ability to support projects in a wide range ofmarkets, and can introduce new product innovations—particularly in response to market failure andcompetitive imbalance (which it singularly failed to do when exporters demanded ECGD support for bondsfollowing the collapse of the surety bond market in 2000).

ECGD’sRelationship withCommercial Banking and InsuranceCompanies and theDevelopment of

the Private Insurance Sector

(i) As ECGD does not act as a direct lender, it has very close relationships with commercial lenders whoeVectively market export finance products to overseas customers and often provide a wide range ofcommercial financing products and services alongside ECGD-supported loans. Without ECGD support,the commercial bankswould not be able to provide financing at tenors, volumes and prices that are requiredby overseas customers—particularly on terms competitive with those available from other export creditagencies. The availability of fixed rate export finance and zero weighted lending (resulting from ECGD’s100% unconditional guarantees) must be preserved.

(j) There is a high degree of risk-sharing in the financing of any major project. In recent years, there havebeen many attempts to allow ECGD to work more closely with both the banking and insurance sectors tolay-oV certain risks and balance its risk portfolio, but in practice this objective has rarely, if ever, beenachieved for a variety of reasons—not least because there is no adequate private market alternative toECGD in taking long and large exposures. The private insurance market cannot consistently providepolitical risk cover beyond a five year horizon, whereas typical tenors for large capital projects in developingmarkets (in accordance with the OECD Arrangement on Export Credits) extend to 10–15 year horizons.

ECGD’s Corporate Governance

(k) We support moves to strengthen ECGD’s topmanagement structure, but believe there remains scopefor the Export Guarantees Advisory Council’s role and membership to be enhanced.

February 2004



Introduction

BExA’s Credentials

1. The British Exporters Association is an independent, national, trade association dedicated toexporting, which uniquely brings together the export interests of manufacturers, banks, credit insurers andexport houses. In recent years the Association’s focus has been very much on matters relating to ECGD.BExA’s membership has a wealth of experience relating to ECGD. BExA is pleased to have this opportunityto contribute to the Trade & Industry Committee’s review of ECGD. A list of BExA members appears asan annex to this submission.

Decline in ECGD’s Standing and Competitiveness

2. The TIC’s last Report carried a paragraph headed: “Praise for ECGD” which stated that “there wassome agreement that ECGD have been at the forefront of developing flexible products for exporters”. Theproducts developed prior to 2000 (eg One stop shop) are still in place. However, few exporters today wouldsing the praises of ECGD in this way. The perception is that, in the league table of export credit agencies,ECGD has now slipped out of the top ten. Even more damagingly, overseas customers are increasinglyreporting that other ECAs can be of greater assistance than ECGD and, therefore, in some cases express apreference for not using ECGD.

3. The main considerations which ECGD has to take into account and which we believe do not apply toother ECAs:

— ECGD has had to devote resources to too-many reviews and introspection in recent years.

— HM Treasury is still breathing down ECGD’s neck. The Treasury Consents inhibit flexibility onthe part of ECGD

— Unlike other ECAs, the UK Government requires ECGD to break-even on FREF.

— The need to break-even on its insurance account is a WTO/OECD requirement of all ECAs.However, the ECGD Trading Fund will be required to make a return on capital.

Establishment of an ECGD Trading Fund

4. In general terms, it is of little moment to BExA how ECGD is structured provided that it is able to“do its job”. The appeal of the Trading Fund has been its perceived mandate to deliver the following:

— An autonomous, flexible and responsive agency, freed fromHMTreasury control over its day-to-day decision-making processes;

— No reduction in the competitiveness of ECGD’s support compared with that available to ourcompetitors in other countries from their oYcial export credit agencies

5. At the same time, after the period of excessive review and ensuing uncertainty, BExA looks to theTrading Fund to provide:

— Urgent restoration of confidence (amongst overseas buyers as well as UK exporters) in the futureof ECGD and in the consistency of its support for UK exports.

There is increasing concern as to whether the Trading Fund will deliver what has been anticipated and isrequired.

Need for Adequate Capital

6. Adequate capital must be available to the Trading Fund. BExA has been informed that a capitalallocation of £1.7 billion is being considered, whereas previously ECGD had anticipated a need for some£4 billion of capital. The main concern is that no mechanism has been proposed for increasing the capitalbase should an upturn in the cyclical global economy lead to an increase in demand for ECGD support.

Premium Rates

7. It would help win business if ECGD’s premium rates were internationally competitive. Already,ECGD’s premium rates for some markets are above the OECD benchmark applied by other ECAs. Thereis a concern that the Trading Fund will need to impose higher premium rates in order to meet its target rateof return on capital (see below). However, we take some comfort from the Prime Minister’s letter to theCBI dated 19 September 2000 in which he stated that: “the capitalisation system being developed will notbe designed to force ECGD to increase its prices to pay a return on capital”.



Achievable v. Target Return

8. The Trading Fund’s target rate of return on capital employed (ROCE) must be set at a realistic levelbearing in mind that other ECAs are required simply to break-even. BExA understands that, on the basisof existing premium rates, the achievable rate of return is only 4.5% above inflation whereas there arerumours thatHMTreasury believes that a target ROCEas high as 18% should be set. Although it is plannedthat the diVerence between the achievable and target ROCEs will be met by annual voted funds, we areconcerned that this will simply perpetuate the myth that ECGD provides a “subsidy” to exporters, and itwill therefore open ECGD to ongoing Treasury and Parliamentary scrutiny, and could be misinterpretedin the international forum. BExA believes that the Trading Fund’s target ROCE should be set no higherthan ECGD’s current achievable return of 4.5% real.

Change in ECGD’s Objectives and its Role in Promoting Sustainable Development

Change in Objectives

9. The TIC report (para. 43) noted that ‘ECGD’s current Mission Statement is “to help exporters of UKgoods and services to win business, and UK firms to invest overseas by providing guarantees, insurance andreinsurance against loss”. In addition, reference was made to supporting “High Level Objectives” whichwere based on a need “to support as much export business as possible, while limiting the risks to thetaxpayer”.

10. Since 2000, the following words have been added to the Mission Statement:

“. . . taking into account the Government’s international policies”.

The supporting “Objectives” have been expanded along lines summarised by the Secretary of State in hisannouncement on 25 July 2000. He stated then that: “The Report recommends that ECGD should bereformed and strengthened so that its activities become more transparent and clearly consistent withGovernment’s wider international policies to promote sustainable development, human rights, goodgovernance and trade throughout the world . . .”.

11. The Government’s wider international policies are laudable and BExA applauds ECGD for takingits new responsibilities seriously. We do, however, feel that, despite deteriorating trade figures, thefacilitation of trade has been low on the Government’s agenda in recent years and that ECGD has paid toolittle attention to its statutory duty to facilitate exports. Our contention is that ECGD has taken its eye oV

the ball so far as exporters are concerned.

ECGD’s Role in Promoting Sustainable Development

12. Over the last few years, ECGDhas introduced a raft of environmental and social tests, including anti-corruption measures, that need to be satisfied before a project can be supported. In most respects these testswere introduced unilaterally in advance of OECD guidelines that all of the major export credit agencies nowfollow. All sustainable development measures should be introduced on a multilateral basis to ensure, as faras possible, that UK exporters are not put in a worse position than overseas competitors.

SMEs/New Policyholders

13. Themain requirement of most SME exporters is short-term credit insurance facilities, which have notbeen generally available from ECGD since its short-term operation was successfully privatised in 1991. Itis rare that the type of exports made by SMEs would qualify for medium term export finance. Resourcesspent on publicising its facilities amongst SMEs could therefore have been better spent elsewhere.

14. BExA applauds ECGD’s initiative in establishing a new unit to help new applicants. In addition,BExA believes that there is scope for attracting newcomers by being more user-friendly. To this end, weadvocate a streamlining of ECGD’s facilities, documentation and procedures. Specifically, the applicationprocess for ECGD’s supplier credit facility should be streamlined to make it more like the simple processused in the a forfait market.

Greater Openness and Transparency

15. BExA considers that ECGD has been open about its financial aVairs, publishing very thoroughannual reports and trading accounts, departmental expenditure reports and various other regular reportsto Parliament. In addition, it issues informative newsletters and provides a great deal of useful informationon its web site. Recent reports in The Times suggesting that ECGD has covered-up the losses it incurred inthe 1990s were totally unfounded—indeed, suitable provisions for those losses have been made and openlyreported upon for over 10 years. Moreover, those losses were incurred mainly on ECGD products that areno longer available (eg: the short-term credit insurance business that was privatised in 1991). There appears



to be a reluctance in themedia and elsewhere to recognise the high degree of transparency that already exists.It is diYcult to see how much more open ECGD could be without revealing commercially confidentialinformation.

Benefits of ECGD-Supported Trade

16. The NERA report into “the contribution which ECGD makes to the competitiveness of the UKeconomy” (published March 2003) concluded that ECD provided a net benefit over the period 1992–2002in the range of approximately £4.1 million to £23.1 million. However, there seems to be a reluctance in somequarters to recognise the true value of ECGD support, which BExA would identify as follows:

(a) For developing countries:

— developing much-needed infrastructure,

— improving the quality of life (in terms of reliable power supply, clean water, flood relief etc)

— enhancing political stability

— promoting the technical development of the workforce, and

— encouraging inward tourism and other wealth-generating industries

(b) For the UK:

— protecting themanufacturing base in vital capital goods—which results in the preservation of jobs/skills, both in main contractors and in their UK sub-contractors, many of whom are SMEs,

— improved balance of payments through increased direct exports (main projects, follow-on orders,spares, maintenance contracts etc) and, in the long-term, through reduced imports (which is thelikely result if UK factories close through lack of export orders), and

— higher employment, both direct and indirect, which results in greater social harmony, improvedtax revenues, lower social security payments etc.

— maintaining/developing trade links with developing countries (thereby enhancing Britain’s long-term influence in the country and throughout the region).

Relationship Between Industry and ECGD

Decline in Number of Deals Undertaken by ECGD

17. The number of deals done by ECGD in 2002–03 was 26 (excluding Airbus and Rolls-Royce). Thisis only partly a reflection of the decline of UK manufacturing industry and capital goods exports. BExAunderstands that other ECAs—such as SACE of Italy—have managed to increase their business activityover the same period.

Administrative Changes for the Worse.

18. Industry enjoys a constructive relationship with ECGD’s underwriters. Nevertheless, there is amismatch between the high-level willingness to do business expressed by senior ECGD oYcials and theworking level timidity and lack of confidence in terms of decision-taking by underwriters. The committeesystem put in place in recent years has produced a slower system and a less can-do approach. The switchfrom geographic specialisation to product/sector specialisation has resulted in a loss of country expertiseand a need for exporters and bankers to consult more widely, thereby losing time. ECGD has been the focusof unfair criticism from the NGO lobby, when the latter’s real target is the buying country, which initiatedthe project/order and is not so susceptible to pressure.

Reduced Flexibility and Appeal for Exporters

19. ECGD continues to oVer good products for exporters: their delivery has deteriorated. The constantreviews and reorganisation over the last five years and, perhaps, the time-lag in the appointment of a newChief Executive, have demotivated ECGD staV to the detriment of the exporter and have caused unwelcomeuncertainty amongst overseas customers. The new systems and policies, mentioned above, have madeECGD less flexible and less attractive to do business with in the following ways:

— It is more diYcult to get fixed rate export finance (FREF) at OECD commercial interest referencerates (CIRRs).

— All too often, ECGD’s premium rates are set above the OECD benchmarks whereas other ECAstend to keep to the benchmark rate,

— Some members report diYculties in obtaining ECGD facilities for business in rich markets(althoughwe understand no final decision against the provision of cover for rich countries has beentaken). We expand on this matter below.



— When opening cover for a new market ECGD’s response is often too little and too late comparedwith other ECAs,

— Increasing unwillingness to go to the maximum credit period,

— Bond support has been refused despite market failure (See below),

— Relative to other ECAs there is an unwillingness to underwrite corporate risk,

— ECGD is unwilling to commit its support at a suYciently early stage,

— In addition, the restrictive Treasury Consents introduced in 2002 have contributed to an inflexibleapproach to commercial requirements of individual export projects—eg in terms of support forforeign/local content.

20. Members have reported just one positive change since the last TIC Report: permitting 40% foreigncontent for contracts under £10 million.

Bond Support

21. ECGD’s lack of an innovative approach is exemplified by its failure to introduce a bond supportfacility. Over the last couple of years, a number of BExA members have experienced a market failure in thecapacity of the bank/suretymarkets to issue bonds and guarantees. The requirement for performance bonds,advance payment guarantees, etc, has been firmly established in most export contracts for many years, andthe total value of these bonds can often represent between 25% and 100% of the contract price. The issuingbanks require exporters to indemnify them against the calling of such bonds and these indemnities countagainst the exporters overall borrowings. A number of factors have conspired over recent years to reducethe market capacity to issue such bonds, including:

— The near-collapse of the surety market, with many players withdrawing from the market andcapacity down from $6,850–8,150 million in 2001 to only $1,500 million in 2004, mainly becauseof the knock-on eVects of 11 September 2001 on the insurance market,

— corporate failures (eg Enron) have caused banks and insurance companies to become morecautious about corporate exposures, and they have therefore scaled-back on their lending limitswith the result that bonding facilities are severely reduced,

— banks are revising their risk assessment procedures in preparation for the introduction of Basle IIguidelines in 2005, and in some cases this too has resulted in a reduced appetite for bond exposures,

— many exporters’ balance sheets (for large groups and SMEs) are not as strong as they have beenin previous years

— mergers of financial institutions have further reduced the availability of credit to individualmarket sectors.

22. BExAhas campaigned forHMG to introduce a formof bond support for exporters in order to stretchthe available market capacity, and has proposed a risk-sharing structure that would provide a commercialrate of return. Many other countries have introduced similar schemes to help their exporters, but DTIMinisters have thus far refused to consider following suit because of a lack of hard evidence of marketfailure. Meanwhile, until the private market’s capacity returns to acceptable levels, BExA members willcontinue to need HMG bond support in order to pursue export contracts on a competitive basis.

Rich Markets

23. Illustrative of ECGD’s attitude towards facilitating exports is its approach to rich markets. For someyears, there has been an internal debate within ECGD about whether it is appropriate for the Departmentto support any projects in rich (ie developed) markets. This debate emanates from the view that ECGDshould not compete with the private sector, but it overlooks several important factors, including:

— The private market cannot consistently provide support for particularly long and large exposures,especially for the very long credit periods that are required to make major infrastructure projectsviable; thus ECGD support is often needed—alongside private sector funding—to enhance themarket’s capacity,

— Export credit agencies in other countries have no qualms about providing such support for theirexporters,

— In order to build a balanced portfolio of exposures, ECGD needs to support some projects inrelatively rich markets, otherwise its portfolio will soon comprise only developing market risks—and it would, in eVect, become simply a “guarantor of last resort”

— ECGD should be able to sell its exposure on rich market projects once the size and period of theexposure have reduced to a level that becomes acceptable to the private sector.



ECGD’S Relationship with Commercial Banking and Insurance Companies—and Development of

Private Insurance Sector

Relationship with Commercial Banking

24. ECGD has a long-established relationship with the commercial banks active in the London-basedexport finance market. These include UK clearing banks and the London branches of major internationalbanks, totalling some 20 active export finance banks today.

— ECGD and commercial banks have enjoyed an open working relationship which aims to provideand improve the export finance service to exporters to assist in their winning of export orders andprojects for the UK.

— The commercial banks provide their exporter/overseas buyer clients with a wide range ofcommercial financing products and services in addition to those export finance services guaranteedbyECGD. The commercial banks will seek ECGDsupport where the commercialmarket is unableto provide a viable export finance solution in terms of tenor and/or amount and/or competitivepricing.

Service/Responsiveness:

25. The commercial banks originate and submit to ECGD potential export financing and overseasinvestment transactions for ECGD underwriting. These transactions are originated by the banks from 1.their UK corporate clients—Supplier Origination, and 2. from their overseas corporate, bank andgovernment clients—Buyer Origination.

— Whilst the ECGD and commercial banks’ relationship has remained open, the continuousGovernment reviews of ECGD and restrictions imposed by HM Treasury over the last four yearshave dramatically reduced the service level to exporters and reduced their success in winningexport orders and projects. ECGD can no longer be described as “user-friendly”. Potential buyersare also recognising that ECGD is less responsive and flexible than in the past.

— The continuous governmental reviews and uncertainties surrounding the proposed ECGDTrading Fund have discouraged sourcing of capital plant and equipment from the UK, withproject managers preferring to source from countries where the support of the Export CreditAgencies are more certain and predictable.

— The proposed introduction of the ECGD Trading Fund has brought a significant decrease inECGD’s ability to respond to enquiries due to the rigid committee approach to the allocation ofECGD risk capital.

— The commercial banks have increased the amount of business they transact with other OECD andnon-OECD ECAs as a result of ECGD’s lack of competitiveness.

Products:

26. ECGD provides commercial banks with

1. export finance guarantees : under its supplier credit and buyer credit programmes, ECGDprovidesup to 100% guarantees to the commercial banks for political, commercial and transfer risks onloans for up to 85%of contract price. The balance is financed on commercial terms.Under suppliercredits, the commercial banks take the documentation risk and the onus is on the bank to justifythe claim to the satisfaction of ECGD. Under Buyer Credits, ECGD assumes the documentationrisk and provides unconditional guarantees of payment. These 100% unconditional guaranteesfrom Government are essential for ECGD-supported loans being classified as zero-weighted forthe lending banks capital allocation purposes.

2. overseas investment insurance: political risk insurance for commercial loans made by thecommercial banks in respect to overseas projects and purchases. ECGD underwrites and takes90% of the political risk on up to four categories of political risk. The commercial banks take theremaining 10% political risk and 100% of the commercial risk.

— ECGDmaintains a comprehensive range of export finance products. However the essential abilityto refine, improve and customise products for all sectors including SMEs (eg cover for L/Cs orforfaiting-type transactions) has largely been lost as a direct result of HM Treasury’s eVorts tolimit the Treasury Consents under which ECGD operates and reduces the flexibility for whichECGD was highly regarded throughout the world in the last two decades and before.

Competitiveness:

27. ECGD as the UK Export Credit Agency needs to provide a competitive product range at acompetitive price if the UK exporter is to compete with his/her competitors as supported by their respectivenational Export Credit Agencies.



— The comprehensive ECGD product range has been maintained but the quality of those productshas largely stagnated or reduced in the last four years due to the lack of flexibility ECGDhas todayto refine and improve its products.

— With the introduction of the ECGD Advanced Portfolio Management system, ECGD charges anumber of premiums at a higher level than its OECD peer Export Credit Agencies. These highercharges are often in those markets where UK exporters have traditionally been successful,reflecting the concentration of risk as a result of this success, but resulting in potential penalisationfor this very success.

— ECGD is the only Export Credit Agency today which requires each and every transaction withan ECGD support interest rate to breakeven. Although the OECD-agreed Commercial InterestReference Rate is recognised by most countries as a truly commercial rate (being set at onepercentage point above the government borrowing rate in most major currencies), the insistenceon 100% hedging of interest rate exposures to ensure break-even of fixed rate export finance(FREF) on each contract can sometimes result in application of a one percentage point surchargeover CIRRs by ECGD, making UK totally uncompetitive.

Basle II:

28. The introduction of self-regulation of commercial bank risk capital reserves under the Basle IIagreements will permit banks significant flexibility in the management of their risk capital. Today ECGDGuarantees are zero- weighted for risk capital.

— During this process of major change it is critical that the zero-weighting of ECGD Guarantees isnot jeopardised by uncertainties surrounding theGovernment’s intentions towards ECGDand theproposed Trading Fund. ECGD guarantees will become even more critical for exports todeveloping countries.

Relationship with Commercial Insurance and Reinsurance Companies and Development of Private InsuranceSector

29. There have been discussions over many years as to how ECGD might work with the CommercialInsurance Market in relation to major contracts with buyers in non-OECD countries. Proposed structureshave ranged from providing insurance on a syndicated basis, to ECGD or the Commercial Marketproviding reinsurance support to one another. The object has been for both ECGD and the CommercialMarket to attempt to create adequate appetite to support British exporters, in terms of risk, capacity, tenor,finance or a combination of each.

30. Where risks are short in overall duration, and where extended credit is not required, the CommercialMarket provides a viable alternative to ECGD. The Government maintains a commitment to provide lastresort top-up reinsurance to specified Commercial Market insurers where capacity for short term politicalrisk becomes limited.

31. The experience of BExAmembers is that for medium term credit risks where the risk horizon exceedsthree years, the Commercial Market is entirely inadequate to support the needs of British exporters.Moreover, attempts by ECGD and the Commercial Market to share risk on major contracts rarely, if ever,succeed in achieving their objective for a variety of reasons. The most prominent of these are as follows:

— The reluctance or inability of the CommercialMarket to support medium or long-term credit risksin politically risky markets. This results from the volatility of the Commercial Market, which issusceptible to constant changes in its perception of political risks. Although there are a very fewinsurance companies which can write up to three years credit risk, or exceptionally five years insome markets, there is no constancy either of capacity or tenor. ECGD, on the other hand, is ableto oVer consistency of capacity and tenor, and premium rates which bear a relationship to thoseoVered by other ECAs.

— The inability, or unwillingness, of the Commercial Banking Market to provide finance oncompetitive terms against the security of cover provided by the Commercial Insurance Market.The banks’ appetite for medium or long-term credit transactions is influenced by their ability toobtain unconditional government-backed guarantees to support commercial lending, and theircapacity to provide funds on a zero-rated basis. Commercial insurance policies provide neitherguarantees nor access to zero-weighting.

— The practical diYculties in getting ECGD to work with the Commercial Market in terms ofwordings, variable premium rates, agreed action in the event of a potential loss, and recovery rightsand duties.

32. BExA’s view is that if British exporters are to be able to compete satisfactorily on medium and long-term credit contracts with those non-UK companies which are supported by their own ECAs, there is noadequate alternative to ECGD. A competitive Commercial Market will not be available in the foreseeable



future, either to work with ECGD, or to provide such cover independently of ECGD. As such, BExAbelieves that ECGD deserves the full support of the Government in providing stand-alone export financefacilities to exporters and banks.

ECGD’S Corporate Governance

33. We welcome the appointment of outside Directors to ECGD’s executive board, and the recentappointment of a Chairman to that board, but there is considerable uncertainty about how the executiveboard will co-exist with the Export Guarantees Advisory Council. In our view, there remains an importantrole for the EGAC, and we feel that the EGAC should be mandated to provide advice to ECGD’s ministersandmanagement on a very wide range of topics. We would be strongly in favour of EGAC’s mandate beingwidened and its membership strengthened to include more members with recent exporting experience.

British Exporters Association

LIST OF MEMBERS (as at 1.2.04)

ABC International Bank EULER HermesABN AMRO Bank GE Energy (UK) LtdAgustaWestland GMAC Commercial Finance plcAIG Hesley Trading (London) LtdAirbus UK Ltd HSBC Bank plcAlperton International Limited HSBC Insurance Brokers Ltd.ALSTOM T & D Ltd JCB Sales Ltd

—Power Conversion Keith Johnson Consulting LtdALSTOM Ltd Kirans (London) LtdANZ Investment Bank LloydsTSB BankAON Trade Credit London & Scottish Int. LtdAshwood Timber & Plastics Ltd Mabey & Johnson LtdAtradius MAN B&W Diesel Ltd.BAE SYSTEMS plc Marconi SeleniaBailey & Davison Ltd Communications LtdBank of Scotland Mercantile Services Int. Ltd.Barclays Bank Mr Michael PossenerBarlow Lyde & Gilbert N & C Building Products LtdBerry Palmer & Lyle Newstead International LtdBlueFinger Ltd Omni Whittington EmergingBNP Paribas Markets Ltd.British Arab Commercial Bank Quantum Trade Finance Ltd.C Phillips Jones & Co Ltd R A Watts LtdCamara Ltd. Raytheon Systems Ltd.Coface UK Rolls-Royce Capital Ltd.Colomendy Limited Sabanci BankCommerzbank Samac Overseas LtdCorus UK Ltd Shingleton & Co LtdCredit Agricole Indosuez Singer & FriedlanderCredit Lyonnais Standard Chartered BankCrown Agents Services Ltd Stemcor LtdDanske Bank Thales plcDCD Trade Services Ltd The Royal Bank of Scotland plcDemag Delaval Ind. V A Tech T & D

Turbomachinery Ltd Wallace Cartwright & Co LtdDenton Wilde Sapte Wallis Shipping Services LtdDeutsche Bank AG Woldtare Export Ltd.EIL Services Ltd



APPENDIX 6

Supplementary submission by British Exporters Association

Export Credits Guarantee Department—Bond Support

One of the ways in which ECGD could improve its support to exporters, and especially to SMEs,would be to introduce a bond support scheme similar to that oVered by several other Export CreditAgencies. We were encouraged by the Committee’s interest in such a scheme and we are pleasedto submit, as promised, a copy of our paper entitled “The Case for ECGD to support the Issuanceof Bonds and Guarantees” that we sent to ECGD in February 2003. (Copies of the paper were alsosent to the International Trade Minister, HM Treasury and the Export Guarantees AdvisoryCouncil), together with:

— a table showing the bond support facilities available from a range of Export CreditAgencies, up-dating the information contained in paragraph 7 of our paper; and

— a note by Aon Ltd on the collapse of capacity in the international surety market, whichis an updated version of the note that was attached to our original paper.

Since February 2003, we have repeatedly explained the need for bond support at meetings withsenior oYcials and with ministers (both DTI and Treasury), and we have further pressed our casein several letters. But this has so far been to no avail. Indeed, the enduring theme of the writtenresponses we have received from DTI ministers has been along the following lines:

“I appreciate producing concrete and verifiable evidence may be diYcult, but to date ECGDhas only seen a few instances of bonding diYculties all of which appear to relate to companyrather than market problems. Only if such evidence can first be provided to ECGD would afurther meeting, to revisit this issue, be useful.”(Extract from letter to BExA from Mr Mike O’Brien MP, Minister of State, Trade &Investment, 27th October 2003)

It is almost impossible to provide the sort of evidence that would satisfy ECGD, but we believethat we have demonstrated a clear need for ECGD bond support to help exporters accept contractsthat require them to arrange bonds. It is not only companies with weak balance sheets that areseeking such support. Relatively strong companies are also finding that, for capacity reasons, thecommercial banking and surety markets cannot always deliver the level of bonding that is demandedby many of their overseas customers.


1 April 2004

THE CASE FOR ECGD TO SUPPORT THE ISSUANCE OF BONDS AND GUARANTEES

Contents

Introduction

The Need for Bonds

Providers of Bonds

Current Availability of Bonds

(1) Surety Market

(2) Bank Bonds

(3) The position of individual BExA Members

What ECGD can do to Provide Bond Support

The SME Perspective

International Competition

Conclusion

February 2003



Introduction

Exporters are frequently required to provide bonds against advance paymentsmade by their buyers undertheir contracts (Advance Payment Bonds) and to provide comfort to their buyer that all their obligationsunder the contract will be satisfactorily performed (Performance Bonds).

There is a severe shortfall of capacity in the surety and bank market for contractual bonds and both largeand small exporters are experiencing significant diYculty in raising the bonds required to meet their futurecontractual obligations. It is feared that this capacity shortfall will continue and that it will be exacerbatedby the introduction of Basle II disciplines.

Whilst ECGD and the private insurance market oVer coverage for the unfair calling of these bonds(“buyer risk”), there exists no ECGD cover to assist the exporter in raising the bonds from their banks orthe insurance market (“exporter risk”) at this time of unprecedented market capacity reductions.

This market failure is not limited to the UK. Several Export Credit Agencies already provide exporterrisk coverage on bonds—on a risk-share basis with the banks—and other ECAs are actively considering theintroduction of such programmes.

BExA’s members believe that there is an urgent case for the British Government to follow suit byproviding bond risk support to ensure that UK exporters are able to remain competitive in the internationalmarketplace.

The Need for Bonds

The requirement for some form of bonding has become almost universal in major projects and, indeed,all domestic and international trade that involves a performance risk and/or progress payments.

The amount of bonding required by the customer on a particular project or contract will depend on anumber of factors including:

— Location: In North America, it is commonly the case that 100% bonding is required (albeit thosebonds are often conditional by nature).

— Contractual Responsibility: If the contractor is responsible for construction/erection, it is likelythat a performance bond of at least 10% will be required.

— Payment Terms: Any advance/progress payments (including loan drawings)made available beforecompletion of the project are likely to be bonded—initially 100% of each payment (typically20–25% of contract value), but possibly with a reduction mechanism related to deliveries orcommissioning.

— Project Finance: The lenders (and ECAs) will usually require developers of projects to insist onhigh levels of bonding.

— OVset Performance Bonds: Generally required for 5–10% of any oVset obligation, and remainingvalid for the duration of the oVset programme (often 10 years or longer).

— Warranty and maintenance obligations: The requirement for warranty/retention bonds of at least5% of the contract value is not uncommon.

— Tenders: It is a common requirement for a tender/bid bond of at least 2% of the tender price to besubmitted with a tender.

Following the award of a contract, the tender/bid bond will not be released until the performance bondand/or advance payment guarantee has been issued. Similarly, on completion of the project, theperformance bond may not be released until the warranty bond has been issued.

The inability of the contractor to provide a bond that is required by the contract could easily result in thecontract being terminated and any existing bonds being called. Similarly, the inability to extend the validityof an existing bond (eg due to a delay in completion of the project) would almost certainly result in that bondbeing called.

Thus, when bidding for a project, contractors not only have to provide a tender/bid bond, but they alsohave to be certain that they will be able to raise the contract bonds as and when they are required—and toextend them if necessary (not necessarily for reasons within the control of the contractor).

In an ideal world, of course, customers would trust contractors to perform according to the contractspecification and to use progress payments for the purpose for which they were intended. But in the currentworld economic and political climate, including several high-profile corporate failures and insolvencies, therequirement for bonds is increasing rather than diminishing—especially in international trade.

One SMEmember of BExA observes that “There is a growing demand amongst customers to ensure theintegrity of bid and of supplies . . .”. The growing demand for bonds and guarantees is an issue that needsto be addressed internationally. Until more benign market conditions are restored, however, the ability toprovide increasing volumes of bonds and guarantees remains vital to the winning of orders.



As prime contractors are finding it increasingly diYcult to procure bonds for export contracts, so too aretheir sub-contractors. Many of these sub-contractors rely on the “trickle-down” benefits of obtainingbusiness from major British-led export projects.

[Because prime contractors are having diYculty obtaining back-to-back bonding from their sub-contractors, we should be grateful if ECGDwould consider reversing its recent decision to remove from itsBond Insurance Policies any liability for loss arising from the capricious calling of a bond due to an eventattributable to a sub-contractor.]

Providers of Bonds

There are two distinct markets for the provision of bonds and guarantees:

— insurance companies who issue surety bonds; and

— commercial banks.

The surety market generally resists issuing bonds that are callable “on-demand” because insurancecompanies prefer to satisfy themselves that the contractor is in breach of his obligations before honouringa bond call. Also they like to have the opportunity to remedy the situation that led to the bond call. Forthese reasons, most customers stipulate that bonds must be issued by banks, even though the credit ratingof most banks is lower than that of most surety companies. Conversely, most contractors would, for thesame reasons, prefer to provide surety bonds—especially as surety bonds do not erode the contractor’s hard-pressed banking facilities.

Outside of North America, customers usually require bonds that are callable “on-demand”, rather thanthe “conditional” bonds that are favoured by the surety companies. These “on-demand” instruments canbe dangerous in the wrong hands because the issuer is obliged to pay the beneficiary on first demand, withoutany regard to the justification of the bond call. Most contractors purchase insurance against the capricious/unfair calling of such bonds—either from ECGD (through the Bond Insurance Policy) or from the privateinsurance market.

In some countries it is a requirement that bonds are issued by local banks (in which case, the contractorusually has to arrange for his relationship bank in the UK to act as an intermediary).

In North America, banks generally issue standby letters of credit, which are similar in eVect to bonds.

Current Availability of Bonds

4.1 Surety Market

Recent research by Aon suggests that the capacity of the surety bonding market has collapsed over thelast couple of years. This is dramatically illustrated in the attached chart, which shows that the capacity ofthe two largest players (AIG and Chubb) has declined from, respectively, $500–$1,000 million in 2001 to$150 million in 2003; and $700–$900 million to $150 million. And other players have simply left the market.Global surety capacity has fallen from $6,850–$8,150 million in 2001 to only $1,400 million in 2003.

Contractors in all countries have felt the eVect of this dramatic reduction in surety market capacity. Until2001, many large multinational contractors would typically have enjoyed significant bonding lines withseveral surety companies. In many cases, those contractors now have much-reduced surety lines that are full(and in many cases overfull) with existing bonds, leaving no capacity whatsoever to issue any new suretybonds.

The reasons for the reduction in surety capacity include:

— knock-on eVects of September 2001;

— collapse for formerly high profile, respected, companies (Enron, World Com); and

— general reduction (or perceived reduction) in the capital value of many major companies arisingfrom declining share prices.

These factors have caused a “perfect storm” of events and resultant losses causing some insurers and re-insurers to withdraw from certain areas of cover. The surety market is one that has been particularly hit bya reduction in capacity.

This all amounts to a market failure that is damaging the ability of contractors to bid for contracts,particularly in North America. Whilst such contracts do not tend to require ECGD-supported finance orECGD insurance, there is an urgent case for ECGD to provide some degree of bond support in order thatUK contractors can continue doing business—and, particularly, large projects—in the important NorthAmerican markets.



4.2 Bank Bonds

There is also a severe reduction in capacity in the bank market to provide exporters with the bondsrequired to perform their export contracts.

The export finance banks oVer their corporate clients a range of finance facilities, often including bondinglines to support their export activities. According to each bank’s own strategy, these bonding line facilitieswill be viewed either as a stand-alone product or oVered as one of a range of products to existing corporaterelationships. In both cases the banks will analyse the corporate credit risk and ensure it is one acceptableto the bank.

When reviewing a request for bonds the bank will therefore address three issues:

— Credit.

— Pricing/Return.

— Capacity.

Credit—An acceptable credit risk is a pre-requisite to the bank providing any bonding lines. Put simply,if the bank cannot get comfortable with the corporate risk, then no bonding facility will be provided.

Pricing/Return—Pricing is dictated by supply and demand in the marketplace. With the introduction ofBasle II, it is hoped that the banks will be free to select their own level of risk capital allocation accordingto their respective risk assessments. Banks that perceive bond facilities as low risk will require less risk capitaland pricing should be relatively low. The converse will also apply. There is therefore likely to be a greaterdisparity in the risk perception and bond risk pricing in the bank market under Basle II, with most of theleading banks in London likely to adopt the advanced approach to credit risk capital.

Pricing in the market has generally been on the increase over the last 12–18 months, partly driven by riskcapital returns being taken more seriously in anticipation of the new disciplines of Basle II being introducedin 2003–04, but also by a perception that corporate credit risk has generally deteriorated.

Capacity—Capacity on a specific corporate risk is a problem for a bank from time to time, especially whenthe exporter has been successful in winning business and has a strong relationship with the bank, which maybe a core bank for the exporter. That bank’s own policy and operational guidelines will frequently determinea maximum level of bonding facilities per corporate client/exporter. Prime considerations may include thenet worth and commercial reputation of the particular corporate, its overall level of exposure to thatcorporate, and overall relationship issues. In some cases the upper limit on the bond facility will be absolute,in other cases the bank might consider adding additional capacity to the limit if it can obtain additionalsecurity, for example in the form of cash collateral. [However, it is often impractical for corporates toprovide cash collateral for bonds—not just because of other demands on their cash and in some cases theconstraints of financial covenants, but also because they need to use the contractual progress payments fortheir intended purpose—to finance work-in-progress.]

Following major corporate failures such as Enron, banks are increasingly unwilling to bear highconcentrations of risk on any one corporate and this has resulted in an overall reduction in the exporter riskmarket. As a result, many manufacturing members of BExA are finding that their bank bonding facilitiesare full (or overfull) with existing bonds and that there is no capacity for the issue of new bonds, regardlessof price.

Moreover, in the absence of any capacity in the surety market, contractors are now having to oVer bankbonds to customers who would have been willing to accept surety bonds. This is putting increased strain oncontractors’ bank bonding lines.

As in the surety market, therefore, there are real signs of market failure in the bank bonding market too.In normal times, it might have been possible to ameliorate the problem in the banking market by turningto the insurance sector—but because of the crisis in the surety market this is not a practical solution to thecurrent problem. The only way of creating increased capacity, therefore, is to look outside of the normalmarkets, hence BExA’s urgent plea for HMG to provide support, either through ECGD or through someother means.

4.3 The position of individual BExA Members

In view of the commercial and financial sensitivity of information about the borrowing/bonding facilitiesof individual contractors, and of the attitude of individual banks and surety companies towards bondinglines, we have asked our members to provide supplementary information directly to ECGD. We would askthat all such information is treated as commercially confidential.



5. What ECGD can do to Provide Bond Support

To date, ECGD has expressed reluctance to provide support for bonds/guarantees because it suVeredconsiderable losses on an earlier ECGD Bond Support scheme in the 1970s as a result of the insolvency ofone major UK corporate. At the time, ECGD provided 100% bond support to corporates that could notobtain bonding lines from their banks. BExA maintains that that loss was incurred because of inadequateunderwriting disciplines. There is no suggestion that ECGD should, in today’s environment, provide a last-resort facility, nor that 100% cover is required.

Indeed, our proposal is for ECGD to risk-share with banks. This would increase the overall bondingcapacity available to an exporter whilst at the same time ensuring that ECGD did not take un-commercial risks.

There are several ways that this support could be provided, for example:

— General Bonding Line: Where an exporter has a general bonding line with a bank or suretycompany, ECGD would increase the exporter’s bonding capacity by providing a guarantee/indemnity to the bank/surety for a proportion of their exposure on a portfolio of existing and/orfuture bonds, thereby increasing overall capacity.

— For a particular export project with a large bonding requirement: ECGD might join a bondingsyndicate for 50–70% of the value of each bond. (Either overtly or by providing guarantees/indemnities to the fronting banks/sureties).

In either case, ECGD would rely on a counter-indemnity from the exporter that ranks pari-passu withthe counter-indemnity given to the banks/surety companies.

Both ECGD and the banks/surety companies would receive commission from the exporter, broadly inproportion to the risk each was taking on the exporter. This should be compatible with ECGD’s break-evenobjective.

ECGD should provide this facility even if it is not providing other forms of support for the project inquestion.

6. The SME Perspective

A bank member has argued that the most diYcult scenario relates not to large customers, but to SMEs.They may not be “poor credits” but their balance sheets are often not suYciently large to support thecombination of bonding and working capital required for new overseas business. Some form of supportshould be considered for SMEs, even if it has to be taken outside of ECGD’s normal trading activities.

As mentioned earlier, many SMEs obtain work as sub-contractors onmajor export projects, and they areusually required to provide bonds to the prime contractor. It is therefore important that such sub-contractors are eligible for bond support even though their contracts might not involve direct exports.

7. International Competition

Exporters in several other countries already benefit from various forms of bond support provided by theiroYcial ECAs—and more ECAs are recognising the need for such support and are seriously considering theestablishment of new schemes.

— AUSTRIA: OeKB are currently not yet providing exporter bond risk support.

— AUSTRALIA: EFIC provides exporter bond risk programmes.

— BELGIUM: OND provides exporter bond risk programmes.

— CANADA: EDC provides exporter bond risk programmes.

— FINLAND: FINNVERA provides bond risk support on a case-by-case basis. Cover may be upto 85% but usually they prefer a risk sharing on a 50/50 basis with a bank.

— FRANCE: The French Authorities are currently considering a scheme under which bonds issuedby commercial banks will be partially insured by Coface against exporter risk.

— GERMANY: Hermes are currently not yet providing exporter bond risk support.

— ITALY: SACE is currently discussing with exporters the provision of bond risk support.

— NORWAY: GIEK provides exporter bond risk support programmes and covers up to 50% onprivate risks and charges the same premium as the bank.

— SPAIN: CESCE has for many years provided exporter/buyer bond risk support programmes toprovide insurance against the calling of bonds for any reason—fair or unfair.

— SWEDEN: EKN has operated a “counter-guarantee facility” for seven or eight years. Normalcover is 50–75% and the premium varies between 0.5–2.00% per annum, payable annually.Approximately 75% of the premium relates to the Exporter risk. There is no requirement that thisguarantee should be complementary to any other EKN guarantee.



— SWITZERLAND: ERG is currently discussing the provision of an exporter bond risk supportprogramme, however it may require a change in law to achieve it.

— UK: No bond support scheme is currently available.

As bonding capacity has dried-up, the absence of ECGD support is becoming an increasingly importantcomponent in the competitiveness of British exporters—and, in some large multi-national groups, it isalready an important factor in sourcing decisions.

8. Conclusion

BExA strongly recommends that an HMGBond Support scheme along the lines described above shouldbe introduced as a matter of urgency in order to prevent a further reduction in the competitiveness ofgovernment support for British industry. At a time when the UK’s visible trade balance is at an all-time low,HMG intervention as a result of market failure would be more than justified. Such support would be verymuch in accordance with ECGD’s mission to help exporters win business.


February 2003

EXAMPLES OF ECA BOND SUPPORT

Country Bond Support? Notes

Austria NoAustralia Yes If involved in a large export project and the exporter’s bank limit

has been reached, EFIC may either issue bonds directly orprovide guarantees to banks issuing bonds. Securityrequirements depend on bond type and risks involved.

Belgium Yes OND provides exporter bond risk programmes.Canada Yes Under its Bid or PerformanceGuarantee programmes, EDC can

insure banks against any call made on letters of guarantee givento buyers. The bank is fully protected (100%) by EDC so theexporter’s working capital is not aVected.

Czech Republic Yes EGAP provides insurance against “fair calling” of guarantees(bonds) as a result of non-fulfilment of the Czech exporter’sobligations.

Finland Yes FINNVERAprovides bond risk support on a case-by-case basis.The BondGuarantee can be a counter security for a bank issuinga bond on behalf of the exporter in favour of a foreign buyer. Ifthere is a claim, Finnvera recovers from the exporter the fullindemnity paid to the bank. The Bond Guarantee can also beused simultaneously both as a counter guarantee in favour of abank and as risk insurance in favour of an exporter. Thestandard BondGuarantee coverage for the bank is 100% but risksharing on a 50/50 basis with a bank is preferred. The bond maybe given by either a Finnish or a foreign bank or insurancecompany.

France Case-by-case The French Authorities have introduced a scheme under whichbonds issued by commercial banks can be 65% insured againstexporter risk.

Germany No Hermes can act as Surety, but without government support.Italy Not yet SACE has been discussing with exporters the provision of bond

risk support.

Malaysia Yes For certain classes of contract, Malaysia Export CreditInsurance Berhad is able to provide support either by way ofinsurance bonds, or by giving indemnity to banks for issuingsuch bonds.

Norway Yes GIEK provides exporter bond risk support programmes andcovers up to 50% on private risks and charges the same premiumas the bank.

Poland Yes KUKE S.A. can either issue bonds or provide re-guarantees asa security for guarantees issued by a bank.

Portugal Yes Advance payment and reinforcement bonds can be provided bymeans of COSEC’s Bond Insurance Policies.



Country Bond Support? Notes

Slovenia Yes Slovene Export Corporation can issue bonds.

Spain Yes CESCE provides exporter/buyer bond risk support programmesto provide insurance against the calling of bonds for anyreason—fair or unfair.

Sweden Yes EKN’s counter guarantee product will be explained by Susannewithin a separate session.

Switzerland Not yet ERG is considering the provision of an exporter bond risksupport programme, however it may require a change in law toachieve it.

UK No

USA Yes OPIC guarantees repayment to US financial institutions in theevent that guaranties, typically letters of credits and bonds, aredrawn. OPIC’s Financial Contractors Programme expands theability of US financial institutions to issue additional contractorguaranties, thus enhancing the liquidity available to contractors.US contractors, especially small and medium-sized businesses,with an established track record, demonstrated financial viabilityand the ability to establish a credit relationship with an issuingfinancial institution are eligible for the OPIC program. Up to75% of the amount of bonds can be covered by the OPICguaranty, with financial institutions assuming 25% or more ofthe transaction.


October 2003

INTERNATIONAL SURETY CAPACITY 2001–04(per account, in US$ millions)

Company 2001 capacity 2002 capacity 2003 capacity 2004 capacity

AIG 500–1,000 500 150 225Chubb 700–900 200–400 150 300CIGNA 500–700 Nil Nil NilCNA 500–700 75 75 75(1)Firemen’s Fund 1,800 Nil Nil NilKemper 600 100–150 Nil NilLiberty 500–700 100–200 75 100St Paul 750 750 200 Nil(2)

Travelers 500 500 500 500(3)Zurich 500 500 250 300(4)

Total 6,850–8,150 2,725–3,075 1,400 1,500

Notes:

1. Outside USA, open for accounts in UK and Canada only.

2. Being merged with Travelers.

3. Outside USA, open for accounts only in Australia and the European Union, although Canada andMexico may be added after completion of the merger with St Paul.

4. Special acceptance by reinsurers required for accounts in Argentina, Brazil, Japan andMexico; capacityof $400 million available for accounts rated investment grade.



The following chart incorporates the maximum amounts in the above ranges.

International Surety Capacity 2001 - 2004(in US$ millions)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2001 2002 2003 2004

US$

milli

ons

AIG

Chubb

CIGNA

CNA

Firemen's Fund

Kemper

Liberty

St PaulTravelers

Zurich Zurich

St PaulLibertyKemperCNAChubbAIG

ZurichTravelersSt PaulLibertyCNAChubbAIG

Travelers

ZurichTravelersLibertyCNAChubbAIG

January 2004

APPENDIX 7

Submission by the Campaign Against Arms Trade

1. The Campaign Against Arms Trade (CAAT) is working for the reduction and ultimate abolition ofthe international arms trade, together with progressive demilitarisation within arms-producing countries.As a step towards this, CAAT is seeking an immediate end to Government assistance for the export ofmilitary equipment.

2. It is against this background that CAAT makes this submission. CAAT urges the Committee to callon the UK government to end all export credit cover for goods being purchased by overseas military orsecurity forces, or armaments-manufacturing bodies. This would include cover for the construction ofmilitary bases. CAAT would like the UK government to set an example to its overseas counterparts bytaking this action unilaterally.

3. Support for such an idea is not confined to campaigning groups such as our own. No less a figure thatMichael Camdessus, formerManagingDirector of the InternationalMonetary Fund, expressed his supportfor “abolishing the provision of export credit for military purposes.” (Speech, Washington DC, 28.9.99)

4. The 1999–2000 Review of the ECGD’sMission and Status was welcomed byCAAT.However, thoughmany submissions, including our own, recommended ending export credits for military exports, the finalreport did not. The Review also saw the introduction of the ECGD’s new Mission Statement whichincluded, for the first time, an objective that the ECGD would “ensure its activities accord with otherGovernment objectives, including those on sustainable development, human rights, good governance andtrade.”.

5. CAAT waited to see if this new, non-monetary, objective would make any diVerence in practice. Afterthree years, it would seem that it is, largely, business as usual.

