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Export Credits Guarantee Department

Volume 464: debated on Wednesday 17 October 2007

It is a pleasure to serve under your chairmanship for the second time in two days, Sir Nicholas. It is becoming a welcome habit.

I am delighted to have the opportunity to spend some time throwing a spotlight on an important institution that has a long track record of supporting British exports and facilitating British trade, but which has been dogged by controversy for most of its history, not least because of its involvement in projects such as the Baku-Tbilisi-Ceyhan pipeline and, most recently, Sakhalin. That institution is the Export Credits Guarantee Department.

The organisation needs to be modernised, and I speak as a member of the Environmental Audit Committee, although I was not a member in 2003, when it published its groundbreaking report calling for changes to the ECGD’s remit. I am also a board member of the Conservatives’ quality of life policy commission—recently, it, too, called for changes to that remit. My thesis is simple: Britain is a recognised thought leader on climate change. Indeed, the Government take pride in their reputation for leadership on the agenda, and some of that pride is well placed. They have taken a lead in setting targets, pushing climate change up the agenda of international politics and, most recently, submitting to the House a draft Climate Change Bill. However, at this critical time we should seek to demonstrate best practice in our institutions. The ECGD is a particularly important institution, because export credit agencies are an important source of capital and therefore an important driver of change in the business community. Those agencies and the ECGD engage with other countries, so they should therefore reflect the British Government’s priorities and values.

The ECGD’s importance is made apparent by its own sustainable development action plan, in which it states:

“The annual total value of capital goods exported with medium to long term finance supported by all the ECAs of the OECD countries usually ranges between £30 billion and £40 billion, with ECGD’s share being around £2 billion. Although this level of ECGD support represents only around 2 per cent. of UK exports annually, the exports that are supported often form part of larger projects”.

It admits:

“ECGD’s involvement provides an opportunity for it to influence the attitudes of project sponsors, host Governments and the other financial institutions in regard to Sustainable Development issues at the project level.”

We therefore expect the ECGD to represent best practice on environmental standards, but the truth is that it pays lip service to them and runs with an unambitious pack. We expect it to support the industries of the low-carbon future, but instead it subsidises a relatively small number of powerful industries that are among the most polluting in the world. Surely, if the Government are serious about matching rhetoric with action, now is the time for them to show more ambition by changing the remit and culture of the ECGD to align it more explicitly with their sustainable development strategy, position it to support the clean industries of the future and bring it out of the shadows. That would transform it into a transparent and accountable public institution of which we can be genuinely proud.

I am delighted to make my argument to a Minister with excellent credentials. The hon. Member for Croydon, North (Malcolm Wicks) is a well respected Energy Minister whose commitment to the environment is not in question. Anyone who doubts it should visit the planning department of Croydon council, where they can see the files that bear testimony to his persistence in trying to install a wind turbine on the roof of his house. In fact, his passion for such technology extends to his having recently presented me with my own mini-wind turbine as a wholly undeserved reward. I have no doubt that he is a Minister who has fully aligned himself personally with the Government’s rhetoric on climate change and the importance of the environmental agenda.

I should like to break my argument into three parts. First, what should we expect of the ECDG? Some voices say, “Don’t muck around with it. It is working—don’t muck around with the core focus.” I suggest to the Minister that that is not good enough in 2007 in the face of climate change and the growing recognition of the wider damage that we are doing to the natural resources on which our prosperity and well-being ultimately depend. Leading politicians attach huge priority to climate change as the greatest threat to our long-term well-being, and we know that the response will require huge change and a transformation of our energy and transport infrastructure. In the short term, we face a major challenge in stabilising our emissions, let alone reducing them. You will be aware, Sir Nicholas, that we have an unfortunate track record over the past 10 years, as our domestic emissions have risen, not fallen. The past 10 years have taught us that tackling the problem is hard, but there is growing consensus about the role of Government. They should correct the market’s failure to put a value on carbon, set the clearest possible framework for the market and lead by example.

There is also growing consensus about the need to reinforce the principle that the polluter should pay. A key audience for that message is business, which is a key agent of change, not least because of its ability to drive change through the supply chain. Sometimes business responds to Government through regulation, and sometimes it responds to employees. It certainly responds to customers and to sources of capital. Export credit agencies are a major source of capital. The Environmental Audit Committee pointed out that they are

“collectively the largest source of public finance for private sector projects”

and

“powerful, influential players in the field of international business. They underwrite ten per cent. of exports from large industrialised countries”.

They are funded by the taxpayer and are accountable to Government. Given the priority attached to climate change, and the Government’s pride in their leadership, an external observer would expect such an important organisation as the ECGD to be a shining example of best practice, standing shoulder to shoulder with the Government’s policy priorities. It is not.

