Set up to assist companies to export capital and project-related goods and services, ECAs provide companies with insurance against the main commercial and political risks of operating abroad, in particular, of not being paid by their creditors. The system is simple. To obtain an export credit guarantee, the exporter takes out insurance with an ECA, which undertakes to pay the exporter for the exported goods should the importer default on payment. If it does have to pay up, the ECA passes on any debt that is not covered by the premiums it has received to the government of the importing country, adding it to the stock of bilateral debt owed to the ECA's home government.16 Ultimately, therefore, it is the poor of the South who end up paying the bulk of the bills.
Many of the projects backed by ECAs would not go forward without their support, since private sector banks and insurance firms are simply unwilling to underwrite the high financial risks involved. Yet, even where the companies involved have failed to take due financial diligence or have been accused of corrupt practices, ECA support ensures that the companies involved are bailed out. In July 1998, for example, the Pakistani government cancelled a deal with BC Hydro, a Canadian company, alleging corruption; part of the loss was swallowed by the project's "senior lender" Canada's Export Credit Agency, the Export Development Corporation (EDC).17
For companies and the banks that finance them, the advantages are obvious. As Midland Bank executive Stephen Kock in charge of arms deals and a former MI6 "asset", puts it:
"You see, before we advance monies to a company, we always insist on any funds being covered by the [UK] Government's Export Credits Guarantee Department ... We can't lose. After 90 days, if the Iraqis haven't coughed up, the company gets paid instead by the British Government. Either way, we recover our loan, plus interest of course. It's beautiful."18
Services provided by ECAs include: providing "Buyer Credits" in the form of 100% unconditional guarantees to banks who make loans available for overseas purchases of goods and services; underwriting the losses of commercial banks if the agreed interest rates on loans for overseas projects prove insufficient to cover their costs "plus a reasonable rate of return"; and covering losses resulting from specified political risks, "such as a foreign government seizing or confiscating an investment, suddenly imposing restrictions on profits leaving the country or the outbreak of civil war".19
It is a truth universally acknowledged that a private company in possession of a business contract must be in want of a public institution to shoulder its financial losses, since private gain is most profitably pursued at public expense.
For companies operating overseas, a range of public institutions - from the Multilateral Development Banks (MDBs), such as the World Bank, to bilateral aid agencies and government-backed Export Credit Agencies (ECAs) and Investment Insurance Agencies (IIAs) - have long offered a range of services that perfectly match the needs of companies seeking to off-load onto the taxpayer the commercial risks of undertaking contracts abroad. A whole industry has now grown up to direct companies to the easiest source of ready subsidy and to help them obtain the funds on offer.
Northern-based companies, for example, have ably exploited the massive infrastructure development programmes funded since the Second World War by the World Bank to open up new markets and secure contracts at the public's expense. Much of the $25 billion lent each year by the Bank to Southern governments for development projects and policy reforms is returned to the North in the form of consultancies or construction contracts, some 40,000 of which are awarded annually.
In 1992, for example, over half the money lent by IDA (the arm of the World Bank which lends money at concessional rates to the world's poorest countries) went to companies in the world's ten richest nations as payments for goods and services. The UK topped the list of the rich countries benefiting from "aid" for the poor: $285 million of IDA money came to Britain in 1992, more than went to Bangladesh.
In 1994, World Bank contracts awarded to UK companies totalled £961 million - some £700 million more than Britain subscribed to the Bank as its annual capital input.
In the US, between 1993 to 1995, the MDBs channelled nearly $5 billion to US firms. Major beneficiaries included General Electric, General Motors, Motorola, IBM, AT&T, Allied Signal, Cargill and Westinghouse. Caterpillar alone raked in $250 million a year in export sales of construction equipment as a result of MDB projects.
But while MDBs provide Northern companies with secure government-funded contracts for infrastructure and other development projects in the South, they have limited facilities for funding private sector projects. Historically, they have also been reluctant to back arms sales or the construction of civil nuclear power plants and other projects with a link to weapons proliferation.
ECAs, by contrast, have no such qualms. Moreover, unlike the MDBs, the majority of ECAs are unconstrained by the restrictive environmental and development guidelines that the MDBs have now been forced to adopt. Small wonder that they are viewed by companies operating abroad as an attractive source of government subsidy.
Sources: US Department of the Treasury, The Multilateral Development Banks: Increasing US Exports and Creating Jobs, Washington DC, May 1995.
In the 1980s, ECAs fell out of favour with industry, largely because they were considered too bureaucratic.20 But now they are the most commonly-used means of featherbedding risky Third World business contracts (see Box: Public Risk, Private Profit). Between 1988 and 1996, the worldwide value of new export credit loans and guarantees increased four-fold - from $26 billion to $105 billion a year.21 By 1996, ECAs were supporting $432.2 billion worth of exports (about 10% of the world total)22 in the form of guarantees, insurance and loans - a 40% increase on the figure for 1990.23 While much of this credit involved short-term transactions, an estimated $70 billion a year was for medium and long-term cover,24 with approximately half of the new commitments going to large infrastructure projects in power generation, telecommunications and transport, predominantly in the South.
