Wednesday 14 October 2009
[Mr. Gary Streeter in the Chair]
UK Relations with Russia
Motion made, and Question proposed, That the sitting be now adjourned.—(Steve McCabe.)
I was delighted to secure the debate back in late July and I start by welcoming you to the Chair, Mr. Streeter. I also welcome the Minister to his new position. I think that he is, remarkably, the 12th Europe Minister in this Government. He changed briefs with Baroness Kinnock on Monday. I expect that that has not given him much time to prepare for the debate, not least because he has, I hope, taken the time to read the Lisbon treaty, which is certainly more than one of his predecessors did. Nevertheless, he and I were previously officers on the all-party group on Russia and I suspect that we may find much to agree about this morning.
Thankfully, there has been some movement in UK-Russia relations since the end of July, when I applied for the debate. Nevertheless, my central premise today is that the Government have failed in most if not all of their foreign policy objectives in respect of Russia in the past three years and that something needs to be done about that. Whatever one’s views on Russia—I suspect that there will be a variety of views in the debate, as always—no one can argue that relations have been a success. UK policy towards Russia has been characterised in the years since the murder of Alexander Litvinenko as one of deep-frozen non-engagement—I would even use the word “festering”.
There are essentially two approaches that one can take towards Russia. One can willingly engage with Russia, with a heavy dose of realpolitik, and seek to get what one can from the relationship—an approach recently described as Schröderisation by Boris Nemtsov, the former Russian Deputy Prime Minister. Alternatively, one can take a critical approach, also engaging but being tough in a way that the Putin-Medvedev duumvirate understands, and taking a long-term view that short-term benefits should be put second to a primary interest of getting Russia to behave more like a normal state.
I had hoped to make a speech, but unfortunately I have another engagement. Whichever of the two approaches is taken, surely the single most important thing to remember is that we need to engage with Russia for trade purposes but also, given the issues of energy security and Islamic fundamentalist terrorism, it is better that we have strong engagement and that they are on our side rather than the other side on both those crucial issues for the decades ahead.
I thank my hon. Friend for that intervention. He has devoted considerable time to these issues. I read his very interesting article about UK-Russia relations last month. He is right to say that whatever one’s views about Russia and whether one likes the current Government or not, one must engage with Russia, because nothing will be gained by what is happening at the moment, which is a policy of complete non-engagement.
As I was saying, our Government take neither approach in terms of how they deal with Russia. They have simply allowed relations to ossify. There is almost no engagement whatever. I was about to contrast the approaches of our Prime Minister with the approaches made by Barack Obama and Angela Merkel, but in fact no approach has been made by our Prime Minister. Incredibly, to the best of anyone’s knowledge—this seems to be confirmed in parliamentary questions—our Prime Minister has never met Vladimir Putin since the right hon. Gentleman became Prime Minister two and a half years ago. The last time that we can be sure that the two men met was in 2006, at a meeting of the G8 Economic Ministers in St. Petersburg. We cannot be entirely sure on this, because 10 Downing street seems to have had a policy in recent times, under the current incumbent, of not answering parliamentary questions about visits or meetings.
I agree with the thrust of the hon. Gentleman’s argument this morning, but will he confirm that the President of Russia is actually President Medvedev, whom my right hon. Friend the Prime Minister has met on a number of occasions, including at the G20? Does he want my hon. Friend the Minister to reassure him that he will be actively engaging with all levels of the Russian Government, including talking about the Khodorkovsky case, which is an important legal test for the Russian Government with their international partners?
I thank the hon. Gentleman for that intervention, which I assume has come from fairly close to Downing street itself. Of course it is important also to engage with the current President, but no one should be under any illusion as to who is really in charge in Russia. I was going to say that our Prime Minister has met President Medvedev at perhaps three different international summits in the past two years, but to the best of my knowledge, there have not been proper bilateral meetings at any of those summits. I shall go on to discuss the case of Mikhail Khodorkovsky in due course.
Let us contrast our Prime Minister’s approach with that of Barack Obama. The US President recently spent a whole two-day summit in Moscow, having long meetings with both Putin and Medvedev. In fact, with Medvedev, he spent an incredible 10 hours in face-to-face meetings. The President’s top Russia adviser, Michael McFaul, said to reporters afterwards:
“I dare you to find a summit that was so substantial, sustained. We hit all of the dimensions of the US-Russia relationship between the government and society, the security stuff, the arms control stuff, the nuclear proliferation stuff, food, health. I can’t think of a summit which was more comprehensive.”
By the way, the 10 hours that Obama spent with Medvedev is in sharp contrast to UK-US relations, with our Prime Minister’s approaches for a short joint press conference with President Obama being spurned five times after the Prime Minister’s deft handling of Abdelbaset al-Megrahi, the Lockerbie bomber, in August. No one is saying that all is perfect in US-Russia relations, but there is progress and there is dialogue. President Obama also took the opportunity in Moscow in July to spend almost a full day engaging with Russian civil society and business leaders, and he pressed especially for greater press freedom, which has been terribly eroded under Vladimir Putin in particular.
A few days later, Medvedev flew to Munich for similarly extensive head-to-head talks with Angela Merkel. Der Spiegel pronounced: “Medvedev Charms Merkel at Munich Summit”. To her credit and in contrast with the rather fawning approach of her predecessor, Gerhard Schröder, Merkel raised various human rights cases, notably the recent murder of Russia-Chechen human rights activist, Natalya Estemirova. Merkel had previously raised with Putin crackdowns on peaceful demonstrators and other cases. Medvedev actually pronounced in Munich his deep shock at the Estemirova murder. He even called her a model for future generations. He said:
“She deserves justice, because she defended our legal system”
“I am sure the person who committed it”—
“will be punished.”
It helps that Merkel speaks Russian well, but she at least shows what can be done with critical engagement. A new German-Russian energy agency was founded, and about 300 delegates from both sides participated in a wide-reaching civil society dialogue.
Where is our Prime Minister in all this? The answer is, nowhere. My hon. Friend the Member for Rayleigh (Mr. Francois), who is with us, attended the 70th anniversary commemoration of the outbreak of world war two at the Westerplatte outside Gdansk in Poland a few weeks ago. Also there were Vladimir Putin and Angela Merkel. Our Prime Minister was also invited, but declined to go, it seems. It seems as though he is actively avoiding Putin, Medvedev and, indeed, anyone Russian.
Perhaps the Prime Minister’s boycott of Russia is deliberate. Perhaps it is a principled boycott, rather like our approach to someone such as Robert Mugabe. If so, it would be helpful if someone would say so, as if that is the case, no one knows about it and instead we just look weak and ineffectual. While Merkel fights for the likes of the family of Natalya Estemirova, and Obama promotes the rule of law, no one is there to bat for the likes of the widow of murdered British citizen, Alexander Litvinenko—whom I met last year—as we approach the third anniversary of her husband’s death on 23 November 2006.
While Obama generates headlines such as “Obama Resets Ties to Russia” and Merkel gets “Medvedev Charms Merkel”, we have had a series of false starts in recent years. A headline in The Times in 2008 stated: “British-Russian relations in deep-freeze, as summit fails” with a photo of Medvedev holding his hand out to our Prime Minister, but our Prime Minister has his face turned directly to the ground and fails to notice the hand outstretched towards him. An article from the BBC in October 2008 was entitled “Mandelson urges end to Russia row”. That was in preparation for Lord Mandelson’s four-day visit, which also ended in failure.
We now hear that the Foreign Secretary is to visit Russia, which I am sure we all welcome. Characteristically, however, the visit was announced by the Russians, not the Foreign Office. The Times of 3 October told us, “British relations with Russia thaw as David Miliband prepares visit”, but I wonder whether we will ever see the thaw that the Government have promised. If we do, will it help to resolve the major outstanding issues in UK-Russia relations, which I will come to in a moment?
Relations can thaw only if there is a face-to-face meeting between Vladimir Putin and the British Prime Minister. As I said, however, the Prime Minister has yet to meet the Russian Prime Minister, and he took four months to meet Dmitry Medvedev after his election in March 2008.
Is my hon. Friend not also staggered that the Foreign Secretary’s visit to Russia in November is the first visit by a British Foreign Secretary since 2004? Does my hon. Friend agree that the Russians probably look on that as quite a slight on their relations with the UK?
My hon. Friend is of course right. A little later, I will talk about some of the historic precedents in British-Russian relations and about how important sending over the right level of person is to the way in which Russia views its bilateral relations with the UK.
The Prime Minister met Medvedev only at the G8 summit. I would not want anyone to think that I was being excessively political, because our relations with Russia are too important for that, but I would contrast the current Prime Minister’s approach with that of his predecessor. Tony Blair made sure that he was the first western leader to meet Vladimir Putin when he took over from Boris Yeltsin in 2000. Indeed, Blair flew to Moscow in March 2000, while Putin was still only the acting leader, and two weeks before the general election that made him President.
The status quo is very odd. Even at the height of the cold war, there was engagement with Russia. Indeed, one could argue that the engagement led by Ronald Reagan and Margaret Thatcher 20 years ago was a key part of the background to the fall of the Berlin wall. We are talking about two of the five permanent members of the UN Security Council effectively having no bilateral relations at the highest level. There are only 10 sets of bilateral relations between permanent members of the Security Council, and I would put good money on the fact that UK-Russia relations are the absolute worst.
If the Prime Minister were ever to meet the Russian Prime Minister, which issues might need to be debated from the British point of view? The first would be progress in investigating the heinous murder of Alexander Litvinenko in November 2008 and other incidents that put UK-Russia relations in a deep freeze at that time. Second would be the continued detention without proper trial of Mikhail Khodorkovsky, Platon Lebedev and others in relation to the break-up of Yukos. Third would be the continuing downgrading of the BBC Russian service at the World Service, partly thanks to actions taken by the Russian Government in recent years. Fourth would be operations of the British Council in Russia, and fifth would be Britain’s conflicting and often counter-productive approach to visitors’ visas for Russian nationals.
I could talk about Georgia, energy security, Chechnya and Russian espionage in London, but I will leave those topics for others to come in on. Similarly, I will not discuss the issues on which UK-Russian co-operation might bear real dividends, such as Iran, North Korea and non-proliferation.
Let me put our relations with Russia in a little context. Russia is going through quite grave economic problems at the moment. Its GDP is set to fall by 11 per cent. this year, unemployment is 9 per cent. and rising, there is 15 per cent. inflation and bankruptcies are increasing. Rather incredibly, the Russian rouble is about the only currency against which sterling has appreciated in the past 12 months, so bad is the state of the Russian economy. Corruption remains a major issue, IKEA has announced that it is pulling out of the country and so on. On the political side, matters could be worse, but they have not really improved in the past three years, and I am sure that others will examine recent activities on the political front and in civil society.
The first of the specific issues that I want to raise is the aftermath of the Litvinenko affair. Despite words of protest, no progress appears to have been made. I would be grateful to hear from the Minister whether, and if so how recently, requests to extradite Mr. Lugovoi have been submitted. I would also be grateful to hear of any other progress that might have been made in solving the murder of this British subject. As we know, Mr. Litvinenko’s widow, Marina, petitioned the coroner in 2008 for an inquest. She did that against the advice of the Foreign Office, which feared that such a move might prejudice any future trial of Mr. Lugovoi or others who might be accused of the crime. Given that the Foreign Office thought at the time that a trial might happen, it would be helpful to hear what progress it is making.
On the ongoing detention of Mikhail Khodorkovsky and Platon Lebedev over the collapse of Yukos, the background to the case has been well documented in previous debates in the House—notably on 10 March 2004—so I will not recount the full story. However, Mr. Khodorkovsky is on trial again for more or less the same alleged offences for which he was tried in 2004. So far, he has served four and a half years in prison camp No. 13 in Kamenokamsk in Siberia, which is close to the city of Chita—a grim part of Siberia, I can tell you. According to Mr. Khodorkovsky’s interview in The Sunday Times on 13 September 2009, which was secretly transmitted to the west, the court proceedings—we should bear in mind that he is on trial for the same offences that he was tried for and convicted of in 2004—saw him locked inside a 1.5 tonne bullet-proof glass case. When he is not being taken to court, he is in his cell, where he spends 23 hours a day in less than five square yards of space with three to eight men. Ironically, he told The Sunday Times that the rules on his detention were relaxed only for the year that he spent in a penal colony—the quality of detention there was actually better than what he has at the moment.
From time to time, there has been a lot of interest in Mr. Khodorkovsky’s case in the House. Indeed, the most interesting early-day motion on the matter—early-day motion 2176—was tabled on 23 October 2007. Remarkably enough, it was tabled by the Minister, who is responding for the Government. As I mentioned, we were previously officers of the all-party group on Russia, so I know of his strong and genuine interest in Russian human rights. His EDM bemoans the incarceration of Khodorkovsky and
“calls on Russia to eschew totalitarianism and more securely to embrace democracy, the rule of law, political plurality and freedom of expression and peaceful assembly”.
I say, “Hear, hear!” to that. The US Senate and the Bundestag have tabled similar motions.
We deserve an update from the Minister on the progress that he has made on his EDM and on ensuring that the Khodorkovsky case has been properly raised in the short time that he has been in his post. It is essential for him to tell us that the Foreign Secretary will raise the case when he travels to Moscow next month. I hope that he will publicly condemn the latest trial and that the British ambassador will visit the trial before the Foreign Secretary’s visit. Either way, I would be grateful if the Minister could update us on what actions he has taken.
I want briefly to examine the ongoing controversy surrounding the BBC Russian service, which I raised at some length in a debate on the World Service last December. As we know, the Russian Government closed down a lot of the joint ventures with local Russian FM stations, and the BBC Russian service—at least the radio service—has never recovered. I would be grateful to hear from the Minister what further proposals there are to launch the Russian language TV service that has been talked about at the World Service.
Does the Minister also share my concern about some of the editing on the BBC Russian service and about the way in which the service fails to challenge official Russian Government viewpoints? In recent weeks, for example, there has been intense debate on Russian websites about the 1999 Moscow apartment bombings, but the BBC Russian service has not even mentioned the issue, let alone attempted to analyse it. It seems that certain topics are still too sensitive to be touched.
Similarly, the service’s April 2009 interview with the Russian Foreign Minister, Sergei Lavrov, is an incredible bit of reading. So positive was it for the Russian Government that the Russian Ministry of Foreign Affairs was the first to publish it, on its website. It is just a series of about eight one-line questions, to which each answer is about five paragraphs from Lavrov, putting forward the official Russian viewpoint. He comes out with some incredible stuff, and at no point was any of that challenged by the BBC Russian service. He says that Russia is
“an undeviating protector of international law”.
He attacks the colour revolutions in the post-Soviet era, saying they are
“not merely examples of gross human rights abuses”—
the revolutions, not the background to them—and accuses them
“also of trampling upon the norms of ethics and morality.”
At no point did the interviewer challenge any of those views or opinions.
The logic of what my hon. Friend says is that we should be interfering with what BBC interviewers do, across the globe. That is not necessarily a positive route forward. Much as I understand some of my hon. Friend’s concerns, surely we should not underestimate the intelligence of people who read such interviews, and their ability to read between the lines. I wonder whether that is happening only in relation to Russia; presumably the BBC has sensitivities with other countries in its interviews with politicians or leading business folk. It is a slightly dangerous path if my hon. Friend is asking any Government effectively to interfere in the BBC’s operations abroad.
I thank my hon. Friend for that intervention, but I strongly disagree with him. Members of Parliament should watch carefully the overall direction that the BBC takes in its foreign coverage. It would obviously not be appropriate for us to interfere or intervene at a localised level, but we should all be concerned if the BBC is allowing the unmediated views of someone like Lavrov to be repeated at length.
Will the hon. Gentleman give way?
I will not take another intervention yet; I want to move on to another point.
I recently met Peter Horrocks, the new head of the World Service, and found him much more amenable than his predecessor at the time of the Lavrov interview. A number of us in this House take an interest in what happens at the BBC Russian service and we look forward to a flourishing future for it.
I want briefly to turn to the issue of visas. I was recently reminded of the effectiveness of the removal of visa rights from individuals, or sets of individuals, in dealing with different Governments. I am told—I believe reliably—by a former senior member of Boris Yeltsin’s Government that effective action was taken at an EU level against up to 500 members of the Nashi organisation, by ensuring that they did not receive visas for the Schengen area. Nashi, hon. Members may recall, is a pro-regime irregular group that was prominent in the very nasty harassment campaign against the then British ambassador in Moscow in 2007. My information is that Estonia cancelled the visa rights of 500 Nashi members, and that that had a knock-on effect in a number of EU countries. I believe that those close to the present regime fear removal of visas for their visits to London. That could be a very effective move in, for example, putting pressure on Russia over other issues that I have discussed.
By contrast, our visa policy towards other, more humble, Russian citizens is sometimes shameful. Since I applied for the debate I have been doing a lot of research on the number and nature of Russians refused visas to this country. I have had representations directly from and on behalf of such Russian citizens. The number of visa refusals of Russians, as a percentage of the global total, has risen relentlessly from 3.3 per cent. in 2002-03 to 6.8 per cent. in 2008-09. Now Russian refusals rank fifth in the world, after India, Nigeria, Pakistan and China—all countries that are more populous than Russia. Some 10,035 visa refusals were made in the last financial year.
I shall not go into detail about some of the cases that have been raised with me, but many of the refusals affect academic and cultural visitors. Those would seem to be precisely the sort of people we should encourage to come from Russia to this country. However, I shall mention one case, which I found particularly shocking—that of Sergei Mironenko from the Memorial organisation, which documents Soviet era oppression. He is the leading editor of documents from the Stalinist past, and was refused a visa to attend the 2009 London book fair. I am not in a position to tell the House everything about that gentleman’s background, but two others from his group were refused visas as well, and I should be grateful to hear the precise reasons for that.
A visa was also recently denied to Yevgeny Tsymbal, a well known maker of documentary films, who has regularly been invited by Queen Mary college as an academic visitor. There has been a surprising number of instances where precisely the more democratic-minded Russians have been the ones whose visa applications have been refused. I was delighted when my great aunt from Vladivostok was granted a visa and came to my wedding in 2005, but I sometimes ask myself whether four years later she would get the same treatment. It seems to me from statistical and anecdotal evidence that the visa situation for more ordinary Russians is rather difficult.
I have a final thought that I want to end on. I mentioned that I would talk a little about the historiography of UK-Russia relations, and I want to contrast two incidents from the past, to suggest how those might provide pointers to approaching a proper relationship with Russia today. The way not to approach matters was shown in the summer of 1939 when Britain explored the possibility of a rapprochement with Soviet Russia, but unfortunately dispatched a middle-ranking naval officer, by sea, to conduct the negotiations. I believe that my information is correct, although I did not quite have time this morning to check it. It took the delegation, at that critical time, three weeks to arrive by boat in what was then Leningrad. I do not for a moment say that the Soviets were a natural ally of this country, then or later, but if the mission was to seek an alliance with them, that seems to have been a rather poor way to go about it. The Soviets, not unreasonably, contrasted the behaviour of the British towards them with their behaviour towards Hitler the previous year, when the then Prime Minister flew out at pretty much a moment’s notice to Munich. They drew the inevitable conclusions about whether Britain was serious about an alliance or relationship with Russia.
The other lesson is from 25 or so years ago, when Margaret Thatcher, who was of course resolute in her approach to the Soviets, nevertheless engaged. She flew to Moscow. She did not take the 21-day boat. She was even cheered by Muscovites in the streets of Moscow on her walkabout. That sort of example, and the recent examples of Barack Obama and Angela Merkel, shows the importance of engagement and resolution in dealing with Russia. We must have some hopes for the Foreign Secretary’s visit, and I await the Minister’s views with interest. We should have no illusion, however, that it is a substitute for talks at the highest level. If Obama and Merkel can do it, surely our Prime Minister can finally summon up the courage to do the same, meet Putin and have substantial talks.
Five hon. Members want to catch my eye, and we have about half an hour before Front-Bench speeches begin, so concise speeches would be in order.
We need to look at our relationship with Russia having examined our past. We in Europe have come out of two devastating world wars. We have seen the fall of the Berlin wall, the 20th anniversary of which is approaching. There have been non-violent revolutions in Czechoslovakia and Ukraine, and democracy has spread across eastern Europe. However, there has also been ethnic cleansing in the Balkans and war and heightened tensions in the Caucasus. We are withdrawing from Iraq and sending more troops to Afghanistan. North Korea remains isolated and antagonistic. Iran is a growing nuclear threat and Pakistan is unstable. These are far from peaceful times. There are new threats: terrorism from religious extremism, and the looming threat of climate change, with its impact on the migration of people, water shortage and famine. Energy security is rising up the political agenda, as are cybersecurity, the war on drugs and the threat of nuclear weapons in the control of rogue states.
