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Lending to Developing Nations

Volume 461: debated on Wednesday 20 June 2007

There has been much talk over the past few weeks about the Prime Minister’s legacy from the past 10 years. With great justification, it can be claimed that the triumphs of the Prime Minister’s premiership, which benefit millions of people, include championing debt relief to the world’s poorest nations, winning what was at times a difficult battle to persuade the international community of the merits of debt relief and securing the multilateral debt relief initiative at Gleneagles, which, along with the existing heavily indebted poor countries initiative, has now cancelled the multilateral debts of 24 nations. As chair of the all-party group on debt, aid and trade, I, like many other colleagues in the House, welcome the Government’s strong commitment to debt cancellation, which builds on the considerable public and parliamentary pressure for progress that we have seen over the past 10 years.

Debt cancellation has been a successful element in the fight against global poverty and economic injustice. For example, an independent study in 2001 found that 10 African countries that had received debt relief through the HIPC initiative had increased spending on health care by 70 per cent. and spending on education by 40 per cent. in just four years. Meanwhile, military spending had remained static. An IMF working paper from 2006 found that reducing debt service for low-income countries had a significant impact on social spending. However, a number of concerns have been raised over recent months about progress on debt relief and particularly about prior debts and new lending. I therefore want to take this opportunity to raise those issues with my hon. Friend the Minister and to seek his assurances on a number of points.

My hon. Friend will be aware of the court judgment that was handed down in London in February in respect of a claim against Zambia by the US company Donegal International, which is owned by Michael Sheehan. The claim related to debts that that impoverished southern African nation incurred more than a decade ago, mainly as a result of buying agricultural machinery from Romania during the cold war. In 1999, Donegal bought the Zambian debt, which had a face value of about $40 million, from Romania for less than $4 million. Appropriately, companies such as Donegal are known as vulture funds because they seek to make a profit by buying up bad debt cheaply and then trying to recover the full amount, often by suing through the courts.

In this case, the courts were critical of the evidence provided by Donegal, but nevertheless found that there was a valid contract and awarded the company a reduced amount of about $15 million. This year, Zambia expects to save $40 million in debt relief through HIPC and other initiatives, but paying Donegal International $15 million will severely limit the impact of that relief. The people who will suffer will be the very poorest, who will be denied basic health and education services in a country where the average life expectancy is a shockingly low 34 years—less than the age of myself and my hon. Friend.

It is hard to know the full extent of such lawsuits because companies do not publicise their actions. As a recent report about the case on the BBC’s “Newsnight” showed, these people work in the shadows and do not welcome the light of publicity. However, the Jubilee debt campaign in the UK has identified at least 40 lawsuits, many of which are still outstanding, that commercial creditors have brought against heavily indebted poor countries which had reached decision point by September 2006. The debts known to be subject to litigation in those cases amount to a staggering $1.9 billion—more than the approximately $1.5 billion in commercial debt that those countries expect to be cancelled.

As I am sure my hon. Friend accepts, public and creditor confidence in debt cancellation rests on the understanding that the resources that are released will be used for poverty reduction, not to pay large sums to commercial creditors who seek to make substantial profits from some of the poorest countries in the world. The Chancellor has been openly critical of the operations of vulture funds—with reason—but it is essential that such criticism is matched by distinct action to combat the problem so that we can assure the thousands of people, including constituents, who have called for debt relief that it will continue to reach those most in need.

The Government are already providing legal advice to debtor countries to allow them properly to defend any court action, and that is welcome, but it is vital that such advice is available at the earliest opportunity. In the Zambian case, the negotiations with Donegal International took place over three years, and the Zambian Government probably made some mistakes in the early part of the negotiations in acknowledging the debt. Perhaps my hon. Friend can advise me, therefore, whether any thought has been given to setting up a rapid-response legal-technical facility that is independent of the Bretton Woods institutions and which can help low-income countries to pre-empt and avoid such lawsuits.