Still a Subsidy forMilitary Business

6. In reports commissioned by the ECGD, and published in April 2000 and January 2003, the NationalEconomic Research Associates conclude that the premiums charged by ECGD do not include all the costsinvolved. In other words, export credits are subsidised by the tax-payer. The Trade and Industry Secretary,Patricia Hewitt MP, accepted this, saying in response that: “the Government’s view remains that anyattempt to eliminate the subsidy should be done only on a multinational basis.” (Hansard, 26.3.03)

7. Before the ECGD Review, the percentage of export credits supporting military goods was always fargreater than the percentage of visible exports accounted for by them which is under 3% a year. This hascontinued to be the case since 2000; in fact, the percentage covering military exports has risen.



Total ECGD Total military Military ECGDcover issued ECGD cover cover as

issued percentage oftotal

£ million £ million %

2002–03 3,532 1,759 502001–02 3,298 1,035 312000–01 5,662 2,735 481999–2000 5,504 1,583 291998–99 3,725 1,700 241997–98 3,541 763 22

(ECGD Annual Reports)

8. The high proportion of export credit support given to military industry means that the arms industryis the prime beneficiary of this subsidy.

9. According to information in Hansard, 12 June 2000 and 21 June 2002, between 1990–91 and 2000–01the Premium Earned in respect of export credits for military goods totalled £251 million; Claims Paidequalled £970 million; and Claims Recovered £122 million. Since the ECGD as a whole is required to breakeven, this would seem to imply that, civil exports are subsidising military ones.

10. Since 1997, the main recipients for export credits for military goods have been:

£ million

Saudi Arabia 6,225South Africa 1,270Brunei 590Oman 535Malaysia 363Turkey 253Qatar 178Romania 106South Korea 82Greece 79Brazil 74Indonesia 67United States of America 65United Arab Emirates 49Thailand 30Singapore 19Egypt 16India 14

(Hansard, 7.1.04)

11. Many of these countries are in regions of tension or conflict or have governments with very poorhuman rights records. Some are far from stable: for instance in Saudi Arabia where the UK taxpayer couldbe left to pick up an enormous bill for military equipment supplied if the regime fell.

12. Even where there is no conflict or human rights concerns, the purchase of military equipment canbe a major misuse of scarce resources. Groups within South Africa are campaigning against the massivearms deal there, which is supported by export credits, on the grounds that the money could be much betterspent tackling problems such as HIV/AIDS and the lack of decent housing for all.

Ending Corruption

13. Military exports are frequently of very high value financially and always shrouded in secrecy—acombination of factors which renders exporting such equipment liable to corrupt practice. It is hardlysurprising, therefore, that there have been recent media reports alleging corruption with respect to militarydeals between UK companies and the Czech Republic, Qatar, Saudi Arabia and South Africa. Many ofthese involve deals supported by Export Credit Guarantees.

14. In the light of this, the ECGD’s commitment to seeking to root out corrupt practices is welcome.CAATwas encouraged to learn that, since theAnti-Terrorism,Crime and SecurityAct 2001 came into forcein February 2002, the ECGD’s Head of Internal Audit and Assurance has dealt with five allegations ofcorruption and has referred all of them to the National Criminal Intelligence Service for furtherinvestigation. (Hansard, 16.10.03)



15. CAAT believes, however, that the ECGD could do more and, in particular:

(a) make companies liable for the actions of their subsidiaries and agents;

(b) require details of agents and agents’ expenses in all cases;

(c) not underwrite commissions as part of the contracts covered;

(d) immediately terminate cover for any project if a bribe has been paid and make the companiesreimburse any claim payment that has been made; and

(e) not give companies making illegal payments in connection with ECGDbacked projects any furtherexport credits or guarantees for a period of five years.

Transparency

16. The ECGD’s Annual Review does now list details of guarantees issued including the exporter, buyer,project and maximum ECGD liability, unless the exporter requests secrecy. This opens the ECGD up togreater scrutiny. However, details of insurance cover provided by the ECGD, which accounts for a rathergreater proportion of its business, are not given. This is regrettable.

17. The ECGD’s website is much improved, with considerable information available on it.

Case Impact Analysis

18. The Case Impact Analysis Questionnaire only covers export credits of concern to CAAT where theproject is not subject to Export Licensing. Construction of military bases would be an example of this. Inall other instances, the ECGD believes that the Export Licensing process is suYcient, even though this doesnot include any environmental analysis of the equipment sold.

Advisory Council

19. CAAT is pleased that the membership of the Advisory Council has been expanded beyond thebusiness community, although disappointed that, to date, this has had little impact in the field of cover formilitary exports.

Assistance from Staff

20. StaV at the ECGD—especially from the Business Principles Unit—have shown a great willingness tomeet, and provide information for, campaigning and other non-governmental organisations. CAATappreciates this.

Subsidies, Jobs and an Unpopular Industry

21. Export credits are part of a general subsidy for the arms trade, which also includes research anddevelopment expenditure; a specialist department, the Defence Export Services Organisation, to promotemilitary sales; and the promotional activities of Government ministers. Rather than benefiting the UKeconomy as a whole, arms exports are subsidised by the taxpayer. The only beneficiaries are the militarycompanies. CAAT has calculated that this subsidy amounts to about £750 million a year.

22. The Government sometimes uses the provision of jobs as the basis on which to justify arms exports.However, a report for CAAT by Defence and Aerospace Analysts demonstrated that the number of peopleemployed in producing arms for export is less than 0.3% of the workforce—far fewer than popularlysupposed. In addition, it shows howmost arms export jobs are located in areas with very low unemploymentand hence tight labour markets. CAAT does not believe that the jobs argument can be used to justify thesubsidy of arms sales by export credits.

23. Furthermore, the arms industry is one to which the public is increasingly opposed. CAATcommissioned a national opinion poll on attitudes to the arms trade. In the poll, which was carried out byBRMB between 1 and 7 May 2003, 1,004 people were questioned face to face. The questions mirroredalmost exactly those asked in a poll undertaken by the Ministry of Defence five years previously.

24. The results of the survey showed a remarkable rise in support for ending arms exports. For example45% of people questioned said that they agreed that the UK should simply not sell military equipment toother countries, whilst only 13% said that sales should be allowed to any country not subject to an embargo.Even limiting sales to European Union and NATO countries only gained the support of 38% of thosesurveyed.

March 2004



APPENDIX 8

Memorandum by the CBI

Summary

1. The Export Credits Guarantee Department (ECGD) provides a key element of the support given bythe Government to business activity overseas. The CBI, therefore, welcomes the decision of the House ofCommons Trade & Industry Committee to inquire into the future of the ECGDwhich, theGovernment hasannounced, it intends to launch as a Capitalised Trading Fund (CTF). The CBI responded both in writingand orally to the Committee’s last Inquiry into the ECGD’s Mission and Status in 1999. That earliersubmission still remains largely reflective of current UK business views.

2. The CBI is concerned that the seemingly endless reviews of the ECGD have led many to question theGovernment’s commitment to this important type of support. As a result, the UK’s ability to attract andretain internationally mobile business is being jeopardised, with all the attendant implications for jobs, notjust in the principal companies themselves, but equally in smaller and medium-sized companies in thedependent supply chains.

3. We have always said that the actual structure or status chosen for the ECGD was of secondaryimportance to the paramount need to ensure it could give UK business genuinely competitive support.However, we had accepted the concept of a CTF, but only if this provided the ECGD with a firmer andmore sustainable basis going forward, enabling it to have the operational freedom and autonomy to oVera flexible, responsive service to its customers. But its ability to oVer such a service, and therefore to commandthe support of business, will be crucially dependent on the parameters set for its operation.

4. The CBI has been led to believe that the ECGD CTF is likely to be closely linked to the DTI and thatit will be operational sometime during 2006 following a preceding piloting exercise. The CBI would wantto see a number of important features and principles adopted within the new CTF which we detail below.Meanwhile, we hope that crucial decisions on the CTF will only be taken by the Government (HMG) afterfull and meaningful consultation with business about their likely eVects. Consultation must not be confinedsubsequently merely to procedural matters.

5. The overriding priority now is that the ECGD must be able to oVer internationally-competitivesupport to UK business at overall levels which compare favourably with those oVered to competitors inother countries by their own export credit agencies (ECAs). Key issues aVecting the CTF include:

— the actual structure of the trading fund;

— the amount of capital allocated to it;

— the return required by HMG on that capital;

— the budgetary arrangements with DTI (including annual voted funding);

— premium policy of the CTF and the need for competitive premiums;

— the maintenance of a broad range of UK markets in which ECGD cover is provided;

— a full and competitive range of ECGD products; and

— sound and independent future ECGD governance.

6. Business needs the CTF to be adequately funded to undertake its important function. It should berequired only to make a reasonable and not excessive return on its capital—particularly since other ECAsare not structured on this basis.We also believe the ECGD should not bemade to rely on annual voted fundsin future and that it should enjoy a degree of autonomy from outside or other departmental interferenceover its management and operation.

Background

7. Following frequent reviews of the ECGD over many years, HMG’s more recent preoccupation withECGD’s risk management, and its commissioning of a report by KPMG, seemed to confirm the worst fearsof business that the Government was much more concerned about risk than with ensuring equivalence ofsupport for UK business with that given to overseas competitors. HMGhas also commissioned two reportsfromNERA about ECGD’s economic cost and benefits.We believed that the first report properly identifiedthe reality. Not only were we surprised that a second report was subsequently called-for, but it also seemedto disregard the ECGD’s important benefits in its concentration upon its cost.Whilst not challenging all thetechnical formulae, business had serious reservations about a number of the assumptions and much elsewithin the second NERA report.

8. UK businesses believe that the current package of ECGD support is less favourablethan that oVeredto their competitors in other countries and that there is considerable scope for its range of products andcoverage to be enhanced in the following areas:

— Whereas at one time some ECGDpremium rates were below the OECD average and others aboveit—giving a broad comparability—they have become consistently simply on or above the OECDpremium benchmark.



— CBImembers judge and report a significant qualitative diVerence of approach between the ECGDand its competitors involving the giving of late commitments from the ECGD. This is due to whatbusiness feels to be red tape, caused often by the need to conform to business principles,environmental examination, Treasury consents, and other considerations. In contrast to that, theFrench ECA,COFACE for example—with a nod from its Ministry—gives commitments earlierandmore readily. In consequence, CBImembers point to a can do approach amongst the ECGD’scompetitors and contrast it with the ECGD’s non-committal and less flexible approach which,coupled with a failure to react quickly, leads to a considerable disadvantage in the UK.

— Some ECAs oVer Bond Guarantee Schemes—the ECGD does not, merely its bond insurancepolicy. Cutbacks by banks and surety companies on their corporate exposures have also made itharder for project and capital goods exporters to provide bonds forwhich the necessary guaranteesare both expensive and diYcult for many to secure.

— There are also tangible diVerences between the ECGD’s and US EXIM’s treatment of theimplementation of the Large Aircraft Sector Understanding (LASU).

— The disinclination of the ECGD to cover some constructional infrastructure and contracting workin developing countries and within its sectoral priorities is also deeply regretted.

9. In summary, UK exporters all too often perceive the UK export finance environment as being morediYcult and less sympathetic towards business than those of their competitors. The uncertainty created bythe multiple reviews and economic benefit analyses of at least the last six years has undermined industry’sconfidence in the ECGD. This is all the more disappointing as prior to this it was not only held in fairly highregard by business but it had, as required of it, achieved a positive return to the Treasury, year on year, oversome of the most diYcult trading periods of the years since its short term business was privatised in 1991.

The Future ECGD CTF

10. In a competitive world, most countries—and all OECD ones—support their exporters in theprovision of medium and long term credits which cannot be provided by the private sector. HMG shouldalso provide adequate support to those based in the UK. Whilst the CBI has never suggested that everyindividual UK business contract should necessarilyreceive support to match whatever may be oVeredelsewhere, we do think that overall support levels should be recognised as providing UK companies with abroadly competitive package overall. We urge that the ECGD CTF’s prime raison d’etre be clearlyunderstood to be to provide support for British international business so that the latter can competeeVectively with its competitors elsewhere.

11. We believe the CTF should have its management and finances ring-fenced and be able to operate asa separate department whose budget is suYcient to enable it to provide essential insurance, guarantees, andrisk management services to UK exporters and investors.

12. The ECGD currently has to break-even over a period of time and has successfully done so. The CTFwill in future, we have been advised, be required tomake a return on the capital it employs. This requirementis not imposed on competitors by other governments or by the OECDArrangement covering the operationof ECAs. It will, therefore, be crucially important that any required return is pitched at a rate low enoughto ensure that it does not lead to unreasonable escalation in the premiums required from the ECGD’scustomers or to a reduction in the range of markets for which the ECGD is able to oVer competitive cover.Higher premiums would make the ECGD CTF services unaVordable to the very companies which needthem most, and reduced market coverage might have the eVect of closing more risky and/or less profitablemarkets (such as many important developing countries) to those companies which have the most to oVersuch markets The Prime Minister gave us most welcome written assurance over two years ago that priceincreases and reduced market coverage were not intended as a result of the CTF and would not occur.

The Size of the CTF

13. The CBI understands that a capitalisation at only around £1.7 billion is now being considered asappropriate and suYcient, having earlier been advised that £4 billion, although tight, might be necessary.We are concerned that the CTFmust be adequately capitalised both for immediate purposes and to respondeither to increased demand that could arise, for example, from an up-turn in the global economy, or indeedany substantial call-down on the guarantees which, after all, is precisely why such export guarantees arerequired.We remain to be convinced that the level currently proposed at £1.7 billion, will indeed be suYcientin either eventuality.

The Level of the Return on Capital Required of the CTF

14. There has been much discussion about the proposed return on capital which the CTF will be required tomeet. We have been advised not to be overly concerned on this issue, as it is claimed that premiums will be set atcompetitive benchmark levels and a voted “subsidy” will be used to top this up to achieve the theoretical rate ofreturn on capital.We do not believe this is an appropriate basis onwhich to predicate fundamental support of this



nature. PreviousNationalEconomicResearchAssociation (NERA) studieshavehighlighted that there is no actualsubsidy inherent in ECGD support.We believe that not only is it inaccurate to describe such export credit supportas a “subsidy” purely because of an artificially high target rate of return—not leastwhen competitor credit agenciesare structured diVerently—but it could also leave the UK open to OECD orWTO challenge.We also believe it isentirely inappropriate to leave ECGD support subject to an annual voted payment which could putdisproportionate resource pressure on wider DTI programmes. Such voted payments would inevitably requiremanagement time and attention and distract from a focus on principal objectives. They could also run counter tothe long-term nature of ECGD’s business.

Other Concerns

15. Two other key requirements which are of great benefit to UK business should be retained within thefuture CTF products:

— Fixed Rate Export Finance (FREF) ensures predictability for exporters in interest rates for exportfinance to assist in winning overseas business, and the importance of FREF has, therefore, beenstrongly emphasised by the CBI for many years.

— Overseas Investment Insurance Scheme (OII) provides ECGD overseas investment insurancecover, and accordingly, in the global economy in which investment is key, facilitates this cruciallyimportant element of international business for UK firms.

16. The CBI has accepted that the ECGD’s Active Portfolio Management scheme should be retained, thoughit could evolve more in a pro-business direction. We also support the overall ECGD commitment to issues suchas Business Principles, Impact Analysis, Operational Risk, Transparency, and to Combating Corrupt Practices.These are all now widely part of good corporate practice and are, as such, also likely to feature within the newCTF. However, we believe that the ECGD CTF should increasingly have the benefit of greater businessmanagement input over all these areas so as to minimise red tape. Good risk management should, of course bepractised, but it should be used with prudence and in a way which properly balances out the needs of HMG andthe ECGD, as well as its customers—UK exporters and investors acting in the UK interest.

17. There is no adequate and reliable alternative to ECGD in the commercial sector. The willingness thereto insure medium and long term political risk remains limited and to the extent it exists, volatile. There isalso no commercial market formedium-term corporate/bank credit risk outside theOECD.The commercialmarket provides insurance only. Under no circumstances will the commercial market provide guarantees,as banks can require.

18. There appears to be some misconception related to the ECGD’s outstanding indebtedness. Much ofthis goes back to the 1970s and 1980s. At that time the policies of the then ECGD—before the 1991privatisation of its short-term business it provided short, medium and long term insurance and guarantees—were, as now, politically directed towards supporting markets perceived then to be developing ones. Someof those countries subsequently proved unable to settle outstanding debt. Clearly the ECGD was not aloneamongst financial institutions in that situation then or even now. Moreover, much of the resulting ECGDindebtedness also related to business for which settlement was made within the terms of the 1991 short-termbusiness privatisation contract. In any event, such old debt can have no relevance to the future capabilityor structure of the ECGD CTF.

19. The new ECGD CTF must, of course, continue to attract high quality people at Chairman, ChiefExecutive, Board and all other levels. People with the necessary technical, financial and all-roundmanagerial skills, and imagination, remain at a premium and such appointments will be key to success,especially given the CTF’s new status. The CBI has already welcomed the appointment of the new part-timeChairman, Graham Pimlott, and awaits that of the new Chief Executive of what will be in eVect the UK’slargest and, arguably, most specialised CTF. We firmly believe the ECGD CTF board could only benefitfrom having muchmore large business expertise, including, as with many similarly-sized financial and otherinstitutions and companies, more non-executive directors. Their expertise will be valuable to complementthe present significant SME and other non-business input. This is a potential resource the CTF can nolonger aVord to neglect.

Conclusion

20. The services, cover and expertise oVered by CTF must be competitive and be seen as good as thatof other ECAs. Already in the global economy many UK companies are coming under pressure to sourceelsewhere, or to lead business deals from plants and locations in other countries. This is due to the UK’scompetitive disadvantage of which a significant factor is finance. If better support than that oVered withintheUK remains available in other countries, this process will continue and, indeed, accelerate. This will haveobvious detrimental implications to UK investment, jobs, skills, knowledge base, supply chains and itsmanufacturing base. A level-playing field is the very least that UK business exporters and internationalinvestors need and deserve. The time has come for HMG to prove its commitment to providing eVectiveand competitive support to allow UK companies to succeed in the global market place.

February 2004



APPENDIX 9

Memorandum by The Corner House

The Corner House is a not-for-profit research and advocacy group, focusing on human rights,environment and development. Over the past five years, it has closely monitored the policies andoperations of the UK Export Guarantees Department (ECGD),22 submitting evidence to a numberof parliamentary inquiries23 and UK Government departments.24

The Corner House welcomes the Trade and Industry Committee’s current inquiry in the ECGDand is grateful for the opportunity to comment on the following issues:

— The ECGD’s objectives and business principles;

— The relationship between ECGD, its customers and other Government organisations withresponsibilities for business development and trade promotions;

— The Department’s role in the promotion of sustainable development;

— The ECGD’s relationship with the commercial banking sector; and

— ECGD’s corporate governance.

A. The ECGD’s Objectives and Business Principles

Since the ECGD was established in 1919, its main aim has always been the promotion of UKexports. The Mission and Status Review of the ECGD in 2000, resulted in the Department beingbroadly required to “take into account” the Government’s international policies on sustainabledevelopment, environment, human rights, good governance and trade. This is to be welcomed.However, three years on and despite some recent improvements, there are clear indications thatthe ECGD’s institutional culture, its approach to underwriting and its interpretation of its foundingAct of Parliament, remain much more geared towards supporting exports than to promoting theGovernment’s international objectives in the types of projects it continues to support. The CornerHouse would argue that in order to meet its new Mission statement to the full, the ECGDproactively seek business that accords with the Government’s international objectives rather thanreactively trying to make the business it supports fit, often rather uncomfortably, with theseobjectives. The Corner House believes that if the ECGD is to continue receiving taxpayer support,as it does, it must demonstrate a clear public purpose, and that this purpose should be thepromotion of sustainable development.

The subsidy to the ECGD is now acknowledged by both the Treasury and the ECGD itself. Theextent and nature of subsidy was documented in a January 2003 report, commissioned by theECGD, by NERA Economic Consulting. NERA noted: “ECGD is currently not required to providea return on the notional capital required to run its business. This means that premiums chargedby ECGD do not reflect the cost of the notional capital required to meet claims arising fromECGD’s portfolio of exposures and, thereby, comprise a subsidy element.”25

NERA found the subsidy for EXIG (export insurance and export credit guarantees), Overseas InvestmentInsurance and FREF (Fixed Rate Export Finance) between 1992 and 2002 to be in the region of £637–£718million (although, since FREF in particular has since been reformed, NERA emphasised that this does notrepresent an accurate representation of the ongoing subsidy).26 This subsidy carries with it heavy potential

22 Since 1999, The Corner House has participated in eight field missions to assess the social and environmental impacts of anumber of projects for which ECGDsupport was or is being sought, notably the Ilisu andYusufeli dams and the Baku-Tiblisi-Ceyhan pipeline. It has also undertaken in-depth research into a number of ECGD-backed projects which have been taintedby allegation of bribery.

23 See, for example, submissions to inquiries into the Ilisu Dam by the Select Committee on Trade and Industry and by theInternational Development Committee; and the submission to the Environmental Audit Committee’s 2003 inquiry intoExport Credits Guarantee Department and Sustainable Development.

24 For example: “UK Export Credits Guarantee Department (ECGD) minimum conditions for reform : Amemorandum fromconcerned non-governmental organisations and parliamentarians”, July 2000; “Lessons of the Ilisu Dam UK Export CreditPolicy, Corporate Governance and Future Investment in Turkey: Lessons from the Ilisu Hydroelectric Project. AMemorandum from Concerned Non-Governmental Organisations”, January 2002; Hawley, S, Turning a Blind Eye:Corruption and the UK’s Export Credit Guarantee Department, The Corner House, July 2003.

25 NERA, Estimating the Economic Costs and Benefits of ECGD: A Report for the Export Credits Guarantee Department”,January 2003, pii.

26 NERA, Estimating the Economic Costs and Benefits of ECGD: A Report for the Export Credits Guarantee Department”,January 2003



liabilities for the UK taxpayer.27 Indeed a KPMG report, also commissioned by ECGD, has described theECGD as “a non-profit organisation, without capital, to provide long-term cover for UK exports toinherently risky markets”.28 Despite the fact that NERA concluded that “there is a strong rationale foreliminating any subsidy in ECGD’s current pricing regime”, and that removing the subsidy would have “anegligible impact on UK capital goods exports and . . . on the volume of business underwritten by ECGD”,the government has now committed itself not to raise premium rates for ECGD business, or to phase outthe subsidy. Indeed, the DTI is apparently considering increasing the subsidy provided through the ECGD,by making a contribution to the ECGD’s premium rates in order to bring them down.29

The Corner House believes that there is nothing inherently wrong with the ECGD providing subsidies,but is of the view that:

— The subsidies should be made explicit;

— They should have a clearly-defined public purpose that reflects the common good; and

— There should be public debate and agreement over what they are for and which industries theyshould support.

In particular, The Corner House would question whether subsidised support for projects abroad that donot contribute to sustainable development, and which worsen human rights and governance situations, arean appropriate or desirable use of public money. We are also concerned that at a time when the ECGDaspires to ensure that its operations mesh with the government’s international objectives, the ECGD isincreasingly supporting those very industries that are least compatible with those objectives. The ECGD’sown External Environment Project’s Varieties of Capitalism analysis points to the fact that demand forECGD business is “likely to be stable in the defence and oil and gas sectors” with a possible rise in demandfrom aerospace customers.30

We note that while announcing the forthcoming DTI white paper on trade and investment, PatriciaHewitt stated that: “We should also recognise that helping the developing world to prosper is in our long-term interests, as well as amoral imperative.”31We believe it is crucial that the DTI recognise this imperativenot just in its trade policy, but also in its export promotion policies, particularly through the ECGD. Toooften, export promotion has focused narrowly on supporting UK business at any cost, and at the expenseof the real interests of the developingworld.We recommend that theDTI ensure that it examinemore closelyhow the ECGD can contribute to sustainable development.

The CornerHouse believes that if the ECGD is to remain a public body and to enjoy a continued subsidy,it must be subject to clear-cut, legally-binding sustainable development, human rights and environmentalpolicies. Although recent steps made by the ECGD to embrace sustainable development objectives are tobe welcomed, they fall far short of a credible sustainable development policy.

In particular:

— The ECGD’s revised Mission Statement fails to put sustainable development at the heart of theECGD’s business. Moreover, the government’s interpretation of the ECGD’s founding Act ofParliament limits the Department’s ability to take proactive steps to promote sustainabledevelopment and to exclude companies whose activities are unsustainable.

— The legal status of the ECGD’s new Business Principles is unclear, their objectives largelyaspirational and their implementation discretionary. As such, they fail to provide the incentives,penalties and binding rules that wouldmake them a suitable instrument for governing the ECGD’sbusiness practice.

— The ECGD still views its prime objective as supporting UK exporters. As a result it hasconsistently favoured exporters interests over those of communities aVected by the projects itsupports. A pertinent example is its refusal to make disclosure of key project documents—including environmental impact assessments—a condition of support, arguing that to do so wouldbe to jeopardise the exporters’ interests.32

27 Recent reports have revealed that huge losses have amassed from ECGD business prior to 1991, when a break-even objectivewas initiated. The debts from this business are in the region of £9.5 billion. These debts represent a cost to the UK taxpayerin terms of revenue forgone. There is still some lack of clarity over whether all of these debts are being actively recovered.Although these losses are historical, ECGD is still a risk to the taxpayer. KPMG report found that ECGD’s portfolio“represents a contingent risk to the Exchequer.” The recent revelation that the ECGD was providing political risk insurancefor a new defence contract with Saudi Arabia, at a time when some analysts consider Saudi Arabia to be very unstable raisesthe question of whether ECGD is still placing politically favourable projects above appropriate risk assessment. The decisionalso to provide backing to UK companies in Iraq despite the fact that serious concerns were raised within government,particularly by the Treasury, as to whether such contracts would be deemed legally binding by any future incomingadministration, raises a similar question.

28 KPMG: Risk management Review for HM Treasury and ECGD, para 3.2.1.29 Export Guarantees Advisory Council (EGAC), Minutes of Meeting held 17 September 2003, para 3.2.2.30 Export Guarantees Advisory Council, Minutes of Meeting held 19 November 2003.31 Quoted in The Guardian, 23/1/04, “Hewitt plans white paper on prosperity in the developing world”.32 The ECGD states that for High Impact Projects, disclosure of EIAs is now required. However, this “requirement” is subjectto the consent of the exporter.



The Corner House believes that any element of discretion should be removed from the ECGD’ssustainable development objectives. The Corner House therefore recommends that:

— Parliament consider amending the Export and InvestmentGuaranteesAct 1991 in order to requirethe ECGD to promote sustainable development through its lending practices and operations andto permit the ECGD to discriminate in favour of environmentally sustainable sectors andexporters.

B. The Relationship between ECGD, its Customers and other Government Organisations with

Responsibility for Business Development and Trade Promotions

Non-governmental organisations and others have consistently raised concerns over the ECGD’s limitedcustomer base and the danger that because the ECGD is so demand-led, it has eVectively been captured bya handful of politically strategic and powerful companies, mainly in sectors whose impacts are at odds withthe goals of sustainable development (arms, oil and gas, nuclear).

Recent information provided to Parliament reveals that BAE Systems and Airbus Industrie haveconsistently been the ECGD’s top two clients, by value, over the last five years.33 The ECGD’s own“External Environment Project’s Varieties of Capitalism” analysis suggests that demand for the ECGD’sservices in the future is likely to “come from a limited number of successful exporters.”34 The implicationof this analysis was thought to be that the ECGD should “develop new products to suit the small range ofcustomers”. This is, however, likely to exacerbate the problem of the ECGD being captured by a smallhandful of particular interests.

The danger of the ECGD being captured by a handful of firms is that it creates a conflict of interestbetween providing tailored customer-focused support to a few companies and ensuring that these companiesand the projects they put forwardmeet the government’s international objectives. The recent suggestion thatBAE Systems may have sought an exception for itself from the ECGD’s new anti-corruption proceduresand particularly from the requirement to provide full details of agent’s commission during a political riskinsurance application for the sale of defence goods to Saudi Arabia may reflect this problem.35

The result is that there is a persistent risk that the ECGD’s environmental and social standards will bediluted. Exporters have consistently complained that changes introduced by the ECGD in relation toenvironmental and social impacts and even corruption, represent unwelcome “bureaucracy”. In relation tothe Trading Fund consultation, one exporter stated that “ECGD requires greater environmental and socialimpact analysis than competitor ECAs. This creates the impression that ECGD is an inhibitor rather thana facilitator of UK exporters”.

The Corner House believes that the adoption of clear-cut, legally binding sustainable development,human rights and environmental policies is essential to ensure that there is no dilution of the ECGD’sbusiness principles due to exporter pressure, as is the danger with a discretionary case-by-case approach. Inaddition, the Corner House believes that if the ECGD were to be more pro-active in seeking business thatmeets the Government’s international objectives, it would automatically expand its customer base.

C. The Department’s Role in the Promotion of Sustainable Development

The UK Government has set out a number of policy commitments with respect to sustainabledevelopment, notably:36

— Refocusing international development eVorts on the elimination of poverty and encouragementof economic growth that benefits the poor.

— Giving particular attention to human rights, transparent and accountable government and corelabour standards, building on the Government’s ethical approach to international relations.

— Using the Government’s resources proactively to promote political stability and social cohesionand to respond to conflict.

— Encouraging financial stability and the reduction of the external debt of developing countries tosustainable levels.

— Promoting economic growth that is equitable and environmentally sustainable.

— Working to reduce violent conflict, including through tighter control of arms trade.

— Working to reduce corruption and ensure respect for human rights and a greater voice for people.

— Encouraging corporate social responsibility by national and transnational companies.

33 Hansard, 12/2/04, Columns 1615–1616W, Response from Mr Mike O’Brien to Matthew Taylor. Other businesses thatappeared regularly in the top five clients by value were: RWE Thames Water plc, Mabey and Johnson, and ABN AmroBank NV.

34 Export Guarantees Advisory Council (EGAC) minutes, 19/11/03, para 3.2.5.35 The Guardian, 27/11/03, “Millions Risked on BAE Contract”.36 See:EliminatingWorld Poverty: AChallenge for the 21st Century (1997) andEliminatingWorld Poverty:Making GlobalisationWork for the Poor (2000).



Whilst the ECGD has taken some welcome steps at reform, its policies and practices still fall far short ofcompliance with the Government’s sustainable development commitments. The Corner House’s views onthe ECGD’s shortcomings in this regard are set out in full in evidence submitted to the Environmental AuditCommittee’s 2003 inquiry in the ECGD and Sustainable Development37 to which the Committee isrespectfully referred. In summary:

— The ECGD’s portfolio remains dominated by unsustainable projects and sectors, as exemplified byits continuing support for arms and fossil fuel projects.

— Of the four principle sectors supported, three (airbuses, other aerospace and defence) areassociated either with high environmental impacts or with adverse developmental impacts(defence). Of particular concern, given the UK’s commitment under the Kyoto protocol to reducegreenhouse gas emissions, is the rise in support (as a percentage of overall business) for powergeneration and energy projects—up from 42% in 1999–2000 to 47% in 2001–02.38

— The ECGD has failed to refocus eVorts on the elimination of poverty, a key UK Governmentsustainable development commitment.

— Since September 1997, the UK has refused to issue export credits for any expenditures that are notdefined as “productive”.39However, the “productive expenditure test” is only applied toHPIC andIDA countries.40 As Romilly Greenhill of Jubilee Research points out, “This means that ECGDis continuing to provide export credits for defence expenditures in other developing countries,many of which are also heavily indebted.”41 In addition, the concentration of ECGD support inthe oil and gas sector is problematic given the clearly established linkages between investment inextractive industries and the exacerbation of poverty and corruption in countries where democracyis weak and the economy overly dependent on mineral extraction.42

— The ECGD has adopted a limited approach to the evaluation of Human Rights issues

— Since 2000, the ECGDhas, to its credit (and virtually alone among the ECA community), includedquestions in its impact questionnaire on the human rights implications of projects. Nonetheless,its approach to human rights is limited and runs the risk of failing to ensure that the ECGDmeetsits obligations under the Human Rights Act. For example, the ECGD’s assessment questionnairealso fails to elicit any information about the human rights context in which the project will takeplace. For example: are people free to express their views without fear of retribution?

— The ECGD’s procedures for assessing Debt Sustainability are inadequate

— TheECGDhas committed itself to “ensuring that debt sustainability will be the prime determinantof the provision of support for exports”.43 Jubilee Research, which campaigns on debt issues, hasexpressed concern that export credits are still being issued for countries with significant debtburdens.44 They cite the example of South Africa where the ECGD recently (2000–01) guaranteedan export credit of around £1.7 billion for trainer/fighter aircraft being sold by BAE Systems.45

Jubilee notes that South Africa is heavily indebted, debt service accounting for about one and halftimes the level of spending on health.46 It is questionable whether increasing this debt through thesale of fighter aircraft meets with the UK Government’s stated sustainable development goal of“reducing the external debt of developing countries to sustainable levels”.

— Defence and aerospace contracts—amajor segment of the ECGD’s portfolio—are excluded from theenvironmental screening process

— The failure to screen defence and civil aerospace contracts has been criticized by a previous reportby the Trade and Industry Committee.47 The Corner House also notes that the practice is at oddswith UK government commitments under the OECD’s Recommendation on Common Approaches

37 House of Commons Environmental Audit Committee, “Export Credits and Sustainable Development”, Seventh Report ofSession 2002–03, HC 689, 2003, pp Ev 6–Ev 48.

38 ECGD support for fossil fuel plant illustrates the point. Recent research has shown that ECGD supported power plantscontribute an annual 13.3million tonnes of carbon emissions, despiteGovernment commitments to reduce theUK’s emissionsby 26.5million tonnes and to assist developing countries to curb their emissions. Although the ECGDhas nowmade availablesome £50 million of cover for the UK renewable energy sector, the support it oVers is a fraction of that oVered to projectsrelying on fossil fuels.

39 Dfid, White Paper, “Eliminating World Poverty: Making Globalisation Work for the Poor”, December 2000.40 Greenhill, R, “Recommendations for the Export Credit Guarantee Department on Debt and Export Credits”, JubilleeResearch, in Corner House et al, op cit 8.

41 Ibid.42 Striking a Better Balance: The Final Report of the Extractive Industries Review, December 2003, available at http://www.eireview.org/eir/eirhome.nsf/be65a087e9e6b48085256acd005508f7/75971F6A8E5A111385256DE80028BEE2?Opendocument

43 ECGD Business Principles, December 2000.44 Greenhill, R., “Recommendations for the ECGD on Debt and Export Credits”, Paper presented to “Beyond BusinessPrinciples Seminar”, in Corner House et al, op cit 8.

45 ECGD Annual Report and Resource Accounts 2000–01.46 Greenhill, R., “Recommendations for the ECGD on Debt and Export Credits”, Paper presented to “Beyond BusinessPrinciples Seminar”, in Corner House et al, op cit 8.

47 Trade and Industry Committee, Third Report, Session 1999–2000, The Future of the Export Credits Guarantee Department,para 56, pxxvi: “We can see no reason for defence equipment and aerospace to be exempted from the screening process andrequest and explanation for the exemption.”



on Environment and OYcially Supported Export Credits, which clearly states that “Membersshould screen all applications for oYcially supported export credits covered by thisRecommendation.”48

— The ECGD’s procedures for vetting projects for corruption have been flawed

— Corruption has major impacts on both the quality and eVectiveness of development. Researchundertaken by The Corner House revealed that the ECGD has consistently underestimatedcorruption as a serious risk factor that could undermine the viability of projects, and as areputational risk both for the companies concerned and the ECGD itself. The ECGD is set toannounce new anti-corruption measures imminently, which will herald a more pro-activeapproach to corruption. There has however been no public consultation and little transparencyon what these measures are likely to be. They are also likely to stop short of imposing the ultimatesanction of debarring companies convicted of corruption—a step strongly recommended by theOECD’s 1997 Revised Recommendations on Combating Bribery, and widely recognised as a verypowerful and important deterrent against bribery (see below under “Governance”).49

— The ECGD’s disclosure policy remains secretive.

— Public access to environmental information and participatory consultation with stakeholdersprior to decisions on financial support is a sine qua non of best international development practice.Yet, despite recent reforms, the ECGD still does release information on the vast majority projectsit is considering backing prior to a decision being taken on their support. Details of projects areonly released if the project is categorised as High Potential Impact—and then only with theapplicants’ permission.

The Corner House believes that the ECGD’s operations will continue to remain at odds with thegovernment’s sustainable development commitments unless the Department is permitted to take proactivemeasures to seek out business that promotes such development. At present, however, the ECGD is entirelypassive in its approach to the sectors its supports, arguing that it is required under its founding Act ofParliament to consider all applications and that it “can consider supporting only that business which comesto us”.50

To address such policy failures, and to bring the ECGD in line with the Government’s sustainabledevelopment policies and objectives, the Corner House would encourage the Select Committee torecommend that ECGD:

— Revisit it’s legal advice in relation to the Export and Investment Guarantee Act 2001;

— Adopt clear, ex-ante human rights, development and environmental standards that apply to all itsprojects on a non-discretionary basis;

— Develop a timetable for phasing out support for fossil fuels;

— institute exclusion criteria against which projects are screened prior to their consideration forsupport. Categorical exclusions should include: arms; nuclear projects; new fossil fuel powerstations and oil exploration projects; and projects in countries with poor human rights records;

— Expand its productive expenditure criteria to all low- and middle- income countries, as classifiedby the World Bank;

— revise its definition of productive expenditure to: “whether projects contribute to social andeconomic development, poverty reduction, and debt sustainability”51;

— review whether it is encouraging pro-poor investment;

— Make the publication of basic project information—name, a short description of the project, itspotential environmental, social and human rights impacts and its impact category—apreconditionof appraisal for all projects, including cases involving insurance only;

— Require all contracts to include a clause binding contractors and sub-contractors to abide by theOECDGuidelines forMultinational Enterprises, in addition to the ILO Tripartite Declaration onMultilateral Enterprises and Social Policy, and refuse support for companies that have been foundto be in breach of the OECD Guidelines for Multinational Enterprises;

— Adopt tighter anti-corruption due diligence procedures, including suspending cover whilecompanies are being investigated for corruption allegations and debarring companies found guiltyof corruption;

— Adopt legally-binding administrative procedures for assessing project impacts, including appealsand redress mechanisms.

48 OECD, Common Approaches, Paris, 2004, para 4.49 Hawley, S, Turning a Blind Eye: Corruption and the UK’s Export Credit Guarantee Department, The Corner House,July 2003.

50 ECGD Annual Review and Resource Accounts, 2002–03, p 18.51 Currently, the departments definition is: “whether the projects: assist social and economic development; or are of maximumbenefit to areas most aVected by poverty; or tackle problem areas where private investment is not available; or, whereverpossible, earn foreign exchange; or encourage viable self-financing projects.”



D. ECGD’s Relationship with Commercial Banking and Insurance Companies, and the

Development of the Private Export Credit and Reinsurance Sector

It is clear that commercial banks are themajor if hidden beneficiaries of ECGD support. Certainly ECGDsupport enables banks to invest in and provide finance for projects in risky markets while passing oV all riskto the ECGD, and hence to theUK taxpayer. The recent case of claims made by three banks under OverseasInvestment Insurance to the ECGD for their investment in Enron’s Dabhol project in India highlights theworrying lack of clarity over who is ultimately responsible for poor due diligence on such investments (seeAnnex I).

On 28 February 2003, the Financial Times revealed that three banks, ANZ, ABN Amro and StandardChartered, were considering legal action against the ECGD because it was failing to accept their claims, foraround $60 million. It appears that the ECGD gave backing to the three banks during 1999 for theirinvolvement in Dabhol, despite the fact that:

— in January 1999, Human Rights Watch had published a report detailing serious human rightsabuses associated with the project;

— there had long been strong and persistent rumours of corruption;

— the Project had been subject to numerous litigations concerning whether the main contractviolated India’s Electricity Supply Act (1948); and

— the Project had been described as “commercially unviable” by the World Bank who refused tofinance it.

The claims by the three banks are in many senses a test case of ECGD’s Overseas Investment Insurance.The case raises questions about what levels of due diligence banks are required to undertake beforeinvestment insurance is oVered. The Corner House believes that the ECGD should ensure that banks arerequired to undertake careful due diligence with regard to risks posed to a project by human rights,environmental and social concerns and by corruption allegations.

E. ECGD’s Corporate Governance

The Corner House has closely monitored a number of infrastructure projects for which ECGD supporthas been requested, from their inception to the point of decision and beyond. These include the Ilisu Damin south-east Turkey, the Yusufeli Dam in north-east Turkey, and the Baku-Tbilisi-Ceyhan oil pipeline. Ithas also conducted in-depth research into the decision-making that accompanied a number of ECGD-backed projects where corruption has been alleged.

Based on this experience, the Corner House has identified a range of governance failures with respect tothe ECGD’s due diligence and risk management procedures: the Export Guarantees Advisory Council;public oversight of the ECGD; and the lack of accountability mechanisms.

1. Due Diligence and RiskManagement Procedures

The Business Principles Unit is subordinate to the Underwriting Authority

The Business Principles Unit (BPU) is responsible for assessing the environmental and social risks of theprojects for which ECGD support is sought. However the advice provided by the unit is not binding on theunderwriting authority to which the BPU reports. The Corner House views this as indicative of the placeaccorded to sustainable development objectives within the ECGD’s institutional culture. It recommendsthat where the BPU advises that a project should not be supported for environmental or social reasons, thisadvice should be binding.

The ECGD’s Case Impact Assessment Procedures are weak, untransparent and open to abuse

The ECGD relies on a questionnaire in order to make its initial assessment of the environmental andsocial impacts of a project and assign an “impact category”. Projects deemed to have low ormedium impactsare not required to provide an environmental impact assessment (EIA). However, the “tick-the-box” formatof the questionnaire is open to abuse. For example, applicants are asked whether the proposed project/business has been designed to meet specified environmental, health and safety, and social standards andgives a series of boxes to tick as a response. No evidence is required to demonstrate compliance with thestandards that are ticked.



The ECGD does not disclose the basis on which specific projects are assigned an impact category nor does itrequire that information on category B and C projects to be made public

This lack of transparency makes it impossible for aVected communities to challenge the ECGD’scategorisation of specific project (particularly Category B cases which should arguably be Category A). Inaddition, such lack of transparency cuts the ECGDoV from a potential source of information—the public—on projects risks that may not have been revealed through the questionnaire. The Corner House believesthat the ECGD’s risk assessment would be significantly improved if information were disclosed on allprojects being considered by the ECGD.

The ECGD’s anti-corruption policies lack credible enforcement procedures

As mentioned before, the ECGD is due to introduce further improvements to its anti-corruptionprocedures from April 2004. However good these procedures will look on paper, they will be inadequateunless the ECGD has a proper enforcement policy regarding corruption. In particular, it is vital thatunderwriters are proactive in reporting evidence or suspicions of corruption picked up while undertakingdue diligence procedures or during post-issue monitoring. Most of the six allegations of corruptionforwarded by the ECGD to law enforcement agencies since February 2002, appear to have been as a resultof newspaper articles. This suggests a reactive rather than proactive response to such allegations. TheECGDmeanwhile told the ECGDAdvisory Council in September 2003 that “there were no cases that were signedafter the warranties had been introduced that were any concern”, despite the fact that two other governmentdepartments had independently forwarded allegations to UK law enforcement agencies regarding a projectin Papua New Guinea backed by the ECGD since the warranties started (see Annex II). The Corner Housebelieves that the ECGD must show that it is willing to police its no-bribery warranty, both by more pro-active reporting of suspicions and by using its own audit powers to request information and documentationfrom companies where suspicion arises. Given that taxpayers’ moneymay otherwise be underwriting bribessince the ECGD includes agent’s commission in the amount to be underwritten, a proper enforcement policyis essential.

2. Export Guarantees Advisory Council

The Corner House welcomes the changes that have been made to the Export Guarantees AdvisoryCouncil and the publication of its minutes. However, it is concerned by the governance implications of anumber of proposals that have been discussed in the Council. For example:

The minutes from the EGAC meeting of March 2003 make clear that EGAC considers that NGOs arenot significant enough ECGD stakeholders to warrant the Council’s engagement with them. Given theimportant role that NGOs have played in bringing adverse environmental and social impacts of projects tothe ECGD’s attention, we believe that the Council’s decision is misplaced. We would encourage theCommittee to recommend to EGAC that it engagemore constructively withNGOs and indeed with aVectedlocal communities on high profile and controversial projects.

We are also concerned that in its latest annual report 2002–03, the EGAC suggested that “with all thesystems now in place” in relation to the Business Principles, it hoped that the Council “may spend less timelooking at these issues and concentrate on other areas”. We believe that business principles will needconstant monitoring, and it is in part the Council’s job to provide this function.

In order to improve the transparency of EGAC, we also recommend that its minutes be published shortlyafter its meetings, rather than waiting for two months before its next meeting in order to approve minutes.

3. Public Oversight of the ECGD

We believe that there needs to be greater public oversight in relation to the ECGD. We would encouragethe Trade and Industry Select Committee to consider the case for Parliament establishing a sub-committeewith the specific remit to examine the ECGD’s annual accounts. We also recommend that high-profileCategory A projects should be required to go through a process of parliamentary approval, as happens inthe US (where projects over $100 million must get Congressional approval).

Establishing AccountabilityMechanisms

The UK Government lays great stress on the links between sustainable development and goodgovernance. It is therefore of regret that the ECGD lacks an easily accessible appeals mechanism52 throughwhich members of the public—and particularly project aVected peoples—may challenge its decisions. TheCorner House notes that both Canada’s EDC and Japan’s JEBIC have both established ombudsmendepartment, and that the US’ OPIC is considering a similar complaints mechanism to ensure greateraccountability.

52 Currently, the ECGD can only be challenged through judicial review or the parliamentary ombudsman.



ANNEX I

Letter to Mike O’Brien from Indian and UK organisations about the Dabhol Power Project, India

Mike O’Brien Cc. ECGDMinister of State for Trade and Investment ABN AmroDepartment of Trade and Industry ANZ Grindlays1 Victoria Street Standard Chartered BankLondon DFIDSW1H 0ET Treasury

Foreign and Commonwealth OYceNational Audit OYceBPShellBritish Gas

27 February 2004

The Dabhol Power Project, India and the Export Credits Guarantee Department (ECGD): compensationclaims and new applications for cover

We are writing to express our concerns about:

— recent claims made to the ECGD in connection with the Dabhol Power Project in India;

— the lessons that need to be learned from this particular case by the ECGD; and

— the possibility that the ECGD may be approached for further cover for the project.

We understand that three banks have approached the ECGD with claims for compensation under theOverseas Investment Insurance scheme in connection with the Dabhol Power Project. The ECGD will nodoubt be taking its own steps to ascertain whether it is legally liable for the claims. We believe that theECGD should reject these claims on the grounds that providing compensation would:

— reward poor investment decisions and lack of due diligence by investors;

— set an extremely bad precedent for settling claims when uninvestigated allegations of bribery bythe primary contractor still hang over a project and when the underlying contract may possiblybe illegal due to corruption; and

— saddle the Indian government unfairly with up to $60 million worth of debt, therebyundermining the UK government’s stated poverty-reduction and accountable governance goalsin DFID’s India programme.