In theory, the ECGD reports to a Government Department but in fact it stands apart and does its own thing. It derives its powers from the Export and Investment Guarantees Act 1991, which has not been materially adjusted for 16 years. It is an institution in decline, given the volume of business that it underwrites. Its core business is the subsidisation of a relatively small number of powerful industries—defence infrastructure, aerospace, oil and gas—that are characterised by their negative impact on the environment. Meanwhile, its participation in the financing of new industries is negligible, at 2 per cent. of the current fund, despite the commitments made by the British Government at Johannesburg in 2002 and, more recently, at Gleneagles. Instead of being at the forefront of promoting corporate responsibility, it pays lip service to what is explicitly described in its sustainable development report as a secondary duty to operate in accordance with other Government objectives,

“including those on sustainable development…human rights, good governance and trade.”

Since 2000, the ECGD has been required to produce a statement of business principles, and I acknowledge the Government’s role in that important initiative. The ECGD’s business principles state:

“We will promote a responsible approach to business and will ensure our activities take into account the Government’s international policies, including those on sustainable development”.

No reference to climate change is made in any of the ECGD’s strategies, risk assessments or investment decisions. The business principles are assessed by case impact analyses, which are designed to provide an assurance that the ECGD’s activities are consistent, but such analyses are not required for its aerospace or defence business, which is subject to other codes with environmental standards of questionable stringency. Even in cases in which the analyses are applicable, impacts are assessed by comparing them with the relevant international standards, for which the benchmark is World Bank standards which, historically, are not very demanding. A process is under way to find a common, more demanding standard, but I do not get the impression that there is much political momentum behind it. I should be interested to hear the Minister’s view and to receive an update.

It would not matter if the standards were the most exacting in the world, because it is quite clear to anyone who does business with the ECGD that it considers environmental and social assessment procedures to be discretionary. Standards apply, but only when it sees fit. It is therefore not surprising that it is extremely reluctant to disclose its analyses, obstructing attempts to obtain them through freedom of information requests. It is not surprising, either, that it has never rejected a project on environmental or social grounds, or that it is embroiled in legal cases with non-governmental organisations such as WWF that find its attitudes utterly frustrating in the new political environment.

Does all that matter? Of course it does, for at least three reasons. First, because at a time when British taxpayers are being told about the changes that they have to make to reduce their carbon footprint, their money is being spent on subsidising the development of projects with high carbon impacts for which the sponsors are not accountable. Secondly, our poverty of ambition has resulted in a missed opportunity to show a lead to other export credit agencies, and, thirdly, the impact of emissions can be linked both directly and indirectly to ECGD activity. In aviation, for example, in the past five years, the ECGD has provided £3.3 billion of finance for the supply of 294 aircraft, which is equivalent to British Airways’ entire fleet being added to the global airline industry every five years with Government support. The ECGD should act as a gadfly to the industry, encouraging it to move further and faster to improve the energy efficiency of those aircraft, but it is not at all clear that it has done so. The Sakhalin project is another example: WWF estimates that the 1.6 billion tonnes of carbon dioxide emissions from the lifetime oil and gas production of that one development are equivalent to just three years of UK national emissions.

That is not good enough. At an absolutely critical time, a key British institution that the Government ought to be able to control is sending the wrong signals to the market. The Government should point the ECGD in a different direction. First, they should change its remit. The 1991 Act should be amended to make it clearer that the Secretary of State and the ECGD must have more explicit regard to climate change and other key policy requirements. Secondly, the Government should change the culture of the organisation to make it more transparent. We should know about direct and indirect emissions resulting from investments facilitated by public money; the ECGD should be required to disclose them and bring its aerospace activities under the scope of the environmental and social assessment, including climate change. Thirdly, they should bring the ECGD into the collective Government effort to control greenhouse gas emissions in this country. They should have targets to reduce contributions to those emissions.

Lastly, and more controversially, the ECGD should lead a shift towards low-carbon finance as part of a Government-led initiative to phase out subsidies to fossil fuel industries. By taking a lead on that issue, the British Government would reinforce leadership on climate change and go with the grain of developments elsewhere. The Minister may be aware that the “End Oil Aid” Bill was introduced in the United States in April 2007 to end subsidies for oil companies’ international operations. Calculations by the World Bank and the Organisation for Economic Co-operation and Development show that global subsidy removal could reduce CO2 emissions by about 10 per cent. worldwide. The EU sustainable development strategy requires a 2008 road map to phase out subsidies that are harmful to the environment. The message is that the polluter should pay, not be paid.

There are concerns about competitiveness, and the Minister might make that argument. I urge him, however, to consider the example set by the Canadian equivalent of the ECGD, which follows best practice by disclosing the environmental standard used to assess projects, and allows appeals against decisions, unlike the ECGD. Unlike its British equivalent, its business is not in decline. Indeed, last year it reported record numbers and business grew by 15 per cent. The message is that the world is changing and it is time for the ECGD to change with it.