Russia, a former superpower, wants to re-establish its global presence and is moving into a new era of diplomatic relations that are fraught with complexity. The collapse of the former Soviet Union was not a triumph of democracy, but more one of economic disintegration. As Russia recovers financially, it seeks a new role and status in a changing world. That is seen particularly in Russia’s relationship with China. The fall of the Soviet Union allowed China to grow in influence and power, particularly economically. China and Russia are participants in the Shanghai Co-operation Organisation, which aims to provide a regional, multilateral framework within which mutually beneficial co-operation in economic, political, diplomatic, security and trade spheres can be pursued. It has become known in some quarters as the NATO of the east, with some writers even suggesting that it could develop into a trade bloc rival to the European Union.
The Shanghai co-operation agreement has been used to maintain de facto control over political movements within central Asia, yet Beijing and Moscow diverge on issues such as energy assets and who should become new members of the organisation. There is already a possible Sino-Russian tension. China is buying into Russia’s petrochemical industry, which adds to Russia’s concerns. China has shown a willingness to invest billions of dollars in areas such as the far east and Siberia, and even along the Moscow-St. Petersburg highway. Some would argue that, in that area of Russia, China’s influence is soon to become greater than that of the Russian central Government. There are those, therefore, who argue that China’s rise is as great a threat to Russia’s east as NATO is to its west.
That gives the west an opportunity to develop a different dialogue and a new relationship with Russia. Through its role in NATO, the UK plays a critical role in working in partnership with Russia, in particular on tackling terrorism, nuclear non-proliferation, the war on drugs and climate change. The resumption of formal engagement between NATO and Russia on the NATO-Russia council is a positive step and opens up discussions in those areas of potential co-operation. I agree with the hon. Member for Hammersmith and Fulham (Mr. Hands) that other positive steps have been taken recently, with nuclear non-proliferation and missile defence moving back on to the political agenda, thanks to announcements made by our Prime Minister and by President Barack Obama.
Iran is a major issue in terms of political and nuclear threats. It is seeking membership of the Shanghai Co-operation Organisation, consistent with its “looking east” foreign policy. If we are to have the support of Russia in tackling the threats posed by Iran, it is important that we also tackle Russia’s feelings of insecurity in relation to the west.
For the west and for Russia, Afghanistan, religious extremism, terrorism and drug trafficking are major threats. In Russia, 10,000 people a year die from drugs, with 70,000 people dying drug-related deaths. We have a major opportunity to work together to tackle the problems of drugs that come out of Afghanistan and the chemical processes needed to process those drugs, which are currently trafficked through Russia. We have an opportunity to create joint structures to build on border and police capacity to tackle drug smuggling.
The economic crisis in Russia is expected to last long into 2010, giving increased significance to the UK’s position as the biggest foreign investor in Russia’s oil and gas industry, and the largest source of foreign direct investment into Russia. Russia’s economy is less than 3 per cent. of world gross domestic product, and is forecast to remain below 3 per cent until 2030. Even Russia’s oil and gas companies, whose output is beginning to decline, cannot thrive without foreign technology, expertise and capital. To develop, Russia will need the support of the west and of the UK to develop its legal system, to tackle economic and banking regulation, and to develop its capacity for labour movement—a problem that is holding back its economic development.
Although Russia currently fears further NATO enlargement, especially the entry of Ukraine and Georgia, and seeks to erode the significance of NATO and EU membership, we have to look at the realpolitik of how we develop the relationships between Russia and the UK and NATO. In a global world, our emphasis has to be on our shared problems. We in the west have long believed that capitalism, prosperity and liberalism go hand in hand, but the end of the cold war has shown that belief to be fallible. The solution is political engagement through bodies such as the World Trade Organisation, increased exposure to the European Union and to EU offers and efforts to build Russia’s economy, and work with NATO on joint military developments and exercises.
There is the possibility of a new relationship with Russia in a new global world. We cannot be innocent and deny the risks that Russia poses to the west, but we cannot turn our backs on potential opportunities to bring Russia further into closer alliance with the west, and to understand the opportunities that co-operation and working together can bring for peace, security and financial security for Russia.
I was born when fighting stopped in Europe at the end of the second world war. I grew up in a household, town and country that had learned to hate fascism and hate Germans. Sixty-five years later, western Europe is united, harmonious and making progress. One needs to ask: how did that transformation come about? Clearly, it did not happen overnight. It started very badly, but there was mutual commitment from everybody who had been through a world war on the continent and was determined to do something about it.
The Soviet Union collapsed only 18 years ago. Surely, it is unrealistic to assume that 65 years of progress can be made in 18 years. More to the point, when we have taken 300 years to get our democracy into its present slightly chaotic state, to expect similar progress in 18 years would be to push our luck a bit. I say that because the Russian Federation is a country in transition. It is a new democracy; it is new at all sorts of things. The tsars before the Bolsheviks were not models of democracy, the rule of law and human rights, so the Russians have little to draw on.
In case I am again accused of being an apologist for the Russians, let me repeat what I say to my Russian friends. Of course Russian democracy is far from perfect. Of course the handling of human rights in Russia is not very clever—we have heard examples of that. Of course the rule of rule of law is weak. We know that and we say so, but the Russians know it too.
The challenge is to ask ourselves whether things have improved in Russia, not whether they are perfect. In my judgment, Russia has made progress. Many people, myself included, wish there was more, but we must be fair. What we have to do on occasions such as this is to ask whether, because there are still so many shortcomings in Russia, we should condemn or try to help. I know where I stand on that. I readily accept that trying to help a new or emerging democracy, with all its shortcomings, requires a difficult balancing act for those who want to keep their self-respect, but who also need to be pragmatic and to be prepared to work with the imperfect to try to make it less imperfect. I know that, but it might help to admit it.
For reasons that I shall explain, I am very much involved and committed to helping people in Russia. I am a member of the UK’s Council of Europe delegation and the leader of one of its political groups, a group that has 27 members from United Russia. I have found that progress can be made. My contribution to today’s debate is to say that it is okay to discuss what the Government of the day can do, but it would be useful for a moment to spare a little thought to what we parliamentarians can do by serving as a route to individual parliamentarians in other countries. I shall leave it to the Minister to say what the Government want to do, and I shall leave my hon. Friend the Member for Rayleigh (Mr. Francois) who speaks for the Conservatives to give our party’s view. My view is that if we can build trust and friendship with members of another parliament, however imperfect, we parliamentarians stand some chance of passing on some of our beliefs and values.
That is what we need to do, but to achieve it, we must understand the Russians. We are talking about a former superpower that has lost its empire, whose rouble has collapsed and which descended into chaos under Yeltsin and at one point even had to rely upon food aid. Is it surprising that such a country should feel humiliated and the need to do something to restore its self-respect? We should be clear about the range of changes that have to be made. When talking about the Russian Federation, we must also remember that it is not some Balkan state. It is geographically enormous, and has an enormous population. Turning around such a country is not as simple as taking action in places such as Kosovo or Macedonia.
We need to help. In my judgment, it can be done at the parliamentary level only through personal contact. We simply cannot afford to leave to Governments, of any colour, the things that my hon. Friend the Member for Hammersmith and Fulham (Mr. Hands) wants to see done. We ourselves have to play a part in building those relationships.
With Russia, as in any other case, we need to understand that no Parliament is made up of people who all believe the same, who think the same, and who have the same policies and the same powers. It is not like that. In any Parliament, and certainly in the Russian Duma and the Russian Federation, there are people whose view of Russia’s future is of a country that is integrated into Europe—not a member of the European Union but a European country. We are a European country and some believe that Russia is part of our continent, but others want Russia to stand alone again. That is perfectly honourable, but I believe as parliamentarians that we could usefully help those who wish to see a united continent, with Russia being integrated with the rest of us into a peaceful future. The track record of conflict in Europe—be it Russia’s or anyone else’s—has not gone away. We need to integrate Russia into Europe to stand the maximum chance of ensuring less conflict or no conflict in the future of our continent.
Mr. Streeter, it is a pleasure to see you here. This is the first time that I have spoken under your chairmanship.
I congratulate the hon. Member for Hammersmith and Fulham (Mr. Hands) on securing this debate on an important subject, and I am glad that it is taking place so soon after the recess. I also congratulate the Minister for Europe, my hon. Friend the Member for Rhondda (Chris Bryant), my next-door neighbour, on his recent appointment.
Many of us have been engaging with Russia for a long time; some, like the hon. Member for Spelthorne (Mr. Wilshire), through membership of the Council of Europe, and others through the Inter-Parliamentary Union. Indeed, next week in Geneva some of us will be taking part in bilateral meetings with the Russian IPU delegation. Those links are important, and should not be underestimated.
I start with Dmitry Medvedev, the Russian President. Had I realised that the hon. Member for Hammersmith and Fulham had Russian ancestry, I would not have spent time in the Library this morning trying to find the correct Russian pronunciations—next time I shall know who to ask. When the President, a lawyer who once spoke out against Russia's “legal nihilism”, took office in 2008, I hoped that human rights and freedom of expression would be strengthened. However, although he has made statements in support of civil society and human rights non-governmental organisations and met their representatives, it would appear that the situation remains largely unchanged.
Seventeen journalists have been killed in Russia since 2000. The killers were convicted in only one case. Those cases include that of Anna Politkovskaya, an internationally known journalist who was a harsh critic of the Kremlin and who exposed widespread human-rights abuses and corruption in Chechnya. She was killed a little more than three years ago, but no one has yet been found guilty of either having killed her or having ordered her killing. They include also the case of Mikhail Beketov, the editor of a newspaper in Khimki, to the north-west of Moscow, who had been reporting on local government corruption and who, last November, was beaten nearly to death and left in the freezing cold; he lost a leg and fingers to frostbite. In February, the editor of a local weekly further north-west of Moscow was found unconscious and bleeding; he had published articles critical of local politicians.
In addition, human rights defenders remain at risk. This summer, on 15 July, Natalya Estemirova was kidnapped in daylight from a street in central Grozny. Hours later, her corpse, with gunshots to the head and body, was dumped by a road in the neighbouring southern republic of Ingushetia. Mrs. Estemirova had been gathering evidence for the human rights organisation Memorial about an alleged campaign of arson attacks by militiamen, backed by Chechen President Kadyrov, against his opponents. House burnings have become a frequent form of collective punishment by local authorities, with at least two dozen incidents in the past 18 months. Suspected militants and collaborators, their relatives and other perceived enemies of the regime are liable to be tortured, abducted and assassinated.
Memorial and Mrs. Estemirova were a constant thorn in President Kadyrov’s side. I met and spoke with Mrs. Estemirova, who was a courageous and principled woman. She knew that her life was in danger, but did not want to talk about that. Instead, she concentrated on raising awareness of what was happening in Chechnya—on stopping ongoing and serious human rights violations and on getting justice for the victims. I understand that President Medvedev has placed the investigation of her murder in the hands of the state prosecutor, who will report directly to the Kremlin. However, the Russian President has already declared that President Kadyrov was not involved.
Only last week, a court in Moscow ruled that Oleg Orlov, the head of Memorial, had smeared President Kadyrov’s reputation by blaming him for the death of Mrs. Estemirova. Mr. Orlov had accused the Chechen President of being guilty of Natalya Estemirova’s murder. However, in court, he explained in his defence that he had meant political guilt, telling the court:
“The current situation in the Chechen Republic, where horrendous crimes violating human rights go systematically unpunished, has given me every basis for believing in the unconditional political guilt of Ramzan Kadyrov in the death of Natalya Estemirova”.
Witnesses, mostly colleagues of Mrs. Estemirova, also said that President Kadyrov had personally insulted and threatened her, forcing her to leave Russia for a time. Mr. Kadyrov’s lawyer is reported to have said that violent separatists, backed by western secret agents, were probably responsible for Mrs. Estemirova’s death.
If justice is to be done in that case, all lines of inquiry must be pursued and any subsequent trials must meet international standards. I must emphasise that there is such a thing as state-sponsored violence as well. More generally in relation to all those cases, the British Government must raise them with the Russian and Chechen authorities, and stress the importance of thorough and impartial investigations to ensure that the perpetrators are held to account.
Impunity is a wide problem in Russia and one that undermines reform in a number of areas. The number of cases filed in the European Court of Human Rights against Russia has climbed sharply from 8 per cent. of all cases in 2000 to nearly 30 per cent. last year, with a number of rulings highlighting torture and judicial corruption. In her examination of politically motivated abuses of court systems across Europe, the Council of Europe rapporteur, a former German Justice Minister, found that prosecutors in Russia have “almost unchecked” power to put people behind bars and that judges are
“subject to an increasing level of pressure aimed at ensuring convictions in almost all cases.”
In addition, she points out that the practice of telephone justice—an official calling and telling a judge how to rule—has evolved for the worse. Russian judges are now so worried about making a mistake and being disciplined or dismissed that they pick up the phone themselves to ask for instructions.
A plan to give extra credit to convicts for time spent in notoriously crowded pre-trial detention facilities has been derailed because it might have resulted in the release of jailed former oil tycoon and Kremlin foe, Mr. Mikhail Khodorkovsky. The rapporteur also cited the start of a second trial against Mr. Khodorkovsky in March as one of “two emblematic cases” that cast doubt on the Russian President’s professed commitment to fighting what he called in the past “legal nihilism”.
I call on the UK Government to raise those concerns with their Russian counterparts and to ask the Chechen and Russian Governments to open up Chechnya to parliamentary delegations, international governmental and non-governmental organisations, academics and journalists. The all-party human rights group, which I chair, has been trying to go to Chechnya since 2002—in fact, I was in Moscow with a delegation in 2002 when we were invited to go to Chechnya. That visit has never taken place. I hope that the dates for the delegation’s visit will be agreed very soon because if there is nothing to hide why not open up the area to visitors?
We have six minutes for two speakers.
I congratulate the hon. Member for Hammersmith and Fulham (Mr. Hands) on securing the debate and on making a very coherent and well informed case. I say to the right hon. Member for Cynon Valley (Ann Clwyd) that each one of us could have cited similar stories and, time and again, we have expressed the hope that the Government would take up such matters, but today’s debate is about what we can do to bring back a UK-Russia relationship that will allow the sort of representations that she talked about to be made. All of us welcome the reset button being pushed—if that is the right terminology—by the Foreign Secretary. I am sure that he would not call it that, but it is mysterious that we have heard about his visit from the Russians rather than from the Foreign Office itself. Perhaps the Minister will be able to address that point.
Any attempt to deal with Russia is both challenging and fraught with difficulties. That is the case not just now but traditionally. The hon. Member for Spelthorne (Mr. Wilshire) said that we cannot alter 70 years of one sort of mentality and 200 years of tsarist rule in just 18 years of a change of mood in a country. The changes that we want to see will never happen quickly in the emerging states of the former Soviet Union, and that is particularly true of Russia, the largest and most complex of those states. The issues in the Caucasus, both in the north and south, will continue to be of concern to all of us. The area is both volatile and very dangerous.
We are right to try to engage with Russia. We need the Russians for a whole series of reasons, not least non-proliferation, climate change, international economic co-operation and regional conflicts in the middle east and Afghanistan. We know how vital their role is in hopefully bringing about some sort of dialogue with Iran and we urge them not to play games on that issue, but to take a firm stance with the west on Iran, but such things will happen only if we are prepared to build a dialogue with them at all levels. It does not matter that the Prime Minister has not had a close relationship with Mr. Putin. What we need to have is a close relationship with the Russian state at all levels—whether it is with the Duma, the Prime Minister or President Medvedev. Too many issues are of mutual benefit to both of us for the stalemate—the vacuum of non-activity—to go on for any length of time.
The Defence Committee produced a very good report on UK-Russian relationships, and the Government response to it is one of the best responses that we have had from the Government on a defence paper from the Committee for some time. It is well worth a read and I commend it to all Members. However, we must deal with a number of issues, including how we get the dialogue back on track. When the Foreign Secretary returns, perhaps he will be able to tell us that he has opened doors that have been closed.
Other key issues include the Nabucco pipeline. Russia has taken one line and the west another, with one going for one pipeline—the south stream—and the other going for Nabucco. It is in the west’s interest, and the UK’s long-term interest, to get secure supplies of gas from Turkmenistan. We must find a way in which Russia can co-operate with making that happen. There is not enough energy coming out of Turkmenistan to supply both pipelines. We must make a decision to back the right one.
In addition, as the hon. Member for Hammersmith and Fulham said, we must address the problem of visas. I am dealing with a case of a constituent who married a British citizen and has a UK-born son who is now back in Russia, trying to get a visa to come back to rejoin her family. She is having enormous difficulties in dealing with that and it is a nonsense.
Once again, we are pressed for time and I know that the hon. Member for Kingston and Surbiton (Mr. Davey) wants to speak, but I must end by saying that we have to acknowledge that Russia is a big player by any measure that we care to use, and we need to be working and co-operating with that country. It is in our interests and the interests of Europe.
I call Mr. Nigel Evans. You have one minute. I am sorry; you have a bit longer.
My contribution will be more of an intervention than a speech, Mr. Streeter. None the less, I am grateful for having one minute.
In conclusion—[Laughter.] I want to ask the Minister a question. Can the Foreign Secretary, when he goes to Russia, raise a number of issues? First, one issue is clearly the British Council. Can the Foreign Secretary ensure that all our offices are open, to enable cultural exchanges and so that the promotion of education via the British Council is allowed to carry on? Secondly, regarding NATO membership for countries such as Ukraine and Georgia, Russia should not have a veto on that sort of thing.
Thirdly, regarding human rights, a number of things have already been mentioned today. However, may I also say how disturbing it is for us to read in the newspapers from time to time about the situation with gay rights, for instance, in Moscow? When there is a gay pride event, the freedoms of young people that we take for granted in this country when gay marches take place are completely denied in Moscow. The violence that takes place there, when the police turn a blind eye to the type of activities that go on to suppress and oppress young gay people, simply should not be allowed to happen in this day and age.
Fourthly, it would also be useful if Russia officially abolished the death penalty. We know that nobody has been officially executed in Russia for some time—I say officially advisedly—but it would still be useful if Russia now showed itself to be a country that recognises that the death penalty no longer has a role to play.
We know that Russia is important, as far as the United Kingdom is concerned; £100 billion worth of trade between Russia and the UK takes place every year. Russia is an important country—we know that. In the Council of Europe, on which I serve, we have tremendous relations with the Russian Members of Parliament who attend. It is useful that there is dialogue from Government to Government, but it is also vital that politicians have that dialogue, which we hope will continue into the future.
I would like to begin by welcoming the Minister for Europe to his new position in the Government. I know that it is a position that he will very much enjoy, as it goes to the heart of many of the interests and issues that he has raised in his time in the House. I look forward to discussing with him the implementation of the Lisbon treaty, when the Czech Republic has signed it.
I congratulate the hon. Member for Hammersmith and Fulham (Mr. Hands) on securing this debate. I agree with much of what he said, although what he said about the BBC gave me some cause for concern. It is quite right that hon. Members criticise the BBC and the way that it reports things; that is absolutely right in a democracy. However, the argument that the Government should intervene in BBC reporting—as he seemed to suggest—is one that I find myself in disagreement with.
Nevertheless, the hon. Gentleman’s overall thesis that the Government should take a different approach to relations with Russia is absolutely right. We have seen a deep freeze. It has not been fruitful for this country, Russia or the wider world. So he is right to stress the importance of the meetings that he referred to. I agree with my hon. Friend the Member for Portsmouth, South (Mr. Hancock) that those meetings need to happen at all political levels.
The British Government’s position after the crisis in Georgia sent the wrong signal, too; the Government made the wrong call on that issue. Over a period of years, the uncritical support from this country for the way that President Bush undertook relations with Russia has also hindered the influence that we have, because we are not seen to be an independent critical voice, which we need to be. Therefore, one looks at the success that President Obama has had. If we had been saying the sort of things that President Obama has been saying, perhaps we would have been a bit more successful, although we obviously do not have the influence of America.