The claims by investors in relation to the Dabhol Power Project will be among the largest and mostsignificant ever made under the ECGD’s Overseas Investment Insurance scheme. We believe it is essentialthat the ECGD learn the lessons from this case for future OII support. It is clear that the case raises seriousquestions about the strength of the ECGD’s own due diligence procedures in relation to OverseasInvestment Insurance—which were clearly inadequate in this instance. In particular, the ECGD mustensure that:

— its own procedures for vetting projects under OII are significantly improved, particularly so asto ensure that projects with corruption allegations are not supported; and

— banks and investors are required to undertake adequate due diligence measures before theECGD extends support to them.

We also understand that three British companies, BP, Shell and British Gas, may bid separately to buyEnron’s 65.15% share in the Dabhol Power Corporation. New bids are likely to be invited in the very nearfuture. It is possible that British companies may approach the ECGD for financial support for these bids.If the ECGD is to provide any further financial support to UK companies for their involvement in theDabhol Power Project, we believe that the ECGD must:

— ensure that there is full transparency and no corruption in the bidding process and that allcontracts, documents and payments relating to the award process are published; and

— require that a new Environmental and Social Impact Assessment be carried out before the plantis restarted, and ensure that all outstanding concerns from the local community are fullyaddressed, including issues of compensation and environmental degradation.

Compensation claims

In November 2003, the Indian news agency, RediV.com, reported that three banks, ANZ Bank,Standard Chartered Bank and ABNAmro had approached the ECGDat some stage during 2003 to makeclaims under the ECGD’s political risk insurance scheme. The report suggested that the amount of claimsto the ECGD could be in the region of $60million. The grounds for the claims appear to be that the Indiangovernments, at both state and local level, have behaved in such a way over theDabhol Power Project thatan expropriation has occurred.



We believe that, in examining the claims made by the three banks, the ECGD should give seriousconsideration to whether the banks concerned conducted adequate due diligence before investing in whatwas clearly at the time an extremely risky project and whether the ECGD would be rewarding poorinvestment decisions by paying such a claim.We also believe that the ECGDmust examinewhether payinga claim to the banks concerned will lead to the Indian government and Indian financial institutions havingto assume an unfair share of the financial burden resulting from the crisis in the project. It is clear that fora lasting and equitable solution to the crisis, foreign investors will have to accept some form of realisticburden-sharing.

In examining the claims, we believe that the ECGD should look particularly at whether investors failedto exercise adequate due diligence in the following four areas:

Failure to Ascertain that the Project was Commercially Viable

The World Bank’s technical evaluation of the Dabhol Power Project submitted to the Government ofIndia in April 1993, stated that “the Bank’s standard project economic analysis concludes that the projectis not viable”. 53 The Bank came to the conclusion that, structured as it was, the plant would producemoreelectricity than there was demand for and that tariVs would have to rise across the board. It predicted thatas a result of the project the Maharashtra State Electricity Board (MSEB) “would incur financial losses.”The World Bank refused to finance the project because of these factors, and certified on three diVerentoccasions between July 1992 and July 1993 that the project was not viable.

While the World Bank’s evaluation was primarily for Phase 1 of the Dabhol Power Project, the StateofMaharashtra’s Expert EnergyCommittee (Godbole Committee) in its report of April 2001, foundPhase2 to have been based on equally faulty projections. The Committee found that: “while the initial demandprojects for DPC were flawed in that they ignored diVerent load types in their projections, the demandprojection that was the basis for commencement of Phase II was based on patently untenable assumptionsgiven the information at that time; assumptions that have since proved to be completely unjustified”(emphasis added).

The World Bank’s predictions were realised in October 2000, when the Maharashtra State ElectricityBoard (MSEB) became unable tomake timely payments to theDabhol PowerCorporation (DPC) becauseit was nearing bankruptcy. The State of Maharashtra’s expert Energy Review Committee (also known asthe Godbole Committee), which examined the project in April 2001, found that MSEB’s bankruptcy wasalmost certainly caused by the high tariVs from the Dabhol Power Plant. Prior to the plant coming onstream, the MSEB had been one of the few profitable State Electricity Boards in India.

We believe that the ECGD should examine whether investors had undertaken rigorous financial duediligence procedures about the risks involved in investing in the project particularly in light of the well-publicised analysis of the World Bank.

Failure toAscertain the Legality, Constitutionality and Political Viability of theAgreements

Signed in Relation to the Project, Particularly the Power Purchase Agreement and the

Guarantees Provided by the Governments ofMaharashtra and India

The origins of the crisis at the Dabhol Power Plant lie primarily in the one-sidedness of the PowerPurchase Agreement (PPA) between the Dabhol Power Corporation and the MSEB. Numerous expertbodies on numerous occasions have found the PPA to be flawed and one-sided in favour of foreigninvestors; these bodies include theWorld Bank, India’s Central Electricity Authority, and India’s AuditorGeneral. Various litigations against the validity of the PPA have been instigated on the grounds that itviolated India’s Electricity Supply Act (1948).54

Among the numerous problems identified with the PPA were that it:

— allowed a return on investment of 26.5%, compared to a return of 16% on equity permitted bythe Electricity Supply Act; and

— required the MSEB to buy power from the Dabhol Power Company regardless of whether theelectricity was required or supplied byDPC, and laid down stiV penalties on theMSEB if it failedto pay within 60 days.

The Guarantee from the Government of Maharashtra included a highly unusual clause requiring theGovernment of Maharashtra to indemnify the Dabhol Power Corporation against any loss arising fromthe illegality of either the Guarantee or the PPA—a clause that was clearly unconstitutional and thatexacerbated suspicions that the Corporation foresaw the possibility that the PPA could be held to be illegalon the grounds of corruption.

53 World Bank, “India: Dabhol Power Project”, April 1993.54 For a full discussion of how the PPA violated India’s Electricity Supply Act, see ERG, “The Dabhol Project: A Case Study”,www.ergconsultancy.com



The Guarantee from the Government of India, meanwhile, was signed in May 1996, in politicallyvolatile circumstances by the then government of India, a BJP led minority coalition, on the same day thatit faced (and lost) a no-confidence motion in parliament, after just 13 days in power.

We presume that the ECGD has examined expert reports on the numerous problems with the PPA andthe State Guarantees, including those of the Godbole Committee, ERG Consultancy, and Human RightsWatch. It is clear from these reports that any remotely serious due diligence into the PPA and Indiangovernment guarantees would have foreseen the considerable problems that might arise from such flawedand politically sensitive agreements.

Failure to Perform Adequate Risk Analysis with Regard to Allegations of Corruption.

Corruption allegations have dogged the Dabhol Power Project since its inception. The project wasnegotiated in June 1992 with unprecedented speed (a Memorandum of Understanding on a $3 billionproject was negotiated and signed within five days of Enron’s arrival in India for the first inspection), atotal lack of transparency, and no competitive bidding.

In January 1995, Enron’s Vice-President of Global Finance, Linda Powers, testified before the USHouse of Representatives that the company had spent $20 million in India on “education and projectdevelopment process alone, not including project costs.” An Indian High Court ruling in December 1996,while refusing to hear a court case on the allegations, found that there were “enough indications. . . whichsuggest corruption by those who were responsible for the deal”.

In April 2001, the State of Maharashtra’s expert Energy Review Committee (Godbole Committee)found that “failure of governance. . . seems to have characterised almost every step of the decisionmakingprocess” on the project, and suggested that there may have been “a concerted eVort towards exercise ofundue influence on the process of decision making at each and every stage”. Two members of theCommittee recommended a judicial enquiry into corruption in the deal. A report by the industry body,ERG Consultancy, on Dabhol suggested that “it is diYcult to believe that [such an] enquiry would cometo any other conclusion than that it was a corrupt deal”. The ERGConsultancy report also suggested thatthe Maharashtra State Electricity Board would have a “potent argument” for cancelling the PowerPurchase Agreement on the grounds that it had been signed “under conditions that prima facie showcorrupt practice”.

Given the potential for corruption and allegations of corruption to undermine the viability of a project,and the fact that evidence of corrupt practice is valid legal grounds for cancelling a contract, we believethat the ECGD should require the three banks concerned to disclose what risk assessment they hadundertaken with regard to the corruption allegations prior to investing in the project. They should alsodisclose what information they required and received from the Dabhol Power Corporation about thecorruption allegations and the law suits that that the Corporation faced in which corruption was alleged.Negligence regarding corruption allegations should, we believe, be grounds for the ECGD to denycompensation to investors.

In addition, we believe that the ECGD should consider:

Failure by Foreign Investors to Accept a Fair Burden-sharing Agreement for the Losses

Incurred by the Crisis at the Dabhol Power Project

The State ofMaharashtra’s expert EnergyReviewCommittee (Godbole Committee) concluded inApril2001 that “existing lenders should suVer losses as a consequence of their inept due diligence with respectto the project”. The unwillingness of foreign contractors and investors to accept losses, however, has ledto the protracted impasse over the future of the project. An example of this was the rejection in December2003 of a proposal put forward by Indian lenders to take over 60% of the foreign lenders’ debt on Phase1 of the project and 30% of the debt for Phase 2. This proposal was based on work by the respectedNareshChandra committee, appointed to help solve the impasse at Dabhol.55 Failure to come to some agreementabout sharing the burden of Dabhol’s debt could place a significant obstacle in the way of recentlyannounced plans to open bids for Enron’s 65.15% share in the Dabhol Power Corporation.

Given that any claim paid by the ECGD will be recovered from the Indian government, we believe thatthe ECGD must weigh up carefully how foreign investors and the Indian government can share theresponsibility for the Dabhol’s current financial crisis fairly. It would clearly be inconsistent with the UKgovernment’s wider development goals if the Indian government were forced to accept the full financialburden of the crisis surrounding Dabhol. It is also possible that any attempt by the ECGD to recover aclaim from the Indian government will lead to a strong backlash within India against foreign investmentin general and against power sector reform in particular.

55 The Financial Express, 30/12/03, “DPC Foreign Lenders Reject Indian FI’s OVer on Debt”.



Arbitration

In November 2003, the American Arbitration Association upheld claims for compensation based on“total expropriation” made by the contractors on the Dabhol project, GE and Bechtel, against theOverseas Private Investment Corporation (OPIC). The Association upheld the claims on the grounds thatthe behaviour of the Governments of Maharashtra and India in relation to the project was “openlypolitical, and not commercially, motivated.” Bank of America has also received compensation fromOPICon the grounds of expropriation in relation to the Dabhol Power Project.

We find the finding of the American Arbitration Association surprising in that it fails to take intoaccount:

— the possible illegality of the contract due to corruption;

— the failure of due diligence by foreign investors and contractors;

— the commercial unviability of the project; and

— the fact that the Power Purchase Agreement (PPA) was rescinded by the Maharashtra StateElectricity Board on the grounds that the Dabhol Power Corporation had failed to providepower at full capacity and within the time-frame agreed in the PPA.

In the event that the ECGD should find itself facing similar proceedings, we believe that given that theIndian government will ultimately be required to reimburse the ECGD for claims that it pays, the ECGDshould ensure that there are substantial inputs and adequate representation during the proceedings fromthe Governments of India and Maharashtra, the Maharashtra State Electricity Board, and Indian energyexperts, including members of the Godbole Committee and the Indian NGO, Prayas.

We look forward to your detailed response to our concerns.

Yours sincerely

Susan HawleyCorner HouseStation RoadSturminster NewtonDorset DT10 1YJUK

Shailender DubeyGeneral SecretaryAll India Power Engineers FederationIndia

Abhay MehtaAuthor, “Power Play” on the Enron-Dabhol ProjectIndia

Simon McRaeCorporate Accountability CampaignFriends of the Earth—England, Wales and Northern IrelandUK

Simon TaylorDirectorGlobal WitnessUK

K Ashok RaoSecretary GeneralNational Confederation of OYcers Associations of Central Public Sector UndertakingsIndia

N S VasantChairmanNational Working Group on PowerIndia



ANNEX II

Yumi Yet Bridge Development Programme, Papua New Guinea

Papua New Guinea ranks as one of the poorest of the Pacific nations in UNDP’s Human DevelopmentIndex. Unemployment is running at 80%, and 37% of the population lives below the poverty line. Its debtis currently running at 70% of GDP. So severe is the economic crisis gripping the country that schoolsaround the country had to close early at the end of last year because they had run out of money.56

On the face of it, the £35.7 million guarantee issued by the ECGD to Mabey and Johnson for thebuilding of 166 Compact 2000 bridges, under the Yumi Yet Bridge Development Programme, should bea project that supports the UK government’s sustainable development commitments. However, withinPapua New Guinea the bridge project has been highly controversial. A closer examination of the projectmoreover, reveals several concerns which suggest that the ECGD’s commitment to sustainabledevelopment and to eliminating corruption are, in practice, still falling short of the mark.

These concerns are as follows:

— There was no tender for the bridges, despite tendering being a legal requirement under PNG law.As a result, according to local experts, including the World Bank’s lead transport specialist forEast Asia, Hatim Hajj,57 the bridges in the Yumi Yet deal are overpriced and could have beenprocured from a PNG firm or from New Zealand for much less. A local bridge-building firm,Hornibrooks, asked to tender but was refused. It says it could have provided the bridges at 26%less cost. The British company involved, Mabey and Johnson, has told The Corner House thatthere was no tender because no other company could oVer the whole financing package that it,through the ECGD, was able to oVer. This raises the question of whether the ECGD, by backingprojects that do not have competitive and transparent tender processes, is hindering governmentsin Southern countries from getting the best value in procurement.

— The Department of Works and Implementation overseeing the project is plagued by corruptionand financial mismanagement. An investigation by PNG’s Auditor General, published in July2001, found that: the department was “grossly mismanaged” with “poor corporate governancepractices and systems prone to high risk of white collar crime”; there were “a very large numberof instances of financial mismanagement, fraud, misuse of public funds, breach of proceduresand abuse”; and that the department presented “a very high-risk environment to theGovernment”.58 The Auditor General estimated that theDepartment had lost £16.5million overa period of three years through corruption, fraud and financial mismanagement. Given the factthat the ECGD’s new enhanced due diligence procedures are supposed to take into account thetrack record of buyer institutions on corruption, the ECGD’s support for a project that is to bemanaged by a department with such a well-documented track record of corruption isquestionable.

— The appropriateness of export credit financing for the project has been called into question. BothAusAid, Australia’s government aid programme, and the EU have substantial grant-basedinfrastructure programmes in PNG. The first secretary for civil engineering at the EU delegationin PNG has told The Corner House that “using loans to finance road infrastructure, or worse,maintenance, is not supported by us, except if there is a clear return on investment available”.59

The ECGD meanwhile made no attempt to contact the EU delegation or other donor agencies,such as the World Bank, in Papua New Guinea to see how the project fitted with existinginfrastructure programmes, and to ensure its local relevance. According to the EU in PNG,“there was no communication neither on technical nor on financial matters, where we certainlycould have given some advice”.60

— The bridge project was not based on a careful analysis of need and or done with any communityparticipation—a factor vital to ensuring the eVective maintenance of infrastructure.61 Critics inPNG have alleged that, in fact, the project, which promised a bridge for every electorate, waspart of an electoral gamble by the previous government in the run up to an election. There havebeen some suggestions that, because the PNG government has used up its available money onexpensive road and bridge projects such as this, it is finding it diYcult to put up counterpartfunding for World Bank and ADB infrastructure projects that have been designed on the basisof the careful evaluation of the actual needs of, and in consultation with, local communities.62

56 James Chin, “PNG on the brink of economic collapse”, The Canberra Times, 14/11/01.57 Email to The Corner House from Hatim Hajj, Lead transport specialist for East Asia, World Bank, 3/12/02.58 Auditor General’s OYce, Department of Works and Implementation. Report by the Auditor-General. Investigations intoallegations of financial mismanagement, fraud and misuse of resources, 26 July 2001.

59 Email from Robert Ziegler, first secretary for civil engineering at the EU delegation in PNG, 25/11/02.60 Email from Robert Ziegler, 26/11/02.61 SeeDepartment for International Development, “Making Connections: Infrastructure for Poverty Reduction”, ConsultationDocument, August 2002, p 13, paras 3.8 and 3.9.

62 PNG Post-Courier, 14/11/01, “Morauta under attack”.



— The bridge programme was not budgeted for by the outgoing government, and has caused thenew government considerable financial problems. The current finance minister, Bart Philemon,has called the former government’s commitment to unbudgeted political projects, including theYumi Yet project, “criminal”.63 The current government has suggested that it may have to cutback on the Yumi Yet project in order to divert money into other projects of more urgentpriority.64 It has also suggested that its current financial crisis has arisen in part out of servicingloans for the Yumi Yet project.65

— There have been unsubstantiated allegations that the UK company involved paid bribes to localministers—allegations that the company has strongly denied. These allegations are specific: that15 million kina (£2.7 million) was paid to the ruling party of the time, the People’s DemocraticMovement, and 10 million kina (£1.8 million) to two ministers responsible for ordering thebridges. Several MPs and politicians from PNG, including the former mining minister of theoutgoing government, have called for investigations to ensure there was no corruption in theproject.66 The Corner House has been given to believe that the PNG Ombudsman may beconsidering investigating the case for corruption. The Corner House believes that it is in thepublic interest to raise these allegations because they have come to our attention from crediblesources within the country. It is not within our ability to ascertain whether they have anysubstance or not, and in any case, we believe that this is the duty of the ECGD and UK lawenforcement agencies.

This case study suggests strongly, as The Corner House noted in its submission to the EnvironmentalAudit Committee that among other things, it is vital that the ECGD:

— Introduce a requirement for competitive tender in all appropriate instances.

— Establish benchmarks for institutional integrity for buyer institutions, which must be met beforea project is supported.

— Ensure, as part of its due diligence procedures, that it seeks advice from donor agencies withinthe country as to the appropriateness of the project to be supported.

— Liase with local law enforcement and investigatory bodies where allegations of corruption areraised.

APPENDIX 10

Memorandum by the Export Credits Guarantee Department

Contents

Introduction to ECGDInstitutional Developments at ECGD since 2000Mission and Status Review 1999–2000Progress towards CapitalisationBusiness PrinciplesTransparencyEGACInternal OrganisationGovernance StructuresNew Customer Service Team

New business and the long-term perspectiveNew Business since 1999FREFActive Portfolio Management

The Legacy PortfolioManagement of ECGD’s historical debtAccount 1/Account 2Debt payments and rescheduling

Current and Future IssuesECGD’s financial objective and competitivenessBusiness strategy and the proposed Ministerially-led Strategy ForumInternational strategy to achieve a level playing fieldCosts/income balance

Concluding Remarks

63 PNG Post-Courier, 14/11/01, “Morauta under attack”.64 PNG Post-Courier, 24/10/02, “Yumi bridges cut flagged”.65 PNG Post-Courier, 25/11/02, “Kina support high on budget priority”.66 The National, 19/11/02, “Demand for Yumi Yet bridges overwhelming”; PNG Post-Courier, 30/8/02, “Contracts padded:MP”.



Annexes

Annex A: External reportsAnnex B: Customer Survey & ECA comparisonsAnnex C: Claims payments 1980–1992Annex D: Analysis of claims outstanding by market as at 31 March 1993Annex E: Claims against recoveries and interest receivedAnnex F: Recoveries of sovereign and non-sovereign debtAnnex G: Account 1 unrecovered claims at 31 March 2003

Introduction to ECGD

1. ECGD is the UK’s oYcial Export Credit Agency (ECA). It is a separate GovernmentDepartment reporting to the Secretary of State for Trade and Industry and derives its powers fromthe 1991 Export and Investment Guarantees Act. Its 400 staV are based in London Docklands andin CardiV.

2. ECGD’s aim is to benefit the UK economy by helping exporters of UK goods and services winbusiness, and UK firms to invest overseas, by providing guarantees, insurance and reinsurance againstloss, taking into account the Government’s wider international policy agenda.

3. ECGD’s role is to help UK capital goods manufacturers and investors trade overseas byproviding them with insurance and/or backing for finance to protect against non-payment. ECGDoperates on a break-even basis, charging exporters premium at levels that match the risks and costsin each case.

4. The largest part of ECGD’s operation involves underwriting finance packages to support thesale of capital goods (such as aircraft and machinery) and services, and to help UK companies takepart in overseas infrastructure projects such as the construction/upgrading of hospitals, airports andpower stations. Support can be given for contracts as low as £25,000 but some of the projects ECGDbacks can go well beyond the £100 million mark.

Institutional Developments at ECGD since 2000

Mission and Status Review 1999–2000

5. The “ECGD Mission and Status Review 1999–2000” (MSR) was published in July 2000. Itsconclusions were informed by the Trade and Industry Select Committee’s January 2000 report “TheFuture of the Export Credits Guarantee Department” and by the International DevelopmentCommittee’s report “ECGD—Development Issues” of December 1999, and by a wide-ranging publicconsultation exercise.

6. The MSR strongly reaYrmed that ECGD’s role is to bring economic benefit to the UK bysupporting exporters, and its conclusions set out a new direction for ECGD. These included:

— Introducing greater openness and transparency to ECGD’s operations.

— Widening the remit and membership of the Export Guarantees Advisory Council (EGAC).

— Seeking to attract more small and medium-sized exporters and investors.

— Ensuring ECGD’s policies and activities were consistent with the Government’s objectivesof promoting sustainable development, human rights, good governance and trade.

7. The review further recommended that ECGD move towards a capitalised funding system, andthat a government Trading Fund would be the most suitable vehicle to deliver this. See Annex A fordetails of two key external reports on ECGD released at the time that had relevance in this context.

8. A Trading Fund is a means of financing trading activities undertaken by the Government. Whilstoperating within a framework agreed with Ministers, a Trading Fund has greater freedom to manageits financial aVairs. In particular it can use its income to settle its liabilities and retain any cashbalances at year-end. It is, however, still subject to the same centrally applied administrative rulesand procedures as a Government department.

Progress Towards Capitalisation

9. ECGD initially planned to move to formal Trading Fund status by April 2002. Further workrevealed, however, that more had to be done to put the Department’s information and riskmanagement systems into shape and in July 2002 the Secretary of State made an announcement tothat eVect.

10. As part of the MSR changes, the Department announced (in March 2003) a package ofmeasures to help UK exporters. This included introducing an improved Country Cover regime;streamlining procedures to approve more deals more quickly in line with ECGD’s Customer Charter;



developing private sector links with banks with the aim of making larger deals easier to complete;and restructuring its process for the environmental and social screening of projects to reduce theburden on industry, while maintaining the rigour of ECGD’s scrutiny.

11. ECGD is now preparing for a move to a Trading Fund, to be preceded by a public consultationand a pilot period, the latter to allow for testing and refinement of the financial framework that willunderpin the capitalised Trading Fund.

Business Principles

12. A key recommendation from the MSR was that before the end of 2000 ECGD should publisha statement of Business Principles and policies and plans for achieving them. In September 2000,ECGD recruited an expert in Business Principles and established the Business Principles Unit to addimpetus to achieving best practice in this area. In December 2000, ECGD issued a statement of itsBusiness Principles.

13. This helped fulfil the MSR recommendation on openness: that customers should know whatis expected of them, to help ensure that these additional processes are eYcient and do not put themat a competitive disadvantage.

14. Since January 2001, an impact analysis process has been part of ECGD’s case assessmentprocess to ensure that the environmental, social and human rights aspects of projects ECGD supportsare compatible with standards used by multinational financial institutions such as the World Bank.The analysis covers not only the exported goods themselves but also the overseas projects for whichthey are destined.

Transparency

15. One of the findings of the Mission and Status Review was that there should be a presumptionof transparency and openness on ECGD’s part, subject to respecting the legitimate confidence of itscustomers and overseas buyers or borrowers.

16. As part of its Business Principles, ECGD has taken several positive steps to improvetransparency and is now matching best practice amongst ECAs. ECGD has developed a far morepro-active approach to stakeholder engagement than previously:

— Since 2001, ECGD’s Annual Report has included a list of issued guarantees

— High impact cases are now listed on the website prior to the underwriting decision beingmade

— Environmental Impact Assessments (EIAs) will be publicly available for high impact casesbefore the underwriting decision is made

— Regular discussions now take place with customers and NGOs on projects and policy.

17. ECGD, like all ECAs, cannot always disclose all information about its business. However,commercial confidentiality is invoked only where it is necessary to protect the competitive positionof UK companies.

EGAC

18. The Export Guarantees Advisory Council meets on a regular basis to give advice to theSecretary of State for Trade and Industry. The Council comprises senior figures from the exportingand finance fields and other relevant areas. The role of the Advisory Council is to advise on theunderlying policies and principles which ECGD needs to follow in order to achieve its MissionStatement, particularly how ECGD should take account of the wider impact of projects on overseascountries.

19. In order to reflect this broader role, the Council’s membership was revised in 2000–01 to bringin outside expertise in the new areas highlighted in the Mission and Status Review: taking greateraccount of the needs of smaller exporters; the developmental benefits of projects ECGD supports;and their environmental and other impacts. Three of the 10 members of the Council are experts onsustainable development and corporate social responsibility.

20. The Council normally provides its advice to ECGD’s Senior Management Team, and also onoccasions directly to Ministers or to other Departments. The Secretary of State is statutorily obligedto consult the Council on reinsurance issues. As part of ECGD’s drive to be more open andtransparent, the Council’s minutes are published on ECGD’s website.



Internal Organisation

21. In September 2001 ECGD’s Underwriting Group was reorganised from a geographic to a sectoralbasis. ECGD’s customers are nowhandled by the same underwriting team regardless of the country towhichthey wish to export.

22. Business managers regularly visit customers for relationship meetings and have constant dialogue onnew business. ECGD also attends conferences and seminars in the pursuit of industry knowledge andcontacts generally. In short ECGD knows its customers far better and aims to give them a better, moreinformed service than before.

CEO/Chair

23. As part of ECGD’s transition to a Trading Fund, the Government decided to strengthen theDepartment’s top management structure by creating a new board with an independent Chair and a newChief Executive to succeed Vivian Brown.

24. Vivian Brown announced in May 2003 that he intended to step down as ECGD’s Chief Executiveafter more than five years in post. A CEO designate has now been chosen after a thorough selection processand an announcement on the identity of the candidate is expected this spring.

25. In January this year, former banker Graham Pimlott was appointed Chair. The role was designed tobring private sector experience to the business of ECGD and to contribute to the strengthening of ECGD’scorporate governance. Mr Pimlott’s extensive background in investment and corporate banking fits thismandate.

Governance Structures

26. In line with one of the recommendations of ECGD’sMission and StatusReview, three non-ExecutiveDirectors were appointed to ECGD’s Management Board in April 2001 to provide an independent sourceof advice and expertise. They help with strategic planning within ECGD and provide an independentperspective to decision-making on the Board.

27. To help strengthen ECGD’s internal controls and corporate governance arrangements, two of thenon-Executive Directors are also part of ECGD’s Audit Committee, one acting as its Chair.

New Customer Service Team

28. In July 2002, the Secretary of State for Trade and Industry, Patricia Hewitt, announced that ECGDwould focus its attention on making it easier for companies to access its support.

29. Following this announcement ECGD improved access to its services for companies new to exportcredit finance and insurance by launching the NewCustomer Service Team (NCST) in November 2002. Theteam provides prospective customers with the necessary specialist advice and support about ECGDproducts and the benefits of its facilities.

30. This initiative has receivedmore than 2,000 enquiries (of which about 200 have been from SMEs) andhandled £15 million of firm business from three new customers (of which two are SMEs). The NCST is alsocultivating 36 prospective new customers who have been issued with preliminary cost indications for £320million of business. The success of these prospects depends upon exporters signing contracts and fulfillingcommercial requirements.

NEW BUSINESS AND THE LONG-TERM PERSPECTIVE

New Business since 1999

31. During the last five years ECGD’s business has remained concentrated in the aerospace anddefence sectors.

ECGD SUPPORT TO DEFENCE EXPORTS (1998–99 to 2002–03)

Year Defence as % of total Total (£m)

1998–99 52 3,725

1999–2000 34 5,504

2000–01 48 5,662

2001–02 31 3,298

2002–03 50 3,532

Source: ECGD Annual Reports



32. The defence sector receives a significant proportion of the overall assistance provided by ECGD asthe table above illustrates. ECGD’s main customers for this business are usually large UK companies butmany smaller sub-contractors across the country also benefit from support. ECGD’s defence businessmainly concerns support services, such as manpower, training and repairs.

ECGD SUPPORT TO AEROSPACE EXPORTS (1998–99 to 2002–03)

Year Aerospace as % of total Total (£m)

1998–99 22 3,7251999–00 28 5,5042000–01 22 5,6622001–02 22 3,2982002–03 15 3,532

Source: ECGD Annual Reports

33. Support for aerospace remains a leading driver of ECGD’s business. ECGD helped to contain theturmoil in the world’s airline industry after 11 September by ameasured response to the withdrawal of coverfor war terrorist acts by commercial insurers, which left many airlines unable to comply with key covenantsin finance documentation. ECGD also continued to cover new business with over £400million underwrittenin the remaining financial year after the 11 September attacks. ECGD’s commitment to the sector duringthis period was particularly appreciated by leading manufacturers and their suppliers. Despite the diYcultcircumstances in 2001–02, ECGD issued guarantees to exporters and investors in all sectors worth £3.3billion, generating premium of £77 million.

34. Bombardier became a customer of ECGD over the past two years to cover its manufacture inNorthern Ireland toward the company’s regional jets.

35. 2000–01 represented a milestone for ECGD. The total amount of business supported was £5.66billion, generating premium of £109 million. This was the most successful year, in terms of the value ofguarantees issued, since the short-term arm of ECGD’s operations was privatised in 1991.

36. ECGDhas classified the top 10 customers in any given financial year, in terms of the business amountthey have brought in, as key customers. As ECGD’s overall customer base has shrunken, the relativedependence on these customers has increased. See Annex B for details of ECGD’s 2003 customer survey andECA Comparisons report.

ECGD SUPPORT TO TOP 10 CUSTOMERS (1998–99 to 2002–03)

Top 10 as TotalYear % of total Total (£m) Customers

1998–99 74 3,725 981999–00 72 5,504 932000–01 82 5,662 802001–02 85 3,298 54

2002–03 84 3,532 70

Source: Capital Pricing Division report and ECGD Annual Reports

37. The performance of ECGD Credit Insurance Guarantees issued after 1 April 1991 (Account 2) hasbeen robust, with trading surpluses reported in all, but one, of the last 13 years. There was a trading deficitin only one year, 1997–98, as a result of changes in risk and significant claims on ECGD following the SouthEast Asian debt crisis. However, ECGD returned a substantial trading surplus (£129 million) the followingyear and restored its cumulative trading surplus (wiping out the impact of 1997–98) by 1999–2000, withsignificant trading surpluses reported each year since.

FREF

38. Under the Fixed Rate Export Finance (FREF) scheme, UK exporters can oVer the overseas buyerlong termfinance at fixed rates of interest. ECGDmakes up any diVerence between the fixed and the variablefloating rates. This means ECGD taking on interest rate risk in addition to the underlying credit risk.

39. The policy on FREF up to April 2001 was a very generous one for exporters, and led to significantlosses to the Exchequer in the 1980s and 1990s. ECGD had a specific public expenditure non-cash limitedprovision, which in recent years ran at around £40-50 million a year (in 1990–91 it was over £500 million).A fundamental review of the scheme in 1999 concluded that whilst the ultimate aim should be to abolishFREF, a unilateral withdrawal of the FREF scheme would have serious competitive implications for UK



exporters. Therefore the Government would work with other countries to reduce and eventually abolishsubsidies provided through FREF-type schemes. ECGD and the Treasury are currently working closelytogether to seek to remove where possible trade-distorting subsidies within FREF type schemes, on amultilateral basis.

40. While the Government presses other countries to reduce the subsidies they provide through FREF-type schemes, the review recommended that ECGD should review the feasibility of operating the schemeon a break-even basis. In April 1999 the Government decided that FREF should operate on a break-evenbasis, and a revised FREF scheme (new FREF) began in April 2001.

41. Meanwhile ECGD has the job of managing the run down of the Old FREF portfolio. The costs ofOld FREF (estimated at around £100million) are being shared betweenECGDandTreasury, with the latterbearing most of the risk (85.3% compared with 14.7%). This should have no impact on premium rates orthe continued provision of New FREF.

Active PortfolioManagement

42. ECGD has developed an Active Portfolio Management (APM) programme to achieve a morebalanced portfolio by managing down concentrations of risk (80% of its exposure being in 20 markets) andthereby greater capital eYciency. This reflected a key recommendation of the 1999 KPMG RiskManagement Review.

43. As a new venture ECGD first had to develop a strategy for taking forward APM, which it did withthe help of outside advisers. The initial plan was to oVer part of the portfolio to reinsurers in 2001. Thelaunch was adversely aVected by diYcult market conditions following the events of 11 September. It wastherefore decided to take broader soundings of the market. However, procurement issues preventedcompletion of a competition that included capital market as well as reinsurance risk transfer solutions. Inthe meantime, ECGD has been able to pursue a trial programme of Credit Default Swaps (CDSs) to startthe transfer of risk in some of its most concentrated markets to the private sector. A CDS is an over-the-counter financial instrument through which one party assumes another’s credit risk in return for a premium.

44. The trials, involving the purchase of CDSs on China and South Africa (these markets were selectedfor portfolio reasons rather than because of concerns about the risks themselves), were a success anddelivered good value for money. ECGD will now be considering how best to carry forward its APMprogramme in the light of this experience.

The Legacy Portfolio

Management of ECGD’s historical debt

45. The international debt crisis of the 1980s had a severe negative impact on financial institutions in boththe public and private sectors. ECGD had to draw heavily on the Consolidated Fund tomeet its obligationsand developed rigorous new financial systems to try to prevent such a catastrophic loss recurring.

46. Claims payments started to rise significantly during the financial year 1979–80 due to developmentsin Iran, Turkey and certain African markets. The table at Annex C illustrates the rising trend in claims andprovision during the 1980s and the adverse impact on ECGD’s cash balance and reserves.

47. The surge in claims resulted from a series of sovereign defaults. While the cause varied from countryto country, the defaults took place against the backdrop of oil crises, global recession, inflation and excessiveindebtedness across a broad spectrum of emerging markets. The contribution of diVerent countries to theclaims may be gauged from the analysis of claims outstanding by market as at 31 March 1993 at Annex D.

48. Recoveries of claims paid started to pick up from the mid 1980s. By the middle of the 1990s theseexceeded the declining level of claims being paid (Annex E).At 31March 1981 theUKhad debt reschedulingagreements with 10 countries entered into at various dates since 1972 (namely Chile, Ghana, Guinea,Indonesia, Peru, Sierra Leone, Sudan, Togo, Turkey and Zaire). By 1990–91 the number of countries hadrisen to 55 and was still rising. It will be seen from the table at Annex F that since the end of the 1980srecoveries have been predominantly of sovereign debt.

Account 1—Account 2

49. On the privatisation of its short-term business and the introduction of new regulations, ECGD ring-fenced its guarantees issued prior to 1991 into “Account 1”. A new “Account 2” was established forguarantees issued for project business since April 1991 and for Overseas Investment Guarantees.

50. Under its new arrangements, ECGD has been able to make a net contribution to the Exchequer since1991 in all but one year (the exception occurring in 1997–98 as a result of paying significant claims inIndonesia, a majority of which ECGD expects to recover over time). Nevertheless, the debt crisis did leaveECGD with significant liabilities and these have been the focus of both Parliamentary and media interestin recent months.



51. As ofApril 2003, ECGD’s un-recovered claims underAccount 1 stood at £5.4 billion and those underAccount 2 £831 million, ie 85% of the principal debt outstanding for recovery by ECGDwas incurred priorto 1991 and largely as a result of the global debt crisis of the 1980s. The markets principally contributing tothe unrecovered claims under Account 1 were Nigeria, Poland and Iraq (see Annex G). In addition to thesesums, moratorium and delay interest of around £4 billion is also outstanding. This represents the interestcharged by ECGD on outstanding debts where it is able to do so. Indeed, ECGD has received substantialsums in interest payments for many years as well as recovery of the original principal debt: for example, theDepartment earned around £158 million of interest on account 1 in 2002–03.

52. In line with normal accounting practice, ECGD has made provisions for loss against its old debts.This information is published each year in its Annual Report. The Accounts for 2002–03 show that theDepartment expects to recover 37.5% of amounts outstanding. This is comparable to other similarinstitutions; indeed, in many instances ECGD and other export credit agencies achieve a higher recoveryrate than other institutions under the multilateral Paris Club arrangements. ECGD is required to considervalue for money considerations in pursuing recoveries of old debts.

Debt payments and rescheduling

53. When a country experiences economic diYculties and cannotmeet its external repayment obligations,debt can be restructured multilaterally on mutually agreed terms at the Paris Club, a group of sovereigncreditors. ECGD forms part of the Treasury-led UK delegation to the Paris Club.

54. The Heavily Indebted Poor Countries (HIPC) Initiative provides debt relief to the world’s poorestandmost heavily indebted countries, with the aim of reducing debt-to-export ratios of these countries downto a target of 150%. To receive debt relief under the Initiative, eligible countries need to make a commitmentto poverty reduction andmeet a number of conditions, such as completion and implementation of a PovertyReduction Strategy, measures to reform public expenditure, maintaining macroeconomic stability, andreaching certain targets in the health or education sector.

55. ECGD has written oV £919 million of HIPC debt (as of September 2003) and remains committed towriting oV a further £1.43 billion.

56. ECGD also oVers a debt conversion scheme, allowing it to sell Paris Club debt owed to the UK oncondition that the proceeds go towards assisting the social or economic development of the debtor country.

57. As an example, in December 2003 ECGD sold £69.5 million of Jordanian debt to a local companyto set up a state of the art information and communications technology (ICT) link within Jordan. Debt salesbenefit all parties: ECGD recovers debt (albeit at a discount) earlier than it would under a reschedulingagreement, the debtor’s hard currency obligations are reduced, and the purchaser gets local currency at adiscount for investment in the local economy.

Current and Future Issues

ECGD’s financial objective and competitiveness

58. ECGD’sAccount 2 (post-1991 business) has a specific financial objective to operate with a reasonableconfidence of breaking even. To do this, it charges exporters premium at levels that cover expected loss andother administrative and operational factors. From this, reserves are built up to pay for claims if overseasbuyers/borrowers default on payment.

59. ECGD’s ‘financial framework’ is the detailed financial criteria jointly agreed between ECGD andTreasury that provides assurance that ECGD is operating within these specific objectives.

60. Competitiveness with other ECAs remains a priority issue for many of ECGD’s customers, with anumber of major UK exporters and associations emphasising the importance they place on a competitiveECGD. This demand needs to be balanced against HMG’s requirements to provide value for money fortaxpayers. The Government will seek liberalisation on a multilateral basis: ECGD and HM Treasury areworking closely together to press other countries to reduce their export subsidies.

Business strategy and the proposed Ministerially-led Strategy Forum

61. The Secretary of State has decided to establish a Strategy Forum to set Government policy for exportcredit support. Ministers and senior oYcials from the DTI and HMT are to meet ECGD’s Chairman andChief Executive and Chair of the Export Guarantees Advisory Council to agree ECGD’s medium to longterm strategic objectives and direction.

62. This is designed to provide a mechanism for key government stakeholders in the provision of exportcredit support to agree a clear policy for balancing the interests of taxpayers and exporters, and an agreedmeans of reviewing progress. This should give ECGD’s Management Board regular strategic direction fordeveloping the Department’s future.



International strategy to achieve a level playing field

63. Internationally, ECGD is working to maintain and extend the multilateral framework for exportcredit disciplines to further eliminate any trade-distorting subsidies and create a level-playing field for UKexporters. The following are the main policy issues being progressed:

— The overall framework within which OECD export credit agencies provide export credit supportand the relationships with the WTO has been revised.

— Reform of fixed rate interest make up across ECAs.

— Anti-Bribery and Corruption—following the successful conclusion of negotiations for enhancedprocedures for assessing project environmental impacts, the OECD’s Export Credit Group is nowlooking at enhancing anti-bribery and corruption procedures.

— The way in which export credit agencies price to cover risk.

— Aerospace. ECGD has led the reforms to harmonise the support provided by the Airbus exportcredit agencies (ECAs) (ECGD, Coface and Hermes).

— Tied Aid. ECGD continues to monitor Tied Aid to protect disciplines in this area, with the aimof minimising the competitive disadvantage that UK exporters represent to foreign competitorssupported by mixed credits.

Costs/income balance

64. The development of ECGD’s business base has to be seen against the background of the shift in theeconomy of the UK and other Western countries towards a service base.

65. International competitive pressures on large manufacturers have increased vastly in recent years.Global economic interdependence through transnational networks of multinational companies has openednew opportunities to gain competitive advantages for specific operations.

66. This has resulted in increased eVorts in outsourcing or relocating certain manufacturing bases, whichare labour-intensive, to low cost countries. This leaves high value-added and locally bound operations inthe UK. The result reduced UK capital goods manufacturing to a small proportion of its former size, nowmainly in high-value added and niche production.

67. Accordingly, ECGD business has levelled oV in recent years. ECGD has increasingly relied on a fewlarge companies in the civil aerospace, defence and oil & gas sectors. As a result, a review will be undertakento establish the appropriate size and shape of the department, consistent with the levels of business andpremium income anticipated in the future.

Concluding Remarks

68. Since the Trade and Industry Select Committee last looked at ECGD, theDepartment has undergonea number of fundamental changes following on from the Mission and Status review.

69. Despite a number of significant challenges—both internally and in the wider economicenvironment—the Department supported a record amount of business in the financial year 2000–01. Itcontinues to support an average annual level of business around £3.5 billion. The Department is on targetto reach its financial objectives for the current year.

70. In addition, ECGD has been at the forefront of international eVorts to reduce subsidies in exportcredits, improve the environmental screening of projects, and in combating bribery and corruption in ECA-supported projects.

71. Negotiations over the next stages in ECGD’s evolution are continuing. A consultation exercise isplanned for customers and stakeholders to help inform decisions Ministers will need to take on ECGD’sfuture. In this respect, the Trade and Industry Select Committee’s decision to revisit ECGD is well timed.

Annex A

EXTERNAL REPORTS

KPMG and NERA

Two key external reports were published alongside the Mission and Status Review: KPMG’s review ofECGD’s risk management, and National Economic Research Associates’ (NERA) study of the economicrationale for the public provision of export credit insurance. KPMG gave ECGD’s current systems a cleanbill of health, but recommended a further strengthening through a system of active portfolio management(APM), essentially transferring parts of its risk to third parties in order to make better use of availablecapital. The TISC had sight of a draft of this NERA report and commented on its findings in 2000.



NERA II

In the March 2003, NERA published a second study (NERA II) into ECGD (jointly commissioned withthe Treasury), developing their earlier study by attempting to quantify the costs and benefits of the publicprovision of export credits by ECGD. NERA II’s findings suggested a range of possible costs and benefitsfrom ECGD’s business over the last ten years of between £2 million and—£47 million. NERA also notedthat it is not possible to judge whether ECGD is the most eYcient provider of export credit insurance andguarantees until ECGD competes on equal terms with the private sector. It recommended that the subsidybe removed by increasing prices to reflect the full costs and benefits of the business supported. However, toavoid placing UK companies at a competitive disadvantage the Government has instead committed itselfto removing subsidy only a multilateral basis through international negotiations (see paragraph 60 above).

Annex BCUSTOMER SURVEY & ECA COMPARISONS

Customer Survey

From April to May 2003, ECGD carried out a survey of its customers to assess the impact of ECGD onjobs, exports and economic activity in theUnitedKingdom. This was the first time that an exercise to gatherthis information from customers had been conducted by ECGDand the outcome was published at the sametime as NERA II.

A strong cross-section of ECGD’s customers contributed thorough and frank responses to thecomprehensive questionnaire that ECGD issued. The responses of customers indicated that they believedECGD had a positive impact on their output and employment, and on that of firms within their supplychains. While the survey was not based on the kind of rigorous economic theory seen in NERA II, it didprovide a snapshot of the perceived value of ECGD in the eyes of its customers.

ECGD also received a number of letters from trade associations. The key concern raised by the majorityof these letters was a worry that ECGD needed to remain competitive with the prices and terms oVered byoYcial export credit agencies (ECAs) in other OECD countries, which may be more heavily subsidised.

ECA Comparisons

In February 2003, ECGD published the result of a survey it conducted comparing its own oVering withthose of other ECAs internationally. ECGD’s main strength was its high-quality product range. The resultsshowed, however, that ECGD tended to have less cover available and tended to be more expensive thanmost other ECAs that lack tough financial targets, and hence may be more heavily subsidised than ECGD.In this context, ECGD is unlikely to close the gap between its oVering on cover and pricing and that of itsinternational counterparts. Thus the Government will push for the elimination of export credit subsidies todeliver a level-playing field for UK exporters.

This survey will be repeated in 2004 and 2005 to see how ECGD is progressing

Annex CCLAIMS PAYMENTS 1980–92

Claims Recoveries Cash Balance67 Paid Claims Trading£m £m £m Provisions Reserves68

£m £m

1980–81 291 80.6 463.4 NA 5011981–82 304 79.7 481.3 NA 6681982–83 584 104 281 119 8631983–84 674 133 -42.3 412 9671984–85 849 327 -400.8 848 8791985–86 777 271 -652 905 9251986–87 780 395 -1,001 1,832 -1661987–88 987 322 -1,164 2,302 -2521988–89 810 326 -1,684 -7311989–90 913 379 -2,387 3,957 -3,8621990–91 968 478 -3,105.4 5,162 -4,6161991–92 954 473 -3,844.4 5,678 -4,276

67 Amounts owing to the Consolidated Fund68 Trading Reserves are ECGD’s cumulative surplus/ (deficit) at year-end. Trading reserves figures for this period in ECGD’soperations were provisional, given the long-term nature of the business.



Annex D

ANALYSIS OF CLAIMS OUTSTANDING BY MARKET AS AT 31 MARCH 1993

As at March 1993 the total un-recovered political claims of £6,407.5 million included £5,551.3 millionattributable to currency transfer diYculties.

Analysis of the top 10 markets making up the £5,551.3 million total:

Market Claims Outstanding (£m)

Nigeria 1,594.6Poland 801.7Brazil 730.1Yugoslavia 351.4Egypt 304.6Mexico 159.9Jordan 128.0USSR 119.0Sudan 114.5Morocco 114.2

Annex E

CLAIMS AGAINST RECOVERIES AND INTEREST RECEIVED

Claims Paid and Recoveries Received

-

200

400

600

800

1,000

1,200

1980

/81

1982

/83

1984

/85

1986

/87

1988

/89

1990

/91

1992

/93

1994

/95

1996

/97

1998

/99

2000

/200

1

2002

/200

3

Financial Year

£'m

Claims Paid£'m

Recoveries& InterestReceived£'m

Sovereign debt receipts by market as at 31 March 2003

Top 10 Markets Cumulative Receipts £m

Nigeria 83.3Poland 75.6Brazil 74.8Indonesia 65.0Tanzania, United Republic of 18.6Peru 14.8Algeria 14.0Egypt 10.7Morocco 8.6Croatia 7.3Others 38.3TOTAL 411.0



Annex F

RECOVERIES OF SOVEREIGN AND NON-SOVEREIGN DEBT

Recoveries - Sovereign Debt and Non Sovereign Debt

0

100

200

300

400

500

600

1989

/90

1990

/91

1991

/92

1992

/93

1993

/94

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/2000

2000

/01

2001

/02

2002

/03

Financial year

£'m

Paris Club

Non Paris Club

Annex G

ACCOUNT 1 UNRECOVERED CLAIMS AT 31 MARCH 2003

Market Un-recovered Claims £m Moratorium Interest £m Total £m

Nigeria 1,819 2,480 4,300Poland 406 368 774Iraq 623 0 623Russian Federation 592 34 626Jordan 285 86 371Sudan 92 243 334Brazil 219 87 306Serbia 171 113 284Zambia 84 114 198Egypt 139 28 157Others 982 611 1603Total 5,412 4,164 9,576



APPENDIX 11

First supplementary memorandum by ECGD

RESPONSE TO THE DOCUMENT PROVIDED BYMARK AND PAUL INGRAM (BASIC)

The Ingrams propose a methodology for calculating ECGD’s subsidy on what the market charges for“identical risk”, which is diVerent to the Value at Risk (VAR) approach that has been adopted by ECGDto determine its capital needs as a capitalised Trading Fund.