ECA support for such projects is now so large that, according to Bruce Rich of the US-based Environmental Defense Fund, ECAs are now:
"the single largest public financers of large-scale infrastructure projects in the developing world, exceeding by far the total annual infrastructure investments of multilateral development banks and bilateral aid agencies."25
Heffa Schucking of the German NGO Urgewald observes that:
"If you are an environmental activist and you are fighting a project that will destroy a river, a forest or displace a community in a developing country, chances are that the project you are up against is being backed by an Export Credit Agency."26
Recent examples include:
- the massive Three Gorges Dam on the Yangtze River in China for which an estimated 1.3 million people will have to move (see Appendix 1);
- the Maheshwar dam in Madhya Pradesh, India which has provoked widespread public protest in the area affected (see Appendix 1);
- the San Roque hydropower and irrigation dam in the Cordillera region of the Philippines, the last in a series of three dams on the Agno river which have severely disrupted the lives, economy and environment of the region's Ibaloi people over the past 45 years (see Appendix 1);
- five dams on the Mekong in Laos, many of which will be undertaken by the private sector on a Build, Operate and Transfer (BOT) basis;
- the Urucu gas and oil project in the western Amazonian region of Brazil which will cut through some of the least disturbed rainforest in the region (see Appendix 1); and
- the Paiton power project in Indonesia (see Appendix 1).
One reason for the explosive growth in the export credit business during the 1990s lies in moves to liberalise the global economy and in the resulting privatisation of infrastructure development and public services. Whereas in the past, infrastructure projects were largely planned, commissioned and financed by public authorities using public money, often in the form of loans from MDBs and other international bodies, the trend now is towards private sector financing and ownership.
Although total net private capital flows to the Third World and Eastern Europe have declined since South-East Asia's economic collapse in 1998, falling from a record $328 billion in 1996 to $140 billion in 1998,27 private sector flows are expected to regain their previous levels and outstrip public transfers of funds once again as the driving force of infrastructure development in the countries of Asia, Latin America and (to a lesser extent) Africa. In the mid-1990s, the private sector financed about 10-15% of infrastructure investments in the Third World, with the World Bank predicting that private investors could soon be providing as much as 70% of infrastructure investment. Although private sector financing for infrastructure projects in the developing world fell to less than $20 billion in 1999, the expectation is that it will soon recover to earlier levels.28
The increasing "privatisation" of infrastructure development has meant that construction and engineering companies have been forced to take on financial risks which, in government-sponsored projects, were previously borne by the State - risks which, in the absence of taxpayer support, potentially threaten shareholder profits and may make raising the necessary finance more difficult. Banks, in particular, have proved extremely reluctant to back large-scale private sector infrastructure projects without the backing of investment insurance, since most such projects are increasingly financed on a so-called "non-recourse" basis - in the event of a default, the investors have no claim other than on the assets of the project itself.29 Although in the boom years of the early 1990s, a significant number of project financiers (perhaps believing their own free-market propaganda) thought they could avoid investment insurance, primarily by using bond issues rather than bank loans to finance their projects, many have had their fingers badly burned, particularly in South-East Asia. As the former Chief Executive of the UK ECGD observes:
"In the year or so up to the end of 1997, there had been growing euphoria both that political risks were a thing of the past and also that any kind of project could be structured as a project financing on a viable basis and that, for example, it did not matter if the project was on the Isle of Wight or [in] Chad. Others thought that it was irrelevant whether the project concerned raw materials which could be extracted and sold for foreign currency or drinking water for consumption by people who had no experience of paying anything for water, let alone the true economic cost."30
Not surprisingly, project financiers are increasingly insisting on some form of investment insurance before they will invest in new private sector infrastructure projects. Raising investment insurance through the private sector, however, is often difficult, particularly where the project is in a country with a low credit rating. As a result, project developers are increasingly looking towards publicly-funded bodies, such as ECAs and Investment Insurance Agencies (IIAs), for support. In the view of banker Martin Copeland of Deutsche Morgan Grenfell:
"ECA support is absolutely critical in countries for which there are no substantial credit limits available at banks."31
Indeed, in the energy sector, many commentators now believe that the future of privately-financed power projects is uncertain unless governments are prepared to give support in the form of investment guarantees. "The lenders cannot do it themselves on an uncovered basis", says Larry Bressler, Vice President of the Sanwa Bank Ltd of New York. "There is a need for export credit and multilateral agencies."32
Multilateral agencies, however, are no longer the easy milchcows they once were. Although MDBs, historically the biggest sources of public money for Third World projects, supply many of the same export credit services as ECAs,33 their funds for private sector support are limited.
More important, under pressure from environmentalists and development activists, the majority of development agencies, such as the World Bank, have introduced new environmental and development standards, which, though far from stringent and often not observed,34 nonetheless impose a range of environmental and social conditions on project developers. Environmental impact assessments are now mandatory for many categories of project; the participation of affected groups is increasingly encouraged; and project developers are (in theory) bound by a raft of rules governing projects involving involuntary resettlement, indigenous peoples, wetlands and forests.