I strongly welcome what President Obama and Secretary of State Clinton are achieving. I would argue that one of the major steps forward for our relations with Russia would be to support those achievements, because we saw President Bush almost ignoring Russia for many years. In many ways, he was almost insulting the Russians with the lack of attention and the lack of significance that he gave to American-Russian relations. We have seen how quickly a different approach is working and bearing fruit. With this different American President leading the way, there are so many goals that we can jointly achieve.
My hon. Friend must have read my notes, because his speech covered the gamut of the issues. We have seen progress and we are continuing to see progress on the nuclear issue. There are talks about cutting the nuclear arsenals. That is fantastic and critical as we approach next year and the nuclear non-proliferation treaty review conference, which could make a historic step in global nuclear disarmament.
We have also seen the very welcome step forward on ballistic missile defence. My own party was the only party in Parliament that argued that Britain should not be co-operating with the Americans on BMD and instead should be arguing against it. I am glad that we have an American President who has now taken that view as well. I am glad, not only because that will reduce the paranoia in Russia on that issue—it was paranoia—but because a sensible approach was not being taken on BMD.
We also must engage with the Russians on climate change. Everyone talks about the importance of China with regard to climate change, but Russia, with its massive energy supplies, is equally significant.
Other hon. Members have talked about Iran, Afghanistan, human rights and, of course, the significance of relations with Russia on terrorism and tackling Islamic jihad across the world. The Russians understand the dangers that Islamic jihad poses and have a lot to offer, if we can improve our relations with them.
There was an area where I disagreed with the thrust of the argument by the hon. Member for Hammersmith and Fulham. He was rightly critical of the Government, but his argument was a little unbalanced; it was almost as though Russia had not played a part in the problems of the relationship. Let us face it; Russia has caused many of the problems. If the British Government had taken a different approach, that might have worked. Equally, however, it appears at times that Moscow has no interest in any engagement from London. It is as though Russia has taken a strategic decision to make Britain the bogey man and to pile its venom on Britain, and that makes any diplomatic overtures much more difficult. I am not saying that we could not do better, but in not focusing on and understanding that point, or at least appreciating it, the hon. Gentleman unbalanced the overall thrust of his argument.
So how do we go forward? I have talked about the significance of working with the Obama team; that approach offers real opportunity. We also need to talk much more about the role of the European Union in this respect. The EU is really important. Other EU leaders are doing much better than the UK’s leaders in this respect, as the hon. Gentleman said. Of course, Angela Merkel is leading that process. However, the problem within the EU, as we all know, is that many different interests are involved in its relationships with Russia. I have seen analysis of the 27 different EU member states that shows that they all have very different interests in their relations with Russia; sometimes there are competing interests. So it is not easy to get a united, concerted EU approach with respect to Russia, and I think that we all recognise that. Equally, however, when we can work more carefully together to get a united EU approach, Russia has to take notice, not just on issues such as energy or trade but on wider issues, too. The EU, with Britain playing a much stronger role and giving a greater lead within the EU on Russia, is one of the ways that we can ensure that Russia is persuaded to engage in the constructive manner that the hon. Gentleman wanted.
I pay tribute to the hon. Member for Spelthorne (Mr. Wilshire). I thought that putting the development of the Russian Federation into a historical context, as he did, was very important. In considering that historical context, I urge other right hon. and hon. Members to view the EU’s role over a period. In my view, the EU is one of the greatest steps forward for humankind in history. What has evolved over a few decades to create that centre of peace and stability is hugely impressive, and it also gives lessons for how we deal with Russia, both in terms of the EU working together and in terms of understanding where Russia is coming from.
I say all that not wishing for a minute that we should pull our punches with the Russians. When they behave outrageously—particularly on human rights, whether with regard to gay pride marches in Moscow, the appalling way that they have behaved over the Khodorkovsky trial and detention, or the way that they behaved over Litvinenko—we must not pull our punches. I urge the Minister to tell the Foreign Secretary that, when he goes to Russia, he should make it clear that we will speak out about these issues; I am sure that the Foreign Secretary would do that, but I believe that he has backing from across the House to do it. British political parties across the board want to speak out on these issues and Russia has to prove itself. That does not mean that one cannot engage as well on all those other joint, shared interests.
I just want to come back to the Khodorkovsky case, however. I hope that the Minister will assure us that that issue will be raised specifically. It is quite symbolic of how Russia approaches law and order, democracy and human rights. If Russia changed its position on the case, it would send a signal to the EU and the west about reform. A reforming Russia is a Russia that we can do business with. One dreams of a position where the strategic EU partnership, over a period of years, can bring about the reform and prosperity that Russia needs. As the hon. Member for Hammersmith and Fulham said, the rouble and the economy are in a mess. That is in neither Russia’s interest nor ours. I hope that we can build on such moves forward and that the British Government will show more leadership in doing so.
It is a pleasure to serve under your chairmanship, Mr. Streeter. I congratulate my hon. Friend the Member for Hammersmith and Fulham (Mr. Hands) on securing this debate, which he introduced very thoroughly. The subject is important and timely, given US Secretary of State Clinton’s visit to Russia only yesterday. I welcome the hon. Member for Rhondda (Chris Bryant) to his new responsibilities as Minister for Europe. His replacement of the previous Minister is marked out as perhaps the first Government appointment in the world to be announced via Twitter. I am sure that his predecessor was interested to be involved in that record.
I should like to mention some of the other contributions from Back-Bench Members. The hon. Member for Bridgend (Mrs. Moon) spoke about the importance of the Russia-China relationship, which we should note. My hon. Friend the Member for Spelthorne (Mr. Wilshire) argued for engagement with Russia, including via the Council of Europe, a forum of which he has considerable experience. The right hon. Member for Cynon Valley (Ann Clwyd) raised a number of important human rights questions, not least in relation to Chechnya. The hon. Member for Portsmouth, South (Mr. Hancock) did so as well and made a case for the importance of engagement.
My hon. Friend the Member for Ribble Valley (Mr. Evans), in a wide-ranging contribution—[Laughter.] I thought that he crammed a great deal into 90 seconds. He raised a number of issues, including human rights and gay rights in Russia. He was followed by the hon. Member for Kingston and Surbiton (Mr. Davey), who also argued for engagement with Russia, particularly under the auspices of the European Union.
Britain’s relationship with Russia is important to this country. Russia is economically important again, is a member of the G8, maintains large armed forces and is one of the world’s biggest energy exporters. On top of that, Russia has considerable diplomatic weight in the world. It is a permanent member of the UN Security Council and has influence in key areas of concern such as Iran, North Korea and Afghanistan. Our two countries have great mutual interests and potentially strong grounds for co-operation. Anglo-Russian trade, for instance, is large and has great potential. Despite the BP and Shell sagas, Britain is the largest foreign investor in Russia. Britain and Russia have joint concerns about Islamic fundamentalist terrorism, nuclear non-proliferation and climate change—issues that should be of concern to all of us.
Given that great potential for co-operation, it is regrettable that Russian actions in a number of areas have harmed what could and should be a mutually beneficial relationship. One such area is human rights and includes Russia’s refusal to extradite Andrei Lugovoi—the man accused of murdering British citizen Alexander Litvinenko in our capital in a particularly cruel and horrifying manner that put many Britons at risk. There is also the continuing detention without trial of business men involved in the break-up of the company, Yukos—a matter discussed in detail by my hon. Friend the Member for Hammersmith and Fulham—and the failure to investigate properly the death of Anna Politkovskaya, which we believe the Russians should make greater efforts to follow up. Forgive me if my pronunciation is not correct; the Minister knows who I am referring to. We should also not forget the harassment of the British Council and the British Broadcasting Corporation—a subject raised by several hon. Members during this debate.
A further direct action by Russia that undermines trust is the resumption of Russian bomber patrols close to our coast. In one of the latest reported incidents, a Russian Blackjack—a nuclear-capable and supersonic bomber—flew within 20 miles of Hull. That is an unnecessary throwback to the days of the cold war and does not improve Anglo-Russian relations.
I have touched on the subject of British investment in Russia, but the harassment of BP and Shell investments in that country, which effectively forced those businesses to hand over some of their best assets to Russian companies, might now be seen even in Russia as counter-productive. With Russian energy assets starved of investment and medium-term forecasts of decreasing production, Russia seems to have begun to realise that continuing foreign investment is desirable. Last month, Prime Minister Putin hosted the world’s major oil companies in Siberia, promising them:
“We would like you to consider yourselves participants in our undertaking. The main condition from our side is that partnerships should be stable and long-term.”
President Medvedev’s emphasis on the rule of law for Russia is right, and we eagerly await evidence that it is creating tangible results.
As well as our bilateral relationship, Russian involvement could be influential in a number of global problems. It would be highly desirable to gain Russian support in Iran. The recent discovery of the Qom enrichment plant has heightened fears that Iran is close to developing nuclear weapons capability. It is hoped that further talks, backed up by the threat of further sanctions, will persuade Iran to allow the International Atomic Energy Agency full access to its facilities.
For those reasons, it is welcome that US Secretary of State Hillary Clinton visited Moscow yesterday in an attempt to gain Russian support. Russia has a major role to play in the international community’s dealings with Iran and, judging by yesterday’s statements by Russian Foreign Minister Lavrov, it may have begun to take seriously its responsibilities in that area. Hillary Clinton, for her part, said that the talks were “extremely co-operative”. The next few months will demonstrate whether that is really the case.
Afghanistan is also key to our relationship with Russia. Russia has as strong an interest as we do in the denial of Afghanistan to those who would seek to use it as a base for terrorism. Russia has a unique knowledge of Afghanistan that dates back to the days of the great game and beyond, and it is important strategically as a route for overflights to the UK. It is hoped that Russia will continue to use its influence to aid the international security assistance force mission in Afghanistan. I believe that the Foreign Secretary will take up that issue when he visits Moscow in November. The Minister may want to say a little more about it when he replies in a few minutes.
Few people would contend that the UK’s bilateral relationship with Russia, despite our many mutual interests, has not been somewhat strained over the past few years. It was hoped that the election of President Medvedev would lead to a warming in relations, to the benefit of both countries. Unfortunately, despite President Medvedev’s arrival, that has not happened. A Conservative Government would welcome a positive relationship with Russia based on mutual respect. We respect Russia as a great and historic power, but that respect must be mutual. We do not believe that relationships between countries should be simply a zero-sum game. Those who believe that tend to find themselves long-term losers. In dealing with Russia, it is important to assess her not just by what she says but by what she does. [Interruption.] I wonder whether that noise is the Russians attempting to contact us as we speak.
As the shadow Foreign Secretary, my right hon. Friend the Member for Richmond, Yorks (Mr. Hague) has said,
“With a Conservative Government, the door will be open to improved relations with Russia. We shall see if a door opens in return.”
It is to be hoped that that door will open, and that we will be able to enjoy an engagement that is to the mutual benefit of our countries and to that of other countries around the world.
Like my right hon. Friend the Member for Cynon Valley (Ann Clwyd), I think this is the first time that I have served under your chairmanship, Mr. Streeter, and it is a great delight to see you in the Chair.
It is also a delight to reply to a debate secured by the hon. Member for Hammersmith and Fulham (Mr. Hands), whom I consider to be a friend. We have co-operated on many issues relating to Russia in the past, and I hope that we will do so in the future. I note that he adopted an uncharacteristically aggressive and partisan attitude. I would respond in kind and be partisan, but it might be of more use to the House if I were co-operative. It is good to see so many hon. Members present, and I think that they all have a clear understanding of the significance of this relationship and its problems. The path that we must take is not straightforward.
Russia is obviously a great nation. It has a great sense of pride, which we respect. It was fascinating to see how many British people wanted to see the “From Russia” exhibition in 2008, for which we had to change the law so that some of the artworks could come to the UK. Russia holds a degree of fascination for British people, as it has for many centuries. We would never want to alienate ourselves from a nation that has produced such greats as Andrei Rublev—undoubtedly the greatest icon painter in history—and literary figures such as Tolstoy, Chekov, Sholokhov and Solzhenitsyn. We need a firm-but-fair relationship, and that is what we strive for.
Russia and the UK are key allies, but there are undoubted problems, as many hon. Members have said, one of which is the situation with Georgia. Russia’s continuing presence in Abkhazia and South Ossetia is an ongoing problem for us because we believe, as does the rest of the European Union, that Russia is not meeting its obligations. There are problems in relation to energy security. Although only 2 per cent. of the UK’s gas comes from Russia, the figure for the EU is 40 per cent. Russia is therefore key to the EU’s energy security. There are problems with human rights, which I will amplify later. The most notable problem in recent years has been the Litvinenko case.
The Foreign Secretary’s visit in the next few weeks will be important, and we hope to make significant progress in our relationship with Russia in the near future.
Should the Foreign Secretary raise the Khodorkovsky case on his visit? If so, will he?
Yes, I am sure that my right hon. Friend will. I hope to speak about that case in more detail later. It is an issue that I raised when I was a Back Bencher.
The key areas where Russia and the UK have to work together are climate change, which has been mentioned, and counter-proliferation, which relates not only to nuclear weaponry, but to the security of fissile material, on which the UK and Russia have worked closely for a number of years. It is not only the US and Russia that have moved this issue forward. Our Prime Minister has taken a key role, because we want to see a comprehensive test ban treaty and to ensure that the nuclear arsenals around the world diminish. We have made a significant contribution by cutting our nuclear weaponry by three quarters. We are prepared to go further if it will help the process. Although no one has mentioned it, Russia also plays an important role in the middle east peace process.
The hon. Gentleman started with a broad attack on the Prime Minister, of whom I gather he is not an enormous fan. Unfortunately, he made many errors. He said that the Prime Minister has never met the Russian President.
Will the Minister give way?
I will not, because I have only a few minutes and a great many issues to reply on. The Prime Minister has met President Medvedev twice this year; the Foreign Secretary has regular dialogue with Foreign Minister Lavrov; and the Secretary of State for Energy and Climate Change was in Moscow earlier this month to build momentum towards Copenhagen.
Will the hon. Gentleman restrain himself and wait for a moment? We try to maintain relations at the highest level that is possible and suitable.
My question was whether, since he became Prime Minister in 2007, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr. Brown) has met Prime Minister Putin, including in his previous guise as President Putin. I have been refused an answer on that matter in many parliamentary questions. Has he met him or not?
I am sorry; I misunderstood what the hon. Gentleman was asking. He referred to the President and I thought that he was referring to President Medvedev. I am happy to come back to him on the question that he has raised.
Contrary to the hon. Gentleman’s comments, there has been a great deal of engagement between this country and Russia in relation to climate change and counter-proliferation. We believe that there are important movements in Russia’s position in relation to Iran and North Korea. We welcome those moves, not least the meeting that took place yesterday. However, Kremlinologists have interpreted the meaning of yesterday’s conversations between Mrs. Clinton and Mr. Lavrov differently. We have also worked closely with Russia on counter-narcotics and Afghanistan—something that has been very helpful.
The hon. Gentleman said various things about the World Service. Although one wants to be critical of the BBC at times, it would be wholly inappropriate for Ministers to analyse the rights and wrongs of its editorial decisions. The absolute integrity and independence of the World Service is part of what guarantees its reach and its ability to make a difference in places such as Russia.
The hon. Gentleman referred to the Litvinenko case. He knows that I have raised that issue many times. The courts have issued a warrant for the arrest of Andrei Lugovoi on a charge of murder. That warrant remains valid. We do not resile from that position. It was a horrific crime that was committed against a British citizen on UK soil. The Government have worked hard to support the Crown Prosecution Service and will continue to do so. We do not believe that Russia has co-operated satisfactorily on our requests. We will continue to seek his trial before the UK courts.
The hon. Gentleman and my hon. Friend the Member for West Bromwich, East (Mr. Watson) asked about Mr. Khodorkovsky. We have raised that issue with Russia and will continue to do so. We raise the issue of human rights with all countries where there are significant issues.
The speech of the hon. Member for Ribble Valley (Mr. Evans) was the best that I have heard today, by virtue of its brevity. He raised the issue of gay rights in Russia. We do raise that matter and our embassy tries to be supportive of British people who try to go there to take part. I think that I am right in saying that the mayor of Moscow, whose comments on these issues are deeply offensive, is in the political party that is aligned with the Conservatives in the Council of Europe. The hon. Gentleman may want to raise those issues in the party grouping, although such groupings are a difficult issue for the Conservative party at the moment.
My right hon. Friend the Member for Cynon Valley asked whether it would be possible to visit Chechnya. I will look into that matter, but it is obviously difficult. She is a very brave woman, as we all know—we certainly know it in south Wales. She visited Iraq when it was very difficult for anybody to do so. She has played an important long-term role in human rights issues. We continue to raise such issues through the EU’s dialogue with Russia. She raised the case of Anna Politkovskaya. Press freedom is vital and it is impossible to have a free society when there is impunity when journalists are killed. Becoming a free society is the best direction in which Russia could move. The problems with Russia’s criminal justice system are well documented.
My hon. Friend the Member for Bridgend (Mrs. Moon) raised some of the same issues and has taken a significant interest in such matters. I hope that we can keep up that dialogue. She, too, is a near neighbour in the south Wales valleys, so we are well represented in this debate.
UK Grocery Market
I hope you will agree that this is also an excellent debate, Mr. Streeter: it is certainly important to many hon. Members. Many organisations. too, will be following the debate, particularly as we are at a crucial stage in the negotiations of the plans, which I shall explain in a moment, originally proposed by the Competition Commission following a lengthy inquiry into the grocery market sector.
Many people may question whether it is appropriate to have any kind of debate about the role of the grocery market sector within the UK in the context of development policy, but today I would like to explore with the Minister the importance of association with such a crucial, leading sector in the UK and development policy itself. I shall also discuss the widespread and growing concern about how the market operates in the UK and the impact of that on developing countries. I welcome the Minister here today and I am pleased to have secured the debate.
I begin by declaring an interest in that, among my many other sins, I am the chairman of the Grocery Market Action Group, which was set up in July 2006 at the commencement of the Competition Commission’s inquiry into the grocery sector. Some of the members of that alliance of organisations are ActionAid UK, Traidcraft and Banana Link. The clear impact on suppliers of the supply chain to supermarkets means that organisations such as the Association Of Convenience Stores, the Rural Shops Alliance, the British Independent Fruit Growers Association, the British Brands Group, and the National Farmers Unions of England and Wales and of Scotland are also members of the Grocery Market Action Group. They have been involved in jointly supplying a case to the Competition Commission during its inquiry.
It is important to understand the context in which I am asking the Minister to respond. The issue is the role of supermarkets at the end of the grocery market supply chain, about which there have been concerns for some time. Indeed, in 1999, my hon. Friend the Member for South-East Cornwall (Mr. Breed) undertook an inquiry into the role of the supermarket from the perspective of both UK planning and the impact of the power of the supermarkets within the supply chain itself. The inquiry considered the manner in which the supermarkets were able to dictate market conditions for all other operators in the supply chain, particularly producers.
The report produced as a result of that inquiry was entitled “Checking out the Supermarkets,” and was sent to the competition authorities. As a result of that and other concerns expressed at the time, in April 1999, the then director general of the Office of Fair Trading referred the matter to the Competition Commission, which undertook an inquiry and, in October 2000, produced a report on the supply of groceries from multiple stores in the United Kingdom. That report recommended the establishment of a supermarket code of practice.
In September 2003, the Competition Commission produced a report on the Safeway merger, which raised further issues about the impact of the effective concentration of power in the supermarket sector. In February 2004, the OFT produced a report on its inquiry into the workings of the supermarket code of practice, which was implemented as a result of the Competition Commission’s report that I mentioned. In March 2005, the OFT produced a second report on the code of practice and, by May 2006, it referred the grocery sector to the Competition Commission. The issue therefore has a long pedigree.
By that stage, many organisations had become frustrated. They felt that action was required to curtail or control the excessive power in the supply chain of supermarkets, which were able to dictate market conditions and force suppliers to accept conditions and terms that were clearly to their detriment; and that it was time one of the competition authorities did something about the issue. It has taken two years for the Competition Commission to complete its inquiry. The organisation—the alliance—that I have chaired and convened during that time has submitted a number of proposals to the Competition Commission during its inquiry. The proposal for an adjudicator—or, to use the Competition Commission’s term, an ombudsman—to oversee the sector and ensure that a code of practice is properly imposed is particularly relevant to today’s debate.
On 13 March last year, I attended an evidence session with the Competition Commission, of which there is a record, and on 30 April 2008, it produced its final report on the UK grocery market. The Government produced their response on 29 July last year. Crucially, the Competition Commission concluded that there was a
“transfer of excessive risk and unexpected costs to suppliers”
“if unchecked will have an adverse effect on investment and innovation in the supply chain, and ultimately on consumers”.