In section 3 of their paper, the Ingrams identify what they consider to be a number of weaknesses in theVAR approach. Against their arguments, EGGD would cite the following:

(i) the VAR Model is used widely in the banking and insurance industry for risk management andmeasuring capital adequacy;

(ii) the Bank for International Settlements (Basle II) capital adequacy arrangements explicitlyrecommend the use of VAR type models for assessing commercial banks’ capital requirements;

(iii) ECGD has adopted best commercial practice in the determination of the appropriate VAR periodand the calculation of confidence intervals;

(iv) ECGD’s approach is consistent with the recommendations inKPMG’s RiskManagement Review(1999) (see p15–17 and p48–50) which recommended a VAR type approach to measuring ECGD’srisk capital requirements;

(v) an integral feature of ECGD’s country and corporate (overseas (buyer) risk assessment is acomparison of our own risk ratings with those of the private sector rating agencies such asMoody’s and Standard and Poors. EGGD’s probabilities of loss are therefore cross-checked withprivate sector comparators; and

(vi) ECGD’s auditors also validate on an annual basis a selected sample of our loss probabilities aspart of the auditing of ECGD’s Trading Accounts.

Critique of the Ingram’sMethodology (IM)

The Ingram’s approach looks at a hypothetical “stand-alone” piece of risk and compares the cost (andtherefore subsidy) based on what the market would charge with that implied by a VAR approach.

Their hypothetical example69 and choice of figures suggest that the VAR approach understates the costto government and therefore the “true subsidy”.

The major shortcoming of IM is that it does not take account of the portfolio impact of underwriting apiece of risk. The VAR approach allows ECGD to assess the impact of an individual risk on its portfolioto determine whether it improves or worsens the Department’s loss distribution. Against this backgrounda piece of risk that improves ECGD’s risk profile implies that it could charge a premium rate lower than therate demanded by the capital markets.

The IM is in eVect a simplified short cut to arriving at the subsidy in ECGD’s pricing. In fact, the IM doesnot make any explicit assumptions about the capital needed to support the risk nor the cost of capital used.The VAR approach is, on the other hand, a more precise measure as it takes account of the specific capitalneeded to support the risk and a more robust estimate of the capital cost (and any subsidy) can bedetermined.

ECGD’s Impact on the Cost of Government Borrowing

The paper suggests that the Government’s borrowing costs are increased because it guarantees ECGD’srisk book. It would be helpful to see any empirical evidence underpinning this statement. It is important tobear in mind here that ECGD does not make loans or issue debt; its guarantees represent only contingentliabilities for HMG. It is only in the event of a default by a buyer that claims arise and the exchequer maybe required to increase its borrowings. Consequently the statement in the paper that the “incrementalincrease for each pound of debt is very small. However, the total cost of the exchequer equates to thesubsidy” is not substantiated.

69 The hypothetical example seems flawed. The cost implied by themarket (based on the quoted figures of 3.5% and 3.2% is in fact£0.9million (and not the £9million quoted). The cost over five years is therefore £4.5million (and not £45million) implying nosubsidy.



Conclusion

The capitalised TradingFund arrangements envisage that ECGD’s riskmanagement should take accountof the cost of capital. Ministers have yet to determine what the cost of capital should be. Several approachesare currently being explored; in particular, ECGD is examining what it might have to pay for its capital ifit were a freestanding private sector entity not supported byGovernment guarantee. In this context, we havelooked at: a hypothetical securitisation of ECGD’s portfolio—in short how much return would privatesector investors demand for assuming ECGD’s risk book; the cost of equity capital for comparatorcompanies in the private sector—an approach used by NERA in their study of “Estimating the EconomicCosts and Benefits of ECGD” (2002); and the target rates of return of other government owned trading fundentities. The so-called commercial rate of return produced by this analysis will help to inform Ministers’decision on the appropriate cost of capital for the ECGD Trading Fund. We believe that the approach oflooking at commercial rates of return is very much in sympathy with the Ingrammethodology. Allied to theprecise measurement of the Department’s capital needs through a VAR model, this should yield a morerobust and rigorously based estimate of ECGD’s cost to government.

ECGD

May 2004

APPENDIX 12

Opening Remarks by ECGO

1. Chairman, could I first introduce myself andmy two colleagues. I am JohnWeiss, currently the ActingChief Executive of ECGD while we await the arrival, probably in early July, of Patrick Crawford who wasannounced early last month as the new Chief Executive of ECGD in succession to Vivian Brown.

2. My colleagues are Tom JaVray,GroupDirector for RiskManagement and JohnOrmerod,Director ofStrategy &Communication. I hope between us that we will be able to cover the full range of your questions.

3. It has been four years since your Committee last looked at ECGD. A lot has happened since includingmore recently the appointment of a new top management team of Patrick Crawford and Graham Pimlottwho was appointed in February to a new post of non-executive Chairman.

4. The economic crises of the late 90s in SEAsia andRussia and the events of 11 September have provideda challenging economic environment for our business. Nevertheless we have continue to issue guaranteesworth between £3 and £3.5 billion for the past three or four years.

5. We believe that this clearly demonstrates the continued importance of ECGD to a wide range ofexporters operating in an equally wide range of overseas markets. While the bulk of our business involvesthe major export projects of the UK’s largest exporting companies we know that the benefit of our supporttrickles down to a very large number of smaller companies who are in the supply chain.

6. Whilst civil aerospace and defence are our key business sectors, the oil and gas sector has gainedprominence in recent years. Examples of the latter was our support in 2002–03 for the Nigeria LNG projectand in the last FY for the BTC pipeline.We have also been successfully supportingUK exporters to winningbusiness in the rapidly growing petrochemical sector in Iran.

7. Since the Mission and Status Review in 2000, we have been restructuring our operating and risksystems to bring them in to line with best commercial practice. Key examples include our Active PortfolioManagement programme—under which we are transferring someECGD risk back into the private sector—and the upcoming major overhaul of our IT business systems and processes. These will stand us in goodstead for the intended conversion of ECGD into a Trading Fund. We have also made significant progressin applying our Business Principles, ensuring that what we do takes proper account of the Government’swider political and economic agenda.

8. Ministers have set financial objectives for ECGD which seek to set a fair balance between givingexporters the support they need while not being a drain on the taxpayer. Some of those who have givenevidence to your Committee have expressed concern that the need to meet this objective means that we arenot always able to match the other Export Credit Agencies on cover and price. We recognise this situationand are, therefore, at the forefront of working multilaterally to reduce any trade-distorting subsidies andthus create a level playing field for UK exporters.

9. Our customers tell us that availability of cover is what matters most to them. With this in mind, sinceJanuary 2003 we have had an improved country cover regime that has given customers greater clarity onwhat cover is available. More than four out of five of all markets now have unambiguously clear coverpositions, compared to fewer than half previously. We constantly monitor the risk environment in majormarkets and move quickly to restore or increase cover where risks allow.

10. Recent examples of important markets where we have increased cover include Russia and Romania,India, Iran andVietnam.ECGDwas also one of the first of themajor ECAs to restore cover for Libya earlierthis year.



11. We recognise that there has been some loss of confidence in ECGD amongst our customers in thepast three years. I know that our new top team want to tackle this as a priority. We are committed toconsulting our customers in the run up to the launch of the pilot Trading Fund and will be listening to theirviews while the pilot is running and before themove to full Trading Fund status. This consultationwill covermost of the issues of concern about the Trading Fund which they have raised with you.

12. Thank you, Chairman, for giving me the opportunity to make this opening statement.

11 May 2004

APPENDIX 13

Memorandum by ECGD Trades Union Side (TUS)

May I introduce myself as the Secretary of the Export Credits Guarantee Department’s Trades UnionSide.

We are aware that the Trade and Industry Select Committee is currently conducting an inquiry intoECGD; I am afraid, though, that we have missed the deadline for providing evidence to the Committee.

However, following our meeting with the Minister of Trade (Mike O’Brien) we have (at the Minister’srequest) recently submitted a paper to him in which we have set out our views concerning ECGD’s BusinessStrategy and proposed Capitalised Trading Fund.We, therefore, believe that the Committee might find thisuseful for their inquiry.

I apologise if this is an unorthodox way of doing things, but I should be grateful if you would kindly bringthe contents of the attached submission to the attention of the Committee, please.

Issue

1. This paper contains the views of ECGD’s Trades Union Side (TUS) concerning ECGD’s BusinessStrategy and proposed Capitalised Trading Fund. Imminent decisions are beingmade about ECGD’s statusand, therefore, we request the Minister to give our comments serious consideration.

2. We represent ECGD’s trade union members (that’s the majority of ECGD staV, including manyexperienced senior managers who believe that a Capitalised Trading Fund is an inappropriate vehicle forECGD). In the past (for example concerning the reorganisation of the Business Group) our views on theconsequences of proposed changes have proved more accurate than those of the Management Board.

Summary

3. A Capitalised Trading Fund is not appropriate for ECGD.

4. It will exacerbate ECGD’s current lack of competitiveness with other export credit agencies (ECAs).

5. The Pilot Trading Fund should not go ahead until a formal review, fully involving the TUS, has beenundertaken to identify benefits from the “shadow” capitalised regime currently operating.

6. ECGD should adopt a Business Strategy that enables it to play a proactive role in an innovativegovernment-led strategy to assist UK exports and UK industry.

7. A move to a Capitalised Trading Fund status will not result in greater operational autonomy forECGD.

8. The requirement to make a return on capital inevitably means that ECGD will be faced with furtherincreasing premium rates and inappropriately cutting administrative costs.

9. Treasury equivalents inmany other countries seem to have amore consistent and professional workingrelationship with their ECAs.

10. ECGD support is not a subsidy.

11. The majority of the claims paid by ECGD are recovered over time.

Trading Fund

12. We do not believe that a Capitalised Trading Fund is appropriate for ECGD.

13. The idea of a Trading Fund was initially presented to staV as the only way to stave oV the threat ofprivatisation and the so-called “zero option”, not as a good idea in its own right. The original plan was tointroduce the Trading Fund several years ago but its introduction has been repeatedly delayed, primarilybecause the Trading Fund was poorly thought out. Furthermore, we believe that those people in ECGDwho first thought of the idea of a Capitalised Trading Fund have changed their views, but are unwilling toacknowledge that their judgement was erroneous.



14. Unlike decisions to convert other Government Departments into Trading Funds, export creditinsurance is an area that many other Departments (including HMT) do not fully understand. A key issue isthat the Trading Fund legislation envisages a much shorter business cycle than pertains for ECGD, whereasECGD’s business is more “lumpy” and involves judgements about long-term risk.

15. The “shadow” capitalised regime has been operating in ECGD since April 2001 but there has beenno review of this whatsoever. As a result, it is not known whether there are in fact any benefits to ECGD,customers, HMT or, indeed, whether it achieves what you are looking for. Therefore, we consider that thePilot Trading Fund should not go ahead until a formal review, fully involving the TUS, has been undertakento identify what has happened over the last three years. This should include a detailed outline of the positivebenefits to ECGD and its customers, of both the current “notional” regime and the proposed “real”capitalised regime.

Business Strategy

16. We are pleased that the zero option and privatisation are no longer being considered. However, weare concerned that disputes and years of continuous review, over ECGD’s direction and its benefit to theUKeconomy, have impaired its ability to operate eVectively (despite the eVorts of staV) and have contributed toECGD falling from the highest point among major ECAs to now being perceived as being one of the worstin terms of oVering a level playing field.

17. To rectify this, a Capitalised Trading Fund is not the answer. Instead, ECGD needs to adopt aBusiness Strategy that enables it to thrive proactively as a key player in an innovative government-ledstrategy to assist the UK export industry. ECGD should be empowered to compete on an equal footing withother ECAs. (TheOECDConsensusCIRR regime, premiumpricing and attitude to business in richmarketsare all areas where ECGD already lags, or will lag, behind other ECAs.) ECGD must be properly fundedand the general view amongst ECGD’s customers is that the currently proposed capital amount will beinsuYcient.

18. We recognise that theGovernment is torn between i) promoting the development of the private sectorto take on the risks traditionally assumed by ECGD, and ii) the need to assist the export industry witheVective use of taxpayers’ money.We are concerned that the end result will be an unsatisfactory compromisethat will severely constrain ECGD’s ability to assist UK exporters competing for business and thus weakensupport for UK industry in general. As explained in the recent joint TUC/CBI submission,70 export creditsupport can be a key factor in winning orders for major capital goods and projects.

Autonomy

19. Capitalisation was pushed by some members of the Management Board as a means of achievinggreater operational autonomy from HMT. There is no evidence to support this contention.

20. Firstly, HOA3 will not give ECGDmore freedom; instead, Treasury Consents would, as you can see,constrain its operations. HMT is saying that ECGD can have more autonomy but it must be within strictfinancial controls. Whilst not arguing against strict financial controls per se, HOA3 is a set of restrictionsthat will operate more like a straitjacket. Despite attempts to relax Treasury Consents, it would be amistaketo think that a move to a Capitalised Trading Fund would really result in greater operational autonomyfor ECGD.

21. Secondly, there is the experience of other Trading Funds in the UK. At the outset, HMT promisedthem that they would not interfere. However, whenECGD (and the TUS) consulted other Trading Funds, itwas clear that, after they had been established, the promised autonomy did not happen; indeed the oppositehappened and HMT were found to be even more intrusive. We believe that HMT would do likewise withECGD, particularly as ECGD would be the largest Trading Fund in the UK (indeed, its asset base wouldbe significantly larger than those of all other Trading Funds put together).

22. We are very much aware that the good relationship that other ECAs have with their Treasuryequivalents seems to allow them the freedom to run their business eVectively and ECGD should be allowedthe same opportunity.

Tax-payers’ Money

23. We are pleased that Ministers are determined to provide an ECA that can deliver. UK exportersclearly want a strong, reliable and competitive ECA to stop the erosion of the flagging capital goodsmanufacturing base. ECGD’s TUS remains convinced that a Capitalised Trading Fund would not achievethis because it requires ECGD, in eVect, to move from a break-even to a profit-making objective. A profit-led ECGD would be keen to attract only profitable business and, when it picks and chooses who getsECGD’s cover, it will tend towards this need for profitability rather than the wider good to theUK economyor, indeed, the wider international development aims of the Government.

70 Joint letter dated 27 February 2004 from Brendan Barber and Digby Jones to the Prime Minister.



24. Regardless of any assurances thatMinisters may have been given, the requirement to make a return oncapital inevitably means that ECGD will be faced with further increasing premium rates and inappropriatelycutting administrative costs. Premium rate increases are not a realistic option for customers because, in manyimportant markets, ECGD is already uncompetitive in terms of price.71 Cutting staV is not a solution either,as this will result in a reduced service to customers and the further deterioration of support for UK exports.Factories would close, jobs will be lost and will go overseas. Also, as ECGD support has a cascading eVecton SMEs, small businesses that depend on larger prime contractors would suVer.

25. With a Capitalised Trading Fund, the UK will be exporting jobs instead of exporting goods andservices—and, instead of paying claims to banks and exporters, taxpayers’ money would be used to payunemployment benefits. The diVerence is that a high proportion of claims paid by ECGD are recoverable.Banks in the UK already admit to steering multi-national clients away from sourcing export contracts in theUK towards sourcing in a country with a user-friendlier ECA that provides a better level of support. Thefuture of UK subsidiaries of overseas parents is also being questioned by such parents who are in a positionto compare the premium rates charged by ECGD with those charged by their home country ECA.

26. HMT equivalents in many other countries seem to be able to maintain a less emotive and moreprofessional working relationship with their ECAs. They acknowledge that the agencies must pay claims andrecognise that the money is well spent in support of the economy and in support of exports. In the UK,however, there has been much discussion concerning export credit support being regarded as a “subsidy”. Infact, previous studies72 have highlighted that there is no actual subsidy inherent in ECGD support. It is alsoworth highlighting that ECGD has managed to break-even over the last 10 years.

27. We clearly share concerns about the impact of ECGD on taxpayers’ money. Whilst perhaps notappropriate to this paper, we have ideas about howECGDcan savemoney (for example, we suggest that closeattention be given to the amount ofmoney that ECGD spends on employing consultants, particularly asmuchof the work they do could be carried out by ECGD staV, for less money).

Tail-end Risk

28. We understandHMT’s concerns about the so-called tail-end risk in ECGD’s portfolio (the possibilitythat, if everything goes wrong, ECGDwill need to pay claims on all its current exposure). However, ECGDrecovers a high percentage of claims, over time. It is important to bear in mind that ECGD’s businessincludes projects with long horizon of risks and, therefore, when making decisions about ECGD’s future itis essential to think long term.

29. If ECGD were faced at some time in the future with paying claims on absolutely everything, thatwould only be as a result of a major world catastrophe, ie no one will be paying anybody anything becausethe world economy will have totally collapsed. On the other hand, there could well be a significant up-turnin the global economy. Government policy should create the economic climate to help achieve this.However, ECGD must be ready to handle this situation and this can only happen if it has an appropriateoperating framework and suYcient staV to help customers compete with their overseas competitors.

Conclusion

30. We believe that a Capitalised Trading Fund is not appropriate for ECGD as, inter alia, it wouldexacerbate ECGD’s current lack of competitiveness with other ECAs. There is no evidence that ECGD’s“shadow” capitalised regime has been beneficial and, therefore, we consider that the Pilot Trading Fundshould not go ahead without a formal review and a detailed outline of the tangible benefits.

31. Amove to a Capitalised Trading Fund status will not result in operational autonomy for ECGDand,instead, HOA3 will operate more like a straightjacket. The requirement to make a return on capital willmean that ECGD will be faced with further increasing premium rates and inappropriately cuttingadministrative costs; both options would result in a reduced service. Treasury equivalents in many othercountries value the role of their ECAs. Support for ECGD is not a subsidy and the majority of claims paidby ECGD are recovered over time.

32. We urge you to assist the UK capital goods export industry, and ECGD staV, by strongly arguingfor a proactive public service role for ECGD, competing on an equal footing with other ECAs, properlyfunded, fully staVed, with the operational autonomy necessary to return to its previous level of service. Inour view, this means rejecting the case for a Capitalised Trading Fund.

33. We would welcome the opportunity to meet again soon to discuss this paper with you.

ECGD Trades Union Side

23rd April 2004

71 ECGD’s Customer Survey (2003).72 National Economic Research Association (NERA) report, published March 2003 ECGD.



APPENDIX 14

Memorandum by Friends of the Earth

Contents

1. Introduction2. ECGD’s Objectives and Business Principles and the ECGD’s Role in the Promotion of Sustainable.Development.

3. ECGD Objectives and Compliance with its Business Principles and Sustainable Development.4. The Inadequacies of the ECGD’s Objectives and Business Principles in the Promotion of SustainableDevelopment.

5. Recommendations.6. Targets for Sustainable Development.

1. Introduction

1.1 Friends of the Earth is an environmental campaign organisation that exists to protect and enhanceconditions for life on earth, now and in the future. We advance our environmental campaign and advocacywork from the perspective of socially just sustainable development.

1.2 Friends of the Earth International have national member organisations operating in 68 countriesworldwide, nearly half of which are in the global south.73 This submission has been prepared by Friendsof the Earth England, Wales and Northern Ireland, although the points made are also informed by sisterorganisations around the world, as well as other non-governmental groups. Friends of the Earth’s nationalhead oYce are in London and have eight regional oYces in England and oYces in Belfast and CardiV. Wehave 102,000 supporters in this country and our work is underpinned by about 250 voluntary local groups.Friends of the Earth relies on individual supporters for 95% of its income. Friends of the Earth Scotland isa separate member of Friends of the Earth International.

1.3 Friends of the Earth is pleased to contribute to the on-going debate on the role of the Export CreditsGuarantee Department in relation to sustainable development and to the Committee’s inquiry. Thissubmission largely falls under three of the issues that the Committee has solicited comments on:

— The ECGD’s objectives and business principles.

— The Department’s role in the promotion of sustainable development.

— ECGD’s corporate governance.

1.4 Our overall position is that the ECGD requires radical reform and that its mission and remit shouldbe amended in order to become a driver of sustainable development in order to support the Government’scommitment to sustainable development and human rights. Friends of the Earth are part of a coalition ofInternational NGOs74 campaigning not only for ECA reforms with respect to environmental protection andtransparency, but also human rights, debt, corruption, military expenditures and other social goals relatingto sustainable development. The Campaign’s reform goals have been articulated in a number of documents,including the Jakarta Declaration75 signed by nearly 350 organisations from around the world and morerecently reiterated in the European ECA Reform platform and ECA-Watch’s collective submission to theOECD negotiations.

1.5 Friends of the Earth’s position has evolved over several years of tracking various ECGD activities.We believe that there has been little significant concrete change at ECGD since our submission to the Tradeand Industry Committee’s last inquiry on the role and remit of the ECGD (Third Report in the 1999–2000session). This submission therefore draws heavily on our previous submission.

1.6 Friends of the Earth concerns regarding the ECGD include:

— For the majority of cases, no information on environmental or social impacts released before afinance decision is made.

— Few clear and specific standards required.76

— Poor Transparency. Although all projects are subject to the environmental questionnaire, theseare not made public.77

— No use of exclusionary screens or “no go zones” to prohibit environmentally high risk projectsor clients.

73 Sometimes known as developing countries.74 ECA-Watch www.eca-watch.org75 Jakarta Declaration For Reform of OYcial Export Credit and Investment Insurance Agencies, http://www.eca-watch.org/goals/jakartadec.htm

76 ECGDnow claims that all projects “should comply in all material respects with the relevant safeguard policies, directives andguidelines of World Bank group”. However, the “should” allows for discretion, and there is no way that anyone can checkfor “medium” and “low” impact category cases as no information is given on them.

77 Therefore there is no way that the public can challenge the information contained in the questionnaire, or the impact categorydefined of the project.



— Limited proactive eVorts to fund renewable energy or other sustainable development projects.

— No compliance mechanisms.

1.7 In this submission our concerns focuses on three areas:

— The current lack of policy coherence with respect to the Government’s sustainable developmentobjectives including the promotion of human rights, elimination of poverty and environmentalprotection.

— The inadequacy of the ECGD’s existing procedures, standards and sanctions to promote thesebroad objectives.

— The weakness of governance structures, including accountability to Parliament and associatedfailings in transparency regarding ECGD’s activities.

1.8 Since the Committee’s previous inquiry, the ECGD has introduced a New Mission Statement andthe associated Business Principles. In his Foreword to the ECGD’s Business Principles, Stephen Byers, theSecretary of State for Trade and Industry said;

“It is true to say that actions speak louder than words”.

Friends of the Earth couldn’t agree more. Unfortunately this submission raises again the majority of theissues raised previously. Some things have changed on paper, but in practice there has been little concretechange in the types of projects supported by ECGD.

2. ECGD’s Objectives and Business Principles and the ECGD’s Role in the Promotion of

Sustainable Development

2.1 Friends of the Earth consider sustainable development to be the long-term process that improves thequality of life for all people while respecting environmental limits and ensuring that future generations canenjoy a similarly good quality of life. The concept thus embraces economic development and fundamentallyassumes the priority to end poverty within the earth’s limits.

2.2 Sustainable development is not simply a question of balancing economic ends against environmentalprotection. This false notion is often cited in policy discussions where there is, for example, scrutiny ofsubsidies for industry or possible market interventions geared towards sustainable development goals.Sustainable development is rather about the fundamental integration of economic, social andenvironmental policy. International Finance Institutions, including the ECGD have an important role toplay. Total ECA support for business transactions cover almost eight percent of global annual world trade.78

A report on International Financial Institutions by DEFRA argues;

“unless investment flows [of IFIs] are explicitly focused on and supportive of environmentally andsocially sustainable economic growth, such growth will not be achieved.”79

2.3 Sustainable development remains, however, more aspiration than reality, as confirmed in a wide andever growing body of technical literature.80

2.4 At the Johannesburg Earth Summit in 2002 Prime Minister Tony Blair acknowledged:“We know the solution—sustainable development . . . the issue . . . is the political will.”

Friends of the Earth believe that all Government departments must play their part in a transition tosustainable development. John Prescott, Deputy Prime Minister has stated:

“Financial investment is essential in achieving all Sustainable Development targets, financialinvestment which is often not readily available.”81

2.5 Therefore, the DTI, including ECGD, has a particularly important role to play. We are pleased thatthe Trade and Industry Committee is revisiting this issue and we note the concern that was raised previously.For example, in the Sixth report of Session 1999–2000 concludes:

“We would be concerned if DTI took their responsibilities for promotion of the Government’scommitment to human rights and sustainable development the less seriously because of a perceptionthat other departments would take up those issues, leading in practice to DTI invariably grantingpriority to commercial considerations.”82

78 BruceRich: TradeAboveAll, TomPaine. Common sense—APublic Interest Journal, http://www.tompaine.com/feature.cfm/ID/4357.

79 Report of a Royal Institute for International AVairs/Forum for the Future workshop held on behalf of DEFRA—BrianPearce and Paul Ekins “International Financial Institutions: Enhancing their role in promoting sustainable development”October 2001 http://www.sustainable-development.gov.uk/wssd/ifi/02.htm

80 See Redclift, M (2000) Sustainability: life chances and livelihoods, Routledge, London and Pearce, D (1995) SustainableDevelopment: The Political and Institutional Challenge in Kirkgby, J, Okeefe, P,, Timberlake, L, Earthscan Reader inSustainable Development, Earthscan, London and Hanf, Kenneth & Jansen, Alf-Inge ed (1998)Governance & Environment inWestern Europe: Politics, Policy & Administration, Longman, UK.

81 John Prescott, in DETR (1999) “A better quality of Life—a strategy for Sustainable Development in the UK”, DETR,London.

82 Select Committee on Trade and Industry—Sixth Report—Application for support from ECGD for UK participation in theIlisu Dam project. 28 February 2000.



2.6 There are two areas for consideration. Firstly whether the ECGD is meeting its own aims andobjectives in relation to sustainable development as set out in itsMission Statement and Business Principles.Secondly whether the ECGD’s current aims, objectives and Mission Statement enable the Department topromote sustainable development.

3. ECGD Objectives and Compliance with its Business Principles and Sustainable Development

3.1 The ECGD’s current Mission Statement contains an objective to operate in accordance with itsBusiness Principles. Friends of the Earth believe that the ECGD is not meeting this objective on severalfronts. These are briefly outlined in turn below.

3.2 “To be as open as possible, while respecting legitimate confidentiality, about what we do”

ECGD’s lack of transparency has been a cause concern in the past. Despite strong criticism from theTrade and Industry Select Committee in the context of ECGD’s handling of the Ilisu Dam project83, thesituation was shown not to have improved as Friends of the Earth tried (without success) to obtain copiesof the Environmental Impact Assessment report relating to the proposed Yusufeli Dam in Turkey (also thesubject of a controversial and subsequently withdrawn application for support to ECGD) in 2002. In thatcontext FOEwrote to ECGD requesting access to a copy of the environmental impact assessment submittedin connection with that project and held by ECGD. The request was denied on a number of occasions ona variety of shifting grounds (including commercial confidentiality and that the information had beensupplied “voluntarily”).

3.3 Eventually, when Friends of the Earth indicated that it was considering taking legal action againstECGD, the Minister wrote to FOE stating that it proposed to divest itself of the Environmental ImpactAssessment (by returning it to the company in question) within 14 days of their letter to us. Once so divestedFOE would not, of course, have been able to obtain the documents from ECGD under the EnvironmentalInformation Regulations because the information was no longer “held” by them. The proposed action was,in eVect, equivalent to shredding. In the event, AMEC withdrew their application for ECGD support andFOE did not take legal action against ECGD.

3.4 Further contact with ECGD in the period since then has indicated strongly to FOE that the lessonsof Ilisu and Yusufeli have not been learnt in this area and that a culture of secrecy continues to be allpervasive at ECGD (despite some very modest changes in ECGD’s disclosure policies). Indeed, what isremarkable to FOE is the lengths to which ECGD are prepared to go in order not to release environmental(and other) information to the public. Whilst EIAs are now required for category A projects, their releaseprior to project approval—along with release of other information—is at the project developers’ discretion.

3.5 Taking into account important developments in this area in international (AarhusConvention); European (Directive 2003/4 on freedom of access to information on the environment) anddomestic (draft Environmental Information Regulations [2004]) ECGD’s approach to freedom ofinformation on environmental matters may well become the subject of unwelcome judicial scrutiny in duecourse.

3.6 “To ensure that in its operations ECGD takes full account of existing and developing Government policyin the economic, trade, foreign policy, developmental and environmental spheres.”

The ECGD have supported many projects in the mining, pulp and paper, oil and power sectors-whichhave had devastating social and environmental impacts. Friends of the Earth believe the ECGD have failedto take account of government developmental and environmental policy in a great number of cases.Examples of these include the Dabhol Power Plant, Maharashtra, India; Defence equipment sales in SouthAfrica; and the Baku-Ceyhan Pipeline.

3.7 “To ensure that ECGD does not contribute to human rights abuses or violations in providing cover forany project or investment.”

The ECGD sponsored Baku-Tblisi-Ceyhan (BTC) pipeline project has been dogged with allegations ofwidespread human rights abuses, inadequate compensation and consultation of locally aVected people andregional destabilisation andmilitarisation. Furthermore, the Host GovernmentAgreements (HGAs) signedby the Azerbaijani, Turkish and Georgian Governments override all local environmental and social lawsfor the next half century and eVectively give BP sovereign power along the pipeline route. Recipientcountries receiving this kind of external pressure undermines global eVorts to increase governance in theglobal south.

83 Trade and Industry Select Committee (TISC)—12th report (11/5/01) “it is not the first time that our detailed considerationof the request for export credit for the Ilisu dam has been bedevilled by excessive secrecy.” This followed from TISC’s earlierreport TISC 6th (9/3/00) referring to “deplorable and counter productive lack of transparency in the way in whichdocumentation has been kept from the public on the Ilisu Dam Project”. The Environmental Audit Committee Report(Seventh, 2002–2003) noted that “Earlier this year ECGD agreed to publish details of high potential impact cases underconsideration on its website. The details are limited to the name of the project, a brief description and contact details for soucesof environmental information. This is a welcome improvement but we are still concerned over the limited nature of theinformation provided and the fact that disclosure is subject to client consent.” (para 29).



3.8 This controversial project has also recently been reported in a leaked report84 as involving projectsponsor corruption, mismanagement and incompetence. John Horam, MP is reported to have said theECGDhad failed tomonitor the project properly and should consider withdrawing its loan.A spokespersonfor the ECGD confirmed, that BP had not informed it of any problems relating to the field joint coatingprior to approval of an ECGD loan. Friends of the Earth, along with a large coalition of environmental andhuman rights organisations believe this to be unacceptable.

3.9 “To take account of the environmental and social impact of projects for which ECGD support has beenrequested.”

The Sakhalin II Oil and Gas Pipeline Project, currently under ECGD consideration has been reported inThe Observer85 newspaper as putting the fragile marine community of Asian grey whale under significantthreat. ECGD investment in this project would be inconsistent with National, European and UnitedNations Conservation Policies.

4. The Inadequacies of the ECGD’s Objectives and Business Principles in the Promotion of


4.1 ECGD is not currently set up as a champion of sustainable development. Indeed, staV at ECGDhaveargued that the Export and Investment Guarantees Act 1991 limits the ability of ECGD to adopt anexclusion lists of unsustainable projects. Friends of the Earth believes that a review of this Act is necessary. Ifthe conclusion of such a review concurs with the view that theAct is hindering the ECGD’s progress towardssupporting sustainable development, then the Act should be rewritten in order to bring the ECGD in linewith the Government’s stated commitment to sustainable development. Friends of the Earth is keen to seethis question resolved.

4.2 The UK Government Sustainable Development commitments from WSSD Outcomes86 include:

— Agreement that corporate social responsibility should be actively encouraged and promoted bygovernment.

— Integration of international trade into the wider sustainable development agenda.

— Urgently and substantially increase the global share of renewable energy sources, to develop morediverse, advanced, cleaner, aVordable and more eYcient energy technologies and, whereappropriate, to phase out energy subsidies which inhibit sustainable development.

— Ask IFI’s and other agencies to support eVorts to create a level playing field for renewable energyand distributed and decentralised energy.

— Create closer links between development and environment policy, in the service of sustainabledevelopment.

4.3 The ECGD’s mission statement claims the ECGD will:“. . . take into account the government’s international policies”.87

This has not prevented the ECGD in providing guarantees that disregard some of the UK governmentsustainable development objectives outlined at 4.2. Friends of the Earth believe this mission statement mustbe revised to ensure the ECGD operate under a framework of sustainable development.

4.4 OYcials from theECGDhave been cited as reporting “pressure fromnongovernmental organisationsas a factor in their decision to release environmental information about projects before making a decisionon the project.”88 A more proactive approach from the ECGD is necessary. Friends of the Earth believesthat the ECGD’s Mission Statement should be radically rewritten so that its fundamental remit is topromote sustainable development. If necessary enabling legislation should be introduced in Parliament.

5. Recommendations

Friends of the Earth, as previously stated in a submission to the Trade and Industry Committee’s lastinquiry, believe the ECGD must:

5.1 Adopt a Clear and Unambiguous set of Mandatory Environmental and Development Standards

These must reflect current best practice in the field. These standards should be aimed at ensuring, interalia, that ECGD-backed projects and exports:

— have the minimum impact on the environment;

— safeguard the lives and livelihoods of those directly aVected;

84 “BP accused of cover-up in pipeline deal” The Sunday Times, 15 February 2003.85 “Only Britain” can save rare whales from extinction Pressure mounts on Ministers to block Shell from destroying the lastsanctuary of the Asian grey whales Antony Barnett Sunday February 8, 2004 The Observer.

86 www.sustainable-development.gov.uk/sd1 strategy/taskforce/wssd.htm87 http://www.ecgd.gov.uk/88 US Government Accounting OYce, Movement Toward Common Environmental Guidelines, but National DiVerencesRemain (September, 2003).



— has the free prior and informed consent of those directly aVected, particularly where forcedrelocation is involved;

— minimise the need for resettlement and ensure that those resettled are better oV than prior to theproject or export; and

— ensure full and active participation of aVected people and interested groups in the decision-makingprocess associated with the project or export.

These standards should be consistent with, or higher than those required by the World Bank group, theUnited Nations Environment Programme (UNEP), the Organisation for Economic Co-Operation andDevelopment (OECD), OPIC and US Exim-Bank. All of these have demonstrable weaknesses, but are stillbetter than no standards at all and oVer a good basis for improvement.89

5.2 Undertake Country and Company Screening

The ECGD should rule out the oVer of cover in countries which consistently abuse human rights. Itshould not oVer support to companies which are in breach of the OECD’s Guidelines for MultinationalEnterprises, nor those proven to have been involved in bribery or corruption. Companies found guilty ofcorruption should be banned from further support for five years, and export credit agencies should notunderwrite commissions as part of the contracts they support. More broadly, the ECGD should considerthe past human rights, environment and development record of companies applying for credits orguarantees, and make support conditional on meeting at least the environmental and social standards thatthey would be subject to in the UK.

5.3 Develop a Concise Project Mandate

The ECGD should not oVer support for any projects which have no demonstrable development benefits.The ECGD should develop a clear project mandate. The ECGD should also define certain “no-go zones”including for infrastructure projects in areas of high conservation value such as primary tropical forests,UN national parks, World Heritage Sites and IUCN protected areas I-IV; large dams that disrupt naturalecosystems or the livelihoods of local inhabitants; projects that would threaten peace and security in aregion; nuclear facilities or arms sales. The ECGD should also require that contracts it supports have beenawarded through open tendering processes.

EVective screening would not only deliver environmental and social benefits, but ensure that the ECGDdid not waste time and money on unsustainable proposals and companies operating illegitimately orillegally.

5.4 Develop a Coherent Transparency Policy

Transparency, public access to information and consultation with civil society and aVected people isessential in both OECD and recipient countries at three levels: in the assessment of ongoing and futureinvestments and projects supported by the ECGD; in the preparation within national ECGDs of newprocedures and standards; and in the negotiation within the OECD and other fora of common approachesand guidelines. The adoption of binding criteria and guidelines is essential to end ECGDs’ abetting ofcorruption. According to Transparency International, the continued lack of action by ECAs to address thisissue is bringing some ECA practices “close to complicity with a criminal oVence.”90

The ECGD, as has other ECAs long argued that transparency policy must be limited to protect legitimatebusiness interests. However, a GAO report91 that studied 24 projects after Ex-Im’s environmental guidelinesfound “limited evidence” of any impact on competitiveness. The report also concluded that specific concernsof business regarding environmental standards were “largely anecdotal and diYcult to confirm”.

5.5 Reform of Extractive Industries Investments

The ECGD should fully implement the recommendations of the World Bank’s Extractive IndustryReview.92 This review initiated in 2000 and completed in 2004 involved consultations with business,government and civil society to formulate guidelines for a suitable future for World Bank investment in theextractive industries. The review recommendations the World Bank include:

— a phase-out of funding for all oil and coal projects;

— full and open consultation with aVected communities, and indigenous peoples, and an end toforced resettlement;

— no oil, mining or gas investment in areas with endangered species and areas of armed conflict;

— no more financing of harmful mining technologies; and

— respect for human rights commitments.

89 For critique on World Bank policy see Bretton Woods Project (2003) “World Bank social and environmental policies:abandoning responsibility?” or Bank Information Centre (BIC) http://www.bicusa.org/bicusa/issues/environmental–and–social–policies/index.php

90 Transparency International submission to the OECD and European Union in September, 1999.91 Export Credit Agencies, Movement Toward Common Environmental Guidelines, but National DiVerences Remain, GAO-0301093, Sept 2003, GAO (United States General Accounting OYce) report.

92 The Extractive Industry Review is available at: www.eireview.org



5.6 Require Project Impact Assessment as a Matter of Course

The ECGD has made some progress on this and requires an environmental impact assessment for highimpact cases. However, it still does not even require an impact questionnaire to be completed for defenceand aerospace related applications. Friends of the Earth is pleased that the Trade and Industry Committeeraised this in its last review that states:

“We see no reason for defence equipment and aerospace sectors to be exempted from the screeningprocess and request an explanation for the exemption”93

We also agree with the subsequent statement that

“The questionnaire is possibly the weakest form of environmental assessment that could have beenchosen.”94

Friends of the Earth believes that the ECGD has a long way to go before it can be said that is carries outrigorous and comprehensive impact assessment. Friends of the Earth believe strategic environmental impactassessments should be conducted for all development projects unless there is a clear case for not doing so.These assessments should then be published on the EBRDwebsite with appropriate notice given, and madeavailable for a 120 day period of stakeholder consultation before a finance decision may be made.

5.7 Adopt a Compliance Monitoring and Auditing System

Experience of impact assessment in the European Union has revealed the need for eVective compliancemonitoring to ensure that mitigation measures are implemented and standards adhered to duringconstruction and operation. Similarly, to ensure that project and company screening mechanisms areeVective requires compliance auditing. At a minimum, the standards of monitoring and complianceoperated by OPIC are recommended.

5.8 Develop an Inspection and Dispute Mechanism

Even with the best assessment and monitoring procedures, there remains a risk that projects supportedby the ECGD may not live up to the expected standards, or indeed that the ECGD itself may fail to applyits procedures rigorously enough. To ensure public confidence in such procedures requires an independentmechanism to address complaints and concerns raised by aVected populations or civil society organisations,with adequate powers and sanctions to resolve disputes. Such a process should be supported by clarificationof the legal right of those aVected by ECGD-supported projects to sue in the UK (and to have access to legalaid so to do).

5.9 Develop Sanctions for Non-Compliance

Clearly the ECGD needs to be able to take some sanction against companies which breach its standardsor abuse its procedures.However, at present, the ECGDhas no procedures in place even to debar companieswhich have been convicted of malpractice. This is despite the UK having signed the Organisation forEconomic Cooperation and Development’s 1997 Convention on Combating Bribery. Under theConvention, among the sanctions that signatories are required to consider for the oVence of bribery of aforeign public oYcial are “exclusion from entitlement to public benefits or aid” and “temporarydisqualification from participation in public procurement or from practice of other commercial activities”.The OECD’s 1997 Revised Recommendations on Combating Bribery also recommend that signatoriesensure that “public subsidies, licences, government procurement contracts or other public advantages. . . could be denied as a sanction for bribery”. (NB—this wording would reflect more strictly the actual textof the Convention, which is unfortunately slightly less forthright than the original text implied).

The World Bank has instituted measures to crack down on bribery. The bank has adopted guidelinespledging to “declare a firm ineligible, either indefinitely or for a stated period of time, to be awarded a bank-financed contract” if the firm is found to have “engaged in corrupt or fraudulent practices in competing for,or in executing, a bank-financed contract”. So far, the Bank has debarred approximately 150 smallcompanies.95 A report by the Corner House96 concludes ECA’s are central to eVorts to combat corporatebribery worldwide. The ECGD should follow the lead taken by the World Bank. Debarment would be oneof the most serious and eVective deterrents against bribery. It would also ensure that the ECGD did notsupport companies with poor track records on corruption.



95 http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTS/PROCUREMENT/0,,contentMDK:20066549xpagePK:84269xpiPK:60001558xtheSitePK:84266,00.html

96 Briefing 30: Underwriting Bribery, The Corner House, December 2003, UK.



6. Targets for Sustainable Development

6.1 The ECGD has recognised that positive measures are also needed to bring forward sustainableprojects for support. Friends of the Earth welcomed its announcement to:

“make available cover for at least £50 million of exports each year that meets its normal project andcountry underwriting criteria; and, participate in an outreach programme, run by DTI’s TradePromoters and the private sector, to stimulate exports of renewable energy goods to emergingmarketsto help overcome the low number of renewable energy applications for ECGD cover.”97

However, as far as Friends of the Earth are aware, no cover has been provided for renewable energy since.This reflects a lack of applications. However, such applications are unlikely to be forthcoming—particularlyfrom small businesses—unless the ECGD take a proactive approach, promoting the fund and specificallyfavouring renewables over conventional energy projects. Support for renewable energy must therefore gohand in hand with phasing out support for fossil fuel projects. The ECGDhas, this year, given export creditsupport for the Baku Tiblisi Ceyhan pipeline, which every year will transport the oil equivalent of nearly30% of the equivalent of the UK’s yearly carbon dioxide output. The ECGD is also currently consideringtwo other big fossil fuel projects.98

6.2 In addition to its renewables fund, the ECGD should develop positive and proactive strategies forsupporting environmental technology and services, information and communication technology and othersectors with long-term sustainable development potential, and within construction and infrastructure, itshould strategically prioritise support for resource eYciency and recycling, embedded renewable energy andpublic transport, rather than mining, fossil power, dams and roads. In the same way as the ECGD providesguarantee funds for specific countries, it could do so for specific sectors that match UK expertise withdeveloping country needs for sustainable technologies.

6.3 The ECGD should set incrementally rising targets for positive investments—for example, beginningby ensuring that 20% of power lending goes to renewables by 2005.

The OECD Development Assistance Committee declared in 1996 that:

“we should aim for nothing less than to assure that the entire range of relevant industrialised countrypolicies are consistent with and do not undermine development objectives.”

Friends of the Earth believe radical reform of the ECGD’s current structures, policies and practices isfundamental in order to meet these objectives.

February 2004

APPENDIX 15

Memorandum by Rolls-Royce

This response is primarily focused on the potential impacts of the impending Trading Fund and thecommercial aviation aspects of ECGD’s business where Rolls-Royce has most direct experience of ECGD’sstrengths and shortcomings.

Executive summary:

— Pre-1999 ECGDwas held up by its customers as being a model export credit agency (1999Mission& Status Review). The subsequent array of consultations and reviews have eroded this positionand given the impression that ECGD is battling for survival.

— Between 1992 and 2002 NERA showed ECGD to be a net contributor to the UK economy. Thiswas a remarkable performance over an extraordinarily diYcult economic period and demonstratesclearly that there is no subsidy inherent in ECGD’s support for UK exporters.

— ECGD’s Benchmarking exercise indicated that by 2002 it did not compare favourably againstother ECAs in terms of either pricing or availability of cover.

— ECGD’s advisory council (“EGAC”) was critical of ECGD’s performance (2003 Report). TheCouncil expressed particular concern about the uncertainty caused by repeated reviews andhighlighted that ECGD should keep the competitiveness issue at the forefront of its agenda whensetting cover and pricing policy.

— The same report recommended ECGD’s future corporate plans should contain specific referenceto enhancing UK industry’s international competitiveness.

97 ECGD Boosts Renewable Energy Sector with £50 million Export Help, 1 April 2003.98 Sakhalin II and The West African Gas Pipeline.



Rolls-Royce’s three major concerns are:

1. That the move to Trading Fund status does not impact on the pricing required to oVer competitiverates and any return on capital employed (“ROCE”) imposed on the Trading Fund does not undermineECGD’s competitive position against other ECAs.

2. ECGD must be allowed a period of stability to enable it to regain customer confidence.

3. ECGD’s clear remit must be to provide UK exporters with the volume of support and quality ofproducts that will enable them to compete eVectively with their overseas competitors.

Introduction and Background

1. The Trade and Industry Committee’s Third Report “The Future of the Export Credits GuaranteeDepartment” (11 January 2000) acknowledged that any fundamental change to ECGD’sMission, status orrole would be inconceivable without reference to the international framework and any decisions relating toECGD’s future should be measured against their consequences for the international competitive positionof British exporters. Since the publication of this report ECGDhas been subject to further scrutiny resultingin the publication of several additional reports, described below, that are relevant to this Review.

2. The first of two NERA reports, “The Economic Rationale for the Public Provision of Export CreditInsurance by ECGD” was published in April 2000. The report concluded that ECGD should continue toprovide cover for medium and long-term capital goods exports. NERA had not identified any subsidy inECGD’s support but stated that if there were one then it should be phased out multilaterally over an agreedperiod. In addition NERA deemed it undesirable for ECGD’s remit to be broadened to include aid-related,environmental or other objectives not strictly related to its core business and recommended that it shouldfocus exclusively on the provision of insurance for medium and long term exports.

3. KPMGpublished their report, “ECGDRiskManagementReview” in July 2000 assessing the strengthof ECGD’s risk management systems. It concluded that ECGD’s approach to risk management was basedon sound principles and that it had a more robust system of risk assessment than most of its peers.