In some cases, agencies such as the World Bank have found the political fallout from funding certain infrastructure projects (such as dams) so damaging that they have all but ceased to support them.35 As Roberto Piccioto, Director of the Bank's own Operations Evaluations Department, recently put it, "growing public awareness of social and environmental impacts of large [hydropower] projects" has made the "risk premia of supporting such schemes 'prohibitive'."36
Unsurprisingly, industry is increasingly irked by what it sees as bureaucratic red tape - it took six years to agree a loan from the International Finance Corporation (IFC), the private sector arm of the World Bank, for a power project on the Hub River in Pakistan - and institutional cowardice, with leading developers such as Enron, the US power company, publicly chastising the MDBs for protracted implementation times and excessive regulation.37
With MDBs no longer playing the game as industry would wish, many companies have turned to national ECAs to featherbed their Third World projects. As Project Finance, a leading trade journal, reports, ECAs are "back in fashion", with "[project] lenders and sponsors citing the export credit agencies as the solution to the funding gap in project finance."38
The attractions of ECAs are multiple:
- First, the services they offer - investment guarantees, insurance against political risk and export credits - are precisely those required to secure the private sector investment now needed to get projects off the ground;
- Second, those services come without any of the environmental and social conditions demanded by MDBs; and
- Third, ECAs have an institutional culture that is secretive, protective of business interests, generally blind to social and environmental concerns, and rooted in the clubby world of City back-scratching.
With rare exceptions - the US Export-Import (Ex-Im) Bank and the US Overseas Private Investment Corporation (OPIC) being cases in point - most ECAs have no human rights, environmental and development standards whatsoever. In Britain, for example, the ECGD is required under the 1991 Export and Investment Guarantee Act to take account of all economic and political factors that might adversely influence a loan. It has no legal obligation, however, to consider the environmental impacts of its investments or the contribution they will make to development; no obligation to ensure that all its projects comply with a set of mandatory human rights, environmental and development guidelines; and no obligation to screen out projects with adverse social and environmental impacts. This is despite clear language in the Final Communiqu_ of the June 1997 Denver Summit Meeting of G7 leaders, which Prime Minister Tony Blair attended as Britain's Prime Minister, committing the UK government to:
"help[ing] promote sustainable practices by taking environmental factors into account when providing financing support for investment in infrastructure and equipment."39
There are no formal policies, for example, that require environmental impact assessments for ECGD-backed projects or export deals; no requirements to ensure that rigorous safety measures and emergency accident response plans are in place for projects involving hazardous facilities, such as nuclear power or chemical plants; no requirements to ensure that those forcibly evicted as a result of a project will be adequately compensated and resettled; no requirements to consult with local people or concerned non-governmental organisations; no requirements to release documents that are relevant to assessing the social and environmental impacts of a project; no requirements to give timely advance notice of upcoming projects so that affected peoples can voice their concerns and objections; and no requirements to publish details of funded projects. Unsurprisingly, the ECGD is backing a wide range of projects with egregious social and environmental impacts (see Appendix 2).
The ECGD is not required to follow even the World Bank's (weak) guidelines for screening and monitoring projects, nor the guidelines recommended by the Development Assistance Committee of the OECD, nor the guidelines drawn up by the OECD to influence the conduct of multinational companies - all guidelines which the UK helped develop and to which it is formally committed.40 Its mission is entirely focused on promoting UK trade by "help[ing] exporters of UK goods and services to win business, and UK firms to invest overseas, by providing guarantees, insurance and reinsurance against loss."41 The only criteria that it employs for assessing projects and investments are "its normal underwriting criteria to ensure that the provision of support ... involves an acceptable risk."42 Although, in some instances (and generally only as a result of public pressure), environmental and social factors are taken into account in this underwriting process, the risks assessed are those posed to the financial and political viability of the project, not the risks that the project poses to the environment and to people.
Indeed, it is indicative of the ECGD's approach to the social and environmental impacts of its investments that senior officials appear at a loss to understand environmentalists' concerns over the Three Gorges Dam in China, which would drown 13 cities and force the relocation of 1.3 million people. Commenting on the project, one senior officer mused, "There was some problem about moving peasants there, wasn't there?"43
Although the ECGD has since commissioned a study "to examine the question of how export credit agencies can best take environmental factors into account",44 it has refused to make the document available for public comment. Likewise, although the Department of Trade and Industry has assured NGOs that "the ECGD is strengthening and deepening its procedures for assessing the environmental impact in the broadest sense of the projects which it supports", no details have been released to the public and there has been no consultation with leading UK environmental and development groups, let alone project-affected peoples.
Even parliamentarians seeking information on the environmental and social impacts of ECGD projects have been stonewalled. In February 1999, for example, Cynog Dafis MP requested a complete list of ECGD export credits and insurance agreements since 1995. In response, the Minister for Trade and Industry told the House of Commons:
"ECGD does not report individual guarantees without consent of the firms concerned and, in view of the number of guarantees involved, disproportionate cost would be involved in obtaining this."45
The ECGD has also refused to release copies of an environmental impact assessment undertaken by a Swiss consultancy firm of the Ilisu dam in Turkey (see Appendix 2). The Swiss Government's review of the assessment was given to the ECGD in July 1998. Neither the study nor the review has been published, however. Balfour Beatty, the British company that is hoping to construct the dam, has been reported as being against the publication of the assessments on the grounds that they are only "preliminary environmental assessments".46 The UK Government argues that the assessments cannot be released because "they are not our property."47 So much for New Labour's election promise that "transparency and accountability are our watchwords."