It recommended the establishment of an ombudsman to oversee a code of practice. The critical point is that the supermarket code of practice was found to have failed in the sense that suppliers living in a climate of fear feared the consequences of making any kind of complaint. The supermarket code of practice had become relatively useless. The Competition Commission therefore proposed having an ombudsman to oversee what was happening and to provide a point to which future complaints could be directed.
The impact of the problem on the developing world is significant. The point that a number of development organisations—ActionAid UK, Banana Link, the Fairtrade Foundation, Traidcraft, Oxfam and others—have been making for a number of years is that what is relevant to UK suppliers is just as relevant to suppliers from developing countries. There is currently a price war between supermarkets on bananas, for example, and that is clearly having a detrimental effect, not so much on the supermarkets, but on the primary producers in developing countries. Indeed, the Fairtrade Foundation’s director of communications and policy said in a press release last week:
“Price cuts serve only to devalue bananas yet further, creating a false illusion amongst shoppers that they can be sustainably produced for such give-away prices…This is highly irresponsible at a time when farmers and workers across the developing world are facing their own economic crisis, as well as battling the growing effects of climate change.”
The impact on developing countries comes in several forms. The concern relates not only to the supermarkets’ ability to force down prices, as they do here in Britain, but to the impact that that has on terms and conditions. Often, the supermarkets do not enter into written contracts and retrospective changes are made to agreements, and when the buyers come back to their original suppliers they often charge for shelf space. Promotions are often conducted at the expense of the suppliers: buy one, get one free offers are not, in fact, the gift of the supermarket, but something the supplier is required to provide for the supermarket. Several practices set out in the Competition Commission’s report show that what the supermarkets are doing is extracting wealth from suppliers. It is appropriate to note that, in these recessionary times, supermarkets are posting record profits. Someone is hurting, but it is clearly not the supermarkets.
A further argument being made by development charities and others relates to the impact on labour standards in developing countries. As the Under-Secretary of State will be aware, on 4 August this year, the Competition Commission recommended that the Government establish the post of ombudsman. That area is the responsibility of the Department for Business, Innovation and Skills, and the post held by his colleague the Minister of State at the Department for International Development straddles both Departments. There will, no doubt, be discussions between both Departments, but the commission has clearly recommended in its report that the role of the ombudsman must be established because the supermarkets have failed to adopt the scheme voluntarily. From 4 August the Government had 90 days to respond and make a decision—three weeks away now.
As the Minister may be aware, I also raised the issue at Prime Minister’s questions on 4 February, asking:
“Does the Prime Minister agree that the commission’s proposed remedies to tackle this problem should now be implemented without further delay?”
The Prime Minister replied:
“The hon. Gentleman is absolutely right to highlight this problem—first, because of the failure to introduce early payment to many of the suppliers, we are asking the supermarkets to do that. Secondly, in relation to developing countries, we have been in talks with supermarkets such as Asda about how they can source their produce from those countries at a fair price. We will continue to push that as quickly as possible.”—[Official Report, 4 February 2009; Vol. 487, c. 844.]
This is an important matter. We are entering a crucial stage in the negotiations. Clearly, many organisations that are suppliers of supermarkets are looking out to see what the Government will do. It is very rare that a Government reject the clear recommendations of a competition authority, which has a responsibility to fulfil its statutory duty by assessing a particular case independent of the Government. The Competition Commission has acted in a responsible manner in this case.
I have several questions for the Under-Secretary. What discussions has he or his colleague, the Minister of State, had with BIS, with regard to the Competition Commission’s request that the Government implement its recommendation? Has the Minister or his Department discussed the matter with other Departments, such as the Department for Environment, Food and Rural Affairs, or with their contacts in developing countries, which clearly have an interest in the matter? What assessment has his Department made of the benefits that an ombudsman would bring to suppliers in developing countries? In what circumstances would the Government ever reject the recommendations of a competition authority, such as the Competition Commission, when it has engaged in such lengthy inquiries into such an important matter? Will his Department make a statement, in parallel with BIS, in the first week of November to indicate how that Department’s decision will impact on suppliers from developing countries?
I begin by congratulating the hon. Member for St. Ives (Andrew George) not only on securing this important debate at such short notice, but on his long-standing interest in development—an interest you share, Mr. Streeter. I welcome the opportunity to make a few observations on his comments.
Around the world, 2 billion people depend on agriculture for their livelihoods. The fragility of the world food system was highlighted during last year’s food price crisis. When those price increases came through, they trapped an estimated 150 million additional people in poverty and pushed the number of hungry people to more than 1 billion worldwide. We urgently need to support poor farmers and consumers to deal with fluctuating markets and survive the current global economic downturn.
The UK supermarket sector, as the hon. Gentleman has so clearly demonstrated, has a critical role to play in that. It is worth more than £100 billion a year, and its purchasing decisions make a huge difference to the livelihoods of producers in developing countries. So far, the UK has led the way in developing African horticulture to supply our markets. Altogether, British consumers spend more than £1 million a day on fruit and vegetables from Africa, and there is an important debate, because of that flow of goods, about the interaction between development and environmental sustainability.
I will take this opportunity to speak about the argument relating to food miles, because the hon. Gentleman has an interest in that area as well. As a Department, we make it clear that, with about 1 million farmers in Africa and their families relying on the fruit and vegetable trade in the UK and depending upon their earnings to get their children through school and to care for them when they are sick, it is important that UK customers do not make their purchasing decisions on the basis of food miles alone.
The distance that food has travelled is an incomplete argument about how sustainable the food that we eat is, and it is important for customers to recognise that when they make ethical consumer choices. In Kenya, for example, small-scale farmers bring their beans to the Kaviani sheds in Machakos district. Each week they sow, weed and pick green beans, and each week they earn an income of around £20, which they can invest in their children’s education.
One of the problems in Africa is not so much the availability of food but its affordability. People literally do not have enough money to purchase the food that they need. Exporting commodities, typically food such as the Kenyan beans, is an essential part of any economic growth strategy to increase incomes and reduce poverty. It is the same for small-scale farmers who produce coffee and sell it on international markets. They do so to be able to buy food locally for themselves. The hon. Gentleman made an important point.
The hon. Gentleman referred to the groceries supply code of practice. When it comes into force in February 2010, it will help to ensure better outcomes for both producers and consumers in the international grocery market. It will achieve that by ensuring that supply agreements are in writing and incorporate the code. The number of designated retailers will increase from four to 11, and they must have trained compliance officers. Certain practices will be prohibited, and the new code will ensure that disputes are resolved through fair and legally binding independent arbitration.
We are still assessing the Competition Commission’s proposal to establish an ombudsman to monitor and enforce the code of practice. The proposal raises several complex issues, and we need to consider its potential impact on consumers and the wider economy. We intend to make a decision on that later this year.
The Competition Commission believes that the benefits of effective enforcement and monitoring by an ombudsman would accrue from future investment and innovation due to increased confidence on the part of suppliers. However, we think that the evidence relating to the argument about those benefits is insufficient at present, which is why we want to do a more careful analysis to inform a future decision. An ombudsman would, of course, generate additional costs that would be borne by the retailers, but our view is that, although such costs are likely to be passed on to consumers, they would not constitute a material increase in consumer prices.
Little is known about the potential impact of either the code of practice or an ombudsman on developing countries. Frankly, analysis has not been undertaken on the issue. It is reasonable to consider that, in theory, the code will provide benefits such as increased investment for developing countries, as it would in the UK supply chain. However, in practice, the number of suppliers in developing countries who would engage with and make use of the code of practice or an ombudsman would be relatively low, so that the benefits would likely be insignificant. We think that the Government can operate in a more effective way to improve the livelihoods of poor farmers in developing countries.
I certainly appreciate the Minister’s point that an ombudsman could have a low impact, but even if very few complaints were pursued through the supermarket code of practice, the existence of an ombudsman and the code, if they have real teeth, would have a widespread impact. As he says, the cost could easily be borne, particularly by a sector that is posting the largest profits in its corporate history.
I understand the hon. Gentleman’s point, and I assure him that, over the coming weeks, the Government will keep in contact with him on this issue, which he has pursued with vigour for some time, so that we can deal with his concerns.
I should like to put on the record the commitment that my Department has to ensuring that agriculture and food security are given the highest attention not just in the UK but internationally. In the White Paper that we launched in July, we set out our commitment to provide more than £1 billion to fight hunger and to increase food production in the poorest countries. We will provide at least £1 billion a year to support growth and trade over the next three years.
In the White Paper, we laid out a commitment to increase our support for fair and ethical trade fourfold over the next four years. At the weekend, we announced a commitment of £12 million over the same period for Fairtrade. We therefore hope that, by 2013, we will have doubled the number of individual producers accessing the benefits of fair trade. At present, 2.2 million people will directly benefit. We hope that that benefit will extend to their families and affect some 7.5 million people all told.
I very much appreciate what the Minister is saying about fair trade and extending the work of the Fairtrade Foundation, which is extremely welcome, but I wish to get back to the point of this debate: the implementation of the supermarket code of practice, which will happen anyway, because the Competition Commission has the power to introduce it. The question remains, and we have only days to consider it, as to whether his Department will exert pressure to ensure that BIS looks seriously at the commission’s recommendation to establish an ombudsman. There is an indication in what he has said that it may not, but it would surely be a first if there were a failure to implement the recommendation of an important commission.
The hon. Gentleman may have misinterpreted what I said. Of course we will have discussions with BIS. My point was that we do not have sufficient evidence to show the direct impact of an ombudsman on developing countries. Although there is a logical argument to be made, and we will make it, we do not have the depth of evidence required to prove the impact of an ombudsman on developing countries. That was the point I was making.
Our work on fair trade will produce other benefits in boosting the impact on the developing world. We expect that the global sales value of fair trade certified products will treble over the next four years. We think that that is a fair way of doing business.
The hon. Gentleman mentioned bananas. There was a major piece in one of the Sunday papers on banana prices. I have discussed the matter with the Fairtrade Foundation and wish to put on the record for interested consumers who may be following this debate or reading Hansard that those supermarkets that have gone 100 per cent. fair trade on their bananas have committed to not joining what I consider to be an unhelpful price war. Something that I did not realise some 30 years ago when I used to stack bananas on shelves was that they were often used by supermarkets as loss leaders to get customers into their shops.
We will continue to support ethical trading initiatives, as we have since 1999, and to work with the food retail industry to develop responsible supply chains that will provide equitable opportunities for small and poor producers and enable them to connect with the market.
The food retail industry challenge fund will help retailers design new business models that will bring millions of farmers into fairer and more profitable trading relationships with UK consumers. We made available a fund of some £2 million to make partnerships work for the benefit of farmers, particularly in Africa. Helping poor farmers to increase their crop yields, giving them the support that they need to trade their goods internationally and ensuring that they can earn a fair price are all fundamental to helping lift millions of people out of poverty. I reassure hon. Members that DFID will continue to work with Governments and businesses around the world to support poor farmers and their communities.
City of London
[Christopher Fraser in the Chair]
Mr. Fraser, it is a great pleasure to serve under your chairmanship, although I fear that we are both absentees from the Select Committee on Northern Ireland Affairs this afternoon. I hope that the Chairman will forgive us.
About two years ago, I went on a course entitled “An introduction to the City”, organised by the excellent Industry and Parliament Trust. During week 4, one of our number—there were meant to be 10 of us there—was missing. That person turned out to be my hon. Friend the Member for Burnley (Kitty Ussher). We inquired as to her whereabouts and found that she had been made Minister with responsibility for the City after just three weeks on the course. I did not receive similar preferment; I just got a certificate at the end of the period.
I am glad that my hon. Friend the Member for Portsmouth, North (Sarah McCarthy-Fry)—the successor to my hon. Friend the Member for Burnley as Exchequer Secretary to the Treasury—will be replying to the debate. Her rise has been similarly meteoric. At one stage in the summer, for one week, she was in the Department for Communities and Local Government and, having solved all the problems there, was rightly promoted into the Treasury. I suspect that her meteoric rise will continue. She is a tweeter on Twitter with 400 followers and it would be the height of my political career if today’s debate got a little mention in a tweet later on.
Yesterday, in the Library, an hon. Member asked me, “Why are you interested in the City? What is behind this debate?” I could have mentioned the Industry and Parliament Trust course that I attended, or my economics degree—half an economics degree; I got the other half in history—but I should have said that the City has an impact, for good and bad, on the whole of our economy. That is as true for a northern Member of Parliament as for any other MP in the country. The City has much to take pride in, including its history and the fact that, every day of the working week, 340,000 people pile into the City, which has a resident population of only 8,000. The City should take great pride in underwriting ventures across the world, providing seed corn and capital to entrepreneurs starting up new ventures and businesses in each generation. Equally, the relatively mundane business of making markets, providing liquidity and dealing in foreign exchange all have their value in a market economy. Some of my best friends work in the City.
Another virtue of the City in recent years is social mobility, of a kind. The background of people who work in the City has been transformed in the past 20 or 30 years, since the big bang. I chair the all-party group on Ukraine, which has led me to a new understanding of the internationalism of the City and how people from all round the world work there, contributing to all sorts of firms and often returning to work in their home countries with an understanding of Britain and our economy. All those things are to the good.
I am an avid reader of the Financial Times and have been since my first Labour party meeting at the age of 15. I sat through the meeting and, at the end, one of the older members of the party—there were only about 10 there—who was well into his 70s beckoned me over and asked what paper I read. I told him that I read The Guardian and he asked why. I knew that he did not have much of an education himself, so I thought, wrongly, that perhaps he was saying that I should read The Mirror or something like that. But he said, “The Guardian is biased.” I asked what he meant and he told me that he always read the Financial Times, which was his paper of choice. He said, “It has to tell the truth because the political and economic elite read it, so this is the paper you should read, my boy.” I have to say that although I have stuck to The Guardian—there is something about reinforcing our own prejudices, is there not?—I also read the Financial Times occasionally. Over the summer, it has indeed been the paper for people to read if they have any interest in the City.
Lord Turner of Ecchinswell, chairman of the Financial Services Authority, made a remarkable speech earlier this summer questioning the social usefulness of parts of the City. I realise that I am quoting him selectively, but let me read a couple of lines from his speech. He said:
“Parts of the financial services industries need to reflect deeply on their role in the economy, and to recommit to a focus on their essential social and economic functions, if they are to regain public trust”.
Lord Turner continued:
“there are good reasons for believing that the financial industry, more than any other sector of the economy, has an ability to generate unnecessary demand for its own services—that more trading and more financial innovation can under some circumstances create harmful volatility against which customers have to hedge, creating more demand for trading liquidity and innovative products; that parts of the financial services industry have a unique ability to attract to themselves unnecessarily high returns and create instability which harms the rest of society.”
That remarkable speech was given in the Mansion House. He got to some of his audience, because they started criticising him in The Daily Telegraph in the days following the speech for the way he tied his bow tie. Apparently, he is a clip-on man. I am a clip-on man as well.
Without talking too much about ties, I have to admit that I, too, am a clip-on man.
On social usefulness, surely one of the biggest problems that we face, and one reason for the catastrophe in financial services, is the sub-prime market. From the mid-1990s, in the United States of America, it was those who thought there must be more social usefulness in relation to financial services who tried to persuade a huge group of people who should not have had financial products to go that way. Much as Lord Turner may have concerns about social usefulness, when politicians or those with an interest in politics try to impose social usefulness in this area, it can often go awry.
The hon. Gentleman makes a fair point, but we should not let the City alone be interested in the City. As I will mention in a moment, quite a few of the reports on the City in this generation have been written largely by City practitioners. A wider group of people should be involved in things like the Bischoff report, for example, which was commissioned by the Treasury, because in that way we get a more holistic view of social usefulness.
I am a James Bond man: I actually tie my bow tie.
I am delighted that the hon. Gentleman has said that we should take pride in the City and what it does. The City does an honourable job. Its 340,000 workers come from around this region—some 6,000 of them are my constituents. They do a fantastic job and probably create more for Britain’s economy on the international scene than any other sector. I accept that there are major problems, particularly with bonuses, but only for the very highest-paid in the City.
The hon. Gentleman puts his case in a balanced way. Let us not think that it is only Lord Turner who says such things. Incidentally, Lord Turner was also criticised at one point for being “Red” Adair Turner, and it was said that he was only speaking as he did because of his links with the current Government. However, having read the Sunday papers, I note that he is also held in high esteem by the Opposition Front Bench and is perhaps destined for a role in the Bank of England. His views cannot be dismissed so easily.
Stephen Green, another establishment figure, who is chairman of HSBC and the British Bankers Association, and also an ordained Anglican priest, published a book this year. He said:
“The industry collectively owes the real world an apology for what has happened and it…owes the real world a commitment to learn the lesson,”
Paul Tucker, deputy-governor of the Bank of England, said, under the dome of St. Paul’s cathedral:
“We can’t give meaning to our lives and have a financial system and economy of integrity purely on the basis of self-satisfaction… We need to have a sense that what we’re doing is socially acceptable.”
I have reflected on my reading of the Financial Times over the summer and thought about what value there is in any of those criticisms.
Another report, which I recommend to hon. Members, was produced in the summer by the centre for research on socio-cultural change at Manchester university. Manchester is a traditional centre of all sorts of industries, including manufacturing, and services and perhaps has a slightly different perspective. The report was written by a variety of people, including some academics and some people with experience in venture capital and so on. They came up with a number of reflections and I shall go through a few of them and then make one or two concrete suggestions.
First, the authors of the report reflected on the fact that, in this generation, the reports done on the financial crisis have largely been insider jobs. The Bischoff report was commissioned by the Treasury. Of the eight people who were the secretariat or the sherpas for that report, seven came from the City of London; only one was a civil servant. Looking at some of the previous inquiries on finance, I think that the Wilson committee was active in the 1980s, Macmillan did a report in the ’30s, and the Radcliffe committee worked in the ’50s. A much wider range of people were involved in the reports and in coming to the conclusions that those committees reached. Those reports stood the test of time for a generation—I studied them when I was doing my economics A-level and degree. In this generation, there perhaps has not been an outside look at the City following the financial crisis.
Secondly, the report from the centre for socio-cultural change at Manchester university produced interesting figures on tax and employment. Of course the City of London has been a big generator of tax—£203 billion in a five-year period—but, to put that in perspective, there has obviously been a big financial cost, because the City has operated in a very procyclical way. The International Monetary Fund calculates that the direct up-front financing cost to the UK taxpayer has been £289 billion in the past year, which includes the cost of the bank recapitalisation fund, the special liquidity scheme and nationalising Northern Rock and Bradford & Bingley. The IMF calculates that if all the Treasury loans and guarantees are added to that, the figure could be more than £1,000 billion. There has been an economic cost, which has been felt by ordinary people in my constituency.
It is probably worth observing also that in the City there are a number of very highly paid organisations that specialise in telling other people how to avoid paying tax.
Indeed, that is true. The tax benefit from the City is not all one way; we can summarise the position like that. There is a big employment impact from the City and it is not just in the City of London. The financial services sector is an important employer throughout the United Kingdom, although many of the very high-value wholesale jobs are concentrated in the City of London. I generalise, but there are more retail banking jobs in the rest of the country. Some academics have argued that our economy has become imbalanced: Baumol, for example, argues that there is only a certain number of natural entrepreneurs in an economy, and if the economic rent is greater than the value in a particular sector of the economy, it sucks in so much of the entrepreneurial talent that there are fewer entrepreneurs in other sectors of the economy. That may have happened in the City in recent years.
Finally, the authors of the Manchester report question whether some banking activities are what they characterise as a “great transaction machine”. They do not say that there has been too much lending, but that there has been the wrong sort of lending—not a bubble economy, but certain bubble sectors, with about 40 per cent. of bank lending on property and more than a quarter on financial intermediaries. What they characterise as productive business investment has stayed much the same throughout the period, at about 10 per cent. of GDP. They calculate that the amount of bank lending that goes to productive business investment has declined from 30 to 10 per cent. They would say that the very highly paid employees in many of the integrated banks have had a common interest with some of the shareholders in the banks in having as many transactions, often obscure transactions, in derivatives as possible. The banks have certainly produced a lot of our profits. At one stage, about a third of all profits of the FTSE 100 were produced by banks. Again, however, that has not been stable and there has been a cost for many of my constituents who have faced the downturn.