4. Also published in July 2000 was the “Review of ECGD’s Mission and Status”. The report endorsedECGD’s risk management processes while recommending a move to Trading Fund status. In his Forewordthe Secretary of State for Trade and Industry stated that the Government accepted the conclusions of thereport, strongly reaYrming ECGD’s role in bringing economic benefit to theUK through its support of UKexporters and investors in overseas markets. He also added a clear statement that ECGD is not a drain onthe taxpayer.

5. In February 2003 ECGD published the “Report on the Comparison of Export Credit Agencies”. Thisshowed that in comparison with other ECAs, overall ECGD was providing the least cover in the fewestcountries at the highest margins. The report was a clear indication of the decline in ECGD’s competitivenessand ability to support UK exporters in an increasingly competitive environment.

6. Bearing in mind the very positive outcome of the Mission and Status Review it was surprising that afurther report was commissioned byHMT and ECGD to ascertain whether there was any benefit to the UKeconomy of providing export credit support. NERA’s second report “Estimating the Economic Costs andBenefits of ECGD—AReport for the Export Credits Guarantee Department” was finally released inMarch2003. Focusing exclusively on the performance of ECGD’s portfolio, NERA confirmed that for the period1992 to 2002, “. . . our estimate of the net benefit of ECGD is in the range of approximately £4.1 million to£23.1 million”. This underlined the Secretary of State earlier observation three years previously, when hestated that ECGD was not a drain on the taxpayer. In fact ECGD had been a net contributor to theexchequer.

The Trading Fund

7. Rolls-Royce has accepted in principle the concept of ECGD becoming a Trading Fund. However thiswas on the basis that it would not lead to any diminution in ECGD’s risk appetite or any further increasein premium levels. For this to be achievable a number of issues associated with the proposed Trading Fundregime require further scrutiny. These issues are discussed below.

8. Adequacy of the Trading Fund’s capital base—HMT has indicated that the capital base will be set at£1.7 billion, down from an original estimate of £4 billion, with no apparent ability to apply for more capitalshould the need arise. There are two reasons why this causes concern. The businesses that ECGD supportsare generally long-term and cyclical. This is especially true of the aerospace industry, which goes throughregular and pronounced peaks and troughs. Our first concern is that during periods of strong exportingsuccess ECGDmay find its ability to underwrite business constrained by the level of capital base.Our secondconcern is that the capital base would be insuYcient to absorb the claims that inevitably follow a downturnand ECGDwould be unable to trade through these periods as it has done in the past. It is worth noting thatECGD’s track record in recoveries is second to none, hence its net positive contribution to the exchequerover time. However such recoveries occur over the long-term and ECGD’s capital base must be flexibleenough to accommodate this.



9. Allocation of capital to individual transactions—The amount of capital allocated to a particulartransaction will have obvious implications for premium levels, discussed further below. There is howeveranother issue with respect to the amount of capital that ECGD will be able to allocate to any singletransaction. It has been suggested that there will be a limit set for individual deals, calling into questionECGD’s ability to allocate suYcient capital to the “large and lumpy” deals that are typical of our exportsof aerospace and defence goods—this would be particularly relevant in the context of A380.

10. Level of Return on Capital Employed (“ROCE”)—The level of ROCE to be imposed upon theTrading Fund has increased steadily from 6% real (ie 6% after inflation), as originally quoted during theconsultation process that followed the Mission & Status Review of 1999, to a level of 18% real now beingdiscussed betweenHMTandECGD. In our experience of reinsuring risks similar to those carried byECGD,ie guarantees carrying downside risk but no upside potential, the returns demanded by commercialinsurance companies are far lower than those being discussed in relation to the Trading Fund. Regardlessof this, it should be emphasized that the OECD and WTO guidelines for export credit agencies (“ECAs”)simply require that they break-even over time. ECGD is the only ECA of its type that is being required tomake a profit for its exchequer.

11. Voted “subsidy”—Industry has been assured that this inflated level of ROCE should not be ofconcern as it represents only the “headline rate of return”. An “achievable rate of return” will apparentlybe set at a level that will enable premium levels to remain “broadly similar” to those charged today and anannual “subsidy” will be voted by Parliament to provide a top-up enabling the headline rate of return to bemet. Rolls-Royce feels very strongly that the availability of ECGD support should not be left hostage to anannual voted payment thatmay ormay not be forthcoming. Nor should there be any suggestion that ECGDis a provider of “subsidy”. Every review that has been undertaken to date has demonstrated quite clearlythat there is no subsidy inherent in ECGD support and that based upon portfolio performance alone, ieexcluding all the additional benefits of maintaining and creating high value jobs within the UK, ECGD isa net positive contributor to the exchequer. We believe that institutionalising a “subsidy”, however artificialit may be, is a dangerous step, opening up both ECGD and the UKGovernment to challenge domesticallyand internationally.

12. Transferring budgetary responsibility for the Trading Fund to DTI—There is a suggestion that DTIwill have to allocate a portion of its finite budget to ECGD and the Trading Fund. Setting the ROCE or“headline rate of return” at an inappropriately high level would absorb a level of resource disproportionateto the risk. In addition we understand that DTI may not have either the benefit of the spread of the existingportfolio to enable it to absorb catastrophic losses or the ability to access additional capital, as perparagraph 8, to enable it to trade through a downturn.

13. Provision of support to “rich markets”—We also understand that ECGD’s strategy and objectivesare under review. Rolls-Royce has become aware of an increasing reluctance within ECGD to providesupport to so-called “rich markets” such as Singapore, Australia and the countries of the expanding EU.There are two reasons why we believe this to be inappropriate. First, airline customers will always haveconcerns relating to the availability of long-term commercial funding for new aircraft programmeswith longlead times and high asset acquisition costs. Even the best credit customers require the comfort of an ECA-supported backstop before having the confidence to place an order. This has been clearly demonstrated withthe experience of A380 programme, where every customer to date including Singapore Airlines, Qantas andEmirates, has requested an assurance with regard to the availability of export credit support. Secondly, arisk portfolio that excludes better credits will be much more vulnerable in a downturn than a more balancedone. This is of particular concern bearing in mind the issues outlined in paragraphs 8 and 12 above.

The Importance of Consistency, Availability and Competitiveness of ECGD Cover

14. Commercial bankingmarkets have contracted as banks continue to merge. This has led to decreasingcapacity for many sectors, including commercial aerospace, as the merged bank limits decline.Consequently, as described in paragraph 13 above, airlines are increasingly seeking the comfort of an exportcredit backstop at the point that an order is placed. Evidence from our Trent campaigns indicates that 80%of our eligible customers seek assurances with respect to the availability of export credit at the time that anorder is placed. Historic data suggests however that a much lower proportion, perhaps only 25–35%,actually take up the support in some form at delivery of the aircraft. This is entirely appropriate in our view,demonstrating that our customers will attempt to access alternative funding if they can, using ECGD as acomplementary source of funding to the commercial markets.

15. Rolls-Royce has also looked at what the availability, or indeed the absence, of competitive ECGDsupport means to an airline customer in terms of operating costs. For an average airline the availability ofECA support in a diYcult economic climate equates to around 5% of aircraft operating costs. As little as a1% diVerence in operating costs can win or lose a sales campaign. If we cannot oVer a competitive exportcredit product from ECGD but our competition is able to present support from its ECA our bid will startwith a 5% disadvantage. This is almost impossible to overcome. It would be necessary to reduce the sellingprice of the aircraft by 20% or reduce fuel burn by more than 20% to have the same impact on overall costs!



16. As noted in paragraph 5 above ECGD’s own benchmarking exercise shows that it does not compareat all well against other ECAs in terms of either pricing or availability of cover. Rolls-Royce saw ECGDdouble premiums for two airline customers when the other agencies involved (US Ex-Im for the one andCoface/Hermes for the other) had been willing to charge the standard premium. We have a more recentexample for a European carrier where a relatively small increase in premium (0.15%) by ECGD over andabove that charged by Ex-Im led the customer to decline the ECGD supported portion of the deal andcomment that this would be taken into account when the next engine order was being placed. As thiscustomer currently operates both GE-powered and Rolls-Royce-powered B747-400 freighter aircraft thiscan be seen as a serious threat to our future business with them. Clearly an “all-American” product withfull Ex-Im support would be a more cost-eVective solution for the airline if ECGD remains uncompetitive.ECGD’s objectives, business principles and role in promotion of sustainable development

17. Criticism has been aimed at ECGD for not providing suYcient support to SMEs. We think that thisis unfair in two respects. First ECGD’s short-term business, where the products were more suited to SMEs,was successfully privatised in the early nineties. Secondly, major UK exporters such as Rolls-Royce haveextended UK-based supply chains—(50% of Rolls-Royce 1,400 suppliers are all SMEs). These suppliersbenefit indirectly every time ECGD provides support to Rolls-Royce.

18. The “Review of ECGD’s Mission and Status” contained a new Mission Statement with subtle butsignificant changes that appear to us to have detracted from what should be ECGD’s primary focus, ie theprovision of competitive support to UK exporters. There was no longer a statement of high level objectivesthat ECGD must “provide the best service at the lowest cost, consistent with our [ECGD’s] accountabilityto the taxpayer for prudent and cost-eVective management”. Instead there was a new emphasis on providingsupport that was consistent with the Government’s other policies with respect to sustainable developmentand human rights.

19. This change in focus seems to us to be moving toward using ECGDas a provider of “aid” rather thanas a supporter of UK exports and jobs. Subsequent statements by Ministers relating to ECGD focusing onthe provision of support to “worthwhile” exports only increase our concern. The Secretary of State for Trade& Industry said in her foreword to the ECGD Yearbook, Global Exporter 2002-2003 “Focussing exportcredit guarantees on productive projects in these [poorer] countries is now enshrined as an underwritingtheme at ECGD . . .” and in the Global Exporter 2003–04 she added that the UK Government’s commitment to help poorer countries develop economic andsocial fabrics was reflected in “the drive to focus export credit guarantees on productive projects—aimsincorporated in ECGD’s Statement of Business Principles.” If these two statements mean that ECGDsupport to these poorer countries should be focused on productive projects then we would probably haveno argument with them. If however the intention is that ECGD support should only be focused onproductive projects in poorer countries then we would strongly dispute this. Malcolm Stephens, in his book“The Changing Role of Export Credit Agencies” (IMF 1999) states that there are a number of bad reasonsfor setting up an export credit agency and lists among them substituting for foreign aid, stating “Exportcredit agencies should be involved in supporting commercial credit, not providing aid.”We would certainlyagree that ECGD’s role is not as a provider of aid.

20. Rolls-Royce is supportive of the Business Principles adopted by ECGD in 2001. We also believe thatthe current exemption for aerospace and defence exports from the requirement to complete ImpactQuestionnaires should continue. The commercial aviation business is one of the most highly regulated inthe world in terms of operations, safety, noise and emissions and the completion of an Impact Questionnairefor commercial aerospace exports would add nothing to this.With regard to defence exports, we believe thatthese concerns may be adequately dealt with through the export licensing process.

21. It is diYcult to see how ECGD might be able to play a role in the “promotion” of sustainabledevelopment. As an export credit agency it is necessarily reactive rather than proactive, providing supportto exporters on request rather than promoting exports per se.

ECGD’s Relationships with Customers and Other Government Organisations

22. ECGD’s relationships with its customers have become increasingly strained over the four years sincethe Mission & Status Review. Much of this has been due to the uncertainty that has hung over ECGD andthe continued debate between HMT, DTI and ECGD as to its future. During this period ECGD lost manygood staVmembers and those who remained were put under increased pressure, particularly those workingon commercial aerospace deals post the events of 11 September 2001.

23. It is vital that ECGD is allowed a period of stability and certainty so that it can recover the confidenceof its staV and customers.We view the appointment of the ex-bankerGrahamPimlott as ECGD’s Chairmanas a positive move. However it is important that the new Chief Executive is appointed quickly and that bothChairman and Chief Executive are allowed a free hand to begin the process of rebuilding ECGD’sreputation as one of the most flexible and proactive of the world’s ECAs. ECGD’s business is long term andits performance, and that of the newChairman andChief Executive, must also be judged over the long term.They should not be forced to make inappropriate decisions based upon the short-termism that an annualvoted subsidy might otherwise impose upon them.



24. It is also worth reiterating that having ECGD provide indications of support, or simply having themvisit a customer alongside us in a sales campaign is often seen as demonstrating the support of the UKGovernment for the exporter and the potential customer. This can be immensely important in jurisdictionssuch as China and the UAE. We also consider that it would be very helpful if ECGD’s remit could be mademore pro-active to support exporters in the sameway thatUSExim’s objectives aremore overtly supportive.This could be used to good eVect in enhancing relationships with exporters and their customers in the manypublic arenas in which ECGD engages. However, at present we have concerns about the messages whichECGD signals in some of these public arenas without prior consultation with manufacturers— for exampleat a recent conference ECGD informed an audience of exporters and their customers that it would be seekingresidual value support from customers on A380s. Clearly, before any remit could be enhanced there wouldneed to be a robust consultation process in place.

25. Despite the comments made in paragraph 24, we find it hard to demonstrate to our customers duringsales campaigns that the UK government are fully committed to Rolls-Royce when ECGD continues toprovide support for USmanufactured engines in Airbus airframes. It seems to us to be wholly inappropriatethat ECGD cover should be given to the US engine manufacturers, GE and Pratt & Whitney, who have acapable and competitive export credit agency of their own, dedicated to providing support for US exportersand US jobs. The advent of the A380 programme presents the ideal opportunity for ECGD to take a robuststand to support UK exports and jobs to the exclusion of the US jobs secured by the sales of enginesproduced by the GE/P&W joint venture.

ECGD’s Relationships with the Commercial Financial Community

26. We have always regarded ECGD as being complementary to and not a substitute for commercialfinancing and we believe that ECGDworks extremely well alongside commercial risk-takers in many of ourtransactions. ECGD should be providing a consistent and competitive presence in what is a very cyclicalmarket, giving our customers the confidence to enter into long lead-time contracts for the delivery of highcost capital assets. This is a role that the commercial markets cannot fulfil, although as described inparagraph 14 above the commercial markets may well be able to provide the necessary financing at delivery.

27. Active portfolio management will play an essential part in recycling the limited capacity of ECGD’snew capital base. The reinsurance of ECGD’s risks is a role that the commercial markets should beencouraged to undertake and we believe that the reinsurance market would be receptive to this.

APPENDIX 16

Memorandum by the Society of British Aerospace Companies (SBAC)

Introduction

1. Aerospace is one of the UK’s success stories. Half a million people spread throughout the UnitedKingdom are involved in a sector that adds over £8 billion of value to the economy each year and accountsfor 7% of UK exports. The UK Aerospace industry is second only to the United States and has a strongpresence in the civil and military markets, with world-class companies in the airframe, engines andequipment sectors. The aerospace market is forecast to show strong growth over the next two decades andthe UK is well placed to take a good share of this growth market.99

2. Companies that operate in the Aerospace and Defence sectors are high-tech employers, creating highvalue-added jobs using a highly skilled work force. The impact of the increased business from the additionalexport sales as a consequence of ECGD support is acknowledged to enhance the sectors’ productivity.

3. However, if the UK Aerospace industry is to remain competitive in global markets, the presence of acompetitive, responsive and adequately funded Export Credit Agency (ECA) is vital. This has beenrecognised on several occasions by ministers. The Secretary of State for Trade and Industry told the Houseof Commons on 22 January 2004 that ECGD has a “very important role to play in supporting Britishmanufacturers in a number of diVerent world markets”. Further, she asserted that ECGD will go “fromstrength to strength in supporting aerospace and other parts of British manufacturing”. Notwithstandingthis and other reassurances from Industry and Treasury ministers, the SBAC is not convinced that this isthe universal view of HMG.

4. The SBAC is very concerned that increasingly the operation of ECGD has been described as a subsidyto British exporting. This is not only incorrect, but potentially very damaging to the standing of UK exportcredit support in the light of European Union, OECD andWTO law and conventions. The SBAC contendsthat rather than acting as a subsidy to British exporting, ECGD has been a net contributor to the Exchequerand through a number of independent reports, shown to have made a positive contribution to the UKeconomy. 100

99 Aerospace Innovation and Growth Team Report, Volume B, page 6.100 See, for example, National Economic Research Associates (NERA), Estimating the Economic Cost and Benefits of ECGD,January, 2003.



5. ECGD has been demonstrated to have a stringent and eVective approach to risk management at leastas good as that of a commercial financial institution and better than many of its peers. In the past, this hasbeen combined with an ability to respond eVectively and flexibly to exporters and their customers. Thecontinuing hiatus over the ECGD’s operational status over the last five years has undermined confidenceamongst ECGD customers that the UK will continue to have an eVective and competitive export creditagency. The uncertainty is already leading some customers to require manufacturers to provide financialcommitments to backstop the availability of export credit support. This, in our view, should not becompany business.

6. This submission reviews the current issues of most concern to major British exporters in relation to therecent and forecast development of ECGD.

The Importance of Competitive Export Credit Support

ECGD and the private market

7. ECGD and its fellow government supported ECAs occupy a crucial sector of the long-term financemarket which is not open to other private market players. While private sources of credit for sales are animportant vehicle for UK aerospace exporting, an eVective export credit agency provides a long-termconsistent presence in the market as well as undertaking to cover diYcult credit and country risks. It shouldalso be noted, that for many customers, even high-quality customers such as Emirates Airlines andSingapore Airlines, the absolute size of the financial requirement in purchasing large numbers of aircraftand engines can only be met with the assistance of a national export credit agency. The evidence of Rolls-Royce’s Trent campaigns suggests that approximately 80% of eligible commercial airlines have sought someform of comfort with regard to the availability of ECGD support at the outset of a marketing campaign.Of these around 25-35% actually utilise that support at delivery. It is worth noting that in A380 campaigns100% of eligible airlines have asked for ECGD support. Those customers will not enter into the long leadtime commitments to purchase large value assets without the backstop of an export credit facility. In manycases, the facility may not be used, but its presence as a potential “lender of last resort” makes a vitalcontribution to winning sales and retaining high value customers.

8. In aerospace markets, price is not the only issue, but also capacity and the ability to lend long term.Certainly within the regional airliner market, where there has been a significant reduction in the number ofcommercial lenders prepared to operate post 11 September, the capacity provided by ECGD is amuchmoresignificant issue than price. The interest shown by good quality airline credits in export credit finance is apositive indicator for ECGD. The SBAC contends that ECGD should continue to be able to take on aproportion of less challenging clients as a prudent measure to maintain a balanced portfolio. Although theprivate capital market has diYculty in coping with the long lead time, tenors and amounts associated withaerospace sales, it may ultimately play a role in assisting ECGD in recycling its capital base through activemanagement of its portfolio.

The importance of competitive premium rates

9. The UK’s interests in Airbus exports face their principal competitor in Boeing, supported by the U.S.Ex-Im. Ex-Im’s attitude to their objectives can be summarised in this statement made in February 2002 bytheir Chairman: “Our job in this changed world is to play the role of the first guys to hit the beach in theUS commercial eVort to penetrate risky emergingmarkets.We find opportunities, take risks and try to drawthe private sector in. In doing so, we foster stability and economic growth at home and abroad, and sustainwell-paying U.S. jobs . . . I will do everything in my power to make Ex-Im accessible and responsive to yourneeds.” Eduardo Aguirre—Ex-Im Bank Vice Chairman Address to US banks and Exporters, February2002.

10. This aggressive commercial approach is reflected in the diVerent levels of premium charged for recentairliner campaigns by Ex-Im and ECGD. In several recent Airbus campaigns ECGD has requested higherthan standard premia. This has had a direct impact on sales, with Airbus losing campaigns to its competitor,Boeing, as Ex-Im has been willing to provide financing support at the normal 3% flat rate. EvenwhenAirbushas secured sales ECGD has sought higher levels of premium than its European counterparts, thusincreasing the cost of financing Airbus aircraft versus the cost of financing Boeing aircraft. This penalisesAirbus customers and will negatively influence later decisions on aircraft purchase.

11. At a time when ECGD is increasing premium levels Ex-Im has taken a step to reduce them. For allsignatories of the Cape TownConvention Ex-Im reduces its premiumby one-third.101 This has already givenBoeing a competitive advantage over Airbus and has contributed to Boeing’s success in recent salescampaigns. ECGD needs to be competitive with Ex-Im to ensure a level playing field between Airbus andBoeing and needs to be in line with its European counterparts instead of consistently pushing premia levelshigher. The premium level is also an issue in the defence sector. In a recent campaign to upgrade two frigates

101 TheCapeTownConvention is theUnidroit Convention relating to harmonising the systemof taking, and registering, securityinterests in commercial aircraft and engines.



for the Romanian government, when Romania’s rating improved the French competition immediatelylowered their premium rates to the minimum for the new risk category. ECGD did reduce their rates uponrequest, but not to the minimum.

Support for Fixed Rate Export Finance (FREF)

12. ECGD should also be able to oVer facilities not available from the commercial market such as FREF.Industry is concerned that competitive provision of FREF by ECGD is under threat. FREF has particularvalue in supporting large defence contracts where customers are making a commitment to repay asubstantial loan over a period of 10-15 years. In these circumstances most customers require the choice tobe able to fix the interest rate for at least a part of that borrowing. If ECGD’s FREF rates are higher thanthe competition’s, this is immediately obvious. Some customers (for example, Chile) have a budget expressedin fixed future amounts, which absolutely require fixed rate finance. If ECGD charges a higher rate than thecompetition, then the present value of the customer’s budget payments will be reduced. SBAC is concernedthat current reluctance to support FREF on competitive terms would probably be made worse underTrading Fund restrictions.

ECGD as a Trading Fund

SuYciency of capital

13. Airbus sales and defence transactions are high value contracts. Many defence sales are valued at over£500 million. It remains to be seen whether the proposed level of capitalisation will be suYcient tounderwrite a regular flow of civil and military deals of this magnitude.

Rate of return

14. The level of return (ROCE) to be imposed upon the Trading Fund has risen steadily from a figure of6% real, originally quoted in 2000, to 8% real in the NERA Report in early 2003 and is now rumoured tohave been set at a level of 18% real. Industry has been assured that this is not something that they shouldbe concerned with as premium will remain at levels “broadly similar” to those charged today and a votedpayment will be used to top this up. The SBAC is concerned that this voted payment, which is only requiredbecause of the artificial level of ROCE imposed, will become branded as a “subsidy” and will be used byECGD’s detractors as evidence of the “cost” associated with ECGD support. In fact, as set out in para 17belowECGD support does not now constitute a subsidy; on the contrary, it confers significant benefits uponthe UK economy. The future availability of ECGD support cannot be left hostage to an annual votedpayment. All other national export credit agencies work to the OECD’s long-term breakeven guideline.Under current Trading Fund proposals ECGD will be significantly out of step with world standards, andthe concern is that UK exporters will as a result be disadvantaged.

DTI Budget

15. The SBAC is concerned that in transferring budgetary responsibility for the Trading Fund to theDTI, including liability for catastrophic losses, the demands of underwriting export credit support couldimpinge upon the DTI’s other activities in support of UK business. The aerospace industry is both a longterm and a cyclical one and ECGD must have the ability to ride out those cycles and trade through theinevitable periods of claims. It has been suggested that the DTI will have to allocate a portion of its finitebudget to ECGD. If this is the case the ROCEmust be set at a level such that it does not absorb an amountof DTI resource disproportionate to the risk and the DTI must have the ability to access additional capitalto trade through a downturn.

ECGD autonomy

16. The SBAC feels that it is somewhat paradoxical that HMG’s intent in changing ECGD’s status wasto free it from direct oversight by HMT yet the result of the current policy would be to chain it to an annualvoted payment and Treasury spending targets. There are already signs that ECGD has deferred decisionson diYcult cases. In general, Industry is still unsure about exactly howmuch delegated authority the ECGDwill possess under the proposed system of annual voting. The position as we understand it is far fromtransparent and makes it hard for both Industry and its customers fully to appreciate what conditions willshape business with ECGD in the coming years.



The Economic Benefits of ECGD Support

The NERA report

17. ECGD has been the subject of several independent studies including two reports from NERA anda KPMG analysis of ECGD’s risk management practices. The last NERA report on ECGD support waseventually published in March 2003. It confirmed that ECGD provided a net benefit to the UK economyof between £4.1 million and £23.1 million over what had been one of the most diYcult periods of ECGD’sexistence, 1992–2002, encompassing the “recession” following the first Gulf war, the financial crisis in Asiaand the immediate aftermath of the events of 11 September 2001. This is surely proof of the adequacy ofECGD’s premium regime and riskmanagement practises and demonstrates that ECGD support for exportsis not tantamount to subsidy.

Wider economic benefits

18. HM Treasury, when assessing the economic benefit attributable to ECGD support, takes intoaccount only ECGD’s trading profits and the salaries paid to its employees. This analysis ignores theincremental increases in jobs, local economic activity, private and corporate taxation and the largecontribution to theUK’s balance of tradewhich occur as a result of additional contracts beingwon by primecontractors, their sub contractors and suppliers as a result of ECGD support. The impact on the UKeconomy of a healthy Aerospace industry is significant. The large companies whose customers havetraditionally used the services of ECGD are, of course, the “routes to market” for their widely dispersednational supply chains, many of which are SMEs. This principle has not changed since the late 1990s. TheSBAC has data on 2,600 companies who supply directly to Rolls-Royce, Airbus UK, AgustaWestland andBAE SYSTEMS aerospace. This does not include UK suppliers to Bombardier Aerospace NorthernIreland.

The impact of customer defaults

19. Defaults on ECGD contracts are rare, and a tribute we contend to ECGD’s ability to assess riskprudently and over the long term. Airbus deals in Philippines and Jordan are examples of non-defencedefault and Indonesia was the last defence related default that the SBAC is aware of. Before that, Iraqdefaulted on loans made to it in the 1980s; these were in respect of civil and defence business. It should benoted that a default does not equate to a write oV. Rescheduled payments from Indonesia are being made.

ECGD’sMission and Developmental Objectives

20. While change in the face of events and failure should be expected, the aerospace industry argues thatthe original ECGDMission statement was clear and to the point, and eVectively summarises the appropriatetask of an ECA. This was: “to help exporters of UK goods and services to win business and UK firms toinvest overseas, by providing guarantees, insurance and reinsurance against loss”. The new statement is: “tobenefit the UK economy be helping exporters of UK goods and services to win business and UK firms toinvest overseas, by providing insurance and reinsurance against loss, taking into account the Government’sinternational policies”. The new statement adds, in the SBAC’s view, an extra overlay of policy-drivenrequirements that are both vague and distracting from an ECA’s primary function. The detailed list ofobjectives also relegates the active supporting of exports with due regard to prudent risk from first toseventh place.

21. The SBAC contends that the ECGD’s new set of objectives obscures the fundamental purpose of anexport credit agency, namely to support UK exports. Industry accepts that the provision of export creditshould conform to HMG policy generally in respect of the destination of defence equipment andappropriate forms of commercial activity in developing countries. Industry would also expect that an exportcredit agency should not be a burden on the taxpayer. However, the SBAC contends that export credit anddevelopment policy should have a clearly defined degree of separation. It seems again paradoxical that while“tied aid” has been roundly condemned as a means of underpinning economic development, the provisionof UK export credits may be in danger of becoming an implicit form of tied aid. Developing countries havethe right both to defend their sovereignty and to derive economic returns from running their own airlines.In practice, the latter is increasingly driven by private investment decisions with non-commercial prestigefactors playing a less prominent role than in the past.

22. Equally, while Industry respects the motives in writing oV the debt of the poorest countries, it wouldbe concerned if this were to have a damaging impact on ECGD’s trading fund capacity. If it is given a limitedcapital base and then expected to write oV debt, ECGD’s ability to support sales might be seriously impairedor called upon to make additional demands upon the Exchequer.

23. The aerospace industry fully concedes the importance of meeting environmental targets. Indeed, theindustry and its products are subject to increasingly stringent international regulation in respect of noise,emissions and safety. Economic pressures have also led to big improvements in fuel eYciency. As in1999–2000, the SBAC sees little value in second guessing international negotiation and agreement on



environmental regulations. This is a broader issue than the provision of export credit and UK Aerospace isplaying a major role in meeting challenging environmental targets. This commitment is underlined in therecent Aerospace Innovation and Growth Team report. However, the SBAC does credit ECGD innegotiating an eVective international agreement on environmental standards for ECAs. This was a goodexample of a measure designed to “level the playing field”. However, ECGD led by example, imposing thenew regime upon UK exporters a full twelve months ahead of its international obligation, causing UKexporters to comply with terms their competitors did not have to face during this period. In short,exemptions for aerospace and defence remain sensible and appropriate; adding another layer of bureaucracywould not add value.

24. In summary, the SBAC is concerned that in diluting ECGD’s basic mission, it will lose the ability toact as one of Industry’s key competitive weapons. TheUK tends to be less aggressive in backing the exporterand while rhetoric should not be taken as a sign of eVectiveness, our competitors seem more prepared tonail their colours to the mast, witness the stance taken by the Ex-Im chairman quoted in para 9 above.

Final Observations

25. The major UK aerospace exporters have a global presence and therefore an increasing ability andincentive to manufacture in locations other than the UK. Decisions with regard to manufacturing locationfor new and indeed existing programmes will be made taking into account the full package of supportavailable in a particular jurisdiction and a competitive, flexible and committed ECA will be a significantconsideration.

26. It is vital that there is an end to the uncertainty surrounding the future of ECGD. On 17 December2002 Patricia Hewitt announced that Ministers had finally decided that ECGD should proceed to TradingFund status and that work was “well under way” between ECGD andHMTreasury to agree the policy andobjectives, financial and regulatory frameworks and operational details of a Trading Fund. There is stillsubstantial debate between the parties however and the trial Trading Fund is unlikely to be implementedby the current deadline of April 2004. A date of July 2004 is now rumoured.

27. Such a protracted debate has done nothing to help UK exporters and may have already done muchharm to customer perceptions of the long-term commitment by the UK to eVective export credit support.While we have been repeatedly assured that the Government has no intention of removing export creditsupport, we still remain concerned that the eVects of what we believe to be the current policy would havethe same eVect.

28. The SBAC would still agree with the view that any fundamental change to the status and role ofECGD must only be undertaken in a multilateral context and any changes to ECGD should also bemeasured against their consequences for the international competitive position of British exporters.ECGD’s primary, perhaps sole mission should be to provide competitive support to UK exportingconsistent with a prudent and economically viable approach to risk and return.

29. The final points in the Select Committee’s 1999–2000 report remain as valid today as they were fouryears ago. The continued support of the UK government and the advantages conferred by the sovereignguarantee were “more important than the exact status of ECGD”. Any threat implied as much as explicit,to remove the State guarantee for export insurance would continue to put UK exporters at a “considerabledisadvantage”. Industry would still endorse unequivocally the view that the ECGD should be assessed onthe basis of autonomy, accountability, commercial freedom transparency and competitiveness. Of these, forIndustry, the last criterion should be paramount.

APPENDIX 17

Supplementary memorandum by the Society of British Aerospace Companies

ECGD AND UK AEROSPACE EXPORTS

1. It is diYcult to isolate any given part of the export process in order to assess its specific impact on UKexport sales. The provision of Export Credit Guarantees has historically played an important role inindividual sales campaigns and over time has made a significant contribution to the export success of UKAerospace. As the SBAC noted in evidence, a large proportion of export credits are not in the event takenup by customers; and in these examples, the provision of a backstop credit would act to assure customersrather than have a direct and measurable impact. However, as the NERA report has shown, the return tothe Treasury from ECGD all activity has been positive.

2. Even if the provision of export credits cannot be separated from the totality of the export process, theimportance of exporting per se to UK aerospace cannot be understated.



a. ABank of England paper showedAerospace, at 54.2%, to have the second largest export to domesticsales ratios of all UK manufacturing.102

b. In 2002, UKAerospace exported over £12 billion worth of civil andmilitary goods, with about two-thirds going to civil customers.103

c. Over the last decade, Aerospace has exported on average 63% of its total output. 104

d. TheUKAerospace industry has contributed on average £2.7 billion to the UKbalance of trade overthe last 10 years.105

e. Compared to five other manufacturing sectors which showed a deficit on the balance of trade,Chemicals, Medicinal Products, Machinery and Transport, Road Vehicles and Motor Cars,aerospace recorded a surplus on the balance of trade.106

f. In terms of export intensity, UK aerospace exports 63% of turnover, compared to the US at 56%and an EU average of 59%.107

g. UKworld civil market share is estimated to be in the region of 12%; the civil market growth forecastsuggests something in the region of 4–4.5% over the next 20 years worth an estimated $250 billiona year in sales. 108

3. Although there are very good prospects for long term growth in the civil market over the next twodecades, it will be highly cyclical with the possibility of shocks comparable to the aftermath of 9/11. In thiscontext, the provision of a competitive Export Credit Agency will be vital in leveling the peaks and troughsof commercial bank investment particular in times of crisis.

4. Although only a few aerospace companies benefit directly from ECGD support, the SBAC wouldunderline the importance of these companies as “routes to market” for their extended supply chains withseveral thousand indirect beneficiaries of ECGD support.

5. It cannot be emphasized enough that the link between export credit guarantees and UK exports is alsoa function of what is available from our major competitors. That is principally these days a function of whatis on oVer from Eximbank for US exporters. This has a particular resonance in both civil and defenceaerospace sales, especially when coupled with the other supports given by government to the US aerospaceindustry.

APPENDIX 18

Memorandum by Transparency International (UK)

Transparency International (UK)

1.1 Transparency International (TI) has been at the forefront of the anti-corruption movement since itwas formed in 1993. TI is a not-for-profit, independent, non-governmental organisation, dedicated toincreasing accountability of government and private sector and to curbing both international and nationalcorruption. It seeks to work in a non-confrontational way with governments, companies, developmentagencies, NGOs and international organisations to build coalitions to combat corruption. TI has made anumber of written and oral submissions to the OECD Working Party on Export Credits and CreditGuarantees (the OECD Group) with a view to strengthening best practice in deterring and combatingbribery on oYcially supported export credits.

1.2 TI’s international secretariat is based in Berlin and there are more than 90 national chapters aroundthe world (www.transparency.org). TI(UK) is the national chapter for the UK and was among the first tobe formed, also in 1993. TI(UK) has on a number of occasions met with staV of the ECGD to clarify itspractice in deterring and combating bribery relative to the OECD Group’s recommendations.

TI(UK)’s Submission and International Business

2.1 TI(UK) approaches this submission from the single issue standpoint of contributing to the reductionof international bribery. In so doing, it will respond primarily to the first issue listed in the Press Notice—the ECGD’s objectives and business principles. To some extent the submission also relates to the promotionof sustainable development and the ECGD’s corporate governance.

102 G. Cameron et al, Openness and its association with productivity growth in UK manufacturing industry, Bank ofEngland 1999

103 SBAC, UK Aerospace: Facts and Figures 2002: Chapter 10104 Ibid.105 Ibid.106 DTI, Aerospace Innovation and Growth Team Report, p39107 Ibid.108 Ibid.



2.2 TI(UK) focuses mainly on bribery in international business but is in no sense anti-business. It hasalways enjoyed support from major companies and professional firms operating internationally. Asignificant number of leading UK companies are corporate members of TI(UK). This linkage with UKcompanies enables TI(UK) to keep abreast of the problems that business encounters in the “front line” offoreign exports and investment. TI has been instrumental in producing and promoting “Business Principlesfor Countering Bribery” as a framework for companies to formulate codes and policies for responding tobribery and extortion.

2.3 TI(UK) is currently giving priority to special projects addressing corruption in the construction andengineering industry and the oYcial arms trade. These sectors were listed as those where the most flagrantcorruption was seen according to the TI Bribe Payers Index published in 2002. Papers published by theconstruction and engineering industry project oVer a wealth of suggested actions to assist in the eliminationof corruption from aVected transactions. Whilst the focus is on that industry, much of the advice readsacross and can apply to business in other sectors.

Progress since the 2000 Review of ECGD’sMission and Status

3.1 The ECGD should be commended for the considerable progress made in 2000 and subsequently.There is now a set of Business Principles the first one of which ensures the ECGD’s taking into account theGovernment’s international policies on various issues. As this first Business Principle already lists some keyareas where this applies (sustainable development, environment, human rights, good governance and trade)there is a case for including an express mention of combating corruption. This would reflect thegovernment’s increasing international commitments in this area. Apart from the OECD 1997 Conventionreferred to in the ECGD’s policies under Business Integrity, the UK in December 2003 formally ratified theCouncil of Europe Criminal Law Convention and signed the UN Convention against Corruption.

3.2 The objectives and policies through which the Business Principles are applied have wording thatcommits the ECGD to combating corrupt practices and to operating according to standards of probity andpropriety set out in the Civil Service Code. This cross-reference to the Civil Service Code could perhaps bemade more eVective in communicating the objective of combating corruption, if in the context of businessintegrity, it spelt out the key relevant points from paragraphs 5 and 8 of the Code.

3.3 The ECGD has endeavoured to meet recommendations of the OECD Export Credits Group and ithas devoted time and eVort to consulting with NGOs on issues of sustainable development and businessintegrity. However, it is understood that new, presumably strengthened, guidance on anti-corruptionmeasures has now been issued to ECGD’s customers but TI(UK) has not been consulted as to the content(see para 6.1 below).

3.4 There is an Export Guarantees Advisory Council, one of the functions of which is to monitor theECGD’s compliance with its Statement of Business Principles. The reports of the Council’s activities in thelast two Annual Reviews do not disclose whether interest has been taken in the objective of combatingcorruption. The concentration appears to be upon environmental and social issues.

Critical Changes since the 2000 Review of ECGD’sMission and Status

4.1 One critical change in the business environment in which the ECGD operates is that with eVect from14 February 2002, the bribery of foreign oYcials or businesses by a UK company or national is a crime,even though no part of the transaction takes place in the UK. This is the eVect of Part 12 of the Anti-terrorism, Crime and Security Act 2001. A crime is committed, whether the bribed party is in the public orprivate sector and regardless of the size of the bribe. This seriously increases the ECGD’s risk exposure alongwith that of banks and other project finance houses. Project contracts may have a number of diVerentgoverning laws, but the new law in the UK may result in contracts being more readily voided for illegalityin circumstances that were formerly not seriously considered. Moreover, it was the government’s expressedintention that the proceeds of corruption and the economic benefit that accrues to a company from foreignbribery could be seized and forfeited under the Proceeds of Crime Act 2002. The circumstances of each casewill determine whether an export credit agency would be liable on an indemnity where underlying contractsare voided. This business risk needs to be managed.

4.2 In the context of TI(UK)’s project on corruption in the construction and engineering industry, it hasproduced a report entitled “Corrupt Practices on Construction Projects—The Business Risk to Banks,Export Credit Agencies (ECAs), Auditors and Shareholders” (copy attached—this and all other publishedpapers in connection with this project are available on www.transparency.org.uk). The Report proposesactions to minimise risk to ECAs.

4.3 Quite apart from the criminalisation of foreign bribery, the business climate is changing. Numerousinternational conventions against bribery have been signed and are currently being ratified andimplemented. Spurred by massive corporate scandals in the USA and Europe, corporate governancerequirements are being constantly tightened. This is in parallel with increasing interest in ethical investment.Corporate reputation is seen as the single most valuable asset that a company has in terms of securing longterm shareholder value. The Combined Code requires listed companies in the UK to comply with theTurnbull guidance. Internal controls have to be adequate to support a company’s eVective and eYcient



operation and to enable it to respond to significant business, operational, financial, compliance and otherrisks. These risks include reputation and business probity issues. Reputation can be damaged by allegationsof bribery in another country, by the conduct of a subsidiary, associated or joint venture company.

4.4 The oYcial publications of government departments, for the first time, are now directed at letting businessknow of the extra-territorial eVect of Part 12 of the 2001Act. Trade Partners UK, who had for long been rathersilent on the issue, has, in association with the Home OYce and the DTI, issued leaflets and web-basedinformation drawing attention to the criminal oVences for overseas bribery, with their severe penalties. Itunequivocally states that “Bribery is bad for business. A culture of corruption is a disincentive to trade andinvestment and payment of bribes is unacceptable behaviour for UK companies or nationals. By upholding thelawand promoting transparency inbusiness activities,British companies enhance their own reputations and staVmorale”. It is vitally important for the future ofECGD that it continues to take this issue seriously andminimisesits own exposure by proportionate measures. There also needs to be a coherent policy across departments fortackling corruption.

ECGD Pivotal in Preventing the Export of Bribery

5.1 By virtue of its function and the business sectors that its operations support, the ECGD finds itself in apivotal position in aVecting the incidence of corruption in international business. ECGD approval of anapplication will, rightly or wrongly, sometimes be perceived as assuring a measure of propriety and “public”approval. ECGD is uniquely well placed to detect and prevent corruption and positively to influence corporatebehaviour to reject bribery in the conduct of foreign business. It is hoped that the newmeasures that the ECGDhas introduced to tackle corruption will advance considerably on existing practice and will make a positivecontribution to ECGD’s business.

5.2 The ECGD, through the OECDGroup, seeks parity of practice with other ECAs, hoping thereby not tobe at a competitive disadvantage with them. In the rapidly changing legal and business environments, it is notat all clear that a softer regime is a competitive advantage, save in the very short term. Business lost by virtue ofmaintaining lower anti-corruption hurdles is business that the ECGD would be better oV without.

5.3 The next two sections suggest ways in which ECGD anti-corruption practice can be further strengthened.

Improved Practice of ECGD in Countering Bribery

6.1 Bribes aremost frequently concealedwithin and represented as commissions payable to or through agents.Applications for ECGD support already contain requests for information that could lead to a conscientiousapplicant’s undertaking a measure of due diligence to ensure that no bribe is payable in connection with asupported transaction. There is also a non-bribery declaration. However, the form of the no-bribery declarationshould be significantly strengthened, so as to improve its impact on applicants’ behaviour by alerting them toECGD’s concerns and to counter unreasonable defences to recourse claims. The applicant should bear theresponsibility for failure of due diligence rather than ECGD. TI(UK) had hoped to propose changes inconsultationwith theECGDand last oVered to assist in this way inDecember 2003. In the event, it is understoodthat the ECGD’s revised anti-corruption practice has recently been sent to ECGD’s customers and that it willbe sent to TI(UK) next month as a definitive document. Given TI(UK)’s positive approach and understandingof business concerns (see para 2.2 above), this is a disappointingly closed response.

6.2 The practice of paying inflated agency commissions is such a common way in which bribes can be passedthat it merits considerably enhanced due diligence. This would minimise the risk of false declarations discussedin para 6.1 above. In the context of TI(UK)’s construction and engineering sector project (see para 2.2 above),it has published a report entitled “The Prevention of Bribery through Agency Commissions” (copy attached).TI(UK) has sent this to the ECGD with an oVer to discuss its contents and to consider its applicability incombating corruption from the perspective of the ECGD’s services. Obviously the same level of due diligencecannot be adopted on all applications. The appropriate level should take account of the amount of cover beingsought and the amount of agency commission(s) being paid.Due diligence byECGDwould therefore be appliedon a tiered basis. A limit of a given percentage of project cost or cover is an inappropriate measure to determinea level of due diligence. What matters in most cases is the actual amount payable relative to actual servicesprovided or to be provided by the agent.

Debarment and Suspension

7.1 There is wide recognition of the importance of a public financing institution’s being able to denyfuture finance or support for further applications from a company found to have bribed. Such debarmentfor a fixed and proportionate period, to include parent and subsidiary companies, is a potentially powerfulsanction in the anti-corruption armoury. This is the practice of the World Bank group of institutions andis recommended best practice of the OECDGroup. The ECGD claims that it is unable to apply this practiceon legal grounds. This is understood to be based upon the general principle of administrative law that theSecretary of State may not fetter his or her future discretion. It is said that this precludes automaticdebarment of a company that has been convicted of corruption or has been debarred from the services ofanother institution for these reasons and that such a practice could be challenged by way of judicial review.



7.2 Although the principle of administrative law is well understood, its consequence in this context issurprising. It suggests that an export insurance function is required to operate in a manner that is lessprudent than would apply to a commercial credit institution that would be free to decline future businessto limit its exposure to the consequences of an applicant’s criminal activities. It is suggested that the powersof the Secretary of State in the Export and Investment Guarantees Act 1991 are so widely expressed that“arrangements” could include a procedure for debarment or suspension. If that is really not the case, thenthe Committee could recommend that the legislation be amended to enable ECGD to come into line withOECD best practice in this respect.

Concluding Comment

8.1 TI(UK) is grateful for the extension of time in which to make this submission. It would be willing tooVer whatever further information or assistance might be found helpful.

Graham RodmellDirector of Corporate & Regulatory AVairsTransparency International (UK)

19 March 2004

Annex A

Report Four by Transparency International (UK):Anti-corruption Initiative in the Construction and Engineering Industry

Introduction

1. TI(UK) has published a series of Reports and Business Tools as part of its Anti-corruption Initiativein the Construction and Engineering Industry. These Reports and Business Tools can be freely downloadedfrom TI(UK)’s web-site at www.fransparency.org.uk

2. This document, “Corrupt Practices on Construction Projects—The Business Risk to Banks, ExportCredit Agencies, Auditors and Shareholders”, gives an example of a major construction project which isprocured by a bribe paid by the companies building the project, and the contract for which is terminated bythe client for illegality once the bribe is discovered. The resultant business risks to the banks and export creditagencies involved in the project, and to the companies’ shareholders and auditors, are then assessed. Actionsare proposed which may assist these parties minimise these risks.

3. References in this document to “C&E companies” are references to construction and engineeringcompanies, and to consulting engineering firms.

Example of a ProjectWhich is Procured by a Bribe, and the Contract forWhich is Terminated for

Illegality

4. (The following example is hypothetical. However, it utilises genuine market practices and conditions,and the analysis of the example can easily be applied to real experiences.)

5. An international consortium submits a proposal to a government in a developing country to build,own and operate a power station. There is no competitive bid involved. The proposal is submitted upon theinitiative of the consortium.

6. The consortium comprises among its members:

— an investment fund;

— a company which owns and operates power stations in other countries;

— a company which manufactures and erects power generation equipment;

— a contractor which undertakes civil and building works.

7. The proposal to the government is based on the following parameters:

— A company would be formed which would be the owner of the power station (“Owner”). Theshareholders in the Owner would be the four members of the consortium, together with someadditional outside investors.

— A company would be formed which would design, supply, erect and commission the power station(“Contractor”). The shareholders in the Contractor would be the power generation equipmentmanufacturer and the civil and building works contractor.

— The Owner would sign a contract with the power utility in the developing country which wouldrequire the utility to purchase all electricity which the power station is capable of generating for afixed fee per kwh.

— The government of the developing country would guarantee the utility’s purchase obligationsunder the power purchase agreement.



— The Owner would place a contract with the Contractor to design, supply, erect and commissionthe power station.

— The Owner would finance the construction of the power station by the following means:

— 30% of the cost would be contributed by equity invested into the Owner by the shareholdersin the Owner.

— 70% of the cost would be borrowed from banks.

— The bank borrowing would be secured by an export credit guarantee issued by the exportcredit agencies in the home countries of the power generation equipment manufacturer andthe civil and building works contractor.

8. The government is receptive to this proposal. However, the Minister of Energy will not approve theproposal without a bribe of US$30 million being paid by the consortium into an oVshore bank account. Allfour consortium members agree that this bribe should be paid. They agree that the bribe will be included inthe construction cost of the project, and will be paid by the Contractor through an agent who will act as anintermediary in paying the bribe.