Secrecy apart, the ECGD's attraction to industry is further enhanced by the self-referential, club-like nature of its oversight procedures. Under the 1991 Export and Investment Guarantees Act, for example, an Advisory Council was established "to provide advice to the President of the Board of Trade, at his [sic] request, in respect of any matter relating to the operation of the Export Credits Guarantee Department."48 The Council does not make decisions on individual deals. However, it makes recommendations on which country markets are opened, closed or put on "alert" in terms of exposure and lending.
The ECGD itself recommends new advisory councillors, who are then "independently" vetted by the Department of Trade and Industry before being approved by the Minister. Council members are chosen "on the basis of their breadth of knowledge and experience" and include "senior and distinguished people from the banking, commercial and industrial sectors." In 1997, for example, the Council included the finance director of GEC, the chair of the BICC Group and the Managing Director of Rolls-Royce Industrial Power Group. Although all council members "serve in a personal capacity" and are expected to remove themselves from the room where they have an interest in the issues under discussion,49 many work for (and, in some cases, run) the very companies that receive the lion's share of the ECGD's financial support. GEC, BICC and Rolls-Royce, for example, all ranked amongst "the top ten main contractors" receiving export credit guarantees in 1995-96, with Rolls-Royce ranking third in the list a year later.
Whilst there is no suggestion of impropriety on the part of any members of the Advisory Council, past or present, the opportunity for back-scratching must always be present. As a senior ECGD official has acknowledged off the record:
"We rely on honesty really. But it's a difficult one. We need people who operate in the marketplace, who understand how the export world works, how the financial world operates ... I can't say to you they don't abuse their positions, but there is no evidence to say that they have done. There again, it would do them no harm in knowing how the ECGD operates. Conflict of interest comes about only on the occasions when the council decides [what countries] come on or come off cover. A council member might think 'hmm, that's very interesting'. It is something no system can stop. You couldn't think up a system that can stop it."
No minutes of the Advisory Council's deliberations are made public, and no representatives from development or environmental bodies sit on the Council.
Whilst agencies such as the UK ECGD continue to operate without mandatory environmental standards, there is strong pressure on other national ECAs to resist taking unilateral action to raise their standards. To do so, governments argue, would mean that their national industries would lose out on new overseas contracts.
The same argument is now being deployed by industry in an attempt to strip away or weaken the standards that some ECAs have introduced. In the US, for example, both the US Ex-Im Bank, the country's official Export Credit Agency, and OPIC, the publicly-backed US investment finance and insurance agency, adopted mandatory standards in 1992 and 1997 respectively.50 OPIC standards now categorically forbid any investment in "projects that require large-scale involuntary resettlement" (defined in terms of the movement of more than 5,000 people) and a ban on support for "large dams projects that disrupt natural ecosystems or the livelihoods of local inhabitants".51
In 1998, however, Republican Senator Frank Murkowski attempted to introduce legislation that would have prohibited Ex-Im from withholding finance for projects supported by any other G7 country. Murkowski argued that US exporters were losing contracts overseas because other ECAs do not impose similar standards to those of Ex-Im and OPIC. Without new legislation, Murkowski maintained, US companies would be "left in the dust while the environment suffers anyway."52
Although Murkowski's proposed legislation failed to make it to a vote during the last US Congress - and has not be "re-offered" to the newly-elected Congress - industry strongly supported his proposals, arguing that Ex-Im's standards are incompatible with its primary objective: protecting US jobs.
Environmental and development groups, however, charge that it is not US jobs that are protected but US corporations and their shareholders. They point out, for example, that most of the companies that have received large amounts of Ex-Im support have ruthlessly shed jobs through downsizing or shifting production abroad in order to exploit cheaper labour costs.
Thus Ex-Im's five biggest corporate beneficiaries this decade - AT&T, Bechtel, Boeing, General Electric and McDonnell Douglas (which has been purchased by Boeing) - have collectively cut more than 300,000 jobs in the last 10 years. Indeed, a study by the US General Accounting Office concludes:
"Government export-finance-assistance programs may largely shift production among sectors within the economy rather than raise the overall level of employment in the economy."53
A study by the Congressional Research Service goes further:
"Most economists doubt ... that a nation can improve its welfare over the long run by subsidizing exports. Internal economic policies ultimately determine the overall levels of a nation's exports."54
Rather than downgrading Ex-Im's standards, argue environmental and development groups, the need is for stronger guidelines, in addition to internal incentives including career penalties, to enforce them. Although the standards currently used by Ex-Im and its sister organisation, OPIC, are a step in the right direction, they are still insufficient to prevent the funding of egregious projects. In the Russian Far East alone,55 recent OPIC and Ex-Im loans have variously supported:
- Investment insurance from OPIC for two forestry projects, one financed by the Global Forest Management Group (GFMG) and the other by Pioneer, both US-Russian joint ventures. The projects both involved logging primary forests and exporting the raw logs to Japan, although GFMG has since ceased its logging operations. Neither company had obtained the necessary environmental certificates required under Russian law for logging operations. The companies also refused to make public the Environmental Impact Assessments that they were required to undertake as a condition of receiving OPIC finance and insurance. These were later obtained by a US NGO which sued OPIC under the US Freedom of Information Act. Independent site visits to GFMG project found that large areas of primary forest had been stripped and that there were problems with the regeneration of second growth forest.