I urge the Government and other donor Governments to consider introducing legislation that requires the creditors of sovereign debtors to participate in collective action, whereby all creditors must provide comparable terms in respect of any rescheduling or relief that has been agreed by a majority of the creditors. That would be similar to the regulatory principles that already apply to individual debtors in the UK, which require all creditors, for example, to abide by any debt relief plan that is agreed by creditors representing 75 per cent. of the value of the debts. In addition, many potential law suits will be based on UK contract law, and I urge the Government to introduce legislation similar to that in the USA prohibiting the purchase of debts solely for purpose of litigation.

I would also be grateful if my hon. Friend indicated whether creditors have given consideration to refinancing the debt reduction facility—a fund based at the World Bank that allows International Development Association-only countries to repurchase commercial debt at a substantial discount. That would allow us to extend the facility to HIPC-eligible nations that have not yet reached decision point and ensure that it covers other categories of debt, such as debts owed to other low-income country creditors.

In the longer term, we all need to recognise that there are still unresolved issues from the current debt crisis, and if we do not tackle them properly, they could re-emerge to create a new crisis as new lending increases. In addition, many of the poorest nations possess considerable natural resources, which are increasingly attracting interest from a wide range of foreign investors. However, worries are building up that much of that investment will fail to benefit the poorest citizens unless it is properly regulated and the benefits are targeted at development.

Some have argued that vulture funds simply do what markets do best and that they are just another financial instrument providing a service to those who want to sell off unpaid bonds or securities and minimise their risk. That may be so, but an unregulated market will not protect the weakest, and such practices will certainly not benefit those who struggle to live on less than $1 a day.

One way to tackle such problems is to support and press for the development of, a just, independent, transparent and comprehensive system for working out international debt, perhaps through an international law on sovereign debt. Such a system would take account of the origins of debts, as well as of their current impact and sustainability, while placing the same moral and legal obligations on companies as it did on Governments. Anne Krueger, the former deputy managing director of the International Monetary Fund, has called for reforms based on principles common to corporate bankruptcy laws so that countries can be given legal protection from creditors and allowed time to negotiate proper restructuring.

Central to such issues is instilling the concept of responsible creditor and lender behaviour. Consideration of creditors’ shared responsibility for the creation of debts will help to indicate the principles that should govern new lending and the behaviour of existing creditors, as well as the proper extent to which outstanding debts should be cancelled. Responsible lending to sovereign borrowers, which should also take into account the granting of export credit guarantees, requires respect for the principles of public accountability, transparency and co-responsibility. To achieve that, lenders should reassure themselves that the borrowing Government are legitimate and accountable to their people in respect of the contracting and use of the loan, and clearly defined checks and balances, such as compulsory parliamentary scrutiny, should be in place. Both lender and borrower should be encouraged to report fully and transparently, ensuring public access to the amounts, terms, purposes, use and repayment of loans.

The lenders should assure themselves that the loan or credit is not for a clearly illegitimate purpose, such as for the purchase of arms to be used against civilian populations. Any loans to finance projects should require conformity to the relevant international labour, environmental and other standards, and be conditional on satisfactory impact assessments on social needs and environmental aspects.

It is welcome news that the G8 Finance Ministers have recently announced their intention to support the development of a charter of responsible lending. However, as I am sure my hon. Friend will agree, it will require further work to ensure that any high-level voluntary charter is given substance and force through the adoption of detailed guidelines by multilateral, bilateral and commercial lenders. I believe that the UK and other Organisation for Economic Co-operation and Development Governments can take a lead and show their intention that they expect the charter to be the industry standard, by making ratification of such a charter a condition of eligibility for an export credit guarantee. I hope that my hon. Friend can give me some reassurance about the Treasury’s intentions for progressing with such a charter.

Finally, there needs to be acceptance by creditors of their shared responsibility for some of the old debts that are still being serviced by low and lower-middle income countries, at the expense of spending on essential services. Many of those debts arose from the self-interested or irresponsible decisions of the creditors in relation to oppressive former regimes; for purposes that would not benefit the people of the recipient country; on extortionate terms; or for projects that failed because of bad lender advice.