9. The construction cost of the power station is US$200million. This is significantly higher than it shouldbe for the following reasons:

— The bribe of US$30 million is included in the price.

— The power generation equipment manufacturer and the civil and building works contractor areeach required to contribute US$ million of equity into the Owner. They are unwilling to carry thisinvestment risk, as they are contractors, not investors. Therefore they include an additionalUS$10million in the construction price to cover their equity investment

— The project is not subject to competitive bid. Therefore, the prices charged by the contractors aresignificantly higher than they would be with a competitive bid.

— In order to make the project financeable by the banks, the Contractor is required to assume moreonerous completion and performance guarantees than it would normally accept. It thereforeincludes a provision for part of these guarantees in its price.

— The export credit premium is 8% of the 70% of the contract price which is being financed by thebanks. Therefore, the premium will be charged not only on 70% of the genuine constructioncomponent, but also on 70% of the bribe, and on 70% of the amount included by the contractorsin the price in respect of equity and provisions.

10. The operating cost of the power station will be significantly higher than it should be for thefollowing reasons:

— The interest rate charged by the banks on the loan is higher than it would be for ordinary sovereigndebt, as the banks have taken into account the greater risks involved in a private sector project.

— The construction cost is higher than it should be, and therefore the interest charges are calculatedon a higher base cost.

— The equity investors require a higher rate of return on their investment than a government utilitywould expect to receive.

11. The Owner is to recover its construction and operating costs through its charge to the utility for eachkwh of power available for generation. The higher costs which need to be recovered will result inevitably ina higher cost per kwh than would have otherwise been the case.

12. The projected high cost per kwh does not pose a problem to theMinister of Energy, as he will receivea bribe of US$30 million upon commencement of construction of the project, whereas the charge per kwhwhich will need to be paid by the utility for electricity available for generation will only be paid uponcompletion of the power station. This will be three years after commencement of the project. The Ministermay not be in oYce at that stage. In any event, the money will have been paid to him into a secret oVshorebank account.

13. The Minister arranges the necessary Government approvals for the project, and arranges for theutility to sign the power purchase agreement, and for the Government to sign the guarantee. In doing so,he needs to share the bribe with various other oYcials.

14. It is agreed by the consortium members that the bribe will be paid by the Contractor, and that thecost will be included in the contract price. The bribe is concealed by the use of an agency agreement. Thisagreement attempts to give a commercial justification for the appointment of the agent, in that it lists thetasks which he will allegedly perform, including provision of local oYce, secretarial and translation servicesetc. It places an obligation on the agent to “assist the contractor in obtaining an award of the contract” butmakes no mention of the agent’s contacts in the Ministry. It contains termination and arbitration clauses.It refers to the amount and the currency of the commission, and the timing of the payment, but does notrefer to its destination. Instead, it places an obligation on the agent to notes the contractor in writing as towhere the payment should be made. In reality, the agent will provide none of these services. His sole role



will be to receive payment from the consortium and to pass it onto the Minister. The senior managementof all parties involved in the consortium are aware of this arrangement, and are aware that the agencyagreement is a sham created to give an artificial commercial justification for the bribe.

15. The project commences. The bribe is paid by the Contractor to the agent in US$ into an oV-shorebank account The agent passes the payment onto the Minister after deduction of the agent’s share. TheMinister pays the other oYcials their share.

16. The project is completed, and the power station becomes available to produce electricity.

17. By the time the project is completed, the government in the developing country has changed. TheMinister is replaced. The new government has been elected on an anti-corruption platform. Rumours havecirculated for some time about possible corruption in connection, with the power station. The newgovernment appoints forensic investigators to assess the project. The investigators’ preliminary report statesthat the cost per kwh which is payable under the power purchase agreement is nearly double the generationcost of equivalent power stations in other countries. A police raid on the ex-Minister’s house discoversrecords which show that he holds oV-shore bank accounts. The government applies under new anti-moneylaundering regulations for court disclosure orders against the bank, and traces the history of the paymentfrom the Minister’s account to the agent’s account to the Contractor’s account.

18. The utility terminates the power purchase agreement on the basis that it was procured by a bribe, andwas therefore voidable on the grounds of illegality. As such, the utility had no obligation to purchase anypower from the power station. The government terminates the guarantee on the same basis. The powerstation therefore lies dormant.

19. The terms of the loans required interest payments to the banks to commence once the power stationhad been completed. The Owner is receiving no revenue from the power station, and therefore cannot paysuch interest. The banks therefore call in the receivers who take over the management of the Owner. Thereceivers negotiate with the utility that the utility will purchase the power at a market rate which is half thepreviously committed rate. The power station starts generating.

20. The Minister of Energy and other recipients of the bribe are arrested in the developing country, andare found guilty of receiving bribes. They are imprisoned for between three and seven years. Some of thebribe money is located in oVshore banks accounts, frozen, and then recovered by the developing country.However, much of the bribe money has been spent or dissipated, and is, in practical terms, irrecoverable.

21. The government in the developing country commences criminal proceedings against the fourconsortium members who initiated the project. The court decides that all four consortium members wereeither aware that the US$30 million was paid as a bribe, or knew that it probably would be paid as a bribe.It declares the agency agreement a sham of which the sole purpose was to provide an artificial commercialjustification for the bribe. Although the agency agreement had been signed and the bribe paid by theContractor, which was a separate legal entity, the court finds that all four consortium members areimplicated in the transaction as aiders and abettors, or co-conspirators. The court fines each consortiummember US$1million. It also declares all profit and overhead recovery derived by each consortiummemberfrom the project as proceeds of a crime, and therefore confiscates these amounts, which totalled US$25million, under the locally applicable anti-money laundering regulations.

22. As a result of the evidence produced at the criminal trial of the consortium members, it is decided toprosecute the individual directors of the consortium members who are implicated in the transaction. Theseinclude the chief executive oYcers, finance directors and commercial directors of each of the consortiummembers. These individuals therefore refuse to travel to the developing country so as to avoid prosecution.There is no eVective extradition treaty between the developing country and the home countries of theindividuals. The prosecution authorities in the home countries of these individuals therefore decide toprosecute them in their home countries, as the law in each of these countries has changed, as a result of theOECDanti-bribery convention, to permit prosecution in the home country for bribery evenwhen all aspectsof the oVence have taken place overseas. The individuals are convicted in their home countries, and areimprisoned for periods of between one and seven years.

23. As a result of the convictions, the individuals are disqualified as directors, and lose their jobs. Theyare struck oV as members of their professional associations.

24. As the Owner, in receivership, has re-negotiated the power purchase agreement to result in a tariV ofhalf the previously agreed amount, the Owner can no longer repay the banks the full amount of the debtand accrued interest owed to the banks. The banks calculate their loss in net present value terms at US$50million. The banks look initially for indemnity from the export credit agencies. However, the agencies refuseindemnity on the basis that the underlying contract had been procured by an illegal act, and the export creditcover had been oVered on the basis of warranties from the applicant that no bribes would be paid.

25. The banks therefore sue the consortium members for recovery of US$50 million, on the basis thattheir criminal actions in paying a bribe had led to the banks suVering the loss. They use the evidenceproduced in the criminal trials as the basis of the civil case. The banks win the court action, and theconsortium members are required to indemnify the banks to the extent of US$50 million, plus legal costs.The consortiummembers cannot aVord this level of damages, and the banks accept US$30million paid overa period of years in full settlement.



26. As a result of the criminal convictions for bribery, each of the four consortiummembers is blacklistedfrom all internationally financed projects for a period of three years. This results in an enormous loss ofpotential future business for the four consortium members. As a result, they cut back considerably ontheir staV.

27. The combination of the criminal convictions, confiscation of profits, civil damages, blacklisting andimprisonment of directors results in a 75% drop in value of the share prices of two of the consortiummembers, and the receivership of the other two. They are all public companies, the shares of which arepredominantly held by pension and investment funds. These funds seek to recover their losses from theauditors, on the basis that the auditors failed to exercise proper due diligence, in that the US$30 millionpayment to the agent was so material that it should have been investigated by the auditors, and thatreasonable enquiries by the auditors would have discovered that the agency agreement which shielded thepayment was probably a sham. The auditors settle the action for a lower amount without admitting liability,as they did not wish a legal precedent to be set in this respect.

28. The result is that everyone loses:

— the consortium members are blacklisted for three years from internationally financed projects;

— two of the four consortium members go into receivership;

— two of the consortium members lose 75% of their value;

— the outside investors in the Owner lose their investment which is taken over by the banks;

— the banks have to settle for a lower payment than their actual loss;

— the auditors have to pay compensation to shareholders in the consortium members;

— the shareholders in the consortiummembers accept a settlement from the auditors of less than theiractual loss;

— the developing country eventually receives power at a reasonable price, but has a long periodduring which the power station is not generating while the dispute is resolved, and therefore losesdevelopment opportunity;

— as a result of the negative publicity surrounding the project, the developing country has diYcultyfinancing other projects, and the scandal undermines political stability;

— some directors are imprisoned;

— the recipients of the bribe are imprisoned;

— all those involved suVer considerable reputational risk.

29. The above analysis assumes that the export credit agencies are able to avoid liability to the banks onthe basis that the underlying contract had been procured by an illegal act. However, it may be that the termsof the indemnity by the export credit agencies to the banks require the export credit agencies to indemnifythe banks even in this situation. In this case, the banks would be indemnified by the export credit agencies,and the export credit agencies would bear the resultant losses attributed to the banks in the above example.The losses may therefore be borne by the tax payers in the home countries of the export credit agencies, asexport credit agencies are normally guaranteed by the home country’s government.

30. The possibility of criminal liability for members of the staV of the banks and export credit agenciesneeds also to be considered. It is so widely known that agency agreements are commonly used to concealbribes that banks and export credit agencies are on notice of this situation. Failure to undertake adequatedue diligence in this regard could expose banks, export credit agencies and individual managers and oYcersto the accusation that they were aiding and abetting bribery by permitting the bribe to-be covered by theproject finance and export credit guarantees.

Assessment of the Risks

Is the above scenario possible?

31. The above scenario is clearly possible. Numerous private sector infrastructure projects have been, orare being, built around the world. Several of these have had suspicions of corruption reported in the press.Bribery is common in international infrastructure projects. The structure described above would sharecommon factors with many projects.

32. Although the above example involves a build-own-operate project, similar (although less complex)parameters would apply to a project procured through more standard methods, where the end user is theproject owner.

33. See TI(UK)’s “Report Two—Examples of Corrupt Practices” (www.transparency.org.uk) for 15further examples of corruption on construction and engineering projects.



Can a contract be terminated if a bribe has been paid?

34. Whether a contract can be terminated when a bribe has been paid would normally depend on the lawsof the country in which the project is being built, and the governing law of the contract. However, manyjurisdictions have the legal concept that a contract which has been procured through an illegal act (whichwould normally include a bribe) is either void from commencement, or can be terminated by the aggrievedparty, who would then be entitled to claim damages. This is true both of legal systems in developingcountries, and under English and other laws typically chosen to govern such contracts. Many contracts alsocontain an express clause entitling termination in the event of a bribe.

35. Therefore, if a client places a contract with a C&E company and a bribe is paid in connection withthe contract award, the client would probably be entitled to terminate the contract and claim damages. Evenif the bribe was paid to a representative of the client, the representative, by committing a criminal act, wouldprobably be acting outside the scope of his authority from the client. The consequences of his criminal actwould probably not be binding on the client.

Can theC&E companywho has paid a bribe be liable for the cost consequences of the contract being terminated?

36. Whether a C&E company who has paid a bribe can be liable for the cost consequences of the contractbeing terminated would depend on the applicable law and on the terms of the contract. However, it is likelythat most legal jurisdictions and contracts would require a party which has undertaken an illegal act tocompensate the aVected parties for their resultant loss. This loss could be extremely significant, and couldinclude the losses to the client, joint venture and consortium partners, sub-contractors, banks and investors.

Can a C&E company be liable for a bribe paid by the C&E company’s agent?

37. It is quite common, particularly on large international infrastructure projects, for a C&E companyto appoint a local agent. The agent will normally be paid a commission if the C&E company is awarded theproject. The whole or part of the commission is often used to bribe an influential person working for theclient or the government of the client’s country, so as to secure the award of the project to the C&E company.In some cases, the agent is appointed by the C&E company primarily to pay a bribe. It is paid a sum ofmoney which is significantly disproportionate to the legitimate scope of work which the agent is contractedto carry out. Often this money is paid in foreign currency into an oV-shore bank account. There would beother circumstances, however, where the C&E company would appoint an agent with the genuine intentionthat the agent only carry out legitimate services. In this case, the agent may still pay a bribe in connectionwith the C&E company’s scope of work, but without the C&E company’s knowledge, and against the C&Ecompany’s wishes.

38. Civil liability would depend on the applicable law in question, and on the terms of the contract.However, a contract is often either void, or can be terminated, in the event that a bribe has been paid inrelation to the contract award. Therefore, if an agent pays a bribe to a representative of the client, and theclient terminates the contract as a result of the bribe, and/or claims damages, then the contractor may beliable for the consequences, even if it had no knowledge of the bribe.

Can a C&E company be liable for a bribe paid by the C&E company’s joint venture or consortium partner?

39. In situations where individual companies do not have the expertise or financial strength to constructthe entire project, companies may form a consortium or joint venture to construct the project. In thissituation, one of the consortium or joint venture partners may pay a bribe to a representative of the clienton behalf of all the partners. This decision may be taken with the consent of all the partners, and the costof the bribe may be concealed in one partner’s scope of work, or may be reimbursed to the paying partnerby the other partners bymeans of a leadership or other fee. In other cases, the decision to bribemay bemadeby one partner without the knowledge of the other partners, and against the wishes of the other partners.

40. As far as civil liability is concerned, the partners in a joint venture or consortium are normally jointlyand severally liable under the contract to the client. The outcome would depend on the applicable law inquestion and on the terms of the contract. A contract is often either void, or can be terminated, in the eventthat a bribe has been paid in relation to the contract award. Therefore, if a joint venture or consortiumpartner pays a bribe to the client, and the client terminates the contract as a result of the bribe, and/or claimsdamages, then all the joint venture or consortium partners may be liable to the client for the consequences,even if they had no knowledge of the bribe.

Can a C&E company be liable for a bribe paid by the C&E company’s sub-contractor?

41. It is unlikely in most situations that a sub-contractor to a C&E company would pay a bribe to arepresentative of the client in relation to the award by the client of a contract to theC&E company.However,this would be possible in the case of a major sub-contract, where the likelihood of the sub-contractorobtaining the work from the C&E company depends on the client awarding the contract to the C&Ecompany. In some cases, the C&E company and its sub-contractor may agree that the bribe will be paid by



the sub-contractor, and would be included in the sub-contract price. The intention may be that the bribewould be better concealed in the books of the sub-contractor than in the books of the C&E company. Inother cases, the sub-contractor may pay the bribe without the knowledge of the C&E company, and againstthe wishes of the C&E company.

42. As far as civil liability is concerned, the C&E company is normally liable under the contract to theclient for. the acts of its sub-contractors. The outcome would depend on the applicable law in question andon the terms of the contract. A contract is often either void, or can be terminated, in the event that a bribehas been paid in relation to the contract award. Therefore, if a sub-contractor pays a bribe to the client inrelation to the contract award, and the client terminates the contract as a result of the bribe, and/or claimsdamages, then the C&E company may be liable to the client for the consequences, even if it had noknowledge of the bribe.

If the above termination scenario is possible, why is it not occurring more frequently?

43. There are many reasons why the above scenario (a contract procured with a bribe being terminatedfor illegality) is not occurring more frequently. Until fairly recently, corruption was accepted by bothdeveloping and developed countries as the status quo. For example:

(a) It was not a crime in many OECD countries for a bribe to be paid overseas.

(b) Bribes paid as “necessary” agent’s commissions were oYcially tax deductible in some OECDcountries.

(c) Aid agencies, export credit agencies and international financing organisations regarded it as theirprimary role to facilitate exports and international development. Bribes were regarded as anecessary lubricant to achieve these ends.

(d) Bribery was regarded in business as an essential and normal part of doing business.

(e) International arbitrators and courts were frequently unwilling to make adverse findings on thebasis of alleged bribery.

44. This has now changed.

(a) Several organisations have introduced conventions against corruption (eg UN, OECD, Councilof Europe, EU). These require signatory countries to criminalise bribery, and to take eVectiveenforcement action.

(b) It is now a crime in the UK for a UK corporation or national to pay or receive a bribe, even if theoVence takes place entirely outside the UK. Similar laws now apply in other OECD countries.

(c) Corporate governance requirements and the trend towards ethical investment demand increasingstandards of integrity.

(d) Banks, export credit agencies, auditors and shareholders are beginning to appreciate thatcorruption introduces unacceptable elements of catastrophic risk

(e) Money-laundering laws in most financial centres require the reporting of suspicious transactions,and permit the freezing of assets.

(f) Arbitrators and courts are becoming more aware of corruption-related issues.

45. Previously, the consequences of the catastrophe scenario outlined in paragraphs 4 to 30 above weretoo severe for anyone to contemplate. If a client in a developing country considered terminating a contractas a result of a bribe, the developing country may have come under serious pressure from developed countrygovernments and international financing organisations to fulfill the contract (even though possibly procuredby a bribe) so as to ensure future aid and finance to that developing country. The developing country mayhave been advised to “uphold contract provisions” even though these were illegally procured. This type ofpressure is now probably illegal, as a result of the conventions referred to above, and subsequent lawchanges. Any organisation or person trying to persuade the developing country to overlook the bribe andits consequences could be guilty of aiding and abetting a criminal oVence, or of attempting to pervert thecourse of justice.

46. Many businessmen are still not fully aware of the above changes, or of their consequences. Businesspractice has in many cases not yet caught up with the changes. International infrastructure projects takeyears to develop, and years to build. Many projects currently under construction may have been procuredby bribes agreed and paid prior to the recent changes in law and practice. Many projects agreed since thelaw changes may have been procured through bribes, either because businessmen have been unaware of thelaw changes, or were reckless as to the potential consequences.

47. It is inevitable that existing and new projects will now come under far greater scrutiny. Publicity andpressure in the anti-corruption arena is growing rapidly. Individuals (even if not directly involved in thepayment of the bribe) can no longer aVord to cover up bribery oVences due to the risk that they will beimplicated as aiders and abettors. Government staV should no longer be able to pressurise a developingcountry government into overlooking a bribe, and therefore upholding an illegal contract. UKGovernmentoYcials are now required to report a suspected bribe committed by UK nationals or organisations to theappropriate UK authorities.



48. This changed situation unquestionably places increased business risks on the parties involved. Theserisks must be dealt with now. They cannot be ignored. The primary responsibility falls on the C&E companyto ensure that it does not pay a bribe, and that a bribe is not paid by its agents, joint venture and consortiumpartners, and sub-contractors. However, it is clear from the above example that the following partiesconnected with the C&E company are also at grave risk in the event that a bribe is paid:

— banks lending money to the C&E company, or to the relevant infrastructure project;

— export credit agencies providing guarantees in relation to the project;

— auditors of the C&E company;

— shareholders in the C&E company.

It is imperative therefore that these parties take the necessary actions to minimise these risks.

Suggested Actions

49. TI(UK)’s “Report One—Introductory Report” (www.transparency.org.uk) makes numerousproposals for actions which could be taken by the various sectors in the C&E industry to reduce corruption.The following brief suggestions are specific to banks, export credit agencies, auditors and shareholders. Asstated above, the following parties are significantly at risk from corrupt practices.

Banks and Export Credit Agencies

50. Banks lending money, and export credit agencies providing guarantees, whether to a project, or tothe C&E company constructing the project, should only agree to provide finance or guarantees if the C&Ecompany has implemented an internal ethical code which commits the C&E company to a strict anti-corruption policy. (See TI(UK)’s Business Tool “Business Principles”) (www.transparency.org.uk).

51. Banks and export credit agencies need to increase their vigilance and due diligence, so that corruptpractices are avoided in relation to C&E companies or projects which they are funding or guaranteeing. Inparticular, when deciding whether or not to finance or guarantee a project, banks and export credit agenciesneed to ascertain whether agents or other intermediaries are being appointed by the C&E company, or bythe C&E company’s parent, subsidiary or associated companies, consortium or joint venture partners, ormajor sub-contractors. The banks and export credit agencies then need to try to find out whether or notthese agents could be used as conduits for the payment of a bribe. TI(UK)’s “Report Five—The Preventionof Bribery Through Agency Commissions” (www.transparency.org.uk) gives an example of how an agencyagreement is used to conceal the payment of a bribe, summarises the damage and risks imposed by bribery,and provides recommendations as to increased due diligence which could be undertaken. TI(UK)’s BusinessTool, “Agency Due Diligence” (www.transparency.org.uk) contains an Agency Questionnaire andAssessment of Agency Questionnaire. It is designed to be used by banks, export credit agencies and auditorsto assist them in assessing whether the agent is a legitimate agent appointed to undertake genuine servicesfor a reasonable fee, or whether the agent has been appointed to act as a conduit for the payment of a bribe.

52. Banks and export credit agencies should require the use of project integrity pacts which oblige theparticipants in a project to act with integrity. The integrity pacts are policed by an independent assessor andcontain enforceable sanctions. (See TI(UK)’s “Report Six—Integrity Pacts”; and TI(UK)’s Business Tools“Integrity Pact—Project—Pre-qualification and Tender” and “Integrity Pact—Project—Execution”)(www.transparency.org.uk).

53. Banks and export credit agencies should deny finance or credit support, for a specified length of time,to C&E companies which have engaged in corrupt practices (blacklisting).

54. Banks and export credit agencies should report corrupt practices to the authorities, and to anyapplicable trade or professional association.

Auditors

55. Apart from a C&E company’s management, no-one is in a better position to assess the legality of theC&E company’s actions than its auditors. They in theory have unfettered access to a C&E company’s staVand records. If an employee believes that there is a realistic chance that corrupt activities will be uncoveredby the auditors, and that the auditors will report such activities to the authorities for prosecution, then thatemployee is far less likely to participate in these activities. The auditors therefore become a very importantpreventive mechanism. Auditors are already under pressure to increase their vigilance after Enron,Worldcom, Tyco, Parmalat and other scandals. They need to increase their due diligence in relation topayments or receipts which could be bribes. See TI(UK)’s “Report Five—The Prevention of Bribery ThroughAgency Commissions” and TI(UK)’s Business Tool “Agency Due Diligence” (www.transparency.org.uk).

56. Auditors should report corrupt practices to the authorities, and to any applicable trade orprofessional association.



Shareholders

57. Themajority of shares in listed companies are held by investment funds. They can have a huge impacton the way companies are run. They are the owners of the companies. The majority of them hold the shareson trust for small private investors and pensioners.

58. Investment funds should:

(a) question the boards of C&E companies in which they invest to see whether the companies are atrisk from the consequences of corrupt practices;

(b) refuse to invest in C&E companies which do not operate eVective anti-corruption policies.

Disclaimer

59. The comments in this Report on the law and its consequences are neither comprehensive norcomplete, and should not be relied on. They are intended merely to give indicators as to possibleconsequences. Independent legal advice should always be obtained. The proposed actions and BusinessTools referred to in this Report are suggestions only, and will need to be adapted to the specificcircumstances of each case. Neither TI(UK) nor the author can accept responsibility for the consequencesof any action claimed to be taken in reliance on the contents of this Report or Business Tools.

Comments on this Report

60. TI(UK) welcomes comments on this Report, and suggestions for its improvement. These should besent to neill.stansburywtransparency.org.uk

March 2004

Annex B

Report Five by Transparency INternational (UK):Anti-corruption Initiative in the Construction and Engineering Industry:

The Prevention of Bribery through Agency Commissions

Author: Neill Stansbury—March 2004

1. Section 1—Introduction

1.1 TI(UK) has published a series of Reports and Business Tools as part of its Anti-corruption Initiativein the Construction and Engineering Industry. These Reports and Business Tools can be freely downloadedfrom TI(UK)’s web-site at www.transparency.org.uk.

1.2 This Report, “The Prevention of Bribery through Agency Commissions”, is designed to assist banks,export credit agencies and auditors in preventing or identifying the use of agents’ commissions to pay bribes.This document:

(a) gives in Section 2 an example of how an agency agreement is used to conceal the payment of a bribe;

(b) summarises in Section 3 the damage and risks imposed by bribery;

(c) provides in Section 4 recommendations as to increased due diligence.

2. Section 2—Example of a Bribe Paid Through an Agency Agreement

2.1 (The following example is example 1.1 from TI(UK)’s “Report Two—Examples of CorruptPractices” which contains 15 examples of corrupt practices in the construction and engineering industries(www.transparency.org.uk))

A contractor wishes to bid for an industrial plant in an overseas country. The owner of the plant will bethe overseas Government, and the contract will be placed by that Government’s Ministry of Industry.

The contractor submits a pre-qualification application, and is accepted as being qualified to submit atender. Shortly after pre-qualifying, the contractor is telephoned by an individual whom the contractor doesnot know. The individual explains that he has excellent contacts in the Ministry of Industry, and can helpthe contractor be awarded the contract. A meeting is arranged.

At the meeting, the individual names, on a “confidential” basis, his contacts in theMinistry. TheMinisteris married to the sister of his wife. The Minister, he explains, has the absolute final say over the award ofthe contract. He further explains that the Minister nurses grievances against the contractor’s country, andas a result, some considerable eVort must be placed into persuading the Minister of the benefits of thecontractors bid. He can help in this regard. The Ministry’s target price for the contract is US$50 million,and the individual will require a commission of 5%of the contract price payable in advance into an oV-shorebank account in return for his assistance.



The contractor receives two other approaches from other individuals who also claim good contacts inGovernment. Having met the two other individuals, the contractor chooses the first individual. Thecontractor’s attempts to reduce the commission and to change the payment currency, timing and destinationfail. However, the contractor does succeed in linking the timing of the payment to receipt by the contractorof the contract down payment from the client.

The contractor requests its in-house lawyer to draft an agency agreement for the individual. Thisagreement attempts to give a commercial justification for the appointment of the agent, in that it lists thetasks which he will allegedly perform, including provision of local oYce, secretarial and translation servicesetc. It places an obligation on the agent to “assist the contractor in obtaining an award of the contract” butmakes no mention of the agents contacts in the Ministry. It contains termination and arbitration clauses.It refers to the amount and the currency of the commission, and the timing of the payment, but does notrefer to its destination. Instead, it places an obligation on the agent to notify the contractor in writing as towhere the payment should be made.

In accordance with the internal procedures of the contractor, this agency agreement is approved in aboard meeting involving the Chief Executive, the Commercial Director, the Sales Director, the ProjectDirector and the Finance Director. It needs to be approved at board level due to the amount of thecommission. Furthermore, the appointment of the agent falls within each of the individual’s scope ofresponsibility. The Sales Director needs to approve it, as the appointment of a sales agent is a sales-relatedfunction. The Commercial Director needs to approve it, as the agency agreement is a legal document. TheProject Director will have the commission as a project cost within his project budget. The Finance Directorwill need to arrange payment of the agent. Each of these individuals knows that the agreement is a sham,and that the US$2.5 million commission will be used to bribe the Minister and other parties. Even thoughthe agent has not expressly said to them “I will use the commission as a bribe”, they are aware that therecould be no other explanation for the requirement to pay such a large amount of money in foreign currencywhen no legitimate goods or services are being provided in return. They also selected the agent on the basisof his high-level contacts. They know that they will never in reality use any of the supposed translation andsecretarial services referred to in the agreement, as they will appoint this type of staV directly in their siteoYce. They also know that such services could be obtained for vastly less than US$2.5 million. They alsoknow that payment for these local services, if genuine, would be made in the country concerned in the localcurrency, and would not be paid into an oV-shore bank account. They are all aware, or at the very least,strongly suspect, that the agency agreement is purely a sham, and that it will be used to deceive the auditors,financing banks and the export credit agencies as to the purpose of the transaction, and that it would be usedto shield the contractor from allegations of impropriety if they ever were to emerge. They are privately veryuncomfortable with the arrangement, but they believe that there is no alternative, as the contractor standsno chance of winning the project unless this commission is paid Jobs are at stake in the contractor’smanufacturing plant. They justify the practice to themselves on the basis that “It is part of the game—everyone does it”. They do not fear prosecution. They are not aware of any instance in their home countryof anyone being prosecuted for this type of transaction. In any event, prosecution was virtually animpossibility, as these arrangements were hardly ever reported to the authorities.

The contractor submits the bid to the Ministry for US$49,870,000 (just under the US$50 million targetof which the agent has advised the contractor). The bid process involves sealed bids with no publication ofprice details of the competitors’ bids. The following day, the agent telephones the contractor. The contractoris apparently 3rd lowest in the pricing. The lowest is US$48 million. The agent requests the contractorurgently to submit a confidential “clarification to theMinistry oVering to drop its price to US$47,7,900, 000on the basis of an alternative technical proposal. The contractor makes a minor adjustment to thespecification, and submits the price adjustment and technical “clarification”.

The contractor is awarded the contract.

The contract includes the provision by the contractor to theMinistry of a financial package supported bya buyer credit. This comprises a loan from a bank to theMinistry worth 85% of the contract price for a fixedterm of 15 years. The contractor will draw down payments from this loan package direct from the bank asthe construction works proceed. The balance of 15% will be paid direct to the contractor by the Ministry.Once the contract is completed, the contractor will have been paid 100% of the contract price, and theMinistry will need to repay the bank the 85% loan over the 15 year repayment period. The bank is insuredagainst default by the Ministry by a guarantee issued by an export credit agency. The premium for suchinsurance has been paid by the contractor direct to the export credit agency, and has been included by thecontractor in its contract price. In order to arrange such export credit cover, the contractor has completedan application form to the export credit agency in which it has disclosed the existence and level of thecommission payment, the name and address of the agent and the scope of services of the agent. Thecontractor has also completed a declaration to the export credit agency that it is not aware of any corruptactivity in connection with the contract.

The commission payable to the agent is included under the export credit cover, and is financed to theextent of 85% under the bank loan.

The contractor receives the down payment from theMinistry. The agent notifies the contractor of an oV-shore bank account into which the commission should be paid. The contractor pays the commission.



The contract is completed. Neither the export credit agency nor the bank at any stage investigates the truepurpose of the commission. The contractor’s auditors check the project accounts. On seeing that the agencyagreement on the face of it creates a legal obligation to pay the commission, they make no further enquiries.

2.2 Analysis of Example

2.2.1 The above is an example of probably the most widespread method of bribing to obtain aninternational infrastructure contract. It is a method used throughout the world, but particularly in countrieswith a more developed legal and audit environment. The reason for this is probably that the legalenvironment in these countries compels companies to cloak their actions in a veneer of legality. The use ofthe agency agreement has proven a simple and eVective tool to enable these companies to bribe withimpunity.

2.2.2 When major tenders are being prepared, the participants in the bid team work closely andfrequently together. Working sandwich lunches and after work drinks are common in the pressurisedenvironment of tender preparation. In this environment, secrets are not normally kept. The fact that anagent is being appointed who is being paid a large commission which is likely to be passed on to a memberof the purchasing utility or Government will often be widely known by the contractor’s senior management.They may joke about the fact that three diVerent agents were competing to prove their close connectionswith the Ministry. It is also unlikely that any member of the board of directors would not have been toldthe true or suspected purpose of the transaction when the agency agreement was approved.

2.2.3 The in-house lawyer who drafted the agency agreement would probably know its true purpose. Anexternal lawyer who has experience in the industry would also probably know, or, at the very least, suspect.

2.2.4 In some, but not all cases, the representative at the bank and at the export credit agency will knowthe true purpose of the agency commission (either through industry experience, or through being informallytold by one of the contractor’s representatives). Perhaps the banker or export credit agency’s representative,on being told about the likely purpose of the commission will say, jokingly, “I didn’t hear that!”). In othercases, they will not expressly know, but even the most limited enquiries would make them realise the likelypurpose of the commission, particularly bearing in mind the normal extent, currency, and paymentdestination of these commissions, and the enormous disparity which often exists between the level of thecommission and the services which the agent is meant to provide under the agency agreement.

2.2.5 In reality, most people in the industry involved in this type of international transaction know whathappens. However, most would be prepared to hide behind the veneer of legality provided by the agencyagreement. This is what will probably happen in the event that the bribe becomes exposed.

(a) All those with actual knowledge of the transaction (ie those who have met the agent and haveapproved the agreement) will claim that they had no idea whatsoever that the agent would passany money onto the Minister or other related party. They will say that the agent is on the face ofit independent of the Ministry, and that the money was paid to the agent, and not to the Ministry.What the agent does with his money is his business, not theirs. They will hand over all documentsrelated to the negotiation and execution of the agency agreement, and these will show no linkwhatsoever with the Ministry or to the ultimate purpose of the payment. They will claim that it isnormal business practice to require a local contact, and that the commission was a normal marketprice for such a service.

(b) All those without actual knowledge of the transaction will claim that they were never told by thecontractor the nature or purpose of the transaction. Inspection of their documents will again showno mention of any underhand purpose.

(c) The lawyers will claim client privilege, and refuse to answer questions. However, if this privilegewere to be waived they would claim that they were merely asked to draft a commercial agencyagreement, and had no duty to investigate its purpose.

(d) The auditors will claim that it is their duty merely to match payment obligations with actualpayments, and that they did so in matching an apparently legal agreement with payment of thecommission. Furthermore, they will rely on the undertaking given to them by the directors thatthe contractor has complied with the law in all its transactions (this undertakingwill almost alwaysbe given by the directors—a director who has broken the law would be very unlikely to admit tothe auditor that he had broken the law).

(e) The bank will deny any actual knowledge of the purpose of the commission.

(f) The export credit agency will deny any actual knowledge. They will also rely on the undertakinggiven by the contractor in applying for export credit cover which expressly confirmed that nocorrupt activity had taken place. The contractor will probably have given this undertaking withthe intention of relying, if challenged, on the argument that they never knew what the agent woulddo with the commission.



2.2.6 The above example analyses the position where the contractor appoints the agent direct. The bribecan be further concealed if the agent is appointed by a parent, associated or subsidiary company of thecontractor in another jurisdiction, or by a consortium or joint venture partner, or sub-contractor of thecontractor.

2.2.7 The above example and analysis must be distinguished from the situation where a genuine agent isappointed for a legitimate purpose, and is paid a reasonable fee for legitimate services provided.Recommendations as to increased due diligence which could help to distinguish genuine agencyarrangements from sham arrangements are contained in Section 4 below.

2.2.8 The above example analyses the appointment of an agent by a contractor. Similar principles wouldapply to the appointment of an agent by a consulting engineering firm.

3. Section 3—The Damage and Risks Imposed by Bribery

3.1 Bribery causes immense economic and social damage. In particular, it can produce the followingresults

(a) an unnecessary project;

(b) a project design which requires unnecessarily complex or expensive components;

(c) increased project costs;

(d) wasted tender expenses;

(e) increased poverty;

(f) reputational risk.

3.2 In addition, bribery poses a significant business risk to banks, export credit agencies, auditors andshareholders as described in TI(UK)’s “Report Four—Corrupt Practices on Construction Projects—theBusiness Risk to Banks, Export Credit Agencies, Auditors and. Shareholders” (www.transparency.org.uk).In particular, if the project contract was procured by a bribe, the contract could be terminated by the clientfor illegality. This could have potentially, catastrophic financial consequences for the relevant contractor’sor consulting engineer’s shareholders and auditors, and for the banks and export credit agencies involvedin the project. Participants can also be criminally liable.

4.Section 4—Increased Due Diligence

4.1 Banks, export credit agencies and auditors therefore need to increase significantly their due diligencein this regard. Many agency agreements are genuine, and the agents undertake valuable legitimate services.However, many agency agreements are shams, and are used wholly or partially to conceal bribes. Steps needto be taken to try to distinguish the two situations.

4.2 TI(UK)’s business tool “Agency DueDiligence” (www.transparency.org.uk) has been designed to beused by banks, export credit agencies and auditors to assist them in assessing whether an agent appointedin relation to a construction or engineering project is a legitimate agent appointed to undertake genuineservices for a reasonable fee, or whether the agent has been appointed to act as a conduit for a bribe. Itprovides:

(a) an Agency Questionnaire which can be sent by banks, export credit agencies and auditors to thecontractors or consulting engineers which they are financing, insuring or auditing;

(b) an Assessment of Agency Questionnaire which can be used by banks, export credit agencies andauditors to analyse the answers given to the Agency Questionnaire.

Disclaimer

5. The comments in this Report on the law and its consequences are neither comprehensive nor complete,and should not be relied on. They are intended merely to give indicators as to possible consequences.Independent legal advice should always be obtained. The proposed actions and Business Tool referred toin this Report are suggestions only, and will need to be adapted to the specific circumstances of each case.Neither TI(UK) nor the author can accept responsibility for the consequences of any action claimed to betaken in reliance on the contents of this Report or Business Tool.

Comments on this Report

6. TI(UK) welcomes comments on this Report, and suggestions for its improvement. These should besent to neill.stansburywtransparency.org.uk



APPENDIX 19

Memorandum by WWF

Introduction

WWF has been engaged in dialogue with the ECGD both in terms of the department’s policies andapproach and discussing some of the projects they have provided finance for. WWF made a writtensubmission to the ECGDs 2002109 review and provided oral evidence to the Environmental AuditCommittee during its review of the ECGD. Our 2002 report contained an extensive review of best practicenot only in ECAs but International Finance Institutions such as the World Bank and also commercialbanks. We feel the DTI committee would benefit from the review of these pieces of work along with thoseof other NGOs such as Cornerhouse and FoE.

We would also encourage the committee to ensure that the ECGD takes these submissions seriously andresponds to NGO input in a detailed manner. NGOs put a great deal of their resources into such work onbehalf of their supporters and should be viewed as an important and constructive stakeholder in eVorts tomove the UK towards sustainability.

WWF requests that the Trade and Industry Committee reviews the report we submitted in 2002 to theECGD and its recommendations, and the extent to which the ECGD has responded to them. Thissubmission to the DTI committee and its 10 main points should be taken as an update and supplement tothat 2002 work. Annex I shows in more detail a summary of the main recommendations of the 2002 report,the headlines of which are listed below:

ECGD must actively promote sustainable development:

— Align with Government commitments on sustainable development;

— Monitor and report on performance of the ECGD;

— Demonstrate and exert leadership; and

— Foster and enhance the competitiveness of UK environmental exports.

ECGD must amend its impact screening and analysis procedures:

— Clarify and strengthen the screening and review process;

— Develop clear and consistent environmental sectoral standards;

— Improve the monitoring of projects;

— Support a presumption of transparency;

— Develop an appeal process; and

— Expand environmental capacity.Over and above these recommendations which still stand, WWF would like the committee to take accountof 10 further subsequent points (many of which relate to the above list).

1. Coherence between UK SD commitments and the Department’s role in the promotion of sustainabledevelopment

2. ECGD mission

3. Transparency

4. Strategic Environmental assessment

5. Review of ECGD supported projects

6. No-go areas

7. Climate change

8. OECD

9. BTC concerns

10. World Bank Extractive Industry Review

1. Coherence Between UK SD Commitments and the Department’s Role in the Promotion of


WWF notes that the ECGD has as part of its mission a commitment to support projects that align withUKgovernment positions.Whilst there has been improved liaison acrossWhitehall on some projects,WWFdoes not feel that ECGD’s portfolio reflects the its commitment to place sustainable development at theheart of its activities (ECGD press release 28 April 2003). There is also limited evidence of incorporation ofthe UK’s position on climate change or biodiversity, as expressed through being party to the UN

109 2002 submission to the ECDG Public Consultation on Case Impact Analysis.



Conventions on these issues. Increasingly guidance is also coming from the European Union. Manyresponsible private sector companies are applying global standards to their operations, with the driver oftencoming from national or supra-national requirements.

WWF is concerned that the ECGD has a target of zero projects being rejected on social or environmentalgrounds. This implies that there is no practice that convenes sustainable development principles that couldwarrant rejection by ECGD. In WWF’s view this sends the wrong signal to business. WWF does notunderstand how sustainable development can be at the heart of ECGD’s activities if the department wouldnever take a stand on social or environmental issues. WWF trusts that ECGD does not rely purely on IFCcompliance as an indicator of agreement with UK government positions.

When compared with the international best practice identified in our 2002 report, ECGD still lags farbehind. In particular, its lack of clear environmental standards and of measures to enhance theenvironmental sustainability of its project portfolio, as well as very limited transparency and monitoringmean that it currently falls behind many of the examples cited. In addition, weak environmental standardsput ECGDat increased financial risk—and threaten the reputation of both ECGDand theUKGovernmentmore generally.

WWF suggests that a review of the existing portfolio is undertaken to assess congruency between existingfinance arrangements and UK government/EU positions. This will inform a more coherent UK foreigninvestment strategy.

2. ECGDMission

WWFbelieves that the Export and Investment Guarantees Act 1991 limits the ability of ECGD to deliveron UK SD commitments and more specifically to adopt an exclusion list of unsustainable projects. This webelieve to be of serious concern and we call for a review of the Act in the light of this. Such a review mustinclude the potential for enabling legislation to alter the mission of ECGD.

WWF believes that the ECGD and their capable staV are hindered in their moves to sustainability by therestricted mandate provided by the Act. We believe that ECGD staV would confirm this to be the case ifquestioned on this matter. We feel that it is the responsibility of Parliament to pressure the Government tolive up to both the spirit and letter of their commitments in these areas by reviewing and adjusting themandate given to ECGD in this regard.

There have been some limited procedural changes in the ECGD since our 2002 submission to the ECDGPublic Consultation on Case Impact Analysis and written and oral evidence to the Environmental AuditCommittee. However we believe these have made little substantive change to the type of projects supportedby the ECGD nor in the due diligence undertaken over such projects. Two particular cases ı the BTC andSakhalin projects—back up our views in this regard.

3. Transparency

The ECGD mission statement includes a commitment to “be as open as possible, while respectinglegitimate confidentiality, about what we do”. Although commercially sensitive information should remainconfidential, the presumption should always be for disclosure, except where the project sponsor candemonstrate a commercial need for confidentiality, as is the policy of the World Bank/IFC and EBRD.ECGD should clearly define what constitutes “commercially sensitive” information in advance, as the EDC(Canadian ECA) does. Disclosure should be a requirement of the guarantee agreement, and not beconditional on the permission of the sponsor.

The ECGD has improved the levels of transparency regarding its own interests and potential activities.WWFwould like to see further information provision regarding the assessment processes undertaken whenconsidering an application for finance.Much of this information can now be requested. It wouldmake senseto make information public as a matter of course, in order to demonstrate transparency. Information onpotential impacts is not provided for public review until after a decision has been made on ECGD supportand environmental questionnaires that are used are not made public. As is detailed in our 2002 report

In terms of the transparency of investments, WWFwould also like to see greater transparency of revenuepayments. The ECGD is committed to tackling corruption, and this is an extension of that work. WWF’sexperience indicates that corruption contributes to the degradation of the environment, through theavoidance of regulation, and the diversion of funds from environmental budgets.

Initiatives such as the Extractive Industries Transparency Initiative (EITI)—whose secretariat is based inDFID—are seeking to promote disclosure by all parties of revenues paid. ECGD should also take note ofthe increasing spotlight being placed on the host government agreements and production sharingagreements framing extractives projects. These frameworks often bypass human rights and environmental



standards that would normally be upheld by national laws and international conventions. If the ECGD isto ensure that its investments comply with these regulations, then it must seek to eliminate loopholesprovided by such agreements.

WWF believes the ECGD should publicly support the EITI, and promote its uptake amongst clients. WWFalso urges ECGD to seek transparency of the legal agreements governing the projects applying for finance.

4. Strategic Environmental Assessment

Another issue that emerged from the BTC pipeline was the detrimental eVect on the project design of notcarrying out a strategic environmental assessment of the project. DFID concluded from its analysis of theproject that it would “strongly support the use of Strategic Environmental Assessment (SEA) for futureinfrastructure projects on this scale”. The IFC agreed to include in its review an assessment of the potentialfor SEA in future large scale and cross border projects. WWF suggests that ECGD should also consider thevalue of applying such a tool to these projects. Given the UK government position outlined by DFID, thisissue is of particular importance for the Sakhalin II project currently being considered by ECGD. OnSakhalin the transboundary issues, cumulative impacts and risks posed to other sectors such as fishing havenot been brought together in an SEA.

WWF believes ECGD should require Strategic Environmental Assessments of large infrastructure projects.

5. Review of ECGD Supported Project

WWF believes more eVort should be put into monitoring by ECGD. This activity is essential to ensurethat standards committed to in the finance application are adhered to for the life of the project. It providesan incentive for the client to continue to meet the standards promised. WWF is also concerned that thebenefits of many projects are exaggerated at the application stage in order to counter negative social andenvironmental aspects, which may also be understated.

WWF believes a review of recent projects would be a valuable exercise to demonstrate the true extent ofpositive outcomes and adverse impacts compared to those indicated by clients.

6. No-go Areas

WWF wishes to see a clear NO GO policy from the ECGD for extractive industries. This would reflectthe Amman Declaration adopted by IUCN (The World Conservation Union), which the UK governmentis a member of. The Amman Declaration states that extractive activities should be excluded from IUCNCategory I-IV Protected Areas. The ECGD should also respect national designations which have not yetbeen aligned with the IUCN system. The ECGD has a clear opportunity to safeguard the future ofdesignated protected areas. Commercial banks such as Citibank have now expressed their desire to respectthese significant areas of biodiversity.

WWF recommends that the ECGD adopts a NO GO policy of not funding any extractives project locatedin a internationally or nationally designated protected area.

7. Climate Change

WWF welcomes the initiative that emerged from Johannesberg, earmarking GBP 50 million per annumfor financing renewables. Funding of oil and gas projects in 2002–03 was GBP 455 million. If the GBP 50million was spent, then this would represent less than 10% of the total spend on energy sources. WWFsupports the CURES Initiative, which calls for a reversal of this bias towards fossil fuels by the internationalfinance community. WWF considers that Vivian Brown’s comments in the 2002–03 annual report statingthat there were increasing oil and gas opportunities does not sit easily with the UK’s desire to be a leaderon climate change.

ECGD support for the recent significant investment by UK oil majors in Russian oil companies willmerely fuel exports to the west. By eVectively subsidising this carbon intensive activity, the ECGD willdistort the market against renewable alternatives. More specifically CURES calls for ECAs to phase outsupport for fossil, nuclear and hydro that does not comply with recommendations of the WCD and replaceit by new renewables and energy eYciency by 2008. Further information is available on:http://www.cures-network.org/texte/cures—declaration engl.pdf )

WWF recommends that the ECGD attends the Bonn renewables conference in June 2004 to enhance itsunderstanding of how it may make this transition.



8. OECD

WWF appreciates that common action from all countries will be needed to collectively move the ECAsector towards sustainability. WWF commends the ECGD on the work it has done to develop the OECDcommon approach for Export Credit Agencies. This framework is important to prevent lowerenvironmental and social standards being a competitive advantage for ECAs. The ECGDmust continue topush the agenda forward in the context of developments in the rest of the international finance community.