I shall close with some questions for the Minister. Does he believe that the ECGD is playing its full part in the Government’s battle to reduce greenhouse gas emissions? Is he satisfied that it is operating with satisfactory levels of transparency and accountability to the public? Does he believe that it offers the taxpayer value for money? Would he support an investigation by the National Audit Office into whether it offers best value? Does he believe that a publicly funded body should continue to subsidise the fossil fuel industry, particularly in emerging markets where the priority should be to help develop clean energy? Does he think that the ECGD should retain its current focus and prioritisation or does he accept the need for change?

May I, too, say what a pleasure it is to have you in the Chair, Sir Nicholas, although it is my first time in two days, unlike the hon. Member for Ruislip-Northwood (Mr. Hurd)? He is clearly more experienced here in Westminster Hall.

I congratulate the hon. Gentleman on the thoughtful way in which he presented his argument. I want to reflect on one or two things that he said, but let me give some background. As the UK’s official export credit agency, ECGD’s current statutory objective is to help to facilitate exports. Its aim, which is set out in its mission statement, is to benefit the UK economy by helping exporters of UK goods and services to win business and by helping UK firms to invest overseas by providing guarantees, insurance and reinsurance against loss, taking into account the Government’s wider international policies. In a sense, that balance is what we are discussing today.

In line with my last point about our wider policies, in 2000, ECGD adopted a set of business principles that help to ensure that it operates in a way that takes account of wider Government policies on sustainable development, debt sustainability, environmental and social impacts, human rights, transparency and combating bribery and corruption. So, we operate within a framework of social and ethical principles.

ECGD undertakes detailed environmental and social impact assessments, including on greenhouse gas emissions, for all the infrastructure projects that it is asked to support. Those assessments are done by its business principles unit—a team of environmental specialists who also help it to establish its policies and practices. Broadly, it requires projects to meet the higher of World Bank or local standards on environmental, social and human rights impacts. That is the benchmark by which it judges the acceptability of projects that it is asked to support.

ECGD has implemented a case impact assessment process, which is publicly available on its website, by which the impacts of projects are assessed and graded so that the projects that it supports are compatible with its business principles. Projects are graded as having high, medium or low potential environmental and social impacts. With high-impact projects, it expects the project sponsors to make environmental impact information, such as an environmental impact assessment or summary, publicly available at an appropriate stage in the development of the project. As part of its continuing commitment to greater transparency, ECGD now publishes a list of projects with potentially high impacts for which its support has been requested, which allows interested parties to make comments. For those projects to which it gives support, compliance with environmental and social standards is monitored during the construction and operational phases of projects.

So much for infrastructure projects; what about ECGD’s other business? Its business is reactive, as it is there to support projects on demand. As the hon. Gentleman has noted, the main demand for its support currently comes from the civil aerospace sector, defence exporters and heavy capital equipment manufacturers. While he was speaking, I was reflecting on whether it would be appropriate, as I think he was arguing, for us to allow certain goods, such as aeroplanes, to be used here in this country, but have a rather more restrictive policy on export credits. There is a real dilemma there, and I am not quite sure where he would go on that. Are we really saying that the ECGD should not support the export overseas of something that is acceptable in the United Kingdom?

I just add that following the world summit in Johannesburg, which the hon. Gentleman mentioned, the ECGD set up a £50 million line of credit for exports of renewable energy technology. That is the good news. However, there have been no applications to the fund in six years. Notwithstanding the ECGD’s reactive role, after this debate I shall ask more questions about why there have been no applications to that £50 million fund for renewable technology.

The ECGD provides some £2 billion of support for new business each year. Some 40 per cent. of that is for the aerospace sector, particularly Airbus aircraft. Leaving aside the potential inaccuracy of an ECGD estimation of an aircraft’s emissions over the course of a working life that may cover different routes, no recognised reporting mechanism makes export credit agencies responsible for reporting emissions resulting from the products of the projects that they support. That responsibility lies with direct investors and managers. Banks have adopted policies in line with that, as they are direct investors, but the ECGD is not. It takes account of the European Union and North American aircraft certification system to determine the acceptability of the emissions from individual types of aircraft and aero-engines. At present, export credit agencies support only new aircraft, often enabling airlines to retire old aircraft and reduce emissions. That is an important aspect of the work.

It is not UK Government policy simply not to support industries that contribute to climate change. It is our policy to require industry to adopt best practice, modern technology and high standards across a range of environmental impacts. The ECGD is in line with that policy. Indeed, it requires applicants for support to state whether their product meets UK standards.