When in doubt, a politician should produce a 10-point plan, so I shall rattle through 10 suggestions that have been made for reform of the City, concentrating on some more than others. The first, which is very much the Government-sponsored idea, is to increase capital requirements in the banking sector. That is good as far as it goes, but we have to reflect on the fact that, just before many of the banks were brought in to see the Government, they were saying that they were meeting all the capital requirements at the time. As we saw in the various television programmes over the summer, bemused bankers were brought in to meet the Chancellor of the Exchequer, assuring him that they did meet the capital requirements. Of course it is easy to get round capital requirements, as various observers have pointed out. One danger is that banks may take on even more risk to sustain high returns on equity. Another is that banks will find a way round higher capital requirements via off-balance-sheet vehicles and exploitation of derivatives strategies and so on. That is a risk.
Moving on to my second suggestion, a variety of people have commented that banks are now too big to fail. Given that they are essentially backed by a state guarantee and that things such as the Glass-Steagall Act in the United States have long since been abandoned, a number of people have advocated a return to simpler banking—narrow banking, as some academics refer to it. John Kay, a distinguished economist who taught me economics many years ago, is a strong advocate of narrow banking—of separating casino banking, if I can characterise it like that, and utility banking. He says, for example, that we should have a system in which a Lehman Brothers should be allowed to fail. A bank should not be so interconnected with the rest of the banking system and counterparties and so on that the consequences of its failing are so disastrous for the rest of the economy.
Although broadly I very much agree with that point and I think that in time the failure of Lehman Brothers will not be seen as the great mistake that conventional wisdom suggests it is, is not the problem the nature of the guarantee? Whereas all of us would accept, I think, that depositors should have their interests guaranteed—there is now an implicit if not an explicit guarantee that all deposits will be guaranteed by the Government—the difficulty that arose in relation to many of the banks that have had problems in the past 12 months is that bond holders also had that guarantee. The extension of that guarantee is relevant in relation to the idea of institutions being too big to fail. The issue is not simply size, but the nature of the guarantees that any Government give.
I accept that point absolutely. The problem will not go away. I was referring to whether we should divide the banking system so that the public are less at risk from failures in investment banking, essentially, and so that there are fewer links into the retail banking sector. Let us consider, for example, the failure of the big insurance firm AIG in the United States. Basically, most people in that firm were involved in conventional insurance. It was perhaps 100 people in one unit, involved in more speculative activity, who brought down the whole firm and put at risk the world economy.
In fact, I shall give one lesson from God’s own county, if I may—there will be only one mention of Yorkshire in the entire debate, Mr. Fraser. The Yorkshire bank has adopted a simple banking strategy down the years. Rather than a pro-business cycle strategy, it uses a through-the-cycle business model. It says that it has stuck to its knitting in recent years. It never became involved in sub-prime lending and self-certification for 100 per cent. mortgages. Indeed, it was criticised, as many traditional or more conservative banks were, for not being innovative enough. Therefore banking structures such as Yorkshire bank do have a future. The Chairman of the Treasury Committee, my right hon. Friend the Member for West Dunbartonshire (John McFall), has tabled an early-day motion on separating retail and casino banking, and that debate will be part of our economic debate for some years to come.
Some commentators say that things cannot be done in an individual country; they have to be done around the world. I wish that we had made some banking rules like those in Canada or Spain, for example, before the banking crash, because even though the rules were not universal, their banks have benefited from the fact that they had a more conservative approach.
The third point is that there should be consideration by the authorities when making regulations of the impact on smaller banks such as Yorkshire bank. Clearly, if there are flat-rate costs, smaller banks will be affected more than larger ones. We must remember that smaller banks often have to use the clearing systems of larger banks. Although the Government have, naturally, been distracted in recent times by the affairs of bigger banks, they should also be interested in the smaller banks.
I will move on to the mutual sector which, looking back, has been a success. It is interesting that our current biggest building society, the Nationwide, was perhaps the least-favoured building society when it came to demutualisation. It was not seen as the most likely candidate and was not demutualised, but it is now a successful mortgage lender. Our building societies have obviously struggled as a result of the financial turmoil, but in many ways they have weathered the storm better than their banking counterparts. A focus on the protection of their members, and lending that is based strongly on money deposited by their customers, has meant that they have been far less exposed than most of the banks.
Building societies have raised a couple of technical points about the Financial Services Compensation Scheme. That is a vital safety net, but it impacts on building societies in an adverse way compared with banks, and the financial regulators need to consider that. For example, Nationwide was hit with a bill of £241 million at a cost of £17 per member as a result of some of the regulation. There must be a case for returning Northern Rock to the mutual sector when it goes back to the private sector.
The fifth point is a suggestion that has been made by commentators far more eminent than myself. There is nothing wrong with securitisation of loans and so on, but in many ways, the shorter the chain, the better and more transparent it is. Various people, including Dominique Strauss-Khan from the IMF and Lord Turner, have revived the idea of having some sort of tax. The Tobin tax was thought up a generation ago as a tax on foreign exchange. I do not think that that would work in today’s circumstances, but some sort of tax on financial transactions would reduce liquidity but also reduce that chain.
The sixth point is about bonuses, which have already been mentioned.
There are two points. Clearly, we already have a tax of stamp duty on general share transactions. Many of the markets—the eurobond or eurodollar market in this country for example—came about simply because of American taxes. Does the hon. Gentleman not recognise that having a range of taxes, particularly on a regional rather than global basis, might see potentially risky transactions being moved to some of the more wild-west elements of the financial services world? Historically, going down that tax route has not tended to work.
I agree with the hon. Gentleman in so far as I think that such a tax would have to be done internationally. Other measures for banking structures and so on could be done domestically, but all those who advocate such a tax, from the IMF to Lord Turner, recognise that it would have to be done internationally.
Moving on to bonuses and remuneration, I am reminded of the phrase, “We’re all in it together”, which has much to be said for it. We are now at the point where some of the remaining banks, such as the Royal Bank of Scotland, Goldman Sachs and others, have done pretty well in recent times. They have done well for a number of reasons: first, because of the Government guarantees, which mean that they have as much liquidity as they need or want, but also because many of their competitors have been knocked out of the market. In the coming days, they are potentially going to announce quite enormous bonuses for some of their staff. I think that Lord Turner was right to muse in the pages of the Financial Times on whether that is right and whether those bonuses have been earned.
The Manchester study that I referred to earlier stated that a lot of those banks have compensation schemes that cover about 50 per cent. of their total financial turnover. It suggested a tax on such bank profits. The last party to do that was the Conservative party in 1991. Again, the banking sector would be wrong to believe that it should be business as usual, and the Government have made certain proposals regarding bonuses.
I must apologise on three points: for disturbing the hon. Gentleman’s thought patterns in the House of Commons Library last night, and also for working at some point at both Merrill Lynch and Lehman Brothers. I have a certain amount of form on this.
I would like to point out that in the eyes of many, both in this country and abroad, we have a very oligopolistic structure—I am sure that the hon. Gentleman will agree. One of the keys to addressing the points that he raises, such as excessive bonuses, is the lack of competition, or potential competition, in terms of access of new financial institutions. I am sure he will agree that after the various mergers that have come about, either spontaneously or at the behest of the Prime Minister or someone else, it is very difficult in this country to deal with the situation. Will the hon. Gentleman comment on that, because it seems that lack of access is an inhibition to addressing some of the problems that he is talking about?
I agree with the hon. Gentleman entirely. I have always been a great believer in competition. From the left, social democrat or so-called progressive side of British politics, we have been too easy on oligopolies or monopolies across a range of sectors. The energy sector is one and possibly the media sector is another. There is a danger in the finance sector now that these great institutions have been created and merged and some are run directly by the state. What follows on from them when they go back to the private sector? We have to think about competition concerns.
Are not these multi-million pound bonuses and payoffs absolutely scandalous? The five directors of MG Rover paid themselves £40 million as the car plant was going bust. Does my hon. Friend agree that we need a high pay commission, or something like that, to police the City and ensure that excessive bonuses that cannot be justified are not paid?
I am a moderate compared with my hon. Friend.
I read The Guardian.
My hon. Friend reads The Guardian too. I am glad—The Guardian needs all its readers these days. I would not set a maximum pay level or bonus level. I would look at the taxation of bank profits and bonuses and approach it that way. However, I share my hon. Friend’s moral fervour. When people such as the chairman of the British Bankers Association make comments such as those I quoted earlier, it has to mean something. Unless the banks address their bonus culture, there will be a role for Government to do more.
I will move rapidly on. An interesting proposal from the Conservative Front Bench is the idea of having a consumer regulator for the retail banking sector. That almost touches on the point made by the hon. Member for West Suffolk (Mr. Spring) about competition and entry into the market. Retail banking could be much more innovative.
The eighth point is purely to ask whether it is time to look again, like Macmillan and Wilson, at having an inquiry into venture capital for our industry and services, and at whether our market is efficient. One of my regrets is that, as I understand it, the private equity movement originated in providing venture capital for new ventures. It has now largely become a vehicle for the takeover of assets and so on, of which Lord Myners has been critical. He has indicated, as have many economists, that he is not sure that such activity brings much economic value in the end. That matter would be worth looking at.
The ninth point is that when the public sector makes big investment decisions, we must be careful to ensure that we do not look too much at the interests of the City as opposed to those of the rest of the country. After the next election, any Government will have tough investment decisions to make about public expenditure. I would hope, for example, that the high-speed rail link, which is of interest to the whole of the country, might be higher up the agenda than Heathrow expansion or even, dare I say it, Crossrail, which has been heavily lobbied for by the City. If it is a choice between one or the other, as it may be, I hope that high-speed rail will be at the top.
I praise Crossrail to a certain extent, although there are no votes in it for me. Most of my residents, particularly those in Mayfair and the Barbican, are not particularly happy with the idea. The hon. Gentleman will know that the Crossrail Act 2008 is now in force, and that it would be relatively straightforward now that the planning consents and so on are in place. Indeed, more than £1.2 billion has already been spent on compulsory purchase and demolition. Should the hon. Gentleman regularly visit the bookshops at the top of Shaftesbury avenue, towards Tottenham Court Road tube station, he will know that the area is already the site of some Crossrail works.
I hope that it is not necessarily either/or. However, insofar as there are plans to limit the amount of investment in the area, Crossrail is now well ahead of the game, and it will make an enormous difference to the whole of the United Kingdom and not only that part of central London in which it is located.
When I am promoted after the next election, perhaps to the role of Economic Secretary to the Treasury, I shall carefully take account of the points made by the hon. Gentleman. If I was drawing up a list, I would put them in the following order: high-speed rail, Crossrail and Heathrow.
A directive on alternative investment managers is being promulgated in Brussels, about which the Mayor of London is getting agitated. I shall not go into massive detail, but I have read the impact assessment done by the European Commission, and there is a case for regulating more alternative investment managers’ funds, such as hedge funds and private equity. I also believe that there is a case for having a set of rules that apply across the sector, because the financial sector is nothing if not innovative, and if we try to regulate only one part of the sector or define it more precisely, we might find that the rules quickly become redundant.
I believe that organisations such as hedge funds are of sufficient size that they have the potential to pose a systemic risk to the economy; lending by banks and the herd instinct of many funds could be destabilising. With pension funds now investing much more in alternative investment markets, consumer protection is becoming more important. I broadly believe that a strong case can be made for regulation by Brussels.
I would point out to the hon. Gentleman that there is no evidence at all that the financial crisis that so catastrophically affected this country and others was the result of the activities of hedge funds. I simply say, as gently as I can, that although one wants ultimately to protect the financial services industry—in the European Union, London is the jewel in the crown—the huge danger, of which we have already seen some evidence, is that it could create a regulatory structure that persuaded our financial institutions to locate abroad. It is a fine balance, and I am sorry to say that there are indications that what is coming out of Brussels—I think that Lord Myners would agree—is excessive and potentially destructive of the financial service industry in London.
I shall briefly quote Will Hutton. This is from The Guardian rather than the Financial Times—there is another view of the world. He said:
“Hedge funds in particular cannot be allowed to peddle the fiction that they had no role in the financial crisis. For the record, in July 2007 London and New York hedge funds had assets under management of some $2 trillion, of which up to $1.75 trillion (we will never know the exact figures) was financed by borrowing. It was the collapse of two Bear Stearns hedge funds and three BNP Paribas hedge funds in July and August of 2007 that triggered the paralysis of the interbank markets in New York and London.”
There are different views on the matter, but whatever the responsibility the alternative investment market had in the past for causing crises, we also have to look to the future, and future-proof ourselves. Such organisations are now big players and they should be regulated. An awful lot of lobbying money is being used to persuade the European Parliament to throw out the proposals, but I hope that my colleagues there will resist that and that they will consider the regulations carefully and that they will properly regulate hedge funds and private equity. Even today, the Financial Times says that according to an American study one in five hedge fund managers have been found to be misrepresenting facts. For consumer protection, there must be a case for backing those proposals.
Slightly controversially, I shall refer to Mr. Rasmussen, the former Danish Prime Minister, who is the nemesis of those hedge funds and private equity firms that are resisting such regulation. He has campaigned for years for such regulation, and came to the City of London earlier in the summer. He said that, at the moment, hedge fund managers appear to be guaranteed 2 per cent. of their investments in annual fees and 20 per cent. in profits. He asked whether, if they had 0.5 per cent. in fees and perhaps 10 per cent. in profits, they would starve. Such questions are relevant and should not be dismissed. Hedge funds are part of our economy, but they should reflect upon the social usefulness of all their activities.
I end by referring again to my economics teacher, Mr. John Kay, who said this summer that our financial sector should be the servant of our wider economy and not the master.
Before I call the next speaker, may I remind colleagues that I intend to start the wind-ups at 3.30 pm.
I congratulate the hon. Member for Selby (Mr. Grogan) on introducing this important debate. I shall focus mostly on hedge funds and alternative investment matters, which was the original title of the debate and a subject on which the hon. Gentleman focused in the latter part of his speech.
The hon. Gentleman gave us a quick tour d’horizon of the history of the City of London, and he was right to say that roughly 350,000 people work there every day. For the first time since censuses began in 1801 and certainly since the arrival of the railways, its residential population is beginning to increase, albeit incrementally. None the less, it is a place not only for work but, to a large extent, for rest and play.
I stress that the present lord mayor has firmly been making the case during his programme of overseas visits that the City is not simply about the banks. The banks may have been particularly hard hit in the past year or so, but other parts of the financial services sector have not suffered to the same extent. When seeking to deal with the banking sector, it is important to avoid having a negative impact on those other parts.
The lord mayor and Stuart Fraser, the leader of the City of London corporation and chairman of policy and resources, have sought to highlight the fact that, as well as the banking industry, insurance, communications, technology, legal, accounting and other related professional and business services industries have an essential role to play in stimulating economic recovery and growth. The hon. Gentleman rightly pointed out, with great fairness, that the whole UK benefits greatly from a thriving financial services business; it may be based in London, but it has great strengths in other centres such as Manchester, Leeds, Edinburgh and Glasgow.
I know that my hon. Friend is aware of the fact, but because of the long-standing nature and history of the City of London, its livery companies and various guilds, as charitable foundations, are hugely focused on the broader community, not only in London but outside. They generously contribute to all parts of the United Kingdom in a most commendable way.
That is an extremely good point. Some of the livery companies have strong connections with other areas; for instance, given the historical and traditional importance of steel, the Cutlers are strong in places such as Sheffield. The fact that a huge number of schools have received large sums from trusts set up, often centuries ago, by the livery companies bears witness to what my hon. Friend says, as does the fact that large tracts in Greater London and outside the square mile—places such as Epping forest, Hampstead heath, West Ham park and Queen’s park—are some of the finest open spaces, which are of great benefit to Londoners and those who live in the home counties.
As the hon. Gentleman said, the financial services global competitiveness group report was published on 7 May. It called for greater co-ordination and strategy in the way in which the UK financial services industry promotes itself. I take on board his concern that too many City folk may have been involved, but it is fair to say, as he did, that although the City was regarded—certainly between 1914 and about 1986—very much as a club, it has become much more open, and there is now more social mobility in some areas than we could have dreamed of only 20 or 30 years ago. City professionals may therefore come from different walks of life than would have been the case a generation or so ago.
Since last year, the City of London corporation has been working to set up a new body with the aim of providing a single focus for promoting the financial services industry to a domestic and international audience. It will work alongside existing bodies in international finance, and Sir Stephen Wright plays an important role in that regard, working with the Mayor of London, who clearly has an interest in the issue. There has been some tremendous co-ordination under the auspices of the City of London corporation, with one eye very much on the future and the importance of our capital, alongside Beijing, which held the Olympics in 2008, and Rio de Janeiro in Brazil, which will be a big global capital in 2016.
As a starting point, a small steering group has been established, and it is anticipated that the new body will be launched and perhaps named later this year. It will be independent, practitioner-led, politically neutral and cross-sectoral. Above all, it will try to represent the financial services industry across the UK, not just in central London. The Government, particularly the Treasury and UK Trade and Investment, have been closely involved in the development of the initiative, which will form one of the most important elements of the City of London’s outlook in the years to come.
I want now to say a few words about hedge funds. In many ways, their rise and power represent one of the biggest changes to the global economy over the past half a century. Largely for that reason, there has been a demand, which predates the banking collapses of the past two years, for an alternative investment directive in Europe.
Hedge funds are predominantly limited liability partnerships, so they are exempted from much of the regulation that applies to investment banks and even mutual funds. As pools of highly mobile capital, they have fast developed a reputation for moving financial market mountains by anticipating future expectations. There is no doubt that they thrive on volatility, and the crux of the controversy that surrounds them is the degree to which they cause or affect fundamental shifts in financial markets.
As the hon. Gentleman said, this relatively unpoliced, unsupervised and, until recent years, fairly low-profile sector of the financial services world is now firmly in the sights of the European Commission, as well as of Mr. Will Hutton of The Work Foundation. However, the Commission’s proposed directive to regulate hedge funds and the private equity sphere betrays, as my hon. Friend said, a lack of understanding about the business’s workings.
Alternative investment funds have already accepted that the new regulatory climate means that they will be required to boost transparency, as well as to accept new controls on disclosure and, most likely, on clearing, settlement and custody. However, the draft directive goes a long way beyond that and may make it quite impractical for funds owned by non-EU entities, which make up a significant proportion of the funds operating in London, to distribute their products in the EU.
The combination of such an approach with other perceived regulatory and fiscal burdens may persuade hedge funds to relocate to other financial centres, such as Switzerland, or to return to the United States, with its much more mature market. Similarly, hedge funds that relocate may provide the critical mass for emerging financial centres such as the Gulf or the far east. Such an outcome would be in the interests of neither the UK and the City of London, nor the EU.
At a supranational level, the directive would diminish competition, and I entirely endorse what the hon. Gentleman said, because competition is key. We will no doubt experience a big hue and cry about huge banking profits in the press in the next week or two, but the point is that competition has simply diminished and died away to a large extent. In fairness, I suspect that most of the huge profits that we will see this year will be an exception, and I hope that there will be new players in the market. We must remember, however, that regulation itself is the biggest barrier to allowing new, innovative companies into any new market. One concern is that a highly regulated market will have a very detrimental effect.
The hon. Gentleman is putting forward the hypothesis that regulation invariably leads to capital flight. In a sense, that is making the case for no regulation whatever. However, there is clearly such a thing as a proper degree of regulation, which attracts capital; regulation is not necessarily negative in its effect on markets.
If things are taken to an absurd level, one would have to agree. Clearly, there needs to be some regulation, not least to protect consumers. To return to the history of the City of London, I was joking with my hon. Friend earlier that we should look at the great scandals that took place in the Victorian era, when mines and railway promoters ripped off consumers. Clearly, that did nothing of value. There is a strong argument for saying that much of what should have given this country’s industry a competitive advantage was undermined because there was no proper regulation or sense of transparency in the City of London in that era, when transparency and regulation were very much in their infancy. It is at least valid to say that. Clearly, having an entirely laissez-faire approach does nobody any favours—indeed, it does not bring in crucial investment.
To return to my earlier point, the directive as currently drafted would, at a supranational level, diminish competition and restrict flows of liquidity into the single market. It would also be seen as protectionist at the very time when barriers need to be brought down, rather than erected. At a domestic level, I fear that it would significantly diminish London’s critical mass as a financial centre and reduce individual and corporate tax revenue. The hon. Member for Selby rightly said that the City of London has been a huge cash cow in the past, and one hopes that it will be one in the future.