WWF would like a firmer stand by the ECGD on the application of the OECD guidelines for Multi-National Enterprises. ECGD’s provision of finance to the Baku-Tblisi-Ceyhan pipeline came whilst acomplaint to the UK contact point for the OECD guidelines is still active. WWF understands the problemsposed by the slow processing of these complaints, and believes this must be addressed if the guidelines areto be eVective. HoweverWWF also notes the conflict of interest posed by the UK ECGD funding a project,which the UK government contact point is still investigating.

WWF calls on the ECGD to push for an improved process from OECD. WWF believes that the ECGDshould not agree funding on any project where a complaint has been accepted by the UK contact point.

9. BTC Concerns

The ECGD announced in February 2004 it would be providing finance to the BTC pipeline, led by BPPlc. WWF continues to have a number of issues on this project regarding the route selection, consultationprocess and the legal regime. WWF will be pursuing these matters with BP management and the IFCOmbudsman. A recent article in the Sunday Times exposed the cover up regime that prevails on this project.An independent contractor blew the whistle on BP, for failing to select the correct coating for the pipe. Ithas been alleged that this decision was based on the interests of the procurement manager, rather than theproduct specification. BP investigated the potential corruption issue, but did not inform any of its potentiallenders. The results of this decision being covered up and not rectified are that pipe has been coated in ananti-corrosion paint that has already split, thereby exposing the pipe, which will result in corrosion andleaks. WWF is concerned that ECGD should learn lessons from the mistake made in supporting the BTCproject and ensure that further projects in the financing pipeline do not repeat such mistakes. The Sakhalinproject is a case in point on which numerous international NGOs are campaigning.

WWF insists that the ECGD thoroughly investigates the matter raised on BTC and publishes a report on thefindings, in order to demonstrate how it deals with reports of questionable management practices by its clients.

10. World Bank Extractive Industry Review

WWF notes that the ECGD will support a project where it is compliant with the World Bank guidelinesor similar, and it has a target of 100% of projects meeting this requirement. The World Bank has recentlyconducted its Extractive Industries Review (EIR) ⁄ a two year global stakeholder consultation, designed toassess whether the World Bank should have a role in extractive industries, and if so what role that shouldbe. A number of the recommendations that have emerged from the EIR are detailed in this submission,however the wider issues are of relevance to the ECGD. The Final Report of the WB EIR is available onwww.eireview.org

Given the close relationship between ECGD decisions and World Bank decisions, WWF believes the ECGDshould review the recommendations of the EIR, with a view to applying them to its future work in extractives.

Annex I

Summary recommendations of WWF 2002 submission to ECGD review.

(A) ECGD must Actively Promote Sustainable Development

Align with Government commitments on sustainable development

Current ECGD activities risk undermining Government commitments on sustainability. The ECGDmust adopt clear and specific objectives with regard to sustainability, directly linked to ECGD Businessprinciples, UK Government sustainable development goals and international commitments (for example,the Kyoto protocol and the Convention on Biodiversity).

Monitor and report on performance of the ECGD

It is not yet clear how ECGDmonitors and measures the success of the overall organisation with regardsto meeting its Business ‘Principles, and UKGovernment commitments to sustainable development. Targetsmust be set to reduce the overall environmental impact of ECGD supported activities to ensure it adheresto these commitments. These should include targets to reduce annual carbon emissions in supported projectsand the percentage of projects impacting on high conservation value forests.



Demonstrate and exert leadership

Through setting an example by strengthening its environmental policies and capacity, as well as throughexerting leadership in international fora like the Working Party on Export Credits and Credit Guarantees(ECG) of theOECD,ECGDcanwork towards the creation of a level playing field promoting environmentalexcellence and sustainable development. The ECGD should push the Common Approaches to reachinternational best practice. In the process it can strengthen its own performance by reducing financial andreputational risk, and capitalising on opportunities to oVer new products and services to clients.

Foster-and enhance the competitiveness of UK environmental exports

There is an opportunity for ECGD to provide real leadership in supportingUK environmental exporters,and improving environmental quality in host countries. ECGDneeds to put in place incentives to encouragesustainable exports. These could include: oVering extended terms of finance, oVering training and grants.

(B) ECGD must Amend its Impact Screening and Analysis Procedures

Clarify and strengthen the screening and review process

There is significant scope in the current process for impacts to go unreported by the company. There isnot a strong legal requirement for the provision of complete, verifiable and honest information, norsanctions when information is dubious. ECGD must require EIAs to be mandatory for all category Aprojects. For category B projects WB standards should be adhered to. 110The EIAs must also require back-up documentation, and conduct spot checks by independent reviewers for all three categories (A, B and C).

Develop clear and consistent environmental sectoral standards

The benchmarking approach means a lack of predictable and consistent standards. The development ofa set of clear ex-ante standards could bring significant benefit to ECGD and the companies it supports byallowing projects to be designed from the beginning with these standards in mind. Following examples fromthe World Bank/IFC, Ex-Im and ABN Amro in the private sector, clear screening policies should beestablished for sensitive sectors or impact areas, including forestry, mining, oil and gas, and water (dams).These should be developed in consultation with stakeholders or existing initiatives—such as the WorldCommission on Dams. Those projects that do not meet these standards should be excluded from support.

Improve the monitoring of projects

Procedures for follow-up, monitoring and enforcement are very weak. Without adequate monitoring,there is a tendency for environmental impact assessments to be used merely as a rubber stamp to allow aproject to go ahead, rather than to create a work-plan to maximise positive environmental impacts andmitigate damage.Monitoring should be necessary for all category A and B projects, based on guidelines andin consultation with stakeholders.

Support a presumption of transparency

Transparency & disclosure is one of the key issues being discussed as part of ECGD’s consultationprocess, and so may change in the near future. However, currently it is one of the areas where ECGD fallsfurthest behind. Ex ante information disclosure should take place 120 days before a decision on the projectis made. Disclosure requirements should be part of the contract between ECGD and project sponsor.Information disclosure should be extended to all projects and should include all information that is notdemonstrated to be of a commercially sensitive nature.

Develop an appeal process

Although ECGD decisions can be challenged through the Parliamentary Ombudsman and judicialreview, there is currently no easily accessible appeal procedure. The ECGD should develop an approachsimilar to the IFC and EDC, with a compliance oYcer or ombudsman to which stakeholders can bring theircomplaints if they feel a decision has not been in compliance with ECGDs own business principles orinternational law.

110 The World Bank states “The scope of EA for a Category B project may vary from project to project, but it is narrower thanthat of Category A EA. Like Category A EA, it examines the project’s potential negative and positive environmental impactsand recommends any measures needed to prevent, minimize, mitigate, or compensate for adverse impacts and improveenvironmental performance.”



Expand environmental capacity

It is unclear whether suYcient capacity (ie staVwith suYcient knowledge and time) currently exists withinECGD to implement the engagement process and other environmental policies. In order to adequatelyincorporate environmental dimensions into ECGD activities greater capacity may be necessary.

APPENDIX 20

WWF-UK’s submission to the ECGD Public Consultation on Case Impact Analysis

Executive Summary

Export Credit Agencies provide the largest source of taxpayers money for foreign corporate investmentin industrial projects in the developing world. Voters and taxpayers, therefore, have a right to informationon how these taxes are being used.

Amajor proportion of ECA support goes to large industrial and infrastructure projects, including powerplants, large dams, mining projects, road development and oil pipelines, all of which can have significantenvironmental and social impacts. The ECGD’s decisions and subsequent actions must be in line with theUK Governments’ national and international commitments to sustainable development.

The ECGD has been undertaking a consultation on their case impact analysis process. To input into thisconsultationWWF undertook research examining Export Credit Agencies and the environment. This studyidentified current environmental best practice amongst financial institutions—export credit agencies,multilateral development banks and the private sector—and compared it with ECGD’s environmentalpolicies. It found that the actions and activities of the ECGD were lagging far behind best practice

Whilst welcoming the opportunity to comment on the detailed case impact process, WWF feel that thereare some serious flaws in the ECGD’s operations and strongly advocates the following recommendations:

(A) ECGD must actively promote sustainable development

1. Align with Government commitments on sustainable development

Current ECGD activities risk undermining Government commitments on sustainability. The ECGDmust adopt clear and specific objectives with regard to sustainability, directly linked to ECGD Businessprinciples, UK Government sustainable development goals and international commitments (for example,the Kyoto protocol and the Convention on Biodiversity).

2. Monitor and report on performance of the ECGD

It is not yet clear how ECGDmonitors and measures the success of the overall organisation with regardsto meeting its Business Principles, and UKGovernment commitments to sustainable development. Targetsmust be set to reduce the overall environmental impact of ECGD supported activities to ensure it adheresto these commitments. These should include targets to reduce annual carbon emissions in supported projectsand the percentage of projects impacting on high conservation value forests.

3. Demonstrate and exert leadership

Through setting an example by strengthening its environmental policies and capacity, as well as throughexerting leadership in international fora like the Working Party on Export Credits and Credit Guarantees(ECG) of theOECD,ECGDcanwork towards the creation of a level playing field promoting environmentalexcellence and sustainable development. The ECGD should push the Common Approaches to reachinternational best practice. In the process it can strengthen its own performance by reducing financial andreputational risk, and capitalising on opportunities to oVer new products and services to clients.

4. Foster and enhance the competitiveness of UK environmental exports

There is an opportunity for ECGD to provide real leadership in supportingUK environmental exporters,and improving environmental quality in host countries. ECGDneeds to put in place incentives to encouragesustainable exports. These could include: oVering extended terms of finance, oVering training and grants.



(B) ECGD must amend its impact screening and analysis procedures

5. Clarify and strengthen the screening and review process

There is significant scope in the current process for impacts to go unreported by the company. There isnot a strong legal requirement for the provision of complete, verifiable and honest information, norsanctions when information is dubious. ECGD must require EIAs to be mandatory for all category Aprojects. For category B projects WB standards should be adhered to.111 The EIAs must also require back-up documentation, and conduct spot checks by independent reviewers for all three categories (A, B and C).

6. Develop clear and consistent environmental sectoral standards

The benchmarking approach means a lack of predictable and consistent standards. The development ofa set of clear ex-ante standards could bring significant benefit to ECGD and the companies it supports byallowing projects to be designed from the beginning with these standards in mind. Following examples fromthe World Bank/IFC, Ex-Im and ABN Amro in the private sector, clear screening policies should beestablished for sensitive sectors or impact areas, including forestry, mining, oil and gas, and water (dams).These should be developed in consultation with stakeholders or existing initiatives—such as the WorldCommission on Dams. Those projects that do not meet these standards should be excluded from support.

7. Improve the monitoring of projects

Procedures for follow-up, monitoring and enforcement are very weak. Without adequate monitoring,there is a tendency for environmental impact assessments to be used merely as a rubber stamp to allow aproject to go ahead, rather than to create a work-plan to maximise positive environmental impacts andmitigate damage.Monitoring should be necessary for all category A and B projects, based on guidelines andin consultation with stakeholders.

8. Support a presumption of transparency

Transparency and disclosure is one of the key issues being discussed as part of ECGD’s consultationprocess, and so may change in the near future. However, currently it is one of the areas where ECGD fallsfurthest behind. Ex-ante information disclosure should take place 120 days before a decision on the projectis made. Disclosure requirements should be part of the contract between ECGD and project sponsor.Information disclosure should be extended to all projects and should include all information that is notdemonstrated to be of a commercially sensitive nature.

9. Develop an appeal process

Although ECGD decisions can be challenged through the Parliamentary Ombudsman and judicialreview, there is currently no easily accessible appeal procedure. The ECGD should develop an approachsimilar to the IFC and EDC, with a compliance oYcer or ombudsman to which stakeholders can bring theircomplaints if they feel a decision has not been in compliance with ECGDs own business principles orinternational law.

10. Expand environmental capacity

It is unclear whether suYcient capacity (ie staVwith suYcient knowledge and time) currently exists withinECGD to implement the engagement process and other environmental policies. In order to adequatelyincorporate environmental dimensions into ECGD activities greater capacity may be necessary.

1. Introduction

The rationale: export credit agencies and sustainable development

— WWF is making these policy suggestions to the ECGD as part of the review process for their CaseImpact Analysis.

— Export Credit Agencies (ECAs) are the world’s largest class of public international financeinstitutions, collectively exceeding the size of the World Bank Group, and represent the singlelargest source of taxpayer support for foreign corporate investment in industrial projects in thedeveloping world.

111 The World Bank states “The scope of EA for a Category B project may vary from project to project, but it is narrower thanthat of Category A EA. Like Category A EA, it examines the project’s potential negative and positive environmental impactsand recommends any measures needed to prevent, minimise, mitigate, or compensate for adverse impacts and improveenvironmental performance.”



— ECAs are public bodies funded through taxes. Voters and taxpayers have a right to informationon how their taxes are being used—as well as to expect that ECA actions are in line with thecommitments and priorities of their own governments.

— A major portion of ECA support goes to large industrial and infrastructure projects, includingpower plants, large scale dams, mining projects, road development in tropical forests and oilpipelines, which often have significant environmental and social impacts. With the trend towardsprivate sector financing and ownership of infrastructure projects during the 1990s, ECA supportof such projects has been growing. Because most of these projects are high risk, many would nottake place without ECA support.

— Although many ECAs have made significant advances in the last few years, particularly in termsof developing a willingness to understand and tackle key issues, social and environmentalstandards are as yet limited. The Working Party on Export Credits and Credit Guarantees (ECG)of the OECD has developed the Common Approaches on Environment and OYcially SupportedExport Credit to try to harmonise environmental standards and avoid an environmental “race tothe bottom” between diVerent ECAs. However, the agreement has not yet been ratified by the USor Turkey. As OECD agreements have to be ratified by all parties the agreement has not come intofull force. The adoption of a draft agreement has been agreed by all states except the US andTurkey. This said the Approaches are heavily criticised by the NGOmovement as being too weakin key areas of transparency and standards.

— WWF is concerned that the ECGD does not have in place systems and policies that facilitate theminimisation of environmental impacts nor the maximisation of environmental benefits. It is forthis reason that we are making the recommendations outlined in the Executive Summary anddetailed further on in this report.

2. Recommendations for ECGD

The following recommendations show howECGD could both strengthen compliance with the spirit of itsBusiness Principles and the UKGovernment’s sustainable development commitments, andmove towards aleadership position in the international finance sector. It also addresses the key questions from the ECGDcase impact analysis consultation—see Annex I for detailed comments on the questionnaire.

These recommendations are based on recent research on best practice to be found in Annex II and IIIwhich looks at International Best Practice and How Does ECGD Compare.

Below we firstly examine what the ECGD needs to do to actively promote sustainable development.Secondly we examine what amendments the ECGD needs to make to its impact screening and analysisprocedures.

(A) ECGD must actively promote sustainable development

1. Align with Government commitments

The ECGDMission Statement calls for it to ensure activities accord with other Government objectives,including those on sustainable development, human rights, good governance and trade. The BusinessPrinciples commit it to constructively engage with project sponsors to achieve necessary improvements.However, there are also a number of sectors ECGD is involved in which contradict Government objectivesand are inherently environmentally unsustainable, particularly related to fossil fuels. Recent research hasshown that ECGD supported power plants contribute an annual 13.3 million tonnes of carbon emissions,despite Government commitments to reduce the UK’s emissions by 26.5 million tonnes.112 Other recentresearch shows similar unsustainable activities supported by the ECGDwith regard to dams and forestry.113

ECGD must move away from supporting projects in unsustainable sectors and moving towards thosewith greater economic benefits, now and into the future. This is also in line with ECGD’s commitment tomeasure applications against whether the projects “assist social and economic development, or are ofmaximum benefit to areas most aVected by poverty; or tackle problem areas where private investment is notavailable . . .”,114 as well as Government commitments to cut carbon emissions.

2. Monitor and report on performance of the ECGD

It is not yet clear how ECGDmonitors and measures the success of the overall organisation with regardsto its Business Principles, including support of UK Government sustainable development priorities andcommitments.

112 “New research shows Blair ‘exporting global warming’”, Greenpeace press release, 12 July 2002.113 “Illegal logging and ECAs’, FERN, April 2002. UK Export Credit Policy—lessons from Ilisu”, FERN, January 2002.www.fern.org/pages/eca/pubs.html

114 ECGD, “Public Policy Issues: Sustainable Development”, 28 July 2002 www.ecgd.gov.uk/graphic/debtdev/susdev.asp?sid%6



— If indicators exist, ECGD shouldmake them public and report on performance in the next AnnualReport. If not, ECGD should develop indicators to measure and monitor performance withrespect to its Business Principles and UK Government priorities, setting targets for improvementand disclosing results in the Annual Report. One of those indicators should be greenhouse gasemissions from projects in the ECGD portfolio. Other indicators could follow the EPI Finance2000 indicators (see Annex VI), while evenmore complete reporting could follow a framework likeIFC’s to show the value added by projects, based on ECGD’s Business Principles.

— To facilitate the transition, targets should be set to increase the percentage of environmentalexports within the ECGD portfolio, as well as targets to reduce overall annual carbon emissionsfrom projects in the ECGD portfolio and the percentage of projects impacting on highconservation value forests. See also Recommendation 4 regarding fostering environmentalexports.

— Greenhouse gas emissions fromECGD supported projects should also be included inUKnationalcarbon accounting.

If necessary the ECGD should formalise its underwriting processes, assessments and review proceduresthrough an amendment to the Export and Investment Guarantees Act 1991. Such amendments have beenput in, place by other ECAs such as in Canada.

3. Demonstrate and exert leadership

ECGD has influence within a number of international bodies, particularly the OECDExport Credits andCredit Guarantees Working Party (ECG) and should use it to level and raise the playing field forenvironmental standards.

— By adopting WWFs recommendations ECGD could demonstrate environmental leadershipthrough its example.

— ECGD should take a leadership role in the ECG, pushing for the Common Approaches to bestrengthened. TheUS’s non-ratificationwas based on their view of theApproaches being tooweakand this position should be adopted by ECGD. At the same time ECGD should work atencouraging Turkey to endorse a strengthened agreement in future. The upcoming review of theCommon Approaches (before the end of 2003) provides an ideal opportunity.

— ECGD should also encourage the OECD to allow more concessional terms or other inducementsfor environmental exports, such as extended repayment terms (as are currently oVered for powerplants and nuclear plants). See also note in Recommendation 8 regarding tied aid.

— ECGD should work with other ECAs to develop a common methodology to report on local andglobal environmental impacts.

— ECGD should join the United Nations Environment Programme Financial Services Initiative115,helping to adapt it if necessary to be more appropriate for ECAs.

— ECGD should work with and (lobby) influence the EC DG Trade’s ECA work to ensure uptakeof best practice across the EU’s ECAs and policy coherence across the EU’s areas of responsibilitysuch as trade, competition, social aVairs and the environment.

4. Foster and enhance the competitiveness of UK environmental exports

ECGD should ensure that as well as avoiding unsustainable projects, they are encouraging moresustainable ones.

ECAs face a number of barriers when it comes to supporting more environmental exports, including highup-front costs and longer payback periods; the relative inexperience of project sponsors; and less establishedmarkets. Additionally, projects with environmental technologies have access to grant funding, for examplefrom the Department for International Development (DFID). Another barrier ECGD faces is that it doesnot deal with short-term loans, which are often favoured by SMEs.However, there is still an opportunity forECGD to provide real leadership in supportingUK environmental exporters, and improving environmentalquality in host countries.

— ECGD should make political and currency risk insurance available, helping to improve projectfinance calculations.116

115 So far only one ECA—Canada’s EDC—has joined the UNEP initiative. For more information see http://unepfi.net/fii/index.htm

116 According to the ECGD, the Overseas Investment Insurance scheme is suitable for smaller investors (ECGDAnnual Report&ResourceAccounts 2000–01, p. 15), yet current research suggests that the provision of such insurance for renewable projectsby ECAs is not well established. See Glenn Stuart Hodes, “Sustainable Finance for Sustainable Energy” in Jan Jaap Bouma,Marcel Jeucken and Leon Klinkers (eds), Sustainable Banking: The Greening of Finance, Greenleaf Publishing, UK, 2001



— It should also develop the capacity to deal with environmental exports, so that ECGD is preparedto support them in appropriateways when grant finance diminishes. This could include conductinga survey of the UK environment industry to understand industry needs, and setting up a unitspecialising in energy eYciency.

— ECGD should encourage environmental exporters through oVering extended terms of financewithin OECD restrictions, as EFIC, JBIC and Ex-Im do (see also Recommendation 3 regardingchangingOECD restrictions). Furthermore, it should strive to expand its provision of political andcurrency risk insurance to environmental exporters, thereby improving project financecalculations for these products. ECGD could also oVer other incentives such as fast trackprocessing.

— ECGD should also help build awareness and capacity amongst environmental exporters regardingits products, including outreach and guidance on preparing projects. The current ECGD eVort toraise awareness amongst SMEs could also be targeted specifically at environmental exporters. Thiswould be in line with the Business Principle committing to make ECGD’s facilities available to thewidest possible range of markets and customers, including smaller firms.

— ECGD could work with grant-making bodies, such as DFID, to jointly fund renewable energyprojects, with ECGD funding the commercially viable components, including services andequipment, and the grant-making body funding costs that are public in nature, such as capacitybuilding. In this context, ECGD should also work within the ECG to adapt the OECD’s Ex-AnteGuidance for Tied Aid, to set appropriate parameters.117

— ECGD could also investigate the numerous private sector examples of innovative environmentalcare products, to see which products might be adapted to fit ECGD’s remit.

— ECGD should allocate at least 20% of their energy portfolios to sustainable energy.

(B) ECGD must amend its impact screening and analysis procedures

5. Clarify and strengthen screening and review procedures

Greater clarity and transparency regarding both standards and assessment procedures would be in linewith the recommendation in the ECGD Mission and Status Review that ECGD produce information forcustomers and interested parties on how it will handle sensitive cases caught in its initial screening process.

— The case impact analysis questionnaire falls behind best practice in a number of ways. Referenceshould be made to our comments on the questionnaire in Annex I on issues such as the need forspot-checks in self-assessment reliant procedures.

— More information should bemade available regarding the review procedures for projects identifiedas Category A or B through the case impact analysis questionnaire. For example, ECGD coulddevelop and make publicly available a series of sector-specific checklists as JBIC does.

— ECGD should make clear what guidelines exist for underwriters in considering the trade-oVsbetween likely environmental impacts of projects, as identified by the Business Principles Units,and its potential benefits. It should also report on the training the underwriters have in order toundertake environmental and reputational risk assessments.

— An EIA should be required for all category A projects. For category B projects WB standardsshould be adhered to (see footnote 111 on page Ev 175).

— Questions should be added regarding positive environmental or social impacts, includinginformation on capacity-building, training, technology transfer, reduction of local or nationalemissions. This would help to better evaluate the overall project impacts.

6. Develop clear and consistent environmental standards

The ECGD puts both the interests of UK industry, the UK taxpayer and project aVected peoples at riskby supporting unsustainable projects. Clearly their policy of ‘engagement’ has failed on numerous countsto ensure sustainability in inherently unsustainable projects and for this reason certain project types mustbe avoided. The ECGDhas the powers to adopt such a stance under the Export and Investment GuaranteesAct 1991.

— Companies applying to the ECGD should have enforceable policies on such issues as humanrights, labour standards and environmental issues. Standards should be clear and specific, directlylinked to ECGD Business Principles, UK Government sustainable development goals andinternational commitments (including for example the Kyoto protocol, UN Convention onBiological Diversity, OECD guidelines on MNEs’ the ILO and the Basel Convention).

117 Crescencia Maurer, The Transition from Fossil to Renewable Energy Systems: What Role for Export Credit Agencies,German Advisory Council on Global Change, Berlin, forthcoming (draft dated July 2002).



— Following examples from theWorld Bank/IFC, Ex-Im and ABNAmro in the private sector, clearscreening policies should be established for sensitive sectors or impact areas, including forestry,mining, oil & gas, and water (dams). These should be developed in consultation with stakeholdersor existing initiatives—such as the World Commission on Dams.

— Those projects which do not meet these standards should be excluded from support. ECGD hasbeen notified of NGO views on these issues a number of times—for example by FoE Internationaland WWF International in May 2002 where we called for funding for fossil fuels, large dams notmeeting the requirements of the WCD and nuclear power to be phased out as well as any projectsthat do not receive prior informed consent from local communities in the developing world. (seefor example Annex VII for the WWF guidelines on Forest Impacting Projects.)

— The benchmarking approach means a lack of predictable and consistent standards. AlthoughECAs generally come to projects at a late stage, exporters often know in advance that they willneed ECA support. The development of a set of clear ex-ante standards could bring significantbenefit to ECGD and the companies it supports by allowing projects to be designed from thebeginning with these standards in mind. Designing a project to limit environmental impacts ismuch less costly overall than adding mitigation measures later. (see also recommendation 8 onTransparency).

— These standards should be developed in consultation with external stakeholders.

7. Improve monitoring of projects

Without adequate monitoring, there is a tendency for environmental impact assessments to be usedmerely as a rubber stamp to allow a project to go ahead, rather than to create a work-plan to maximisepositive environmental impacts and mitigate damage. For example, a World Bank review of theenvironmental assessment process found that while the EIA procedure itself was sound, the key problemswere in implementation, including inadequate supervision. The ECGD proposal is for independentmonitoring only of categoryAprojects, relying on host country authorities to enforce compliance for others.Yet it is a common problem in developing countries that governments lack the resources and capacity toadequately monitor and enforce environmental regulations, while corruption can be another problem.118

— Monitoring should take place for all category A and B projects based on guidelines developed inconsultation with stakeholders and made publicly available. (See for example JBIC’s monitoringguidelines for sensitive sectors; footnote 114 on page Ev 176).

— Consideration should be given to building capacity in countries where credit is expended to ensurethey have capability to assess and monitor potential impacts.

8. Support a presumption of transparency

As theMission and Status Review notes, transparency is important for maintaining public confidence inand understanding of ECGD119, and for demonstrating accountability. It is also important for thereputation of the UK Government.

— As in the Jakarta Declaration (http://www.fern.org/pubs/ngostats/jakarta.htm) transparencyrefers to public access to information and consultation with civil society and aVected people inboth OECD and recipient countries at three levels: in the assessment of ongoing and futureinvestments; in the preparation of new procedures and standards; and in the negotiation withOECD and other fora of common approaches and guidelines. (see www.fern.org/pages/eca/intcamp.html)

— All key project information (not only environmental) should be publicly available. Environmental,social and economic aspects are interdependent and information on all three is necessary forstakeholders to be truly informed. These requirements are in accordance with the Aarhusconvention.

— Although commercially sensitive information should remain confidential, the presumption shouldalways be for disclosure, except where the project sponsor can demonstrate a commercial need forconfidentiality, as is the policy of the World Bank/IFC and EBRD. ECGD should clearly definewhat constitutes ‘commercially sensitive’ information in advance, as the EDC does. Disclosureshould be a requirement of the guarantee agreement, and not be conditional on the permission ofthe sponsor.

— Ex ante information disclosure should take place 120 days before a decision on the project is made.Disclosure requirements should be part of the contract between ECGD and project sponsor.

— Information should be clearly available both on the website and at the project site in a culturallyappropriate way for those aVected by the project.

118 See for example, World Bank, World Development Report 2002, Washington, DC, for a discussion of institutional failuresin developing countries.

119 Export Credits Guarantee Department, Mission and Status Review 1999–2000, London, 2000.



— Information on individual transactions should also be available ex post, on the website and in theAnnual Report. In addition to the information currently printed in the Annual Report, thereshould be a description of the company, site and purpose of the project, a description of key issuesand mitigation measures, and monitoring and compliance plans—along with environmentaldocumentation.

— ECGD should develop its Annual Report into a Sustainability Report. This would include ex postinformation on projects, as well as sustainability information related to ECGD itself.

9. Develop an appeal process

Although ECGD decisions can be challenged through the Parliamentary Ombudsman and judicialreview, there is currently no easily accessible appeal procedure for project aVected peoples. Time should begiven for such appeal between project approval and contract commencement.

— ECGD should consider developing an approach similar to the IFC and EDC, with a complianceoYcer or ombudsman for cases in which stakeholders feel a decision has been out of compliancewith ECGD’s own Business Principles. The compliance oYcer should be independent ofmanagement and focused on problem solving—providing redress and satisfaction to aVectedpeoples while helping to find compromise solutions.

— Clarity should be given as to how aVected communities can appeal against projects both duringassessment procedures as well as after credit has been oVered. This must be in accordance with theEU directive on Environmental liability

10. Expand environmental capacity

ECGD advocates an approach of constructive engagement. While such an approach can be an eVectivein eVecting environmental improvements, such eVectiveness relies on a high quality team such as thoseemployed in best practice Socially Responsible Investment fund engagement. It is unclear whether suYcientcapacity (ie staV with suYcient knowledge and time) currently exists within ECGD to implement this andother environmental policies. Implementation requires adequate expertise; senior level responsibility forcompliance; appropriate training and incentives for underwriters and other non-environmental staV; as wellas the alignment of staV appraisals with performance on the Business Principles.

— The setting up of the Business Principles Unit to manage environmental and social issues has beenan important step in the right direction, but capacity and training should be expanded.

— The ECGD Business Principles commit it to providing customer-orientated, eYcient andprofessional service. This could be enhanced by developing the capacity to run an environmentaladvisory service to help customers understand environmental risks and opportunities, as many ofthe private sector banks such as UBS and Credit Suisse have started to do. A survey of IFC clientsrevealed that the IFC’s assistance on environmental matters was amongst the top three mostvalued services. This service would also be valuable internally—providing underwriters with ahelp-desk related to environmental risk assessment.

— See also Recommendation 4 regarding capacity to deal with environmental exporters.

3. Conclusion

Since the end of 2000, ECGD has taken some steps towards aligning its activities with the commitmentsof the UK Government. These steps include the development of the Business Principles and the expandedrole of the Export Guarantees Advisory Council. The Principles require ECGD to take into account theGovernment’s international policies on sustainable development, environment, human rights, goodgovernance and trade. Another major step was the development of the impact analysis questionnaire, alongwith the current consultation process. In addition, publishing a list of ECGD guarantees in the AnnualReport is a move towards greater transparency.

When compared with the international best practice identified in Annex III, ECGD still lags far behind.In particular, its lack of clear environmental standards and of measures to enhance the environmentalsustainability of its project portfolio, as well as very limited transparency and monitoring mean that itcurrently falls behind many of the examples cited. In addition, weak environmental standards put ECGDat increased financial risk—and threaten the reputation of both ECGD and the UK Government moregenerally.

As the ECGD Mission and Status Review notes, “Ill-conceived and poorly executed projects can havenegative impacts on the environment and local people and make for poorer quality risk. It is in ECGD’sself-interest to take full account of these factors in its assessments and to promote good projects. ECAs havean important role to play in improving project impacts, by working in partnership with stakeholders toinfluence negotiations to achieve an acceptable outcome.”120

120 Export Credits Guarantee Department, Mission and Status Review 1999–2000, London, 2000.



Through setting an example by strengthening its environmental policies and capacity, as well as throughexerting leadership in international fora like the ECG, ECGD can work towards the creation of a levelplaying field promoting environmental excellence and sustainable development. In the process it canstrengthen its own performance by reducing financial and reputational risk, and capitalising onopportunities to oVer new products and services to clients.

ANNEX I

PROPOSED AMENDMENTS TO IMPACT QUESTIONNAIRE

Preface

TheECGDexpects all projects to complywith theWorld Bank’s Safeguard Policies andwith the ECGD’sBusiness Principles. This impact questionaire is intended to screen projects for compliance. Significantfailure to meet the ECGD’s stated expectations will result in projects being screened out from support.

For projects involving significant or medium potential environmental damage or social and human rightsimpacts, the ECGD requires an EIA and/or SIA or RAP to be prepared and released to the public in a formand language comprehensible to project aVected people. All projects which impact indigenous peoples orethnic minorities will require an Indigenous Peoples Development Plan. Applications for projects thatrequire such documents will be assessed until the required documents have been disclosed.

Impact Questionaire has major gaps and should require supporting documentary evidence of claimedcompliance with stated standards.

A. Format

The “tick-the-box” format of the questionnaire is open to abuse. For example, Section 3 simply askswhether the project/business has been designed tomeet specified environmental, health and safety and socialstandards and gives a series of boxes to tick. No evidence is required to demonstrate compliance with thestandards that are ticked. Moreover, the ECGD undertakes no checks to verify the information supplied inthe questionnaire for projects assigned to Category C and only occasional checks for Category B projects.

This is of serious concern. Given that Category C projects are not subject to any further investigations orconditionality (beyond the standards requirement “for compliance with laws”), there is likely to beconsiderable pressure on company’s to squeeze borderline cases into Category C. It is therefore imperativethat claims made in the questionnaire are subject to vigorous checks.

We recommend that:

The ECGD requires that all assertions as to compliance with the standards specified in Section 3 of theImpact Questionnaire be backed by documentary proof:

All categories of project are subject to spot checks to confirm the information provided throughout the ImpactQuestionnaire.

B. Content

Whilst the impact questionnaire adequately covers major environmental impacts—which also form theprime determinant of the categories into which projects are assigned—it is weak on impacts related to debt,climate, development, human rights and labour rights.

Corruption, for example, has major social, environmental and economic impacts. Corruption arising inprojects supported by the ECGD, meanwhile, poses serious reputational as well as material risks both tothe ECGD itself and to British exporters in general.We believe that to avoid this, the ECGDneeds to ensurethat it tightens up its due diligence procedures for deterring and detecting corruption. We believe that thisshould include additional questions relating to corporate governance and accountability at the ImpactQuestionnaire stage, additional requirements to prove compliance with anti-corruption legislation andaccounting standards at the warranty stage, further anti-corruption procedures, and increased riskassessment of buyer institutions.



The information requirements outlined in Annexe 3 conflict with those in the proposed Impact Questionnaire

We note with particular concern that the information requirements listed for each impact category inAnnexe 3 conflict with those in the Impact Questionnaire. Thus Paras 1.4 and 2.2 of the Impactquestionnaire states that EIAs and RAPs will be required if the project is located in any of the specified sitesor involves any of the specified social impacts. By contrast, Annexe 3 states in respect of CategoryA projects:“For greenfield projects an Environmental and/or Social Impact Assessment will usually be required . . .”(emphasis added).

The ECGD should clarify which wording holds. We would oppose any element of discretion in the requirementto carry out and release EIAs and other impact assessments.

1. Descriptions and General Information

1.1 Please give a brief description of the goods/services/project that you are supplying/investing in.

Goods:

Project:

1.2 As or for what is the project site currently used?. Urban . Industrial . Greenfield

. Other—please specify:

1.3 Please give the exact geographical location of the project site:

1.4 Please indicate if the goods/services/project will be located in or could have an environmental impact uponany of the following: (Please mark all relevant boxes.)

. Semi-arid areas and desert margins

. Properties on World Heritage List and other internationally recognised protected areas.

(for list see website http://www.unesco.org/whc/heritage.htm)

. Tropical or sub-tropical forests (especially primary forests) and other high value forests.

(NOTE: High conservation value forests are defined in the Forest Stewardship Council’s Principle 9, asforests that need special protection for their biological value (eg they may contain rare or threatened speciesor ecosystems); their environmental value (eg they serve as critical watersheds) or their social value (eg theyare the prime source of subsistence materials, medicines and food for local communities).”

. Rivers, lakes, coastline, coral reefs and wetlands, including mangroves

. National Parks, nationally designated nature reserves and all other conservation areas, and themargins of these

. Habitat of endangered species of flora or fauna or areas of high concentrations of biological diversity

. Habitats providing important resources for vulnerable groups (eg indigenous or tribal groups, womenor ethnic minorities)

. Areas largely untouched by humans (wildlands)

. Areas of high concentration of population or industrial activity where further development couldcreate significant environmental problems

. Other areas of local interest or sensitive locations—please provide details:

Please note that for its analysis of projects located in any of the above or in any of the sectors listed in theGuidance Notes, ECGD will require the information contained in an Environmental Impact Assessment(EIA). The ECGDwill not process an application involving significant environmental impacts until an EIAto international standards has been submitted and disclosed.



1.5 Has an Environmental Impact Assessment (EIA), Social Impact Assessment (SIA) or ResettlementAction Plan (RAP) been prepared or is one planned?EIA: .Yes .No .Planned .Don’t knowSIA: .Yes .No .Planned .Don’t know

If Yes, please attach. If an EIA, SIA or RAP is planned, please forward a copy of the Terms of Referenceand timescales for completion. The ECGD will not process an application involving resettlement orsignificant social impacts until an EIA, RAP or SIA to international standards has been submitted anddisclosed.

1.6 Are any other Export Credit Agencies (ECAs) or International Finance Institutions (IFIs) involved inthe project?

. Yes . No . Don’t know

If yes, please state names of IFIs or ECAs involved:

2. Potential Impacts

2.1 Will the goods/services/project have any actual or potential environmental impacts in any of the followingareas? (Please mark all relevant boxes.)Water pollution or extraction . Damage to wildlife or habitats. Local air quality . Climate change (UN Framework Convention on Climate

Change Kyoto Protocol). Acid deposition . Ozone depletion (Montreal Protocol)

. Biological diversity (Convention on Biological Diversity). Use of hazardous substances . Production of damaging or toxic waste. Noise pollution . Downsteam impacts

. Degradation of land (eg soil contamination, erosion or salinisation)

. Other adverse environmental impacts, please specify:

. Beneficial environmental impacts, please specify:

If there are actual or potential environmental impacts, please give details (including any mitigatingfactors, consultants’ reports, choice of technology, etc.).

2.2 Will the goods or project cause, require, bring about or stimulate any of the following social and humanrights impacts? (Please mark all relevant boxes.)

. Resettlement of the local population . Compulsory acquisition of land

. Loss of pastures, fishing grounds, orchards, grazing land or productive land

. Temporary use of productive land

. Displacement of, or damage to, existing industry or agriculture

. Job losses among the local population . Large-scale influx of workers

. Child labour . Bonded or forced labour

. Damage to sites of cultural, historic or scientific interest

. Impact on indigenous peoples, ethnic or religious minorities or vulnerable communities

. Use of armed personnel (from private firms or state security organisations)

Please provide details of any of these that apply, including details of impacts that may be caused outsidethe immediate project area (for example downstream or downwind):

Please note that for its analysis of projects involving any of the above ECGDwill require the informationcontained in a Resettlement Action Plan (RAP) and/or a Social Impact Assessment (SIA). Where ethnicminorities or indigenous peoples are impacted, the ECGD requires an Indigenous Peoples DevelopmentPlan. The ECGD will not process a project until these documents have been submitted and disclosed tothe public.



Is this project in a region of current or recent conflict. Yes . No

If yes, please give details

Is the project area subject to restrictions on civil liberties, for example through martial law or emergency rule?. Yes . No

If yes, please give details

Please note that for its analysis of projects involving any of the above ECGD will require an analysis ofthe human rights implications, including the implications for consultation, of ongoing conflicts oremergency rule regimes.

. Other social drawbacks, losses, or disadvantages, please specify:

. Social benefits, please specify:

2.3 Will the benefits of the goods/project (including employment opportunities for local people) be open to all,regardless of race, religion, gender, social grouping, etc.?

. Yes . No . Don’t know

If No, please provide details and justification of selection process:

3. Standards

3.1 (a) Will the goods/services that you are supplying/investing in or has the project/business been designedto meet recognised environmental standards?

Goods:

.Host Country .UK/EU .World Bank .IFC .Other .None

Project:


If yes, the ECGD requires supporting documentary evidence

If None, please explain:

(b) If the project/business has been designed to meet any other environmental performance standards pleaseidentify and provide a copy of these.

Environmental standard:

.Copy attached

3.2 Please indicate whether the goods/services/project that you are supplying/investing in will be compliantwith UK or Destination/Host Country health and safety standards and supply details of any health andsafety guidance that you supply to the users/operators of your goods/ projects.

Standards:

.UK .Destination/host country .Other .None


If Other or None please give details:

Guidance:

.Attached .None provided thus not attached



3.3 Will the goods/services that you are supplying/investing in or has the project/business been designed to meetrecognised social standards?

Goods:


Project:

.Host Country .UK/EU .World Bank .IFC. .Other .None


If None, please explain:

Anti-corruption questions to be added to the Impact Questionnaire (IQ)

Under Section 3 of the IQ, Standards, we would like to see the additional questions added:

3.4 (a) Does your company have an anti-corruption programme to ensure compliance with national law?

.YES .NO

(b) If YES, what measures has your company put in place to ensure that persons acting on the company’sbehalf, including agents, subsidiaries and joint venture partners, are aware of and comply with your anti-corruption programme?

3.5 (a) Does your company have a written whistleblower protection policy?

.YES .NO

(b) If YES, which of the following measures has your company introduced to support this policy?

.written procedures aimed at employees, sub-contractors and other persons outside the company actingon its behalf

.an internal hotline

.a line manager to whom to report concerns

.an ethics oYcer

.a person independent of line management to whom to report concerns

.other (please specify)

.training for management, employees and persons acting on the company’s behalf on whistleblowerrights

3.6 (a) Which reporting standards, including accounting, social, economic and environmental, does yourcompany use?

.Global Reporting Initiative Sustainability guidelines

.Other. Please specify.

(b) Does your company disclose routine information about its financial transactions (ie tax payments,royalties and other) with the national government of the country in which the project is being considered?

.YES .NO

Please specify the type of payments disclosed or the reasons for non-disclosure.



(c) What procedures does your company have to ensure that information on payments to host governments isaccessible locally?

(d) Does your company include in its financial statements the full range of contingent liabilities including thosethat may arise from non-implementation of anti-corruption measures?

.YES .NO

3.7Will the contract to supply goods/services or the project you are supplying or investing in be won throughcompetitive tender?

.YES .NO

If not, please explain:

4. Please give details of any other information that you think may be relevant to ECGD’s assessment ofthe impact of this project, including any positive impacts not previously identified.



Annex 2

DRAFT NEW IMPACT QUESTIONS(for inclusion in Application Forms)

Table 1

Category Definition Issues/activities Examples (individual circumstancesmaywarrant diVerent categories)

A Activities which due —Major pollution of air, soil —Mining and mineral processingHigh to their type, scale or water —Oil and gas exploration andpotential or location have the —Clearing of significant developmentimpact potential for major areas of natural vegetation —Oil refineries and large tank

adverse impacts on (what definition?) farms and pipelinesthe environment, the —Impact on habitat —Petrochemical, plastics andworkforce, their important to endangered / chemical manufacturingimmediate protected species or fragile —Potentially sources of majordependants or the areas eg wetlands, small pollution eg leather tanning,community at large. islands etc. asbestos processingThese may not be —Bulk storage of —Nuclear power plants andreadily predictable, inflammable, explosive or nuclear fuel processingand are usually hazardous material —Thermal power plantsirreversible, diverse —Use, handling or ((300MW) and transmissionor sensitive. production of toxic or —Iron and steel plants and other

substances hazardous to metal processing and productionFull formalhealth in significant plantsassessment withquantities or at high —Cement (clinker) productionspecialist inputs isexposure levels. —Pulp millsrequired.—Processes that can give rise —Large scale agriculture and

Monitoring and to high societal risks as well forestry involving clearing ofreporting by as significant risks to the natural forest (what definition?)specialists will workforce —Large dams, water extractionnormally be —Work that directly aVects and treatment projectsrequired. public safety —Major road, railway or airport

—Significant numbers of developmentspeople being moved from the —Sea ports and inland waterwaysproject site (whether or not —Large scale tourismthey have formal rights) developments—Substantial job losses —Involuntary resettlementplanned or expected in the —flood management projects, majorfuture transfer schemes, large-scale—Large non-local labour irrigation developmentforce being brought into theproject site (whether for atemporary constructionperiod or longer)—EVects on culturalproperty or vulnerablegroups—Use of forced or childlabour—Uncontrolled use of armedsecurity forces



Category Definition Issues/activities Examples (individual circumstancesmaywarrant diVerent categories)

B Activities which Activities which could have —Manufacture of glass andMedium could cause adverse some environmental impact, ceramic productspotential impacts on the but do not have the potential —Manufacture of structural ironimpact environment, the for major pollution and are and steel products

workforce, their not sited in environmentally —Manufacture of rubber andimmediate sensitive areas. plastic productsdependants or the —Spinning, weaving and finishingActivities which could havecommunity at large, of natural and synthetic fibressome impact on workers andbut these are —Thermal power plants'300MWothers, but which do notunlikely to be as —Cement production (milling)have the potential for adiverse or sensitive —Processing of pulp to paper andmajor incident and are notas those from High board—this could be vicariouslysited in areas where anyRisk activities and high impact if the source product isuncontrolled activity on siteremedial measures from an unsustainable source, is thiscould impinge on the localcan more easily be considered?population.implemented. —Sawmilling and manufacture of

Some job losses but usually veneer, plywood and other woodFull review by the by natural wastage. based materials board—this couldBPU is required.be vicariously high impact if the

Regular self- source product is from anreporting by the unsustainable source, is thisCompany would considered?usually be adequate Fruit and vegetable processingwith monitoring by —small dams and micro-hydro sincethe relevant host these are often undertaken on smallcountry agencies. rivers/streams in sensitive, upland

areas.

C Activities which are Minimal environments —Public transport vehiclesLow unlikely to cause impacts —Telecommunicationspotential material adverse —Business servicesWorkers’ rights properlyimpact impacts. —Sales of minimal impact goodsprotected through national

into stockBasic review. legislation and company—Replacement/refurbishment ofpolicyReporting or existing equipment

monitoring is not No substantial movement ofnormally required. people into or out of the

project site

ANNEX II

INTERNATIONAL BEST PRACTICE

This section aims to provide an overview of best practice—first amongst ECAs and MDBs, and then someexamples from the private sector. It should be noted that it has not been possible to describe the details ofthese policies. In some cases the policies and procedures listed may only apply to projects of a minimumduration or above a certain value. Additionally, it focuses on the general policy of the institution withoutattempting to list specific exceptions which may exist. The table in Appendix 5 provides further details ofthe ECAs and MDBs investigated.

Best Practice Amongst ECAs andMDBs

1. Environmental screening and review procedures

It is common practice amongst all institutions analysed to screen applications for environmental impacts,assigning each a category121—A, B or C (a few institutions also use an additional category). This is oftenbased on a questionnaire.

121 Category A means the project has potential significant environmental impacts which may aVect an area beyond the projectsite, including projects in sensitive areas or sectors. Category Bmeans potential impacts are less than for category A—usuallysite-specific and reversible. Category C means the project is likely to have minimal or no impacts.



— JBIC also confirms environmental considerations identified through its questionnaire via sectorspecific checklists122 for A and B projects.

— EKN’s questionnaire also requests details of potential positive impacts (rather than only negativeimpacts), backing documentation or an explanation of answers, and provides definitions andguidance notes.123

— Formany of the institutions, an environmental impact assessment (EIA) is required for categoryAprojects, while some less detailed form of environmental audit is required for category B projects.

2. Environmental standards

Most ECAs follow a “benchmarking approach” regarding environmental standards. This means thatthey do not have one clear environmental standard, but choose examples of international environmentalgood practice as reference points or benchmarks for a particular project. In general, the standard chosenfor a particular project is not publicly disclosed.

— The EDC follows the benchmarking approach, but for category A projects it also discloses thestandard chosen as the basis for the environmental review.