I am aware of the interest in the large integrated oil and gas project being developed at Sakhalin island in Russia, to which the hon. Gentleman referred. There has been controversy about the project’s environmental and social impact. Alongside Japanese and US export credit agencies and commercial banks, the ECGD has been asked to support the provision of export credits of $650 million. WWF-UK recently launched legal proceedings to seek a judicial review of a decision that it claims has already been made by the ECGD to support the project. The Government’s position is that no decision has yet been taken on whether the agency will support it. A decision is unlikely to be made until the new year, and it would be wrong for me to speculate about it now, but I can give an assurance that it will be based on whether the project meets the ECGD’s publicly stated environmental and social impact policies, consistent with its business principles.

May I also say, as it is part of this ethical debate, that the ECGD’s business principles require that it take reasonable precautions to avoid financial loss from supporting businesses tainted by bribery and corruption. Following an extensive public consultation, the agency introduced new strengthened bribery and corruption procedures on 1 July 2006. They require greater transparency on the part of exporters, including providing the ECGD with the name of any agents involved and giving it new audit rights to check compliance.

The UK has played a major role in supporting the multilateral debt relief initiative. The Government have played their part in assisting the world’s poorest countries to address their debt problems as part of their commitment to poverty reduction as the overarching objective of the UK’s aid and development policy. The ECGD is playing a full role in that.

In order not to recreate the debt problems of the past, the ECGD’s business principles require that it take account of debt sustainability when it supports projects to countries that are vulnerable to debt problems. It has adopted productive expenditure policies so that its support to such markets is made available only for projects that will provide economic benefit to the country concerned and not undermine debt sustainability; for example, import substitution projects that earn foreign exchange.

Many of the agency’s policies and practices are informed by international agreements through the Organisation for Economic Co-operation and Development, which is the primary body for the international regulation of officially supported export credit, and through the EU. For example, several international agreements set minimum standards in areas such as credit terms and premium rates. They help to ensure that export credit agencies all work to common terms, so that competition is between exporters and not their Governments. The context is that export credit agencies are big players in financing international trade. In 2005, agencies from the OECD countries financed projects worth more than $45 billion.

The ECGD has been an international leader in improving discipline in the provision of export credits. More recently, its efforts have helped to achieve OECD agreements to combat bribery, to apply common approaches on environmental issues and to adopt certain principles on the provision of export credit support to very poor countries that are vulnerable to debt problems.

I have been following the Minister’s argument with interest, but he is moving on from the thrust of my argument. I know that I can speak frankly to him. He is a highly intelligent Minister, capable of delivering his own personal view on a subject. He is reading out a fairly explicit brief from the Department, but may I ask for his personal view? Does he accept that there is an argument for a change to the ECGD’s remit in respect of striking a balance between the need to promote trade and the need to protect the environment, or is the message from the Department that the status quo is entirely adequate?

What I have been doing, albeit with a little help from my friends in the Department—we work closely together—is to demonstrate to the hon. Gentleman that there is an ethical framework. We take account of environmental considerations and social impacts, and we work internationally with other export credit agencies to ensure that purpose. If he is asking whether we might be doing more to ensure that we can align our sustainability and climate change objectives with our export credit objectives, perhaps we can, and I shall certainly consider that. The hon. Gentleman presented a bleak picture of what the agency is doing, but I do not accept it. His view was not as balanced as the one that I would usually expect from him.

Given that much export credit is now given by countries outside the OECD, and that that can bring difficulties in the future, we are doing our best to work with such countries to ensure that there will be common standards. An objective of the OECD is to reach out to the export credit agencies of non-OECD countries to ensure that they play by the same rules as the agencies of OECD countries. In that context, it is reassuring that Brazil recently agreed to sign up to the OECD’s aircraft sector understanding which governs export credit agency support for aircraft sales, and that several non-OECD countries, including China, have attended OECD meetings on export credits as observers.

The hon. Gentleman would expect me to put the debate in the wider context of what the Government are doing about climate change. He paid tribute to the Government for being a world leader on climate change issues. It is important to put matters in context. We are all concerned about emissions from aircraft and from aviation. It is one of the reasons why we want aviation to be brought into the reform and future of the EU emissions trading scheme.

Also, because of our commitment, we have recently announced two major projects. A Severn barrage would have a major impact on producing more renewable energy in the future, and on cutting emissions. We are interested in the major feasibility study on it. The hon. Gentleman will also have noted the recent announcement about a carbon capture and storage project. We want a major UK demonstration of that important technology.

I promise to reflect on what the hon. Gentleman has put to us thoughtfully and with much intellectual rigour this morning. I have set out the Government’s position, but nothing is set in stone. We will look to the future together.

Sitting suspended until half-past Two o’clock.