The directive could also damage the market for the professional services that assist the hedge fund and private equity industry, such as law, accounting, investment consultancy and specialist IT.
This is an important point. Some of the countries that have perhaps been driving the ambition for further regulation have virtually no hedge fund activity. Does my hon. Friend agree that the success of the City of London and the diversity of financial services—I agree that financial services should be properly regulated, but that has not been the case in the past—are hugely important for the whole EU, which is diminishing in importance as trade flows and economic activity move eastwards? The success of the City is one anchor of our future prosperity, and we risk losing it at our peril.
I entirely agree. That is an important point. Power is shifting eastwards to India and China. They have two and half billion people between them, and they will be the two big economic superpowers of our lifetimes—certainly by the middle of the century. That shift has undoubtedly been accelerated by recent events, and nothing would be more catastrophic for Europe—whether within the confines of the EU or as a time zone—to relinquish what should be and has been one of its traditional advantages. The importance that should be attached to the financial services business as a whole cannot be overstated, given the propensity of the 20 million or 30 million people a year who are added to the Chinese and Indian middle classes to save, which means that there will be a great reliance on what should be a great industry for us.
To the directive’s opponents, the European Commissioners’ attention on these issues seems to have been promoted all too often by an unholy alliance of continental bankers and politicians who are concerned in part to effect something of a power grab. Eighty per cent. of the hedge funds managed in Europe are accounted for by London, while fewer than 20 per cent. originate in Paris.
The plain truth is, as my hon. Friend pointed out in an intervention, that the asset management business has not been directly implicated in the global financial crisis, so one must ask why the EU is suddenly giving such priority to its regulation. Typically, hedge funds are small start-up businesses—a far cry from the large international banking institutions whose antics, in part, jeopardised the entire global financial system last autumn. Their offshore domicility often owes much to the need for simplicity in tax and regulation, as places such as the Cayman Islands are not beset by double taxation treaties and reclaim bureaucracy.
The impetus for a European directive derives from panic in response to the economic crisis, alongside a partisan vision of hedge funds and private equity as a wild west show of amoral speculators and asset-strippers. Even one or two people in the Labour party have been known to espouse such views. However, there has been no crisis of asset management. Unlike banks, hedge funds neither leveraged themselves to the hilt—of course, they lacked the balance sheets to do so even if they had been so inclined—nor ran down from adequate levels of liquidity. Indeed, those that have failed—several have—have not threatened the entire financial system.
In truth, one of the unsung successes of the Financial Services Authority—I hope that I am not too far out of line with my party’s views on this matter—has been its ability to keep the hedge funds sector ticking along relatively nicely in recent years. It cannot make sense for a European directive to insist on onerous hedge fund registration requirements by giving Commission officials the right of veto over their investment strategies. That will simply result in the drying up of investment from outside the EU to hedge funds here, which is, as my hon. Friend the Member for West Suffolk pointed out, against not only UK interests but French and German interests and those of the other 24 nations of the EU.
All that investors in the global market ask is to be given free rein to choose their investment managers. Instead, the proposed brave new world for hedge funds and private equity risks forcing EU-based investors to abide by a system of rules whereby they will have to instruct EU-based managers and place their assets in EU funds. A more sensible approach would be to examine how and why hedge funds became so powerful so rapidly. Perhaps the homogenising of mainstream institutions in the financial sector as a result of interdependencies and the converging effect of regulatory creep gave rise to the demand for a new diversity of off-balance-sheet methods to manage assets and credit. In particular, in the aftermath of the Enron scandal a decade ago, stricter regulations that were introduced to control off-balance-sheet activity simply resulted in an explosion in special purpose vehicles, which were created to bypass a culture where stifling regulation presented a massive competitive advantage to those institutions able to reap the benefits of economies of scale.
I am not here to bury hedge funds, but equally I would not give them untrammelled praise. There is little doubt that the emergence, in reaction to regulatory overkill, of a largely unpoliced, unsupervised hedge fund sector had significant distorting effects on the entire financial system. Additionally the huge, largely unregulated profits derived from the most successful hedge funds had a perverse effect on the strategies employed by investment banks whose profits could never emulate those obtained in the tax-free, “regulation-lite” regimes enjoyed by the funds. As those profit margins became ever more the talk of the City half a decade or so ago, unrealistic expectations of compensation were ratcheted up.
By 2004, senior banking executives watched enviously as hedge funds’ profits soared and the brightest and best of their junior staff were poached to make their fortunes in those funds. In retaliation, many leading investment banks elected to allow the emergence internally of “virtual fund” teams specialising in the riskiest but potentially highest-return sectors. More often than not, such star teams negotiated and were granted special shadow profit-sharing status internally. I must accept that that proved to be the worst of all worlds, giving those teams the green light to indulge in relatively unprecedented risk-taking, all the time underwritten by the banks’ colossal balance sheet. That seemingly safe umbrella encouraged ever greater leverage and the spectacle, even in the good times, of such a small proportion of banks’ profits being retained. Naturally, that strategy was questioned only after the credit crisis exposed the folly of allowing an inherently riskier culture of hedge funds to pollute the banking system.
I am glad that I have had the opportunity to speak at some length, and want to conclude with this thought on hedge funds: it is right for policy-makers to engage intellectually with the proposition that the rewards and super-profits should be justified only in return for exceptional performance, rather than as an arbitrage for tax and regulatory breaks; but that requires a much more systematic analysis than the European Commission has provided of the structure of the financial services sector. Scapegoating hedge funds and the private equity industry cannot be a sensible first step on that path.
I congratulate the hon. Member for Selby (Mr. Grogan) on securing the debate and keeping us on our toes by leaving us marginally uncertain as to its exact title. I thank him, too, for sharing his 10-point plan with us. Why he is not Chancellor of the Exchequer I do not know. I assume it is because he is far too cheerful.
Down this end of the Chamber, we have a caucus of northerners—or we did have when the hon. Member for Pendle (Mr. Prentice) was here—but none the less we have no doubt about the importance of the City and the financial sector to the UK and world economies, the British balance of payments and Government revenues. It is critical. We also have no doubt that that is built around a degree of integrity, probity and good regulation, connectivity with the rest of the world, length of experience and downright financial skill. We can, I suppose, praise that without necessarily overestimating it. I sometimes get very big brochures sent to me by the City of London, telling me how it pretty well accounts for most of the UK economy. I am never quite certain whether the information includes all businesses with a head office in London as belonging in the City, or whether it estimates appropriately the substantial economic contribution made by London outside the City. It is also worth mentioning in passing that certain cities, such as Edinburgh, have proportionately—though not in size—a bigger financial sector even than London’s.
We should not, however, underestimate the importance of the City. Look at what goes wrong when things go wrong there. We suffer in our constituencies and across the land. There has been a long and heated debate in the north and throughout the country about the relationship of the City to the wider economy, and in particular the relationship between manufacturing industry and commerce and the City, manufacturing generally being something rather grim up north and City life being something rather sophisticated down south. A refrain that has gone on for decades—as long as I have been thinking about the economy and politics—is criticism of the City for a degree of short-termism and for being attracted by property rather than production, services rather than sustainability.
This is a slightly artificial debate, and all sorts of qualifications are needed, as well as recognition of the positive role that the City has played in the economy as a whole. However, the picture for most of our lifetimes has been of the growth of the services and financial sector in the economy and the decline of the manufacturing sector, even below EU levels, and even given our acceptance of the fact that we all have a problem resisting the modern challenge of China, India and the like. Coupled with that has been the rise of new financial giants. We have mentioned some of those: hedge funds, private equity and venture capitalists within and without the banking sector. It is easy to see it, sometimes, in terms of a further tilt away from the long-term investment in which the mutuals engaged and long-term investment in general.
I know that there are some pretty solid defences of current City fashion, and the hon. Member for Cities of London and Westminster (Mr. Field) did a good job of presenting such defences. I, too, have read the handouts from private equity houses and organisations that emphasise that they are not a bunch of shameless asset-strippers, as they are sometimes characterised by people who do not qualify their remarks sufficiently, and that in fact they re-engineer companies, reconfigure them and in some cases provide more employment and certainly greater profits. I know too—it is a perfectly valid point that has been made several times in the debate—that they are not responsible for the credit crunch. That was the result of very traditional high street banks, which formerly nobody was agin, behaving rather badly and uncharacteristically, in a way that suggested more than a flirtation with casino-type finance. The hedge funds, on the other hand, have had very limited interest and involvement in the mortgage market. However, it has to be said—it was mentioned, I think, by the hon. Members for Selby and for Cities of London and Westminster—that hedge funds did play a part in accentuating financial panic because they are such big players and deal in bank shares, often at critical moments and often with money borrowed from the banks.
If we want to avoid the evils that have beset us recently—the frauds, the Madoff affair, which was essentially a hedge fund affair, the foolishness that has characterised patterns of investment, and the instability that has been all too prevalent recently—we cannot duck the problem of regulating the new financial giants. We cannot back away from that. We must consider the possibility that something needs to be done if not because those organisations are responsible for the past but because, as the hon. Member for Selby said, there might be problems in the future, particularly given the fact that these giants are moving huge amounts of money around the globe and they are relatively opaque financially. They are big players that add enormously to liquidity, which is often said in praise of them. However, they engage in aggressive market behaviour while, ultimately, bearing few of the social costs.
When we talk about hedge funds, we have to put it on the record that 50 per cent. of them, for whatever reason, are situated offshore in places such as the Cayman Islands. I am not saying that they are in league with the pirates of the Caribbean, but we would prefer them to take their fair share of social responsibility, particularly as they have a powerful social effect. I recognise that many operate onshore in the USA and the UK, but they should be prepared to pay up in tax terms for the advantage of working in a well regulated economy. That said, it also has to be pointed out that last year, according to my figures, hedge funds alone paid £3.2 billion in tax revenue, which the UK can scarcely do without at the moment.
I do not want to be generally damning because if we look into what a hedge fund is supposed to be, we would find that the definition is a little more fluid than one might expect. There are different kinds of beast under the label of hedge funds. The French do not use the words hedge fund; they use the expression “fond spéculatif” because not all such funds hedge. The case for a degree of regulation beyond self-policing is quite strong, but the extent of that regulation is the issue. Fundamentally, we all agree that we want to secure the economic advantages that the funds bring, but we also want to ensure that the social benefits are provided, too. As the hon. Member for West Suffolk (Mr. Spring) said, it is a matter of balance and getting that balance right.
I put it on the record that it is not a straightforward equation—that the more regulation that we have, the more capital flight we will get. Mention was made of the Indian financial market, which is regulated much more restrictively than the British markets at the moment, but is still attracting significant capital and investment. There is a debate to be had and Mr. Rasmussen, if nothing else, has started it. He has the Mayor of London going, and there are all sorts of views about whether or not this is a Euro-plot against the British hedge fund industry, which accounts for 80 per cent. of the European total. Nevertheless, the debate is well worth having and should be conducted in a relatively mature way. The insurance companies are having another sensible debate about solvency. To some extent, there has not been a great deal of discussion about the type or quality of debate. In this place, we have talked more about who is to regulate, and not how people are to regulate.
The bottom line for me as a northern MP, whatever regulation or fiscal policy we have, is that we must move away from short-termism, or make regulation much tougher. Moreover, we must move the economy in the direction of sustainability in financial and economic terms and not encourage an environment of the fast buck.
I shall close with a little story that encapsulates the debate. I hope that the hon. Member for Cities of London and Westminster will sympathise with the plight of the company that I describe. I represent a seaside town which for decades had a profitable sweet factory, making a product called Chewits. I did not eat it much myself, but it sold well at the seaside. I went to see the company when it was in process of retooling; it was profitable and doing rather well. It employed people who had to operate at a relatively skilled level and it provided a good mix of employment. It was then bought by a City company. The machinery was sent to eastern Europe, the skilled work force was sacked, the job mix in the town was worsened, the carbon footprint of production was increased and the land was sold for housing. The UK economy did not benefit, but profit was made in the City. That may be the operation of a free market, but I question, in those circumstances, whether it is wise.
I congratulate the hon. Member for Selby (Mr. Grogan) on securing the debate, even though it had a changing title. As my hon. Friend the Member for Cities of London and Westminster (Mr. Field) and the hon. Member for Southport (Dr. Pugh) said, it was until relatively recently entitled “The Impact of the Hedge Funds on the UK Economy” and we had all geared up for that. None the less, the broadening of the title gives us the opportunity to make some more wide-ranging remarks about the City.
I will, if I may, be critical of the hon. Member for Selby, who used lazy shorthand in the title of the debate. He will have offended people who work in Canary Wharf or in the west end, and people who see themselves as part of the financial services sector but who are not located in the City. He has also forgotten about the people in Whitely, just outside my constituency boundary, who work for Zurich Financial Services, and the 300 people who work in the Lloyds Bank call centre in my constituency. They are all part of the financial services sector, as indeed are the staff of banks and insurance companies and the stockbrokers who are dotted across the whole of the UK.
When we talk about the size of the financial services sector and the contribution it makes to the UK economy, we should remember that it is a sector that is based across the whole country and not just in the Square Mile. We must be careful to remember that because it represents a means by which the financial services sector can start to re-establish trust with people by reminding them that it is an integral part of our lives. The debate about hedge funds and the activities of the people in the City and the insurers remind us that they have an impact on our lives. Today, we have talked about hedge funds in a bit of a bubble, but who are the investors in hedge funds? It is not just high net worth individuals; it is our pension funds. Two thirds of the investment in hedge funds come from pension funds, including that of the Church of England. There is therefore a direct relationship between the returns that they make in those funds and the benefits that we enjoy in our pensions. We cannot view the City in isolation, and nor should the City or the financial services centre think of itself in isolation from the rest of the economy.
The hon. Gentleman had a 10-point plan. I will not go through each of the 10 points, but I want to pick up on a couple. Bonuses, for example, are an important issue for people to understand. Over the course of the past two years, the taxpayer has supported the banking system through the stakes taken in RBS or Lloyds, which we supported, and the indirect guarantees and indemnities that are on offer to the financial services sector. The current stability of the banking system is a consequence of taxpayers’ support, not just here but across the world. That support was given to help its balance sheet and not its bonuses, and banks must remember that as they come into the bonus round over the course of the next few months. The bonuses are a product of taxpayers’ support and they should not lose sight of that.
On the hedge fund directive, which both the hon. Gentleman and my hon. Friend the Member for Cities of London and Westminster discussed, we must remember that it is not just about hedge funds. It is the alternative investment fund management directive and it affects hedge funds, private equity and endowments. The Wellcome Foundation and the endowment of Oxford university are affected by it, as well as the funds in Germany that are used to finance wind farm investment. Most Latvians find the finance for their houses through funds and they will be affected by the measure, too. What is happening across Europe is that people who thought carelessly that the measure was just about those nasty big hedge funds are now realising that it has much greater impact.
Why are hedge funds attractive? It is because people want to invest in them and they want the returns from them. However, I think that some people feel under pressure from hedge funds, whose activist nature creates and promotes change in financial markets and economies. In some economies, people are reluctant to accept that change is a good thing in that way.
Some people think that there is a zero-sum game here for Europe—that by introducing tougher regulation on hedge funds, Europe will see business moving from London to Frankfurt or Paris. However, it will not move to Frankfurt or Paris. That business will move outside the European Union: it will go to Singapore, Geneva or New York. The regulatory drive in Europe risks making Europe uncompetitive and forcing jobs and business not out of London, but out of Europe. That is an argument that we need to make, not just here in Westminster but in Brussels and in other European capitals.
There is another lesson that we should draw from the hedge fund directive. When the directive was being drawn up, the Government failed to recognise the wider impact that it would have. I think that Lord Myners is rectifying that, but it would have been far better if the Government had been engaged much earlier while the directive was being thought about, rather than just waiting until it was published. Can the Minister tell us if the Chancellor of the Exchequer spoke to the Commission the week before the directive was published, because I understand that the Chancellor’s French and German counterparts did? It would be helpful to know if the Chancellor was able to put a word in to stop the directive from being published. It seems that the French and German Finance Ministers were rather more successful in getting their views known.
Just to be absolutely clear, the hon. Gentleman suggested that the Chancellor should have stopped the directive, so is the position of the official Opposition that there should not be a directive at all? What is the position exactly?
There needs to be proportionate regulation of the sector, which recognises the risks and responds to them. My hon. Friend the Member for Cities of London and Westminster talked about the Financial Services Authority. The FSA has been very effective in regulating hedge funds, because the regulation is proportionate to the risk. The directive, as it is currently drafted, is not proportionate to the risk. It is a rather muddled document. Furthermore, because of the lack of due process in putting it together, the costs of the directive could potentially outweigh its benefits. We want proportionate regulation that reflects the risk that these funds pose, not regulation simply for the sake of it.
Let me speak briefly about the wider financial services sector. Clearly, the actions of certain banks and financial institutions created the financial crisis that we see today. There was a failure to recognise the risk that certain financial institutions took on through the way that mortgages were sliced and diced and repackaged into collaterised debt obligations, or CDOs squared, tripled or even cubed. There were complex transactions that meant that there was a loss of understanding between the product that people bought and the underlying mortgage.
There was also a failure to understand the risk attached to these instruments. I do not know what other Members read on their holiday, but “Fool’s Gold” by Gillian Tett is a book on the subject that is well worth reading. She sets out in it how little some banks understood about these instruments when taking them on. Their creators—JP Morgan—actually took on very few of them and came through the financial crisis in good shape.
I have a suggestion; in many ways, it is a “back of the envelope” suggestion. It is that unless the senior directors of a bank can explain, within two sides of A4, a product that they are trying to create, such a product should not be marketed by that bank.
My hon. Friend makes a good suggestion. There was a disconnect between the directors and the boys in the engine room: each seemed to think that the other knew what they were doing. I just wonder if that disconnect was not a cause of the crisis.
There are some regulatory issues that we need to address. Clearly, the capital requirements in place for banks had not been fully thought through. The capital requirements under Basle II encouraged procyclicality in lending and they encouraged banks to lend more in the good times. The Spanish banking system had countercyclical capital and it has come through in a much more robust state than the UK banking system and other banking systems. Obviously, we need to get the capital requirements right.
We also need to ensure that there is a proper matching of capital to risk. Certain banks were able to make some quite risky investments and engage in some quite risky trading activities because they had a strong retail base. We should ensure that capital is much more closely aligned to the level of risk in trading activities and capital should also reflect the riskiness of bonus structures. If remuneration structures lead to a certain type of activity, capital should match those structures too.
The regulatory structure in the UK needs reform. We have argued that there should be a “twin peaks” approach, whereby the Bank of England would act as a prudential supervisor and a new consumer protection agency would act as a consumer champion. It is interesting to note that France—a country with which we do not necessarily see eye to eye on these issues—is looking at moving to a “twin peaks” approach, with the Banque du France, France’s central bank, acting as a prudential supervisor, just as in the Netherlands and Australia there is a separate prudential regulator and a separate conduct of business regulator.
That structure is important as it would reinforce the importance of prudential supervision. Our existing regulatory regime, whereby the FSA acts as the prudential regulator and is also responsible for the conduct of business, rather meant that the prudential aspect got lost in recent years, because the accountability of the regulator drove it towards more conduct of business regulation. Our reforms would tackle that problem by ensuring that the regulatory structure properly addresses both prudential supervision and the conduct of business rules that really regulate the way in which consumers buy products from insurers, banks and others, and receive advice.
There is no magic bullet that will solve the problem, only a series of interventions that we need to make. We need to get the capital provisions right and we need to get the regulatory structure right. However, we also need to ensure that the financial services sector sees itself as an integral part of the UK economy. It is only by getting those structures right and by building up that trust that once again people will be content to see the City continuing to grow. People talk about “the imbalance” and say that the financial services sector is too big. The answer is not to shrink that sector, but to grow other parts of the economy. That is the message that we need to think about when we look at the impact of the sector on the UK as a whole.
First, I want to congratulate my hon. Friend the Member for Selby (Mr. Grogan) on securing this debate. I would also like to thank him for his very kind remarks to me and I am sure that, when we win the next general election and form the next Government, he will be considered for a starring role.
I am afraid that I cannot contribute to the debate on bow ties because I have never worn one, hand-tied or otherwise. However, I can confirm that I am a Guardian reader.