— The Ex-Im Bank does not use a benchmarking approach. It has a set of numerical guidelinesrelated to air emissions, water quality and noise impacts, as well as qualitative guidelines for otherenvironmental and social factors, such as pulp and paper, mining, oil and gas, power plants, forestoperations, hydro power and water resource management.

— The World Bank/IFC also have their own environmental standards, numerical and qualitative,based on the Pollution Prevention and Abatement Handbook124. They also have specific policieson natural habitats, forestry, dams and international waterways.

3. Monitoring

More than for other areas, there is no standard approach amongst the organisations towards monitoringof environmental impacts of projects, or of the impacts and performance of the organisation as a whole.There is also generally less information available regarding monitoring procedures.

— JBIC undertakes monitoring for category A and B projects based on information supplied by theborrower—and in some cases conducts its own investigations. It is particularly notable for havingsector-specific monitoring forms, which are publicly available125.

— Since 1999, Ex-Imhas tracked annual global greenhouse emissions from power projects it supports

— EKN has started evaluating the climate impact of its overall guarantee portfolio and strategies, inorder to reduce impacts.

— The IFC has developed a framework to measure and monitor internally the positive impact, or“value added” of projects—the Private Investments’ Contribution to Sustainable Development126.This is based on eight indicators, of which two look specifically at environmental performance,while others consider issues like accountability and transparency or management and capacity, aswell as social issues. The framework measures positive impacts beyond the minimumenvironmental and social safeguards (which all projects must comply with).

4. Environmental expertise

Many of the organisations did not have publicly available information detailing the number ofenvironmental staV, or environmental training which non-environmental staV undergo. This is an areawhere best practice generally lies with the private sector (see Appendix 4), as well as the World Bank andIFC.

— In addition to having an environment and engineering division, the Ex-Im Bank has a dedicatedstaV member for its “environmental exports program”.

122 JBIC has checklists for thermal power, hydro power, steel mills, copper smelting works, mining, petroleum/natural gasdevelopment, petrochemical, forestry, paper and pulp, road construction, airports, ports and harbours, general industry andinfrastructure. See www.jbic.go.jp/english/environ/guide/finance/check/index.php

123 See www.ekn.se/includes/MIlijobilagaENG.pdf124 See http://wbln0018.worldbank.org/essd/essd.nsf/Docs/PPAH125 See www.jbic.go.jp/english/environ/guide/finance/monitor/index.php126 Based on International Finance Corporation internal document, Private Investments’ Contribution to SustainableDevelopment: Recognizing strong environmental, social or corporate governance contributions to development impact inprojects, which was the basis of indicators developed by SustainAbility, IFC and Ethos for the report, Developing Value: Thebusiness case for sustainability in emerging markets, London, 2002.



— In addition to internal expertise and training, the IFC requires its financial sector clients to attenda one-week training seminar in environmental management. A survey of IFC clients revealed thatthe IFC’s assistance on environmental matters was amongst the top three most valued services.127

5. Transparency and disclosure

Key issues in transparency and disclosure focus on questions of what information is disclosed, at whatpoint in the project cycle and for which projects.

— The World Bank, IFC and the EBRD all have a policy of presumption in favour of disclosurewhere disclosure would not materially harm the business and competitive interests of clients.

— While all organisations commit to keeping commercially sensitive information confidential, theEDC is unique in defining at length what constitutes information related to “commercialcompetitiveness128”.

— IFC and EBRD require project sponsors to make environmental information public for categoryA and B projects—unlike many of the other organisations that have a policy of disclosing projectinformation, but only with the permission of the project sponsor.

— Several of the organisations have a policy to disclose project information a number of days(between 30 and 120) before a decision on providing financial support for the project is reached(ex ante)—particularly for category A and sometimes B projects. The exact informationdisclosed varies.

— Several organisations also publish ex post transaction details on their websites and/or annualreports, although again the information disclosed varies. The IFC, for example, posts on itswebsite information on the project sponsor and major shareholders, location and description ofsite, description of company and purpose of project, environmental category and a description ofkey issues and mitigation measures, and monitoring and compliance plans. It also publishesenvironmental documentation, including EIAs and environmental audits.

6. Exclusions

— TheMDBs have the most extensive exclusion lists, which include wildlife regulated under CITES;pesticides, herbicides, pharmaceuticals and other hazardous substances subject to internationalphase-outs or bans; drift net fishing inmarine environment using nets in excess of 2.5 km in length;and in the case of the IFC/World Bank, logging in primary tropical moist forests. As an example,see the EBRD exclusion list in Appendix 8.

— The ECAs also have some exclusions. These include:

EFIC: prohibited materials and substances based on Australian customs.

Ex-Im: banned and restricted pesticides and chemicals, and commercial logging in primarytropical forests.

— EKN is reviewing its involvement in the Indonesian pulp industry.

7. Positive incentives for environmental exports

— Some ECAs actively encourage exporters of environmental technologies to approach them,particularly through considering or oVering extended terms of finance (within OECDrestrictions129). These include EFIC, JBIC and Ex-Im.

— The EDC is conducting a survey of the Canadian environment industry to better understand itsprofile and needs.

— The IFC has an environmental projects unit to identify and develop environmental projects,especially in partnership with grant-making institutions.

— The World Bank has established the prototype carbon fund to develop the market for project-based greenhouse gas emissions reductions within the framework of the Kyoto Protocol.

127 John Ganzi, Frances Seymour and Sandy BuVett, Leverage for the Environment: A guide to the private financial servicesindustry, World Resources Institute, Washington DC, 1998.

128 See www.edc.ca/corpinfo/csr/disclosure/treatment—e.htm129 To avoid competition between ECAs based on the financial terms they oVer, and to ensure they are not providing subsidiesbut are consistent with market terms, the OECD has restrictions on the terms of financial support which ECAs can oVer.However, as discussed on page 6, extended payment periods are currently oVered for some sectors, including power plants,nuclear plants and civil aircraft.



8. Appeal procedures

Few of the ECAs have specific appeal procedures.

— Both the IFC and the EDC in Canada have a compliance oYcer, which is independent ofmanagement and has an ombudsman-like role for dispute resolution. The compliance oYcer actsas an intermediary, encouraging dialogue between the EDC and a complainant, includingrecommending methods for dispute resolution.

ANNEX III

HOW DOES ECGD COMPARE?

Since the end of 2000, ECGD has had a set of Business Principles130, with the role of the ExportGuarantees Advisory Council (EGAC) expanded to advise also on these Principles. The Principles requireECGD to take into account the Government’s international policies on sustainable development,environment, human rights, good governance and trade. These Principles, along with the impact analysisquestionnaire and related consultation process, put ECGD ahead of some ECAs with regard to managingthe environmental impacts resulting from its activities.

However, when compared with the international best practice identified in Appendix 2, ECGD cannotbe called an overall leader. In particular, its relative lack of clear environmental standards, transparencyand disclosure, monitoring, environmental exclusions and positive incentives for projects which enhance theenvironment mean that it currently falls behind many of the examples cited.

The following description, outline ECGD’s policies in the key areas analysed for this research, incomparison with best practice. In general, ECGD’s policies comply with the OECD’s CommonApproacheson Environment and OYcially Supported Export Credits. However, the Common Approaches are onlyapplied to civil projects (ie non-aerospace and non-defence), which account for less than half of its projectportfolio (the exact percentage varies by year).

1. Environmental Screening and Review Procedures

— As noted, only civil cases are screened based on the case impact analysis questionnAire. In termsof content, the questionnaire falls behind best practice through not requiring (for many of thequestions) backing documentation or explanation of answers, clear definitions of terminology andcategories, and a section to outline potential positive environmental impacts.

— ECGD also lacks sector specific criteria, policies or checklists—at least there is no publicly-available information regarding such criteria.

— EIAs are required only for large greenfield projects in sensitive sectors/locations, but not for allcategory A projects. No clear environmental audit procedures are described for category Bprojects.

2. Environmental Standards

— ECGD, as for most ECAs, follows a benchmarking approach, but does not publish informationon the standards selected for a particular project. (Currently there is no standard disclosure ofenvironmental information for projects, although this policy is currently under discussion.) Thereis an “expectation” of compliance with World Bank or other MDB standards if host countrystandards are insuYcient.

3. Monitoring

— At the project level, monitoring takes place on a case by case basis. There are no sector-specificguidelines for monitoring, which is usually on the basis of verified reporting by the project owner/operator throughout the period of ECGD financial exposure.

— At the organisational level, the EGAC is responsible for reviewing the application of the BusinessPrinciples to new cases being considered for support. Since this process only began in 2001,information on the results of the project reviews is so far limited to two cases. In both cases, theBusiness Principles and relevant procedures were found to have been “applied appropriately”131.Apart from this, there is no reporting on the overall performance of the organisation with respectthe Business Principles, or other environmental criteria such as overall CO2 emissions.

130 See www.ecgd.com/downloads/ECGDBusPrinciples.pdf131 Export Credits Guarantee Department, Annual Report & Resource Accounts 2000–01, London, 2002.



4. Environmental Expertise

— In the 2000–01 Annual Report, the EGAC notes with respect to the Business Principles that it is“aware of the investment made by ECGD in specialist training in this area for underwriters andother staV”132. However, there is no other publicly available information on the environmentalexpertise within ECGD, apart from the existence of the Business Principles Unit with twoengineering/environmental specialists. It is thus unclear whether there is suYcient capacity in theorganisation to undertake the environmental procedures ECGD has committed to.

— There does not appear to be any specialised expertise within ECGD related to environmentalexports and exporters.

5. Transparency and Disclosure

— Transparency and disclosure is one of the key issues being discussed as part of ECGD’sconsultation process, and so may change in the near future. However, currently it is one of theareas where ECGD falls furthest behind.

— Some ex ante information is released, but only for sensitive projects on request.

— Some ex post project information is published in the Annual Report. This is a new policy and animprovement compared to the past, although the information is very limited as yet. It includes onlya listing of the country, exporter, buyer, project name and ECGD maximum liability, and doesnot cover all projects.

6. Exclusions

— There are no exclusions—although exports to Highly Indebted Poor Countries are limited to“productive expenditures”.

7. Positive Incentives for Environmental Exports

— No positive incentives or specialised environmental care products.

8. Appeal Procedures

— The only course of action to appeal an ECGD decision is through parliamentary mechanisms.Parliamentary committees can scrutinise ECGD. Decisions can be challenged throughParliamentary Ombudsman and judicial review. However, there are no procedures specific toECGD.

132 Ibid.

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ECGD and the Environment

Screening andassessment review Environmental Environmental Transparency and Appealprocedures standards Monitoring expertise disclosure Exclusions Positive incentives procedures

UK Civil cases Benchmarking For category A, Business Some info on No, although for No. Through(ECGD) screened based approach. ECGD “likely” Principles Unit request for projects in HIPC parliamentary

on questionnaire. to require with 2 sensitive projects. countries, mechanismsEIAs for large, periodic engineering/env Annual Report support limited only.greenfield monitoring specialists. contains a list of to “productiveprojects in reports by project guarantees expenditure”.sensitive sectors/ owner, and issued.locations. “may” also

requireindependentmonitoring.

env% environment(al)

info% information

HIPC% Highly Indebted Poor Country



ANNEX IV

BEST PRACTICE IN THE PRIVATE SECTOR

Commercial banks and others in the private financial sector are increasingly recognising the importanceof good environmental management to their bottom line performance. Research shows a correlationbetween the average eYciency of a bank and the degree to which it adopts an “oVensive” or “sustainable”(as opposed to “preventive” or “defensive”) approach to the environment. Those banks categorised ashaving an “oVensive” or “sustainable” approach in their environmental and social policies had an averageeYciency of 69%, vs 62% for “defensive” banks.133

The private sector is still generally weak with regards to specific environmental standards and screening,with the majority of banks refusing to accept responsibility for their clients’ actions. In one survey, only 10of 34 banks that responded said they carry out some level of environmental screening.134 However, theprivate sector does provide a number of leading examples in the areas of environmental risk assessment andthe development of new and innovative financial products for environmental care. Some private sectorbanks are also amongst the leaders regarding their in-house environmental expertise, particularly thoseoVering environmental advisory services to clients.

Environmental Risk Assessment

— According to a study of 34 of the world’s top banks (based on assets), 56% undertake some formof environmental risk analysis in setting up credit and financing arrangements. Of these, 24%adhere to the guidelines of the World Bank (including Deutsche Bank, ABN Amro, UBS andCredit Suisse), 3% to OECD guidelines and 15% set one or more sectors aside from financing.135

— Credit Suisse notes the importance of being able to recognise environmental risks associated withclients or projects early on. “This ability can help to significantly reduce exposure to credit, liabilityand reputational risk.”136 Credit Suisse integrates environmental aspects into its lending decisionsand helps customers to recognise environmental opportunities and risks.

— Swiss Re produces an annual internal environmental risk report to assess the company’senvironmental exposure.

— ABN Amro have a dedicated environmental and social risk management unit, and provideenvironmental and social risk awareness training to non-environmental staV, including thoseinvolved in client relationships and the general risk assessment process. Auditors are sent out toreview projects periodically—which includes a review of environmental issues. They also have apolicy for risk assessment of Forestry and Tree Plantations, while a policy on mining is beingprepared.

Environmental Care Products

— Swiss Re oVers investment vehicles, project financing and credit guarantees for markets arisingfrom greenhouse gas emissions reductions within the implementation of the Kyoto Protocol. Athree-member GreenhouseGas Risk Solutions team is being financed initially for three years from2001 to develop solutions and products. For example, they are devising a “contingent capital”solution for the planned extension of several wind farms in northern Europe.

— Credit Suisse oVers the Global Water Basket and Global Alternative Energy Basket, which investin water supply and alternative energy. They have also set up PrimeNewEnergy, a companywhichinvests in listed alternative energy companies.

— Of those banks which have insurance products as a core service, 69% oVer clients an insurancepolicy for environmental damage that they have either suVered or caused to third parties.137

Environmental Expertise and Advisory Services

— Roughly 50% of the 34 banks in the study previously cited138 oVer a financial advisory service toindustrial customers.

133 Michael Jeucken, “Sustainable Banking in Perspective: The Cases of 34 International Banks”, Sustainable Finance andBanking: The Financial Sector and the Future of the Planet, Earthscan, 2001.

134 James Giuseppi, “Assessing the ‘Triple Bottom Line’” in Jan Jaap Bouma, Marcel Jeucken and Leon Klinkers (eds),Sustainable Banking: The Greening of Finance,Greenleaf Publishing, UK, 2001.

135 Michael Jeucken, “Sustainable Banking in Perspective: The Cases of 34 International Banks”, Sustainable Finance andBanking: The Financial Sector and the Future of the Planet, Earthscan, 2001.

136 Credit Suisse Group, Credit Suisse Group Sustainability Report 2001.137 Michael Jeucken, “Sustainable Banking in Perspective: The Cases of 34 International Banks”, Sustainable Finance andBanking: The Financial Sector and the Future of the Planet, Earthscan, 2001.

138 Ibid.



— UBS has a help-desk to assist business and credit oYcers in assessment and management ofenvironmental risks, andCredit Suisse has an environmental risk unit, which also provides supportto customers.

— Following EPI finance indicator guidelines (see Appendix 6), banks such as Swiss Re and CreditSuisse report on their environmental capacity, including the number of specialists and the numberof staV trained in environmental issues.

Best Practice in the Private Sector Related toWWF Global Priorities

— ABN Amro has a policy on risk assessment for forestry, and is developing one for mining.

— Many banks oVer products related to energy eYciency, climate change and/or water.

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ANNEX V

COMPARING FINANCIAL INSTITUTIONS

The following table contains a summary of the findings for the financial institutions analysed in the key areas of enquiry.139

Blank squares indicate no information was available. “A”, “B”, and “C” refer to project environmental categories140. See the end of the table for a list of acronyms andabbreviations.

Screening and Environ-mental Environ-mental Transparency and Appealreview procedures standards Monitoring expertise disclosure Exclusions Positive incentives Procedures

EDC Screening not Benchmarking As deemed Team of Publishes project Undertaking Compliance(Canada) public. EIA approach. For necessary. engineers and info ex ante, survey of env oYcer,

“normally” “A”, the intl env specialists. including EIA, industry to better independentrequired for “A”. standards used but only with understand of mgmt, withSome env are disclosed. consent of profile and needs. “ombudsman-assessment for sponsor. like” role for“B”. Transaction info dispute

posted 90 days resolution.after signing.“Confidential”info defined atlength.

EFIC Based on World Based on PPAH Annual report EIAs and mgmt Based on Env exporters(Australia) Bank procedures. and intl treaties. details how plans for “A” Australian encouraged to

EIA for “A” projects accorded released 45 days customs re approach EFIC,based on PPAH. with SD before decision. prohibited which considersFor “B” EFIC principles. Transaction materials, providingwill examine Monitoring of details for “A”, substances and extended terms ofimpacts and “A”, but results “B” and “C” in countries. finance.mitigation not published. Annual Report.measures.

139 Information on ECAs based on unpublished document: HeVa Schucking, ECAs in Comparison, Urgewald, 2001 and updated with relevant information.140 30 Category A means the project has potential significant environmental impacts which may aVect an area beyond the project site, including projects in sensitive areas or sectors. Category Bmeans potential impacts are less than for category A—usually site-specific and reversible. Category C means the project is likely to have minimal or no impacts.

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Screening andreview procedures Environ-mental Environ-mental Transparency and Positive incentives Appeal

standards Monitoring expertise disclosure Exclusions Procedures

Ex-Im (USA) EIA required for Based on World Desk reviews but Env and Project name, Excludes EPA Environmentalprojects in Bank/US no site visits. Can engineering location and banned and exportssensitive sites, standards. request that division with description restricted program—hydro, greenfield Related to air monitoring plan approx three disclosed ex ante. pesticides and includingprojects. quality, water use be prepared. staV. Dedicated EIA disclosed in chemicals, and maximum

and quality, staV member for a form commercial allowablewaste mgmt, “environmental “authorised by logging in repayment terms.natural hazards, exports” project sponsor”. primary tropical Renewableprotection of program. forests. energy advisoryecological committee tosources. Focused expand supporton pulp and for renewables.paper, mining, oil Target of 5%and gas, power renewables.plants, forestoperations,hydropower andwater resourcemgmt.

JBIC (Japan) Borrower Benchmarking For “A”, key Environment Info disclosed Projects with AYrmative Suggests thatEntries in submits approach. items are selected analysis after screening, significant policy to finance a forum toitalics are part “screening for monitoring, department. with outline and adverse eVects on projects designed discuss andof JBIC’s form”. Env issues and for “B” category. For protected areas. to improve env— examinedraft env confirmed via based on “A” and “B”, and to reduce disputes,guidelines not sector-specific monitoring form. analysis greenhouse gas which alsoyet in force. checklists for Info supplied by documents also emissions. includes

“A” and “B”. borrower, but published. Ex stakeholders isChecks extent of JBIC may also post, results of desirable.stakeholder investigate. env reviews ofparticipation for “A” and “B” on“A”. EIA for website.“A”. Env review Disclosure alsofor “B”. for funding to

financialintermediaries.

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EKN Questionnaire Benchmarking On case by case One env Requests Reviewing(Sweden) asks for both approach. basis.EKN have coordinator and applicants involvement in

negative and started some external publish info on Indo-nesian pulppositive impacts. evaluating consultants. env impacts of industry.EIA required for climate impact of planned projects.“A”. Climate its guarantee Some ex posteVects must be portfolio and info published.stated in EIA. reduction

strategies.

EBRD EIA required for Host country/ Monitoring may Presumption in Exclusion list Energy andsome greenfield, EU/World Bank be required favour of based on intl eYciency team tomajor expansion standards in line during EBRD disclosure in the conventions. See develop andor conversion with global financial absence of Appendix 8. implement energyoperations, and conventions involvement in compelling eYciencywhere project project. reason for investmentmight aVect env confidentiality. projects.sensitive areas. For “A”, EIA

and executivesummary (inlocal language)released 60 daysprior to Boarddecision forprivate sectorand 120 days forpublic sector. For“B”, env analysisreleased 30 daysprior to Boarddecision.

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IFC Projects screened Based on PPAH Monitoring at Approx 60 env Presumption in Exclusion list: Special unit to OYce of CAOinternally based and intl least annually staV, including favour of protected identify and (ombudson info provided conventions. until loan is env investors. disclosure. Env wildlife, develop env person)by sponsor and Policies on repaid—and and social info hazardous projects—esp incategory natural habitats, longer when an publicly available substances partnership withassigned. EIAs forestry, dams equity stake is at or near site for subject to grant-makingfor projects with and intl involved. all “A” and “B”. international institutions.significant waterways. EIA released at phase-outs; driftimpacts, or least 60 days net fishing withenvironmental before Board long nets; andaudits or similar decision—and env logging inwhere likely info for “B” primary tropicalimpacts more projects at least 30 moist forests.restricted. days ahead.

World Bank Projects screened PPAH, and intl Monitoring until 250 professionals EIA released at Exclusion list: Portfolio of env Inspectioninternally based conventions. final payment is working on least 60 days protected projects rose panelon info provided Policies on disbursed. env-related before Board wildlife, from $564 m inby sponsor and natural habitats, issues. decision. The hazardous 1993 to $1,072 mcategory assigned. forestry, dams Bank has a substances in 1996, butEIAs for projects and intl number of pilot subject to dropped to $514with significant waterways. projects to test international m in 2000.141

impacts, or ways to provide phase-outs; drift Prototype carbonenvironmental additional info net fishing with mech for project-audits or similar on projects to long nets; and based emissionswhere likely target audiences. logging in trading.impacts more primary tropicalrestricted. moist forests.

env % environment(al)info % informationintl % internationalmech % mechanismmgmt % managementPPAH %World Bank’s Pollution Prevention and Abatement HandbookSD % sustainable development141 Operations Evaluation Department, OED Review of the Bank’s Performance on the Environment,World Bank, 5 July 2001.



ANNEX VI

EPI FINANCE INDICATORS 142

CommercialIndicators: Banking Investment Banking Asset Management Insurance

ManagementPerformance (MPI)1: Know-how Environmentally relevant posts and environmental departments2: Training Environmental management training3: Auditing Environmental management auditsOperationalPerformance (OPI)4: Integration into the Environmental Environmental risk Assets under green Environmental riskcore business risk check check management coverage5: Environmentally Financing Transactions with Investments in Environmentallyoriented services environmentally environmentally environmentally innovative products

oriented pioneers oriented pioneers oriented pioneers

ANNEX VII

WWF SUGGESTED STANDARDS FOR BANKS’ FOREST INVESTMENT POLICIES

Background

Despite its value to humanity, over 50% of the world’s original forest cover has disappeared and forestscontinue to be lost at a rate of 9-16million ha/year143. At the same time, the quality of much of the remainingforest is declining rapidly.

Without significant changes in policy and practice, the process of forest conversion and excessiveextraction of resources from forests will continue at an alarming rate and pose a major threat to HighConservation Value Forests (HCVF)144, freshwater ecosystems, livelihoods of forest dependant peoples andhabitats of endangered species such as elephants, rhinos, tigers and great apes.

A key strategic goal of WWF is to halt and reverse the loss and degradation of forests worldwide. Inaddition to outright protection,WWF promotes sustainable forest management to avoid over-extraction ofresources and systematic landscape planning to protect High Conservation Value Forests from conversion.

By financing commercial operations aVecting forests, the financial sector plays a crucial role in forestconversion. At its worst, easy access to funding encourages companies to engage on growth paths which areunsustainable environmentally as well as economically. In light of this danger, leading players in thefinancial sector have started systematically screening potential projects according to environmental criteria.By doing so, the financial sector contributes towards the adoption of sustainable business models.

WWF calls on financial institutions to adopt policies for their financing activities aVecting forests. Thisdocument sets out suggested standards for such forest investment policies.

Scope of Forest Investment Policy

— Types of banking relationships to which the forest investment policy (“Policy”) applies: (a) loansextended by the lending institution (“Bank”), whether as an individual lender or as part of asyndicate, (b) bonds underwritten by the Bank, (c) financial instruments (eg stocks, bonds)purchased by the Bank for its own book

— Counterparties to which the forest investment policy applies: Companies that receive financingfrom the Bank (“Companies”) and that (a) extract resources from forests, (b) manage forests, (c)conduct operations in forests, (d) conduct operations on land recently145 cleared of forests, (d)process or trade unprocessed forest products (e) engage in operations with a direct impact uponforests (f) are related146 to companies that are involved in any of the activities (a)-(e)147

— Projects/operations to which the forest investment policy applies: The conditions of the Policyapply to a Company’s operations irrespective of division or geography

142 “EPI-Finance 2000: Indicators measuring the environmental performance of financial institutions”, 28 July 2002,www.epifinance.com/project.htm

143 United Nations Food and Agriculture Organisation.144 High conservation value forests are defined in the Forest Stewardship Council’s Principle 9, as forests that need specialprotection for their biological value (eg they may contain rare or threatened species or ecosystems); their environmental value(eg they serve as critical watersheds) or their social value (eg they are the prime source of subsistence materials, medicines andfood for local communities).



— Contracts to which the forest investment policy applies: (a) all new proposals submitted to theBank’s Risk Management Unit148 for approval (at the time of approval), (b) existing contracts (atthe time of the next semi-annual/annual review)

Conditions for Financing

Forest management

— Sound forest stewardship: TheCompany adopts soundmanagement practices for its forest-relatedoperations, so as tominimize negative environmental impact of its operations, such as biodiversityloss. The Company undergoes FSC-certification for forests under its management and/or sourcesits wood from FSC-certified forests

— Wood sourcing and tracking: The Company does not engage in sourcing from illegal loggingoperations149; the Company puts in place institutionalized processes for the systematic tracking ofall wood (chain of custody)

— Toxics management: the Company has in place procedures to minimize and monitor the properuse and disposal of chemicals, biological control agents and liquid, air and solid non-organicwastes150

— Genetically modified organisms: The company does not engage in the planting of geneticallymodified tree species or procure timber from sources engaging in the planting of such species

— Stakeholder involvement: Processes are in place at the Company for regular consultation of localstakeholders and for their participation in decision making where such decisions aVect theirlivelihoods

— Respect for local communities: the Company (a) does not infringe the legal and customary rightsof indigenous/local peoples to own, use and manage their lands and resources, (b) puts in placemeasures to strengthen and diversify the local economy, (c) provides local peoples withopportunities for employment, (d) does not engage in activities that damage the health of localinhabitants

— Respect for employees: The Company provides its employees with fair compensation, the right toorganise and a healthy and safe working environment

Forest conversion

— Type of forest: No conversion of high conservation value forest

— Time period since conversion: No projects on land converted after 1994, unless proven to be non-HCVF151

— Legality: No contravention of any local, state or national law or of international agreements towhich the country concerned is a party (including, but not limited to, moratoria on logging,declarations of protected areas, environmental laws)

— Method of clearing: Nomethod of clearing that has a negative impact on the environment beyondthe immediate area planned to be cleared (eg fire)

— Legal title: No conversion of land under dispute152

— Landuse planning: Landuse plan in place with agreement of local stakeholders and companiesextracting forest resources from the area

— Impact assessment: Third party assessment of environmental and social impact of the project/company

145 “Recently”: since 1994.146 “Related”: owned by the same majority shareholder/ultimate beneficiary.147 Cf. Appendix 1 for examples of industries.148 Unit’s title will vary by organisation.149 Cf. Appendix 2 for a definition.150 Cf. Appendix 3 for examples of practices.151 The 1994 deadline ensures consistency with the international standard of the Forest Stewardship Council (FSC).152 Includes disputes over customary rights of indigenous or local peoples.



Application of Forest Investment Policy

— Required level of compliance: A project/company to be financed must satisfy conversion andmanagement conditions. The Risk Management Unit may grant exceptions from individualconditions of the Policy, provided that the Company commits to move to full compliance by theend of a transition period not exceeding five years. In all cases where exceptions have been granted,the (semi)-annual review shall explicitly assess the progress that the Company has made in movingto full compliance

— Required documentation: Any proposal must include documentation of a recent assessment ofeach condition in writing. Such assessment can be undertaken either by a trusted third party153 orby the Bank itself

— Enforceability of conditions: Loan documentation should include the conditions set out in thePolicy with an understanding that false declarations of compliance or failure to adhere to theconditions are considered events of default

— Transparency and independent monitoring: Regular audits of the Company/Project areundertaken by an independent third party or by the Bank, assessing the Company’s compliancewith the conditions of the Policy. The summary results of these audits are made public

— Regular review: (a) contracts are reviewed at least annually by the Bank’s RiskManagementUnit,(b) should the Company/Project be found to be in default of the conditions of its loan facility, thistriggers an immediate review by the Risk Management Unit

— Capability building: (a) the Bank undertakes training programmes of all personnel involved in itscredit application and approval processes to ensure an adequate level of understanding of thePolicy, (b) the Bank maintains a dedicated Environmental Risk Assessment unit that acts as acentre of competence towards credit oYcers

— Exceptions management: All exceptions to the Policy must be approved by Environmental RiskAssessment and a member of the Bank’s Executive Board154

Standards appendix 1

Examples of industries whose operations directly aVect forests (not exhaustive)

— Logging

— Pulp & paper

— Timber plantation

— Oil palm plantation

— Soy plantation

— Lifestock rearing

— Shrimp or other aquaculture farming

— Extractive and open pit mining (eg ore, precious stones & metals)

— Energy generation

— Infrastructure projects (eg roads, dams for hydroelectric power generation)

— Tourism


WWF believes that illegal logging and other forms of forest crime are part of a larger problem thatincludes issues of forest governance and corruption and is much more significant than simply a question ofa few people violating resource-management laws. WWF uses the term “forest crime” to include both largeand small-scale timber theft and a variety of issues such as transfer pricing, breaching tax rules, any illegalaspects of timber sourcing and circumvention of concession agreements through bribery or deception.

— Based on theWorldBank definition (as published in theWBCEO forumon forests), illegal loggingis defined as logging outside a concession area in excess of quota in a protected area withoutappropriate permits without complying with bidding regulations

— without submission of required management plans

— in prohibited areas such as steep slopes, river banks, and water catchments

— protected species (as defined by CITES or other international law)

— with duplicate felling licenses

— using girdling or ring-barking to kill trees so they can be logged legally

153 “Trusted third party”: An auditor/certifier independent from the Company.154 Definition of appropriate level will vary from company to company.



— that contracts with local entrepreneurs to buy logs from protected areas

— removing of under/over sized trees from public forests

— reporting high volumes extracted from forest concessions to mask that part of the volume is fromnon-authorized areas outside of the concession boundaries

— using bribes to obtain logging concessions

— using deceptive transfer pricing and other illegal accounting practices to distort prices, volumes,cash flows and debt service levels (for example some companies will inflate the price of importedinputs such asmachinery and deflate prices and volumes of their exports to reduce nominal profits,their tax liability with the host country and to illegally transfer funds abroad.)

— that engages in the illegal transport and trade of timber or the smuggling of timber

— that is processed with out the required licenses and that is not in compliance with environmental,social and labour laws


Policies and procedures in place to reduce the level of wastes would include among others:

For Pulp and Paper Operations:

— The use of dry debarking processes

— Prevention and control of spills of black liquor

— The preference of total chlorine free processes but at a minimum the use of elemental chlorine freebleaching systems

— Reduction of the use of hazardous bleaching chemicals by extending cooking and oxygendeligification

— Aim for zero eZuent discharge where feasible. Reduce wastewater discharges to the extentfeasible.

— Incinerate liquid eZuents from pulping and bleaching process.

— De-water and properly manage sludge

— Reduce the odor from reduced sulfur emissions by collection and incineration and by using low-odor recovery boilers fired at over 75% concentration of black liquor

— For Vegetable Oil Operations:

— The preference of citric acid to phosphoric acid in degumming operations

— The preference of physical refining over chemical refining

— Maintenance of hexane levels, if used, below 150 mg / m3.

— Recirculate cooling waters

— Collect wastes for use in by-products (animal feed) or as fuel.

— For Wood Products Operations:

— Do not use pentachlorophenol, lindane, tributyltin, copper chrome arsenate as a preservativegiven that less toxic alternatives are available for wood treatment

— Use of pressurized treatment processes

— Recycle solvent vapors where feasible or destroy them in a combustible device or a bio-oxidation system

— Manage contaminated soil and sludge as hazardous wastes

— For Plantations:

— A no burn policy / practice

— All hazardous materials, process residues, solvents, oils and sludge from raw water, processwastewater and domestic sewage treatment systems must be disposed of in a manner to preventthe contamination of soil, groundwater and surface waters

— Transformers or equipment containing polychlorinated biphenyls should not be used

— Preference for Biological and non-chemical pest control systems (eg barn owls for rat control)

Chemicals, biological control agents and solid non-organic wastes includes among other things: NOx,VOC (volatile organic compounds), total reduced sulfur (TRS), AOX (absorbable organic halogens), BOD(biochemical oxygen demand), COD (chemical oxygen demand) chlorine dioxide and elementalchlorine,polychlorinated biphenyls (PCB), and chromated copper arsenate (CCA).



ANNEX VIII

ERBD Exclusion List155

EBRD guarantees may not be issued to guarantee exports or imports of the following types of goods:

— Armaments and munitions

— Tobacco and tobacco products

— Hard liquor (over 12% alcohol volume)

— Products prohibited for import to, or exports from, the relevant countries by applicable law orinternational convention.

In addition, the following environmental-related activities, products and substances are not eligible underthe programme. Any applicants or end-users in the EBRD’s countries of operations involved in productionor trade of such products are not eligible for TFP transactions.

— Trade in wildlife or wildlife products regulated under Convention on International Trade inEndangered Species of Wild Fauna and Flora (CITES);

— Release into the natural environment of genetically modified organisms (GMOs) or trade inGMOs to be released into the natural environment;

— Production, distribution, sale and trade in pesticides, herbicides, pharmaceuticals and otherhazardous substances subject to international phase-outs or bans;

— Drift net fishing in the marine environment using nets in excess of 2.5 km in length;

— Production, storage, treatment disposal or trade in radioactive materials and radioactive wastes,excluding trade in medical or quality control equipment, etc where the radioactive source is trivialand/or adequately shielded;

— Production or trade in products containing PCBs (polychlorinated biphenyls);

— Production, use or trade in unbonded asbestos fibers and asbestos-containing products excludingasbestos cement sheeting where asbestos content is less than 20%;

— Transboundary trade in waste or waste products;

— Shipment of oil or other hazardous substances in tankers without valid IMO certificates, includingMARPOL and SOLAS certificates;

— Production, use or trade in chlorofluorocarbons (CFCs), halons and other ozone depletingsubstances subject to international phase-out;

— Activities involving harmful or exploitative forms of forced labor/harmful child labor,discriminatory practices, or practices which prevent employees from lawfully exercising theirrights of association and collective bargaining;

— Activities prohibited by host country legislation or international conventions relating to theprotection of biodiversity resources or cultural heritage;

— Other activity in violation of host country (ie national) health, safety and environmental laws orregulations;

— Lack of export or import licenses or other evidence of authorization of transit to/from country ofexport/import.

References

David Allwood, “ECGD Response”, Beyond Business Principles workshop, House of Commons,London, 23 May 2002.

Jan JaapBouma,Marcel Jeucken andLeonKlinkers (eds), Sustainable Banking:TheGreening of Finance,Greenleaf Publishing, UK, 2001.

Credit Suisse Group, Credit Suisse Group Sustainability Report 2001.

Nigel Dudley and Sue Stolton,ToDig orNot toDig: Criteria for determining the suitability or acceptabilityof mineral exploration, extraction and transport from ecological and social perspectives,WWF, January 2002.

ECA Watch, Reforming Export Credit Agencies—Our Demands, Berlin, March 2002.

“EPI-Finance 2000: Indicators measuring the environmental performance of financial institutions”, 28July 2002 www.epifinance.com/project.htm.

155“Trade Facilitation Programme, Exclusion List”, European Bank for Reconstruction and Development (EBRD), 29 July2002 www.ebrd.com/apply/trade/about/exclude.htm. The EBRD’s Trade Facilitation Programme promotes foreign tradewith central and eastern Europe and the CIS. Through the programme, the EBRD provides guarantees to internationalconfirming banks. In so doing, it takes the political and commercial payment risk of transactions undertaken by issuing banksin the countries where the EBRD operates.



Export Credits Guarantee Department,Mission and Status Review 1999–2000, London, 2000.

Export Credits Guarantee Department, Annual Report & Resource Accounts 2000–01, London, 2002.

Fern, “Export credits: Fuelling illegal logging”, Fern Briefing Note, April 2002.

Fern, “Fern’s Comments on the Report from the Commission COM (2002) 212 final ‘Experience gainedand the convergence achieved in applying the provisions laid down in the Directive on medium and longterm export credit insurance’”, Brussels, 24 July 2002.

John Ganzi, Frances Seymour and Sandy BuVett, Leverage for the Environment: A guide to the privatefinancial services industry,World Resources Institute, Washington DC, 1998.

Greenpeace, Exporting Pollution: Double standards in UK energy exports, London, July 2002.

Kate Hampton, Credit where it’s Due: The Role of Export Credit Agencies in Promoting SustainableEnergy,WWF International and the Institute for Policy Studies, Switzerland, October 2001.

Nicholas Hildyard, Briefing 14—Snouts in the Trough: Export Credit Agencies, Corporate Welfare andPolicy Incoherence, The CornerHouse, 400 (14), 1999

Michael Jeucken, “Sustainable Banking in Perspective: The Cases of 34 International Banks”,SustainableFinance and Banking: The Financial Sector and the Future of the Planet, Earthscan, 2001.

CrescenciaMaurer,TheTransition fromFossil toRenewable Energy Systems:What Role for Export CreditAgencies, German Advisory Council on Global Change, Berlin, forthcoming (draft dated July 2002).

Crescencia Maurer with Ruchi Bhandari, The Climate of Export Credit Agencies, World ResourcesInstitute Climate Notes, Washington, DC, May 2000.

National Economic Research Associates, The Economic Rationale for the Public Provision of ExportCredit Insurance by ECGD, ECGD, London, 2000.

OECD, Common Approaches on Environment and OYcially Supported Export Credits, 2001.

Operations Evaluation Department, OED Review of the Bank’s Performance on the Environment,WorldBank, 5 July 2001.

Brian Pearce and Paul Ekins, International Financial Institutions: Enhancing their role in promotingsustainable development, Department for Environment, Food & Rural AVairs, London, 2002.

HeVa Schucking, ECAs in Comparison, Urgewald, 2001 (unpublished).

SustinAbility, IFC, Ethos (2002), Developing Value: the Business Case for Sustainability in EmergingMarkets, London

Swiss Re, Swiss Re Environmental Report 2001: Achievements and expectations.

Lori Udall, “Export Credit Agencies”, Prepared for Thematic Review V.4: Regulation, Compliance andImplementation,World Commission on Dams, Cape Town, 2000.

World Bank (2002), The World Development Report 2002, World Bank, Washington DC.

APPENDIX 21

Supplementary memorandum by Transparency International (UK)

Export Credits Guarantee Department

Further to my e-mail of 7 May and in response to the request made by Ms Mallaber at the Committeesession on 20April, I now enclose a copy of the e-mail message of 4December 2003 from ECGD that copiedto me a summary of the opinion of Counsel on which the ECGD relied in order to claim that it was notempowered to operate a debarment sanction.

I had been hoping to be able to let you have a full response to the request of Mr Hoyle for informationregarding the approach to due diligence adopted by other export credit agencies in regard to agents’commissions. I regret that this has not proved possible. TI’s international secretariat did not have recentspecific information and TI(UK) does not have the resources, nor indeed would it be particularlyappropriate, itself to undertake a direct survey. I have been in touchwith ECGDwhich has kindly briefedmeon the basis of an OECD survey valid as ofMarch this year, but not yet finalised and not therefore generallyavailable. The OECD Working Party on Export Credits and Credit Guarantees surveyed measures takenby the oYcial export credit agencies (ECAs) of 28 member countries to combat corruption by reference toa number of questions which include some directed to the practice in respect of agents’ commissions.

The vast majority of ECAs indicated that agents’ commissions are eligible for oYcial support. Someexclude agents’ commissions and others apply a numerical cap such as 5%. Most apply a case-by-caseapproach and judge commissions against what they consider to be industry norms.



About two-thirds of ECAs require details of agents’ commissions at some stage during the life of thesupported credit. More than half of these require them at the time of the application, which is currently theECGD’s practice. Some ECAs indicated that details of commissions are sought in the event that someimpropriety is suspected.

Whilst writing, I am enclosing a copy of a summary (received from the prosecuting counsel) of a LesothoCourt of Appeal judgment in the case of Lahmeyer International GmbH which had been charged withbribery in the case of the Lesotho Highlands Development project. The case is unusual in that the hostcountry itself prosecuted a number of international contractors. Its interest for present purposes lies in thefinding of the Court of Appeal that the substance and reality of an agency commission is more importantthan the appearance derived from related agreements which may be mere shams.

I trust the Committee will find this supplemental information helpful.

ECGD and ECA Anti-corruption Best Practice

Thanks for your comments—I have forwarded them to our OECD team and am trying to arrange for around table, although this has proved very diYcult so far and written comments may prove to be the bestway forward. Apologies for the delay in my response—I had to take some time oV at short notice.

With regard to your questions over the blacklist, I asked counsel to revisit the position we have statedpreviously in the light of your comments and they stand by the following:

“ECGD is subject to general principles of administrative law. Pursuant to one of such principles, thesecretary of state may not fetter his future discretion; he must, in each case, evaluate all relevant facts beforemaking decisions. If blacklisting means automating a refusal to grant cover to a company that has beenconvicted for corruption or debarred from the services of another institution, blacklisting would be contraryto the duties of the Secretary of State and could be successfully challenged by way of judicial review.

“While ECGD cannot blacklist companies, a company’s conviction for corruption or its inclusion in theworld Bank’s blacklist would be a prima facie reason for refusing it cover.”

I will be in touch shortly with regard to the best practices document.

C of A (CRI) 6 OF 2002

IN THE COURT OF APPEAL OF LESOTHO

In the Matter between:

LAHMEYER INTERNATIONAL GmbH APPELLANT

and

THE CROWN RESPONDENT

Executive Summary

The Full Court—being:

J H Steyn, PresidentF H Grosskopf, Judge of AppealJ W Smallberger, Judge of Appeal

1. The appellant, Lahmeyer International GmbH (“Lahmeyer”), appeared in summary proceedings inthe High Court beforeMofolo J and two assessors on twelve counts of bribery allegedly committed over theperiod 21 December 1989 to 10 April 1997. At the conclusion of a protracted trial Lahmeyer was convictedon seven counts (being counts 2, 6, 7 and 9 to 12) and acquitted on the remaining five counts. It was sentencedto fines on each of the seven counts amounting to £10,650,000 in all. The present appeal is directed againstLahmeyer’s convictions on all seven counts. There is no appeal by Lahmeyer against sentence. The Crownhas noted a cross-appeal in respect of four of the counts on which Lahmeyer was acquitted. It also seeks toappeal against what it claims to be the leniency of the sentence imposed.

2. The essence of the charges against Lahmeyer was that it, with intent to bribe, had from time to timepaid varying sums of money into Swiss bank accounts held by one Z M Bam (“Bam”) and his wife (“MrsBam”) who thereafter, acting as intermediaries, had transferred the amounts in question, or part thereof,to Mr Sole (“Sole”), who at all material times was the Chief Executive OYcer of the Lesotho HighlandsDevelopment Authority (“the LHDA”) and a civil servant in the employ of the Lesotho Government (andas such a public oYcial). The Crown alleged that the payments in question were made in respect of actionor inaction by Sole in his aforesaid capacity and were intended to influence him in such capacity. That Solewas a public oYcial is not in issue in the appeal.

3. The LHWP is one of the biggest and most ambitious projects in the world and entailed inter alia theconstruction of the Katse Dam in a remote and inaccessible part of the Highlands of Lesotho. The ambitand objects of the project are set out in the judgment. One of its principal purposes was the delivery of watersto South Africa.



4. It is not necessary to set out the details as to how Lahmeyer came to be involved in the project andhow they developed a relationship with Bam referred to above. However, it is common cause that Lahmeyerpaid Bam vast sums of money, some of which was on-paid to Sole. The amounts paid to Bam weresubstantial amounts in cash ie £1,495,590 and by way of bank transfers into Bam’s Swiss Bank accountssome £804,213. In all rounded oV the sum of £23,000,000. In terms of the charges before us payments fromBam to Sole were made from the bank transfers into Swiss bank accounts held by Sole.

5. The crux of the present appeal is whether the payments to Bam, particularly those on paid to Sole,were bribes or were legitimate remuneration for agency work done by Bam under valid representativeagreements. It was common cause that the question to be answered was: were these agreements genuine orwere they shams, calculated to disguise the true nature of the relationship—ie bribery?

6. We have analysed the evidence extensively in the judgment (see par 15 at p 15 to par 44 at p 39). Weproceed to pose the ultimate question at par 45—p 39 of the judgment, where we say:

“… in the light of all the evidence adduced at the trial, was Lahmeyer’s guilt established beyondreasonable doubt?”

We go on to say that: “This translates into whether the only reasonable inference to be drawn consistentwith all the facts, is that Lahmeyer bribed Sole.”

7. We then concluded as follows:“[46] It is common cause that the evidence with regard to counts 6, 7 and 9 to 12 establishes a flowof money from Lahmeyer to Bam and in turn from Bam to Sole. It was conceded on behalf ofLahmeyer that bribery could have been the cause of the payments to Sole, but it was contendedthat this had not been proved beyond all reasonable doubt. We are satisfied on a conspectus of allthe evidence, and having duly stepped back a pace to “consider the mosaic as a whole” that,applying accepted principles of inferential reasoning, the only reasonable inference to be drawn inthe present matter is that Lahmeyer paid Bam money for the purpose of bribing Sole, that themoney that was passed on to Sole by Bam in respect of the counts in question was in furtheranceof that purpose and that the RAs were not genuine in that they were primarily entered into asdevices to disguise the true relationship between Lahmeyer and Bam and to facilitate unlawfulpayments to Sole. In the result Lahmeyer’s appeal against conviction on counts 6, 7 and 9 to 12falls to be dismissed.”

8. We then deal with count 2 and concluded as follows at par 57 p 44:“[51] In our view the Crown has failed to prove any link between Lahmeyer’s payment ofFF135,760 to Bam andBam’s payment of FRF 458,600 to Sole. The probabilities in fact show thatthe payment to Sole derived from Acres and not from Lahmeyer. In the circumstances the Crownhas failed to proved its case on count 2 and Lahmeyer’s appeal against conviction on count 2accordingly succeeds.”

8. The Cross Appeal by the Crown

Counsel for Lahmeyer contended that the Crown did not have the right to appeal in accordance with theprovisions of sec 7(2) of the Court of Appeal Act (Act 10 of 1978) which limits the right of the Crown toappeal only “upon a point of law.” This provisionwas however amended byAct 8 of 1985. As a consequencethe Crown now has the same rights of appeal as an accused, ie it can appeal on any matter “of fact or law”.

9. The Crown cross-appealed on counts 3, 4, 5, and 8 on which the High Court acquitted Lahmeyer. Wehold that the Crown’s appeal succeeds on counts 3 and 5 and is dismissed in respect of counts 4 and 8.

10. Sentence

We deal with the various considerations that should be borne in mind by a Court of Appeal in general,and by this Court on the facts of this case in particular.

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