- Export credits from Ex-Im for millions of dollars worth of US-built pulp mill equipment to Roslesprom, the Russian State Timber Industry Company. A memorandum of understanding has also been agreed to underwrite export credits for logging equipment. Roslesprom's director has since been forced to resign amid allegations of corruption.
- Financial guarantees from OPIC for the Sakhalin II Oil and Gas Project off Sakhalin Island. Critics of the project warn that "inadequate oil spill response preparations threaten endangered grey whale populations, priceless stocks of wild salmon, pristine shorelines and the livelihoods of fishermen in Sakhalin and Northern Japan."
- Financial support from OPIC for the Kubaka gold mine in the Russian Far East. In 1997, the coffer dam which holds toxic tailings from the mine was found to have sprung leaks, threatening major pollution of the surrounding environment. The dam was later found to have been built to a different design to that presented in the project's publicly-released environmental impact assessment.
OPIC's support for coal-fired power stations and oil and gas development in the South and the former Soviet bloc has also come in for criticism, with environmental groups charging that such funding is "engendering a structural reliance on fossil fuels ... that threatens the welfare of people in developing countries who are ... at greatest risk as the climate grows more unstable."56 In 1997, notes a recent report by the Washington-based Institute for Policy Studies (IPS):
"over 70 per cent of OPIC's direct project finance was in the electric power generation and oil and gas development sectors, with a commitment of $539 million in loans out of a total of $707 million; 41 per cent of OPIC's entire assistance portfolio (both insurance and project finance) was committed to projects in the power generation and oil and gas sectors."57
Ex-Im too has invested heavily in fossil fuel projects. From 1992-1998, the two agencies between them underwrote $23.2 billion in financing for oil, gas and coal projects around the world: over their lifetimes, these plants will release 29.3 billion tons of carbon dioxide a figure which, IPS notes, is "slightly greater than all global emissions for 1996."58
IPS argues that such lending will increase climate change and therefore "runs counter to the US Congress' stated goal of garnering greater participation by developing countries in slowing the rapid pace of fossil fuel combustion and the increasing reliance on fossil fuels as an energy source in developing countries." In many countries, less carbon-intensive energy options are available, from natural gas to solar, but these are not being backed by the two agencies.59 In the case of the corruption-ridden Paiton Power Project in Indonesia, backed by Ex-Im and promoted by such Washington insiders as Henry Kissinger and Warren Christopher, such alternatives were recommended by the Indonesian government's own power consultants. Paiton, however, still went ahead.60
Because the US will also be affected by the climatic instability caused by the continuing use of fossil fuels, OPIC's and EX-IM's support of fossil fuel projects suggests what IPS terms a "less than full implementation" of the US National Environmental Protection Act, which applies to US government-backed projects outside the United States that lead to significant and adverse environmental impacts in the United States. Such legislation would require OPIC and Ex-Im to take into account the global environmental impacts of each fossil fuel project it funds, rather than just the specific local impacts. Yet the wording of their environmental guidelines allow them to skirt the requirements of the Act.
Indeed, the IPS report reveals a range of areas where OPIC and Ex-Im guidelines fail to protect the environment and people or to ensure transparency and accountability. In the case of OPIC, for example, there is no requirement to calculate power plant emissions until after a project has been approved; no requirement to assess the cumulative emissions that are likely from power plants or their relative global impacts; and no requirement to carry out environmental assessments on power plants which are under 200MW in capacity. Moreover, says IPS, "OPIC's current and proposed disclosure policies for environmentally sensitive projects are grossly inadequate for a publicly-backed organization." Many upcoming projects listed by OPIC - a "Philippines residual fuel-fired power plant" being one example - give the public no substantive information about their likely impacts.
The failure of ECAs to take account of the environmental and development impacts of their projects has inevitably meant that many have failed socially, environmentally and financially.61 Indeed, the very nature of exports credits encourages businesses to take unwarranted financial risks at the public's expense, while enjoying the full benefits if a project is successful. As Michel Van Voorst of Eurodad, a Brussels-based NGO, notes:
"This is a clear case of moral hazard: exporters are incentivised to maximise their exports, in the knowledge that they will, at public expense, be bailed out of deals that go bad. This also distorts pricing: the financing terms of deals do not reflect the real level of risks, with the illusion of cheap financing encouraging unnecessary borrowing."62
Where companies make claims for losses covered by ECAs, the liability passes to the ECA, which, in turn, passes the losses on to the importing country. The claims thus end up being added to the stock of bilateral debt owed to the ECA's national government, the peoples of the South ultimately picking up the bill. In effect, Northern governments are using Third World money to subsidise their exports, the chief beneficiaries being the shareholders of some of the richest companies in the world.