The impact of the City of London on the UK economy is, of course, a highly topical issue and one that deserves a rich and informed debate. I think that we have had a rich and informed debate today, which has gone much wider than the original title of the debate, and I thank my hon. Friend for changing that original title to enable us to look at some of these wider facets.
We have had contributions from several hon. Members. The hon. Member for Cities of London and Westminster (Mr. Field) concentrated on the hedge funds, because that is an area of expertise for him. The hon. Member for Southport (Dr. Pugh) touched on hedge funds, but he also looked at the wider economy and regulation. The hon. Member for Fareham (Mr. Hoban) touched on hedge funds, bonuses and the wider financial services sector.
My hon. Friend presented us with a 10-point plan—double the five-point plan. I hope to cover as many elements of that 10-point plan as I can, but of course time is limited. I will do my best.
The hon. Member for Fareham made an important point when he asked what we are actually talking about when we talk about the City of London. Technically speaking, of course, the square mile and its environs, including the west end and Canary Wharf, form the hub of the major global financial centre, but I think that the term “City of London” is more often used as a metaphor for the wider UK financial services industry. That is what I have taken it to mean in the context of this debate.
As my hon. Friend said, the UK financial services industry plays a vital role in our economy. As I have a bit of time, I will start by laying down some facts and debunking a few myths about the City of London and its position that frequently, and perhaps unhelpfully, circulate.
There is an impression that London is only about financial services. That, in turn, translates into concerns that the UK economy as a whole is unbalanced. It is easy to assume that London’s economic output is completely dominated by finance, but the sector generated 17 per cent. of London’s GDP in 2006, compared with a UK average contribution of 7.5 per cent. to regional GDP. That is interesting to note, particularly when one thinks of the remarks made by the hon. Member for Southport about the northern regions. Even regions better known for their expertise in advanced engineering and low-carbon technology have financial sector output nearing the national average. That includes Yorkshire and Humberside.
Balance is a relative concept. The UK financial services industry as a whole, depending on the extent to which financial intermediation activity is measured, accounts for between 7.5 and just over 10 per cent. of national output. As a further comparison, the manufacturing sector alone accounts for about 14 per cent. of UK output. Of course we stress the financial services sector’s importance to the UK economy, but comments about its dominance need to be considered in context.
Many references were made to the importance of City competitiveness, which assumes that the UK financial services industry is only about London. The hon. Member for Fareham and I, who have neighbouring constituencies, know that there are many financial services sector industries outside the City. The reality is that London is home to just under one third of overall UK financial services employment; individual regions such as the north-west generate almost 10 per cent. Regions differ by sub-sector. London is strong on broking and fund management, the east of England on life insurance and south-western Scotland on life insurance and pensions.
Our long-term objective—anybody’s long-term objective—is fair, efficient, stable financial markets that support economic growth and prosperity. That means that there must be interaction between the financial services industry and the wider economy—another point that has been made—but achieving that optimal interaction is, of course, riddled with tensions and challenges. There is a criticism predating the current crisis about the detachment from the broader economy with which the City—sometimes “the City” is used as a synonym for the higher value-added or exotic elements—is seen to operate. On one level, that has to do with the complexity of the products, but on another, the sense of detachment cuts to the heart of economic morality. I cannot remember who made the point that some see it as encouraging a brain drain from other economically valuable sectors at the expense of local economies.
A second tension is the apparent misalignment between risks borne by taxpayers in allowing the financial sector to grow and the actual benefits gained by those citizens from the sector’s basic role in allocating capital and helping society manage risk. A third is the combined gravity of the Government’s actions to tackle problems in individual financial institutions and restore system-wide stability. Questions have been raised about whether there is an optimum size for the UK financial sector relative to the wider economy. That, in turn, has generated a debate, mentioned by many hon. Members, about whether individual financial institutions have become too big to fail and, if so, what the appropriate regulatory response is.
Having identified what the tensions are, I will try to answer the questions raised about how we propose to address them. The Banking Act 2009, the Turner review and the Treasury’s wide-ranging White Paper “Reforming financial markets” have given us some pointers for where to go: more effective prudential regulation and supervision of firms, greater emphasis on monitoring and managing system-wide risks, greater confidence that the authorities are ready and able to deal with problems involving systemically important institutions and greater protection for the taxpayer when an institution fails.
My hon. Friend mentioned the Glass-Steagall Act. The only point that I would make is that banks of all sizes, not just institutions above a certain size, have encountered difficulties. I am not convinced that a cap on size would necessarily be an effective way of managing risks. I believe that looking at systemically important institutions and managing risks is a better approach.
I absolutely agree with my hon. Friend about mutuals. I would; I am a Labour and Co-operative Member of Parliament. In “Reforming financial markets”, we made the point clearly about the importance of the mutual sector, particularly in creating a diversity of institutions. There has been a tendency to concentrate on one type of institution, and diversity balances risk.
I agree. I hope that Northern Rock goes down the mutual route, and that the mutuality of building societies will come back into vogue. Does the Minister not recognise, however, that ever stronger regulation is an impediment to the diversity to which she refers?
It is about getting the balance right and recognising that just because an organisation is managed mutually, that does not mean that the consumer assumes less risk. If consumers invest in an institution, they are entitled to the protection of regulation, whether the institution is a mutual organisation or a plc. It is about getting the balance right.
We talked a little bit about the international level. The fifth point, I think, was a financial transaction tax, or what in my old Co-op days we called a Tobin tax and debated regularly at the annual party conference. I am sure that my hon. Friend will be aware that it cannot be done on its own but would have to be done globally. The Prime Minister said in a recent speech that it was worth considering, and I know that the French are conducting a feasibility study and a working party on it. We will be watching with interest how it develops. It is certainly not something that the UK could do on its own, and there is an awful lot more work to do on it.
I am conscious of the time, and I want to pick up as many points as possible. I turn to corporate governance, because not all risks can be addressed simply through regulation. Sir David Walker is due to report on the governance landscape in the UK banking sector in November.
A number of people mentioned bonuses. We are approaching tackling bonuses with four basic principles: rewards for failure are not appropriate; bonus payments should be based on long-term, sustainable performance; bonuses should be designed to shape future performance and thus subject to appropriate clawback if performance is not good; the regulator should take bank remuneration into account when supervising a bank.
Moving on to hedge funds in my last two minutes, I think that there is a tendency to cast hedge funds as the villains. We have heard many different aspects of that in this debate. Mention has been made of the total value added by hedge fund managers to the UK economy; a PricewaterhouseCoopers report said that it was £76 billion for 2007. The report further highlighted their value with estimates that hedge funds accounted for 1.3 per cent. of the London work force and 5.9 per cent. of total London earnings.
The UK regulatory regime is among the most rigorous in the world and, in general, has stood up well, but the Government and the Financial Services Authority have identified one aspect that requires strengthening: oversight of the impact that hedge funds’ investment position and strategies have on systemically important market sectors. We are looking to strengthen oversight in that area.
On the EU directive, we support the high-level structure and approach of the directive, which is similar in many ways to the current UK regime. However, there are a number of detailed points at which we think the current draft would impose large costs and constraints on fund managers without a commensurate improvement in regulatory protection. If that improvement is not obtained, there is no point doing it. Lord Myners is leading on the issue and we regularly meet with other EU member states. The Swedish presidency is developing a revised draft that we believe will represent a major improvement on the Commission’s draft, and the European Parliament has just started work on the dossier and appointed a rapporteur.
The question of the impact of the City of London on the UK economy requires us to consider more broadly how the financial services and the economy interact, the tensions in the interaction and how Government, industry and other market participants can work together. The joint effort requires proper regulation.
Plymouth CityBus, with its cheerful red and white livery, is as much part of our great city’s identity as the iconic red and white lighthouse, Smeaton’s Tower, that stands on Plymouth Hoe. One of the many things that makes people in Plymouth angry about the proposed sell-off of the bus company by the Conservative council is that a sale to a rival company could rob us of that distinctive part of our city’s identity. People have an attachment to and an affection for their bus company. People like the red and white buses because CityBus has a successful track record of providing good, efficient bus services. As Jack Dromey of Unite said just a moment ago, it is one of the finest bus companies in the land. This debate is not about a bus company that has failed and so has to be put into the private sector, but about one of the most successful bus companies in the country.
CityBus was formed in 1986 and is wholly owned by Plymouth city council, making it one of only a dozen or so municipally-owned bus companies left in the United Kingdom. It employs nearly 500 local people, and some of its very fine workers have joined us today. The company has an annual turnover of approximately £17.5 million and although an annual dividend is returned to the council, importantly, profit is continually invested in vehicles and services. Through careful stewardship of resources over the years, the company and the fine people who work for it have come up with a recipe that ought to be seen as an example of what works.
CityBus provides Plymouth with a high level of access to bus services, despite how spread out the city is. More than 95 per cent. of people in Plymouth—I think it is as much as 98 per cent.—are within 200 metres of a bus stop. In similar cities, the distance is 400 metres. I hope the Minister agrees that the service is one that many would envy. We must surely aspire to create more such services if we are to meet the urgent demand of our climate change targets.
The CityBus recipe is sensitive to change. The success of the 60 or more buses that run every hour between Derriford and the city centre allows other less well used routes to survive. It is ironic that the bus war that was prompted by the council’s proposal to sell CityBus is attacking the core of the successful recipe for sustainable bus services in Plymouth—that is, the successful routes.
The company works well on prices. For example the dayrider ticket is good value compared with those in other cities. That is possible because CityBus, as a publicly owned company, has used its competitive position to benefit everyone. It currently has 60 per cent. of the competitive market. If CityBus is sold to a rival bus company, an even fiercer price war is likely, as has been seen in other cities. Although that might drive down prices and appear to be good for customers in the short term, in the longer term it would probably lead to the emergence of one dominant company. If such a company was not in public hands, as sure as night follows day, it would end up stifling competition and keeping prices high.
It is ironic that CityBus, which is a successful recipe that delivers good outcomes to all, is being put at risk just as the problem of bus wars leading to dominant companies has emerged all over the country. There has been a market survey by the Office of Fair Trading and a consultation is ongoing on the matter. If that leads to a full-blown investigation by the Competition Commission, it would be well advised to look at how the sustainable bus services work in Plymouth.
CityBus provides sustainable bus services that are good for older people. I have described the good network with most people living within 200 metres of a bus stop. That is much better than other cities with denser populations, which should make it easier to provide such a service. Goodness knows what would happen to the level of access in our city if the bus service was sold off. It is clear that any loss of access would hit older people, especially older women, hardest as they rely more on bus services.
The issue also matters to younger people. A company that had to serve multiple shareholders rather than the community through the proxy of city council ownership would almost certainly result in a reduction of school buses. At present, CityBus provides an additional 12 buses to provide extra capacity on school runs during peak time. The city council is highly unlikely to be able to support those additional services. If it did, the money would not come from the current subsidy. That is just one aspect that makes the proposal so stupid. The knock-on effect would be that general bus services became more crowded and roads would become more congested as people switched back to cars for school journeys. The school bus service removes more than 4,000 car journeys from the road each week—that is 160,000 journeys in a school year, which all take place at peak times. The proposal would also affect the target to increase bus use from 16 to 20 per cent. Need I say more? This crazy proposal will be bad for young and old alike.
We must rise to the steep challenge of transport playing its part in the immensely stretching targets set out in the Climate Change Act 2008. The silo mentality of the Tory administration in Plymouth will drive a cart and horses through a valuable green asset.
The Prime Minister is going to put assets such as the Dartford toll crossing into private ownership. Is that not inconsistent with the points that the hon. Lady is making?
I will touch on that point in a moment. However, all politics, including local politics, is a matter of priorities. That applies to assets as much as it does to anything else.
The silo mentality of the Tory administration in Plymouth will drive a cart and horses through an incredibly valuable green asset, which has been developed through cross-party stewardship over several decades. CityBus is a green asset that not only provides good access to public transport for a high proportion of the population, but invests its profits to that end. It is not under pressure, as a private company would be, to distribute a higher proportion of its profits to shareholders. That means that all vehicles operate on ultra-low-sulphur diesel fuel and all new vehicles comply with the latest emission levels. It is ahead of the curve in investing in Euro 4.5 and 5 vehicles.
Unlike most other bus companies, CityBus still employs a pool of local engineers, which is a sustainable way of ensuring high-quality maintenance and reliability. A pool of local, skilled employees ensures that engines and parts are maintained to high standards and that an environmentally unsustainable waste of parts and engines is avoided. There is also high-quality performance in terms of emissions. Most companies that might express an interest in taking over from CityBus do not have engineering or coaching as part of their core business, so both activities would be likely to stop if it were sold. That would result in the loss of 10 per cent. of the jobs. The engineering work would have to be done elsewhere and it is unlikely that the win-win balance of engineering and sustainable maintenance practices would be preserved.
Plymouth’s successful bus network is the result of a delicate balance and a special recipe. The way in which the council has gone about what it describes as
“seeking to place a value”
on the company has upset that balance. The early signs of the bus war that has been prompted must surely be depreciating the value of CityBus. That is not exactly degree-level economics. We have seen negligent stewardship not just of an outstanding environmental asset, but of taxpayers’ money. There must surely be a case for someone in the Audit Commission investigating whether proper consideration was given to the repercussions of selling the company at a time when market values have plummeted, a bus war was entirely predictable and environmental assets should be most particularly valued and protected. Councillor Tudor Evans, who is Labour’s leader on the council, specifically drew attention to that not just once but several times before the decision was taken to proceed.
Of course, Plymouth city council has to raise money in the face of difficult economic circumstances and the likelihood of tighter public spending. However, I say to the Minister that it is a question of priorities and there are other ways of saving money. The capital programme could be engineered differently, or other assets could be sold. It says a lot about Conservative priorities in Plymouth that they have chosen to target CityBus without setting out why it is a priority for disposal over other assets.
Will the hon. Lady give way?
No. I am sorry, but I have only a small period of time, and I think that other hon. Members may wish to intervene.
The decision to proceed comes from a silo mentality that pays no attention to the consequences for people, whether they are young or old customers, the environment or the service provided. A silo mentality has been compounded by a seemingly cavalier disregard for using up to £962,000 to prompt a bus war, which has made bus users and non-bus users alike angry and worried.
The union Unite has done a cracking job in organising a campaign to rally behind CityBus. It has overwhelming support from people in Plymouth, including many Conservative voters and Plymouth’s Labour councillors. Our priorities are clear: unlike the Conservatives, we will support a tried and tested company that is working. We will support the young, the elderly and those on low incomes, who rely on these services and who would lose out if another bus company were to run them. We will support environmentally sustainable transport and we are prepared to put our money where our mouth is in relation to that.
To spend £962,000 of Plymouth people’s money to investigate the sale of a bus company that people do not want to be sold is wasteful, arrogant, damaging and it is already upsetting a recipe that has worked well in Plymouth for a long time. Why spend so much money now on a valuation? It is perverse.
I am grateful to the hon. Lady for allowing me to contribute to the debate. I certainly accept that CityBus is a very impressive company, but does she agree that although it is owned by the council, it is not run by the council; it is run by its own board. Why on earth would a private company spend millions on buying CityBus and then slash its routes and reduce its services in the way she has described? I am bound to ask whether she is just scaremongering and using the issue to launch her election campaign.
I launched my election campaign in 1997 and have not stopped since. I do not think the hon. Gentleman can have listened to what I have said. If he needs to study what makes up the economic argument I am advancing, he need look no further than the market survey of the Office of Fair Trading, which may be about to prompt a full blown Competition Commission inquiry. I would be delighted to brief him on the detail of how the margins and the profits are deployed in a different way when a company is wholly publicly owned—in fact, I am about to come to that.
According to Marc Reddy, who is the managing director of First Devon and Cornwall—one of two companies to have withdrawn their initial interest in the proposal—the bidding process set up by Plymouth city council to find out how much the company is worth is a “shambles” and could end up costing “many millions of pounds.”
My hon. Friend has made the range of opposition to the sell-off that exists in the city clear and flagged up the critical reaction of the managing director of one of the other bus companies. In fact, Mr. Reddy has also expressed concern that the whole management exercise has been a “total disaster” and that it could cost the taxpayer millions of pounds—far more than the optimistic figure quoted by the council. In his response, I hope that the Minister will consider the fact that, in addition to the wholly negative effect of a bus war, pressure may be put on Plymouth city taxpayers. Far from being an asset sale, this is a Dutch auction.
I could not have put it better myself. To put it simply, CityBus works. It works by providing value for money, excellent access and environmental efficiency in an age that calls for responsibility, public service and sustainability.
In concluding, I want to say to the huge number of people in Plymouth campaigning to expose the folly of selling CityBus, “Keep up the good work. I will do everything I can to back you.” I know that the Minister does not have powers to halt this stupid proposal—I wish he had—but I feel it is important to tell him about something that works in the world of bus public transport, particularly at a time when the Office of Fair Trading is focusing concerns on how things are not working in many other cities and communities. I hope that he will take note of this important example of how operations in the world of bus transport can and do work, and that he can point us in the direction of how we can hold the Tory council in Plymouth to account over its appalling stewardship of this green jewel in our city’s crown.
I would like to think that the Tory council’s negligent handling of this issue and taxpayers’ money could open it up to being surcharged. I guess it is too much to hope that the Minister will be able to point me in the direction of such powers, but I hope that he will draw the appalling record of the Tory cabinet in Plymouth to the attention of his colleagues in the Department for Communities and Local Government, so that it is fully taken into account in the assessment of the council’s hopeless and hapless performance on this issue.
I congratulate my hon. Friend the Member for Plymouth, Sutton (Linda Gilroy) on securing the debate and thank her for bringing these matters to the attention of hon. Members. She may be aware that I have strong empathy with her view in that Ipswich Buses, along with Plymouth CityBus, are two of only nine remaining municipal bus companies. I am well aware of the depth of feeling that the proposed sale of Plymouth CityBus is causing in her constituency. I congratulate my hon. Friend on the part she has played in raising the profile of the issue.
Of course, we all know how important a strong local bus service is to communities everywhere in the country, urban and rural areas alike, and that people have entirely justifiable concerns when their local service appears to come under threat. Central and local government provide more than £2.5 billion in support and grants to the bus industry every year, which is three times the level of support provided a decade ago. Support for local transport will remain a priority for the Government.
A reliable bus network that offers good value for money is vital to further reducing urban congestion, improving air quality in our cities and lowering carbon emissions from transport by providing a real and credible alternative to the car for many short journeys. The bus is also key to improving access to employment and other services for a great many people, especially, but by no means exclusively, those without a car.
The bus provides a connection with a community—particularly for the more vulnerable people in society—which is why, in addition to providing free off-peak bus travel across the whole of England to all older and disabled people since April last year, we are continuing to look at how concessionary fare reimbursement is paid, so we can ensure that it is administered in the fairest and most cost-effective way. Precisely because local buses are so important to the communities they serve, it is Government policy to ensure that local authorities are empowered to make decisions on the best way to manage their local bus service. That is why the Local Transport Act 2008 gave local authorities the powers they need to build stronger working relationships with bus operators so they can create binding arrangements that provide better and more sustainable bus services, with better facilities and a higher standard of service for passengers.
The 2008 Act introduced new powers to allow local transport authorities to sign voluntary partnership agreements with multiple operators for the first time, or to encourage further the use of binding quality partnership schemes, which compel operators to provide services to a minimum standard in exchange for local authorities improving facilities for passengers and vehicles. Indeed, the Act makes quality contracts schemes a realistic proposition for the first time, under which a local transport authority can introduce a London-style franchise system and take full control over the way buses are operated in their authority area.
Just to clarify, does the Minister oppose the sale?
The point I am making at this stage of my speech is that we have provided the powers across the piece for local authorities properly to hold bus companies to account. However, the situation would obviously be different in a case where the local authority has ownership, which is something I will come to in a moment.
We are already seeing many examples of close partnership working across the country, which is reaping real benefits for passengers. We continue to work hard to promote those new powers, providing guidance and advice to local authorities and encouraging them to make full use of the powers contained in the Act. Of course, we meet regularly with our colleagues in local government and with representatives from the bus industry, and it is clear that there is no one-size-fits-all solution.
Bus operators operate routes where people use them the most, and the economic sense of that is clear. In addition, local authorities can, and do, subsidise routes that provide a further social benefit—indeed, 500 million vehicle km run on that basis every year.
There are many important services and only a finite amount of money, but the message is the same: decisions on local bus services are best made by those locally elected to take them. Councils are elected to work in the best interests of the communities that elect them. While it is for central Government to provide the legislative framework that gives councils the tools to do their job, Westminster cannot, and should not, seek to control their actions. The same is true for the assets owned by local authorities.