The HIPC initiative could be interpreted as an acceptance, to some extent, of the unsustainability of some debts, but there has still been no systematic attempt to investigate how those problems arose and what steps should be taken to prevent similar problems in the future. I encourage the Treasury, following the recent example of the Norwegian Government, to initiate a system of debt audits, particularly for loans that are still being repaid to this country by Kenya and Indonesia, and to consider whether cancellation is warranted where the UK has been responsible in the past for poor or harmful lending—so-called odious debts.

I am the first to acknowledge that the issue is very complex and that changes will never be easy; but then neither were the debt cancellation deals that the Government have fought so hard for over the past decade. Our constituents rightly demand that our aid commitments reach the world’s poorest, and the Government need to tackle the problems with action as well as words. I hope that my hon. Friend can today provide us with some reassurance on those points.

It is an honour to serve—for the first time, I think—under your chairmanship, Mrs. Dean. I congratulate my hon. Friend the Member for Glasgow, North (Ann McKechin) both on securing today’s debate, on such an important and topical subject, and on her commitment to the cause of social justice around the world and her work in driving forward progress by Governments on the millennium development goals. It is because of the campaigning work of my hon. Friend and other parliamentary colleagues, and campaigners in her constituency and throughout the country, that we can make progress on many of these issues in international discussions. I commend her for all of the effort that she has made.

My hon. Friend is right to say that the progress that we have made on debt relief and on securing not only the millennium development goals but a substantial increase in the global resources devoted to tackling the issues in question is one of the great achievements of the past 10 years. Together, the work that we have done on multilateral debt relief and for heavily indebted poor countries will, over time, reduce the debt burden of the world’s poorest countries by some $110 billion, allowing the savings from debt relief to fund country-owned strategies for poverty reduction. That has been a very important part of the wider leadership shown by the UK—through both the Prime Minister and the Chancellor of the Exchequer—in taking such matters forward in international discussions, so I agree with my hon. Friend’s starting point.

My hon. Friend is also right that it is important to ensure that debt relief should help recipient countries to increase poverty-reducing spending in such areas as health, education and rural agriculture. As a group, the HIPCs have made great improvements in sanitation, child mortality rates, gender equality, the encouragement of primary education and environmental sustainability. Those are the positive benefits that flow, in pursuit of the millennium development goals, from the debt relief that my hon. Friend rightly highlights.

We need to remain vigilant, because of both the progress that we have made and the dangers identified by my hon. Friend. If we are to continue to tackle poverty and to ensure that the full benefits of debt relief will be realised, we need to continue with several actions. We need to ensure full implementation and financing of the HIPC and multilateral debt relief initiatives, with all countries delivering on their commitments; we need to see to it that HIPCs and other countries that receive debt relief ensure that the savings from debt relief are spent well, for poverty reduction; and we need, together, to ensure that new borrowing is appropriately concessional, well targeted and used for productive purposes, so that countries can achieve their development goals without running into new debt problems in the future. The UK is, in particular, committed to tackling the threat, described by my hon. Friend, posed by so-called vulture funds. They threaten to divert the benefit of debt relief away from those for whom it was intended and who need it most.

Recent events have highlighted the problem of so-called vulture funds, companies that buy debt from heavily indebted poor countries at a discount and seek to enforce the debt in full after debt relief has increased the countries’ ability to pay. Those companies seek to profit from the world’s most vulnerable countries, diverting much needed resources away from the fight against poverty. In doing so, they threaten to undermine the efforts that the international community has made to ensure that those countries receive debt relief under the relevant initiatives.

I am sure that my hon. Friend will agree that it is important to emphasise the scale of the problem. A study published in August 2006 by the World Bank and the International Monetary Fund noted that a growing number of commercial creditors and distressed debt funds are engaging in litigation against HIPCs. The last survey of participation in the HIPC initiative found that 11 of the 24 post-decision point respondent countries had been targeted with law suits by 44 litigating creditors. The total reported claims under litigation amount to about £2 billion, including principal, arrears, interest and penalties. The total claims were about 22 per cent. higher than total HIPC debt relief to be provided by commercial creditors, and for some countries they are very large relative to gross domestic product, so my hon. Friend is right to emphasise the scale of the potential threat.