Export credit- related debts now constitute a major drain on the foreign exchange earnings of developing countries. Many have been unable to fulfil their repayment obligations and have been forced to the Paris Club, the international forum in which creditor countries meet with debtor countries to reschedule debt repayments. Although severely indebted poorer countries qualify for debt reduction of 67% under the so-called "Naples terms", such reductions are only approved if the debtor country has a "satisfactory" three-year track record of implementing IMF structural adjustment programmes and has cleared its arrears with the Paris Club. Critically, however:
"The reduction is only applied to eligible debt, that is, all debt incurred before the country's first visit to the Paris Club. Debts contracted after this so-called cut-off date are excluded. For instance, in 1995, Uganda (cut-off date 1982) received a 67 per cent reduction of its eligible bilateral debt stock. This represented only a 2 per cent reduction of its total debt."63
In cases where export credit debts are reduced or written off, the tab is picked up by tax payers in the ECA's home country. This, however, is rare.
Some financial commentators now warn that, just as the debt crises of the 1970s were caused by reckless lending by Northern banks to the South in the search for quick and spectacular profits, so the failure of many private sector-financed (but publicly insured) infrastructure projects in the 1990s could be transformed into a serious sovereign debt problem for many Southern countries. In order to attract private investors, many governments in South-East Asia and Latin America, for example, have committed themselves to billions of dollars worth of contractual obligations (not least incurred through ECA-underwritten investment guarantees) to protect investors and lenders against foreign exchange risks. In many South-East Asian countries, these contractual obligations have now been triggered as a result of the recent economic collapse: unless they can be restructured, they are now due in one lump sum. As the Financial Times warned in the immediate wake of the South-East Asian economic crisis: "Combine this structure with significant current account deficits and the scene becomes reminiscent of the sovereign debt environment of the late 1970s and early 1980s."64
Worldwide, export credit-generated debt now accounts for 56% of the debts owed by the Third World to official creditors and 24% of their total debts, including debts owed to private banks.65 As Eurodad notes: "A few countries, such as Gabon, Algeria and Nigeria owe more than 50 per cent of their total debt to export credit agencies."66 Moreover, because export credit-related loans are usually made at less concessional rates than other official loans, "they figure disproportionately in a country's debt service profile".
In the case of the UK, 95% of the debt owed by the South to the UK Government is in the form of export credit debt. Indonesia, for example, owes £800 million to the ECGD; Algeria, £63 million; China, £2,352 million; and Iraq, £652 million (including debts incurred for weapons supplied prior to the Gulf War). All told, at the end of 1997, the outstanding debts on loans guaranteed by the UK Government through the ECGD to the world's 41 Heavily Indebted Poor Countries (HIPCs) stood at £4,685 million.67 Figures supplied to the House of Commons library by the ECGD in 1998 showed that the UK is due to receive £923 million in repayment of export credit debt between the years 1998 and 2031 from the 26 HIPCs which have agreed payment schedules.68 If interest on the debt is taken into account, the total figure would amount to £1,383 million.
Many of the export credit debts owed to the UK ECGD were incurred through loss-making arms deals;69 others through poorly conceived projects; and still others in the pursuit of foreign policy objectives with little regard paid to the financial viability of the projects supported. The ECGD, for example, operates a special account known as "Account 3" from which guarantees are issued to countries that are considered uncreditworthy and which therefore fall outside the ECGD's normal approval criteria. A senior ECGD official acknowledges that Account 3 projects are "political" loans. One example cited was "Russia, where we provided support politically. [The Government told us] 'let's help Yeltsin ... that was started by the Government for political reasons."
Those who pay the price for such geo-politicking, however, are not the companies which receive the export credits and investment insurance guarantees handed out by the ECGD and other ECAs, nor the politicians who make political capital out of the "rescue packages" and "development assistance programmes" they are able to announce, but poorer people the world over who end up bearing the costs of the debt through cuts in public expenditure, poorer services and higher prices for basic needs.
Neither is that debt burden purely financial: the support of ECAs for dictatorial regimes has also subjected the citizens of many countries to internal repression.
Moreover, the use of ECA credits to establish new markets for Northern companies has been a major force in promoting a development model that favours the North over the South, fuels inequality, exacerbates environmental degradation, marginalises poorer groups and fuels poverty. As Titi Soentoro of Bioforum, an Indonesian NGO, notes of Indonesia:
"ECAs played a key role in supporting the Suharto regime's system of economic and political monopolies. The regime's military security approach assured low costs for land appropriation and a relatively docile and inexpensive labour force. Foreign investors, often supported by ECA finance, competed to align themselves with the powerful business interests close to the Suharto family for example by offering free shares to Suharto's children and other relatives and business associates. In return, investors were assured access to lucrative sectors of the Indonesian economy and were able to receive 'assistance' from Indonesia's armed forces when it came to clearing people off their land for their projects, stifling labour unrest, or preventing mobs from storming their polluting factories."70
Unsurprisingly, campaign groups in the UK and elsewhere are calling for the cancellation of export credit debts incurred through "political" loans or where ECAs were cavalier in their support of financially-dubious projects. Indeed, as a report by the UK House of Commons Library points out, cancelling the HIPC debt owed to the ECGD would:
"have a considerably smaller effect on the Exchequer than is perhaps implied by the headline figures on the level of third world indebtedness".
According to the report, the Exchequer is due to receive £932 million between 1998 and 2031 in repayment of principal from the 26 HIPCs which have outstanding debts with the ECGD and which have agreed payment schedules. Cancelling these payments would cost the Exchequer less than £30 million per year. If, as the report suggests, some 80% of the debt is unrecoverable, then the cost to the Exchequer falls to a mere £6 million a year. "Clearly", remarks the House of Commons Library, "when set against the size of the general government expenditure, the effect on the Exchequer of cancelling sums owed to ECGD by the 26 Heavily Indebted Poor Countries (HIPCs) seems fairly insignificant and easily manageable."71
Pressure from environmental and development groups, particularly in the US, has led to ECA reform's now being placed firmly on the international policy agenda. The urgent need to reform the OECD's national ECAs, for example, was fully recognised at the Denver G7 Summit in 1997. The Final Communiqu_ for the Summit stated:
"Private sector financial flows from industrial nations have a significant impact on sustainable development worldwide. Governments should help promote sustainable practices by taking environmental factors into account when providing financing support for investment in infrastructure and equipment. We attach importance to the work on this in the OECD and will review progress at our meeting next year."72
Although the Final Communiqu_ of the May 1998 Birmingham G8 Summit failed to follow through with a further statement on ECA reform, the G8 Foreign Ministers addressed the issue in their own Ministerial Statement, arguing:
"Building on the efforts of the OECD on taking environmental factors into account when providing official export credits, we encourage further work by the OECD to this end and ask for a report back next year."73
More recently, the Environment Ministers of the G8 endorsed the need for ECA reform in the Ministerial Communiqu_ issued after their G8 preparatory meeting at Schwerin in March 1999, their Final Communiqu_ specifically calling for measures to "better integrate the environment dimensions into the work of international financial institutions and export credit agencies". Significantly, Paragraph 4 of the Communiqu_ stressed:
"Global competition should never become a race to the bottom in environmental protection. We will therefore use our best efforts to expedite international co-operation on establishment, general recognition and continual improvement of environmental standards and norms. This is not just a question of appropriate legally-binding international standards and norms; it also involves other instruments at international level such as voluntary environmental initiatives, agreements and codes of conduct, innovative and flexible approaches as well as greater attention to environmental performance, compliance and public reporting, for example in standardisation work by the International Standards Organisation (ISO) and other organisations. In this context we welcome UNEP's strengthened co-operation with the banking and insurance sectors. We welcome the new Environmental Handbook of the World Bank as a good starting point and call for a continuous application and improvement of these standards and encourage other public and private financial institutions to follow this example. We furthermore stress the need to apply environmental considerations to both domestic and foreign direct investments."74
Although welcoming "the work being done by the OECD with a view to strengthening procedures for taking environmental considerations into account in the operation of export credit agencies", the environmental ministers unanimously called for the ECA reform process to be strengthened:
"The progress achieved in international co-ordination during the past year is encouraging, but needs to be followed up. We agree that the OECD Export Credit Group should accelerate its work. The group should report to OECD ministers on a regular basis, including on general progress and on any progress attained on common agency action for specific projects."
The call for accelerated action is timely. Despite several years of discussion within the OECD Export Credit Group, little progress has in reality been made in reaching agreement on common environmental standards for ECAs. Regretfully, the UK has been at best lukewarm to the reform process, demonstrating no leadership within the OECD discussions and making a minimal contribution to the debate.
Negotiations have proceeded at a dilatory pace and have been crab-like in their direction, moving sideways rather than forward. In May 1998, for example, the Export Credit Group produced a Statement of Intent on Officially Supported Export Credits and the Environment. The statement has never been made public but is opaque in its language and limited in its content. For example, the statement commits ECAs to paying greater attention to environmental concerns when preparing their risk assessments. The statement of common intent is so weak and ambiguous that it can readily be interpreted as a call to examine the risks that the environment poses to a project's financial and technical viability (something which ECAs should in any case undertake as a matter of due diligence) rather than the risks that the project poses to the environment and to society.75 Such self-serving ambiguity inevitably calls into question the commitment of the ECAs to taking environmental concerns seriously. Although this criticism was raised within the Export Credit Group, the UK nevertheless proceeded to endorse with other Export Credit Group members a statement that is so vague as to be meaningless.
More recently, the Export Credit Group has adopted what it terms a "common line approach", under which ECAs participating in a common project have agreed to share information on environmental issues and to consider whether or not to undertake an environmental impact assessment (EIA). Such EIAs will not be mandatory in projects covered by the new agreement; the "common line" merely allows the participating ECAs to "consider" - the language goes no further than this - commissioning impact assessments. In addition, such impact assessments will be restricted to reviewing environmental issues: no account need be taken of wider social and sustainable development concerns.
Moreover, because the "common line" will only apply to a handful of projects at most, the vast bulk of the guarantees and export credits backed by ECAs will not be covered by the agreement. Critics also point out that there is not even a methodology for deciding which projects should be covered by the "common line". Furthermore, discussions on the projects will be informal, with no record being made available to the public - thus denying non-governmental organisations and project-affected groups the chance to comment. And the language, such as it is, refers only to environmental concerns, not to wider social and sustainable development concerns.