My hon. Friend set out the case of Zambia, against whose Government a vulture fund brought a case in the UK High Court in 2007. We congratulate the Government of Zambia on the strong defence that they mounted in their recent legal case. It was the first defence in a case of the kind that has ever been even partially successful. The claim by the vulture fund, Donegal, was for $55 million in respect of Zambian debt that it had purchased from the Government of Romania. The judge ruled that Zambia should pay only $15.5 million, plus £600,000 of defence legal costs. That was a partial but important success, and its impact will be felt across the world. Vulture funds cannot continue to expect to profit from the world’s poorest countries. We are determined to limit the damage that vulture funds cause.

We are working to tackle the problem in two ways: first, by preventing vulture funds from being able to buy and aggressively pursue debts in the first place, and secondly by limiting the damage done by cases that are already under way. To prevent the problem, we are working with the World Bank to help poor countries to buy off their commercial debts at the earliest possible opportunity. Under those deals, for which the UK and others provide funding, countries buy off their debts at a huge discount. The debts are then gone forever and the matter cannot be taken to court. More than $8 billion worth of debts have already been cancelled in that way, and we are working to make the system more effective. As I have highlighted, however, in some cases, debts are already in the hands of vulture funds, so we are working with the African Development Bank and others to ensure that countries have access to the best possible legal support to fight those cases. For example, the strong defence that Zambia recently put up reduced its costs by $40 million.

We are also working with countries to improve their debt management and to develop a charter on responsible lending to reduce the risk of debts being sold to vulture funds. The details of those measures were set out in a written statement to the House on 10 May. I would like to reassure my hon. Friend that that statement makes it clear that we support proposals at the African Development Bank to develop a legal assistance facility to help countries that are facing legal action to gain access to technical and legal support.

We continue to raise this issue in international forums. When the Chancellor raised the problem at the meeting of G8 Finance Ministers on 18 May, G8 Ministers expressed concerns about the actions of some litigating creditors against heavily indebted poor countries, and agreed to work together to identify measures to tackle the problem, based on the work of the Paris Club. We continue to work with our international partners on that, and I hope that my hon. Friend is reassured that that is very much a priority for us.

My hon. Friend raised several other issues on which we must keep moving forward. We must ensure that future lending is more responsible. The experience of the past 20 years has shown how damaging excessive debt burdens can be. A number of studies have concluded that developing countries with high debt ratios have suffered lower growth rates—possibly as much as a percentage point of gross domestic product per year, which might sound like a small amount, but is huge. That problem is a result of the debt overhang problem, whereby private investors are deterred from making growth-enhancing investments because of concerns that future profits will be taxed away to pay for debt service.

Our debt relief efforts are freeing money to support poverty reduction strategies, and have introduced significant headroom for new borrowing. As my hon. Friend pointed out, it is essential that we work together to ensure that new borrowing works to support development. Appropriate concessional lending can fill a market gap and help to establish a track record of good debt management, which is essential to creditworthiness. Excess or inappropriate borrowing puts that process into reverse, and can take former HIPCs back into the problems from which we have helped them to escape. That is why we must be responsible about future lending. It is right that the international community should consider carefully the issues that my hon. Friend has raised.

Partnership lies at the heart of our work on debt sustainability and responsible lending. Both creditors and borrowing countries must share the responsibility of ensuring than any new lending is appropriately concessional and is used for productive purposes.

What discussions has my hon. Friend had with the banking community in the UK about the charter and whether it is prepared to adopt it as part of its future lending criteria?

May I provide a little more context before coming to that point? We believe that Governments should work together to improve co-ordination and transparency, take account of debt sustainability when making decisions on lending, and ensure that their lending supports economic development and good governance. We also believe that all new lending to low-income countries should take account of the World Bank and International Monetary Fund debt sustainability framework, should be appropriately concessional and targeted, should be used for productive purposes, and should be in line with the economic and development priorities set out in IMF-World Bank programmes. When G7 Finance Ministers met in February, they highlighted the importance of developing a charter on responsible lending. Our intention is that that charter should highlight the role that all Governments must play to ensure that their lending to low-income countries is sustainable, and we are keen to ensure that a wide range of countries sign up to those principles.