Addressing such policy incoherence is now a matter of urgent concern. At an international level, environmental and development groups in the OECD countries are pressing their governments to:
- Extend the current reform process within the OECD's Export Credit Group to include Investment Insurance Agencies, such as the UK's Commonwealth Development Corporation, which is in the process of being semi-privatized;
- Lay down a strict timetable for reaching an international agreement within the OECD on the adoption of common, mandatory environmental and development standards for all OECD Export Credit Agencies and Investment Insurance Agencies;
- Stipulate World Bank and OECD DAC (Development Assistance Committee) standards as the minimum acceptable starting point for negotiations on such standards;
- Require the OECD's Export Credit Agencies and Investment Insurance Agencies to introduce transparent procedures that would permit public access to information relevant to the environmental and development impacts of ECA-backed projects and require consultation with affected or interested parties.
Within their own countries, many NGOs have gone further, insisting that the adoption of mandatory standards and more general measures to make ECAs accountable to the public should not wait on the outcome of discussions within the OECD. As public institutions, the operations of ECAs should serve the public interest, not simply the interests of private businesses. Making them accountable to the public, both in their home countries and in the countries where the companies they support are operating, is fundamental if they are to have a legitimate development role in the future. The same applies to those companies which are subsidised by the taxpayer. At the very least, they should be required to justify that support through a process that allows for public debate and scrutiny. There is also a strong case for building "stakeholder obligations" into any subsidy: if public money is invested, why should this not give the public a stakeholding?
In the UK, a wide range of development, human rights and environmental groups from Friends of the Earth to Campaign Against Arms Trade (CAAT) are now pressing for reforms that would bring the ECGD into the age of sustainable development. In particular, such groups are demanding that the UK takes immediate steps to require the ECGD to develop an Ethical Guarantees Policy, embodying a commitment to socially-just and environmentally-sound development, and to anchor that policy firmly in its Constitution. Key elements of such a policy might include:
Mandatory human rights, environmental and development standards aimed, inter alia, at ensuring that projects
- have the minimum impact on the environment;
- safeguard the lives and livelihoods of those directly affected by ECGD-backed loans;
- minimise the need for resettlement and ensure that those resettled are better off than prior to the project;
- assess alternatives to the proposed project, including the option of the project not being implemented; and
- ensure the full and active participation of affected people and interested groups in the decision-making process surrounding the project.
These standards should be consistent with, or higher, than those required by the World Bank and recommended by the Development Assistance Committee of the OECD. They should also fulfil the letter and the spirit of the UK's undertakings under those international agreements and conventions which it has ratified, such as the UN Covenant on Economic, Social and Cultural Rights; the UN Convention on the Rights of the Child; the UN Convention on the Elimination of Discrimination Against Women; the UN Climate Convention; the Kyoto Protocol; the UN Convention on Biodiversity; the Rio Declaration (on sustainable development); the Basle Agreement (on the transboundary movement of waste); the UNCTAD Rules for the Control of Restrictive Business Practices; and relevant International Labour Organisation (ILO) Conventions, such as those on Labour Conditions and Indigenous and Tribal Peoples.
- Internal procedures, including career penalties and rewards, to ensure that inappropriate projects are screened out and that approved projects comply fully with agreed environmental and development standards.
- A requirement on the ECGD to consider the past human rights, environment and development record of companies applying for ECGD credits and investment guarantees;
- A requirement on UK companies receiving ECA support that they agree to meet the same environmental, labour and development standards in other countries as they would be expected to observe in the UK;
- The cancellation of all cover to companies which have been proved to have been involved in bribery or corrupt practices;
- A requirement on the ECGD to ensure that the contracts which it supports have been awarded through open tendering processes;
- An end to ECGD support for non-productive projects and programmes, including arms exports and the export of equipment that could be used for military means or civil repression.
- Advance notification on pending applications, detailing the type of project, the amount guaranteed, the companies involved, the country involved and likely human rights, environmental and development impacts;
- A requirement on the ECGD to make public all documents relevant to the human rights, environmental and development impacts of ECGD-supported projects and to make translations available in the languages of project affected people;
- A presumption in favour of disclosure, with companies having to demonstrate commercial confidentiality before a document is withheld from public release;
- A requirement on the ECGD to consult with affected communities and interested public interest groups prior to any decision being taken on approval of a project and to demonstrate how account has been taken of the issues raised.
- An independent procedure to hear and adjudicate on complaints received by the public over ECGD-backed projects, along the lines of the World Bank's Inspection Panel;
- Legislation enabling those adversely affected by projects supported by the ECGD to sue in the UK and to have access to legal aid;
- Measures to broaden the base of the ECGD's Advisory Council, by including those with an expertise in human rights, environment and development issues;
- A requirement on the ECGD to report annually to the UK Parliament and for the government to hold a debate on the report.
- An independent review of the ECGD's debt portfolio with a view to sharing financial responsibility for projects that were poorly conceived.
- The writing off debts incurred through the moral hazard attendant on the use of export subsidies made available through the UK ECGD.