We hope to build on all that by working with leading commercial creditors on having their own voluntary charter for lending to low-income countries. I have raised that issue informally in my discussions with the London banking community, and I shall continue to do so in the coming months, as well as starting formal discussions of those issues. It is important that we focus not only on Government responsibility and lending, but commercial creditor responsibility, so we are keen that a voluntary charter should be drawn up. I am happy to keep my hon. Friend informed about those discussions as we formalise them and take them forward.

As part of our commitment to debt sustainability, the UK has supported the development of the debt sustainability framework by the World Bank and the IMF, which is an important tool that debtors and creditors can use to inform their lending decisions. The framework has a key role to play in preserving and supporting debt sustainability. The commitment to ensure that all lending is guided by and fully consistent with the framework should underpin work on the charter for responsible lending and the voluntary charter for commercial creditors, which I have mentioned.

My hon. Friend also asked about export credit agencies. I am pleased to report that the UK has led a successful international initiative to regulate lending to developing countries. By way of background, it is important to note that Government-sponsored export credit agencies have played a significant and important role in lending to developing nations. Those agencies help domestic companies to export goods and services, including to developing countries, by providing insurance and guarantees to protect exporters from non-payment and political risks. However, loans from export credit agencies have added to the external debt problems of developing countries in the past. Before the recent debt relief programmes, 30 to 40 per cent. of developing countries’ debt was owed to ECAs, but most of that debt has been forgiven, thanks to the large-scale debt relief provided under our debt relief initiatives.

New borrowing can play an important role in meeting the millennium development goals, but it needs to be properly managed, especially on commercial terms. To avoid a repeat of the “lend and forgive” cycle, the UK has been leading international efforts on responsible lending by ECAs. The Treasury has been working in an effective partnership with the Department for International Development and our Export Credits Guarantee Department, as well as working through the EU and the Organisation for Economic Co-operation and Development to establish a framework for ECA-supported lending to the countries that are most at risk of debt distress. Those countries include HIPCs and countries for which the International Development Association will give only grants, not loans—the so-called IDA-only countries.

The UK’s Export Credits Guarantee Department has always operated to higher standards than those in many other countries when assessing the suitability of supporting exports to poor countries. For example, any requests for ECGD support for projects in HIPC and IDA-only countries have to be approved by both DFID and the Treasury. DFID assesses those requests against several criteria to check whether the lending is affordable and whether the project will add to the social and economic well-being of the country.

One reason why the UK sought certain changes to the OECD statement of principles was to bring the world up to our high standards. There is an OECD statement of principles on unproductive expenditure, which governs ECA-supported lending to poor countries. We are working closely with the IMF, the World Bank, and Finance Ministries of the Netherlands, Sweden and Italy to promote an extension of the OECD statement to all low-income countries, as well as taking various other steps to make lending more responsible.

Positive steps were taken at the OECD export credit group meeting in April 2007. The meeting agreed two key developments, the first of which was to extend the scope of the OECD statement of principles beyond HIPCs to cover all IDA-only countries, in line with the policy of the UK’s ECGD. As a result, at least 26 more countries will be covered by the agreement, including Afghanistan, Angola, Bangladesh, Kenya, Nigeria, Sri Lanka, Sudan, and Vietnam.

The second key development was a move to improve information sharing with the IMF-World Bank on the volume and terms of ECAs’ new financial commitments. That will allow the IMF-World Bank to cross-check data that they receive from borrowing countries and thereby ensure that there is debt sustainability. The agreement will help the OECD’s efforts to encourage new, emerging lenders to improve data sharing and reporting. The IMF and World Bank have also announced that they will set up dedicated electronic mailboxes to respond to questions from ECAs on certain issues.

We have made good progress, but we will not stop there. We are working with international institutions and other countries to develop the initiative by making proposals at the next OECD export credit group meeting in November. We will propose further enhancements to the OECD statement of principles to give clearer guidance. Those important steps show that we are taking forward the agenda, which my hon. Friend rightly says is important.

Sitting suspended until half-past Two o’clock.