Sitting suspended for a Division in the House.
I was saying that councils are elected to work in the best interests of the community that has elected them, and that we in Westminster should not seek to control their actions. I was about to say that the same is true for the assets owned by the local authority. In many ways, this addresses the point raised by the hon. Member for Rochford and Southend, East (James Duddridge), who is no longer in his place. At the end of the day, it is for locally elected councils to use their assets in a way that provides the best benefits to the people who elected them. Plymouth city council is ultimately accountable at the ballot box to the people of Plymouth for its actions, not to us in Westminster.
On the question of assets, if the Office of Fair Trading decides to call in and look at the impact of sell-offs and bus wars, would the Minister think it appropriate for the sale to be halted while the investigation is undertaken?
People would have to look at the competition implications of a change in circumstances on a case-by-case basis. As my hon. Friend knows—I shall deal with this briefly—there is the question of the OFT review.
In all our work with the bus industry and local authorities, two clear messages come across: local buses are best managed at a local level, and transport works best when operators and local authorities work together. Our consistent improvements to the regulatory framework contribute to those goals.
Of course, there is a case for competition where it has a role to play. Hon. Members may be aware that the OFT recently published a report that encouraged more competition in the bus industry. I commend it on the depth in which it has examined this issue so far. The Department for Transport will continue to work with the OFT to decide the best course for the bus industry. We can see that even though car ownership has risen, people are still choosing to travel by bus.
So where do we go from here? The bus is absolutely key to achieving every part of the Government’s transport strategy. We want to demonstrate that measures designed to support and encourage sustainable travel, including walking, cycling and public transport use, which together we have termed “smarter choices”, can help to ease congestion, increase physical activity and reduce environmental impacts from transport.
Local authorities are beginning to consider their next local transport plans, and we expect to see smarter choices as a key component, as is already the case for many authorities. By implementing measures on smarter choices, including encouraging the greater use of buses, local authorities, businesses and local communities will be able to harness the benefits in their areas.
I have said that the bus is a key weapon in meeting this country’s obligations on carbon reduction, and that is true, but the bus is of paramount importance to many people for any number of other reasons. Nearly one fifth of all commuting trips are now made by public transport, and I fully expect to see that figure rise even further through the support of smarter choices. With the introduction of free off-peak local bus travel anywhere in England, older people now have more freedom to travel in retirement than ever before. People feel safer and more comfortable when travelling than in the past, and those factors are reflected in rising patronage, which reverses a trend that had been drifting downwards since the 1950s.
Such changes do not happen suddenly, but take place over time, as people adapt their behaviour to a modern world in which we need to be more conscious of our carbon footprint, and in which we cannot rely on building new roads to cope with increased demand for transport. Behaviour change is absolutely integral to our strategy, which the evidence shows is working. I genuinely believe that we have the right regulatory arrangements between central Government, local government and the private sector in respect of the bus industry, and we will continue to work to build on the improvements that we have made and to construct a stronger, more robust network for the future.
I promise my hon. Friend the Member for Plymouth, Sutton that I will raise her concerns with my ministerial colleagues in the Department for Communities and Local Government. If she believes that Plymouth city council has done anything inappropriate, there is obviously a role for the district auditor to look at the use of resources. However, as I have said, at the end of the day, it is for the people of Plymouth to make a judgment on decisions taken by the city council.
I understand that CityBus provides the people of Plymouth with good access to bus services and that it is a popular service, especially with older people and because of its school-run capacity. I have spoken a great deal about the influencing role that councils can have.
To follow through on the point made by my hon. Friend the Member for Plymouth, Devonport (Alison Seabeck) as to whether there should be a suspension if there is a reference to the OFT, would the Minister agree that, with a bus company that is as successful as Plymouth CityBus, there would be a good reason to consider putting the whole thing in suspension pending the OFT’s consideration?
I come back to my central point, which is that the framework that we have established puts the primary responsibility for making such decisions on the local authority. It will have to do that in the context of that knowledge, and I am sure that my hon. Friend will ensure that everyone in Plymouth knows that the city council knows that those are the circumstances.
I want to be clear about what the Minister is saying. He is not saying that his Government are telling Plymouth city council not to sell CityBus. Is that correct?
I made it clear that the framework in which we see councils having a relationship with bus companies is one for the local authority. However, having said that, I have entirely described the set of relationships between local government and bus companies, and how those can be improved by many of the frameworks that we have put in place in legislation over the past few years. Any local authority that owns a bus company should cherish the opportunity that it has and make the most of owning a bus company, because it may find that the power to influence may not always be as great as it has been through direct ownership of the bus company.
I have the honour to be chairman of the all-party group on the Maldives, following in the distinguished line of the previous chairman, Lord Naseby. I am delighted to see attending this debate my hon. Friends the hon. Member for South-West Devon (Mr. Streeter), for West Suffolk (Mr. Spring) and for Braintree (Mr. Newmark), all of whom have a real interest in the Maldives.
The all-party group was set up some eight years ago at the request of the then Maldivian high commissioner and a great deal has been achieved during that period. Last year, I had the privilege of visiting the country, together with my hon. Friend the Member for Northampton, South (Mr. Binley). We were charged with the task of monitoring the preparation for the 2008 presidential elections and exploring avenues for mutually advantageous co-operation between our two countries. This debate gives the Minister the opportunity to respond to a number of points, on which I hope the British and Maldivian Governments will be able to work together.
The Maldives has made incredible progress, with the first multi-party elections being held in October last year, President Mohamed Nasheed being sworn into office and President Maumoon Gayoom stepping down after more than 30 years. That is undoubtedly a triumph for democracy and an example that the rest of the world should applaud, as the transition to democracy was made without violence or bloodshed. That is a proud achievement for all Maldivians. Setting a similarly positive example, I am delighted to tell hon. Members that the new Government of the Maldives—a Muslim nation—has recently re-established diplomatic relations with Israel after 15 years, which is another splendid achievement.
President Mohamed Nasheed travelled last week from Malé to Manchester to address the Conservative party conference. The President spoke about the economy, democracy and climate change, which he described as a matter of “life or death” for the country.
During the summer Adjournment debate on 21 July, I reported that the high commissioner, Dr. Farah Faizal, had advised me that no funding had yet been received from the Department for International Development and that she could not get a meeting with the relevant Minister. I am delighted to say that since then DFID has met the Maldivian Foreign Minister, Dr. Ahmed Shaheed, but unfortunately the outcome is still far from totally satisfactory. DFID is offering relatively little support to this fledgling democracy, to which our country owes an obligation, given our historic ties, as the Maldives seeks to overhaul the public sector, institute democratic reform, reduce the budget deficit, improve governance and deal with the threat of climate change.
Although I understand that DFID might take the view that the country falls outside its framework for assistance, does my hon. Friend agree that, being a Muslim country that is now a fully fledged democracy, if its Government and democracy were allowed to fail, it would send a bad signal to the wider world and that Britain ought to ensure that it succeeds?
My hon. Friend has immediately got to the heart of the matter. I am sure that his words are not lost on the Minister.
Since 2005-06, DFID has provided no bilateral overseas development assistance to the Maldives. In the past three years, United Kingdom net bilateral aid to the Maldives totalled only £103,000 out of a total South Asia programme worth more than £2.1 million. None of that £103,000 came from DFID; it came from other UK official sources, including the British Council. DFID offers development assistance indirectly to the Maldives through a multilateral aid programme, whereby funding is channelled through international organisations such as the European Union, the World Bank, the International Monetary Fund and the United Nations.
The new President of the Maldives has inherited a difficult fiscal position, as my hon. Friend is aware. It is extraordinary to note that, for a country of its size, the Maldives has a relatively large fiscal deficit and inherited debt is high. Yet in absolute terms, relative to DFID’s entire budget, the sum needed would be relatively small to begin to address the matter. Just to support my hon. Friend’s point, this is the youngest democracy in the world and in the Commonwealth, and we owe a great deal to it.
I understand my hon. Friend’s points. I do not want to beat up the Minister too much, because if I do we will get nothing out of this debate. The whole point of an Adjournment debate is to achieve something at the end of it.
The amounts are still tiny in international development terms. Total aid to the Maldives by multilateral agencies is currently around £10 million annually, to which DFID contributes about 5 per cent. This is no substitute for dedicated UK development assistance to the Maldives through a structured bilateral programme and a specialist person operating in DFID’s south Asia desk.
DFID now classifies the Maldives as a lower middle-income country, and as such it is not on its priority list of low-income countries. However, although it is not one of the world’s poorest countries, it is one of the lowest lying, and as such is one of those most vulnerable to the impacts of climate change. More than 80 per cent. of the nation is less than 1 metre above sea level and, according to a 2007 study by the United Nations Intergovernmental Panel on Climate Change, a rise in sea levels of 7.2 inches to 23.2 inches by 2100 could render the Maldives completely uninhabitable. The Maldives will participate in December’s UN climate summit in Copenhagen, which will be a chance to seal a deal on a successor agreement to the Kyoto protocol. This is an important issue for the residents of the Maldives.
The UK made a significant contribution to aid relief following the 2004 tsunami. DFID committed £50 million in aid, providing assistance in the form of landing craft, vehicles and humanitarian relief supplies, such as bottled water. I visited last year and saw some of the assistance that was given. The effect of the disaster was phenomenal: two thirds of the country disappeared momentarily into the Indian ocean, and when the sea withdrew, it took 62 per cent. of the country’s gross national product with it. Electricity, communications and freshwater supplies on many islands were destroyed by the salt water.
Such disaster scenarios have the potential to multiply exponentially as a result of climate change and rising sea levels. Financial assistance is urgently required to fund adaptation and mitigation strategies, technology development, capacity building and preparation of national plans to deal with these threats. Although natural disasters can never be completely averted, it makes much more sense to support the country’s investment in planning and preparation than to rely solely on emergency relief and clean-up operations further down the line.
The Maldives national adaptation programme for action, adopted in January 2007, identifies the most urgent and immediate adaptation needs of the country with regard to predicted climate change. The cost of that alone is estimated at about $100 million. The Maldives has pledged to become the world’s first carbon-neutral country within 10 years. The country is showing leadership in mitigation actions to reduce national greenhouse gas emissions and demonstrating its commitment to stopping climate change. The British Government should reward such nations for leading and setting an example.
The Maldives has an international reputation as a tropical paradise of white sands and wonderful waters, as we all know. Tourism is the main economic activity in the country; it contributes about 30 per cent. of gross domestic product. The annual number of tourist arrivals is greater than the total population of the Maldives, and 70 per cent. of the foreign exchange that flows into the country comes through the tourism sector.
However, the very things that attract tourists to visit the country are some of those most under threat. I am referring to land and beach erosion and damage to coral reefs, for example. I hope that the United Kingdom Government will help the Maldivian Government to act now to prevent the loss not only of the special ecology of the islands, but of the country’s most vital source of income. Rising water levels pose a threat to livelihoods, infrastructure, food security and health—for example, through the flooding of homes and agricultural land, contamination of ground water and an increase in waterborne diseases.
The Maldivian Foreign Minister met representatives of DFID and secured 50 per cent. funding for the V14 meeting next month; the 14 countries most vulnerable to climate change will meet in the Maldives on 9 and 10 November. I fully acknowledge that that is a most welcome contribution, but I hope that the Minister will pledge that he will see whether even more can be done.
The Maldives’ programme of economic reform presents new opportunities for United Kingdom businesses. The plan to make the Maldives carbon-neutral within 10 years offers particular possibilities for co-operation, as UK companies have expertise and know-how in the field of renewable and low-carbon energy.
The British Council has done a great deal, and I hope that it will do even more. It does not have a dedicated presence in the Maldives, although there is an office in Sri Lanka. The Voluntary Service Overseas programme in the Maldives closed this year, as the country’s rating on the UN’s human development index has considerably improved in recent years. Adult literacy, for instance, is almost 100 per cent. However, there is a huge shortage of teachers in the Maldives, which follows the United Kingdom’s GCSE and A-level system. Some 3,000 students sit A-levels each year, but the Maldives has no university for them to attend. My colleagues and I are working to address that issue and establish links with individual British universities, and I think that we are making some progress. However, additional assistance from the relevant Department and the British Council would be highly beneficial in meeting the Maldivian Government’s higher education objectives.
The main scholarship scheme promoted by the British Council in Sri Lanka is the Chevening scholarship scheme, which the British Government created in 1994. The Maldivian Government would also like to institute a volunteer programme for United Kingdom graduates to teach at schools in the Maldives, as part of the international wing of the Maldives volunteer corps. I hope that many graduates will take advantage of that opportunity, which is being promoted by the high commissioner. I think that the British Government would like to take that forward and ensure that more graduates set an example with that initiative.
DFID global school partnerships promote partnerships between schools in the United Kingdom and schools in Africa, Asia, Latin America and the Caribbean. Again, such partnerships provide a wonderful opportunity. The UK international health links funding scheme is a Tropical Health and Education Trust and British Council funding scheme supported by DFID and the Department of Health. The Maldives would definitely benefit from such assistance in the health care sector. The acute scarcity of skilled health personnel is a major constraint in the sustainable development of the Maldivian health sector. The links between environmental and human health are not unknown, and the Maldives finds itself in a precarious position in that regard.
To continue the educational theme, having worked to promote and strengthen educational links between our two countries, I am shocked and appalled by the situation in which many Maldivian students find themselves. As there is no British diplomatic mission in the Maldives, applications for United Kingdom student visas must be made in Colombo, Sri Lanka; Maldivian citizens enjoy visa-free entry to the UK as tourists. That has been causing delays in visa processing, and as the university year has commenced, some students are in danger of losing their places. Last year, out of 113 student visa applications, 86 encountered problems, which caused considerable delays and financial cost to the students.
It is absolutely ridiculous that citizens from the Maldives must travel to Colombo to apply for a visa. That is unacceptable. I hope that the appropriate Department will reconsider the present arrangement. I see no reason, if it is not possible to post a UK Border Agency official to the Maldives, why it should not be a condition of the outsourcing contract to have, at the very least, an approved officer in the Maldives to collect the necessary information, which could then be forwarded to staff in India for processing. I simply do not understand the situation, and I have written to the Home Secretary and the Foreign Secretary on the issue.
To conclude, I am delighted thus far with the assistance that the Government have given the Maldives, but given our historical links, I hope that the Minister will be persuaded to do even more.
I congratulate the hon. Member for Southend, West (Mr. Amess) on securing this important debate. I welcome his genuine concern and interest, which he has shown over a long period, in the Maldives and in pursuing the interests of the people of the Maldives. I am sure that we would all acknowledge the genuine passion with which he made his contribution—I also have to say that I hope that he continues to enjoy many a holiday in what is a beautiful country.
Our relationship with the Maldives remains a very important priority for the United Kingdom. I assure the hon. Gentleman and other hon. Members present, as well as our friends in the Maldives, that we as a country are fully committed to providing all the support that we can to the Maldives at this transitional and crucial moment in its history.
The debate is an important opportunity to applaud unashamedly the Maldives for its impressive progress on both development and democratic reform in recent years, of which all Maldivians can be incredibly proud. The hon. Gentleman rightly welcomed the first multi-party presidential elections in 2008 and parliamentary elections earlier this year. I commend the success of those historic elections and I recognise the role played by the new Government and the outgoing Administration in ensuring the smooth and peaceful transition of power that followed. The elections were undoubtedly an important step on the path to establishing an effective, accountable and functioning democracy.
We as a country played an important role in supporting the elections. We maintain regular contact with Government and opposition parties and encourage cross-party dialogue. It is vital that the new Government continue to consult and involve the opposition parties and the Maldivian people in the important decisions that they are making to continue to strengthen democracy.
I pay particular tribute to the hon. Member for West Suffolk (Mr. Spring) for his personal contribution to and support for that smooth transition of power and for his contribution to emphasising the importance of sustaining that responsible approach from the new President and Government in an environment of reconciliation. The hon. Gentleman deserves tremendous credit for the role that he has fulfilled.
I want to draw attention to the President’s visit to Manchester—my home city—only last week. I want to put it on record that the President’s speech was by far the best speech heard during the entire period of that conference in Manchester. With the funding that we have provided, we have continued to help the Maldives to consolidate and strengthen its democratic institutions, and to raise awareness of the rights and responsibilities of civil society and the democratic system. As part of the European Union, we have taken part in election observation and contributed to projects on democratic reform. The hon. Member for Southend, West was right to raise the specific question of climate change, and I will come on to that in a moment.
Our contacts with the new democratic Government reflect our support for political reform and economic development. The Prime Minister and the Minister with responsibility for Asia met President Nasheed in April specifically to discuss democratic reform, climate change and the economy. As the hon. Gentleman said, Ministers from the Department for International Development have recently held talks with the new Government to discuss development issues. Through regular visits to the Maldives, the British high commission in Colombo maintains strong relationships with the Government, opposition parties and civil society.
The country undoubtedly faces development and economic challenges, but there is no question but that over the last three decades it has made significant progress on development. It has moved from being one of the 20 poorest countries in 1978, to having one of the highest per capita incomes in south Asia. The economy has expanded at an average of 7 per cent. per year for the last 25 years through effective development of the tourism and fishing industries. The powerful progress that the country has made on provision for education and health is indisputable.
The hon. Gentleman was right to recognise the serious fiscal challenges that the country now faces. Those challenges threaten to overshadow recent economic and political progress. President Nasheed has made it clear that he has inherited a large fiscal deficit. We recognise the vital importance of the reforms that the Government of that country seek to implement during a difficult time of economic downturn.
During the debate, the hon. Gentleman suggested that the UK should offer more financial support to the Maldives at this particular time, and that we should reopen a DFID bilateral programme. He was right to say that DFID has not provided any bilateral development assistance to the Maldives since 2005-06. As a former DFID Minister, I can say that DFID unashamedly prioritises its overseas development assistance to the lowest-income countries where it believes that it can make the most difference to poverty levels. The Maldives has an impressive record of poverty reduction, and will shortly graduate to middle-income country status. It has achieved all but two of the millennium development goals that world leaders signed up to during the Gleneagles conference.
In a spirit of bipartisanship, I say gently that it is not the position of the shadow Secretary of State for International Development, or the Leader of the Opposition, to change development policy regarding where the UK targets its resources, which is on those countries that most need support for the elimination of poverty, and those countries that have made very little progress. It would be entirely inconsistent for the Government to single out the Maldives and make it an exceptional case; we must apply the criteria in a consistent way. It is not only a question of my Government taking that position. In my view, based on his previous policy statements, the shadow Secretary of State for International Development would adopt exactly the same position if he ever had to make such a decision.
The UK is a major donor to the Maldives and, as the hon. Gentleman said, it is important that we calibrate that through significant contributions to international financial institutions such as the IMF, the World Bank and the Asian Development Bank. We have encouraged the Maldives to approach those financial institutions and we have helped with technical assistance to enable it to do so. Only this year, the UK funded a fiscal policy adviser who assisted the Maldives with its recent negotiations with the IMF. When an application is presented to the IMF board, the UK will work to ensure that it contributes the necessary resources for economic stability and development in the Maldives. We will use our influence with the IMF to get the right outcome, providing that the bidding process and the application meet the necessary business standards.
As the hon. Gentleman acknowledged, bilateral co-operation must mean more than just financial assistance. The UK helps to build capacity through targeted interventions in a range of areas to help the Maldives tackle some of the serious challenges that it faces, the greatest of which is climate change, an issue that has been well reported in this country in recent times.
The effects of climate change are devastating for the fragile environment of the Maldives, especially since 80 per cent. of its 1,200 islands are no more than 1 metre above sea level. That makes it an almost unique situation in the context of the climate change debate, and that is why it is crucial that at the UN conference on climate change in Copenhagen in December, we see an ambitious deal that is comprehensive and equitable for all countries. We believe that a global deal that addresses carbon emissions, funding flows and technology represents the best way to protect countries which are particularly vulnerable to the effects of climate change, such as the Maldives.
As hon. Members will be aware, our Prime Minister will be leading the United Kingdom delegation and demanding that the international community does the right thing on climate change, in the same way as he led the international community in ensuring that we did exactly the right thing during the economic crisis that we have just faced.
We welcome President Nasheed’s leading role on the international stage in highlighting the impact of climate change on vulnerable countries, and we fully support his recent announcement of a forum for leaders of countries vulnerable to climate change, which will be held in the Maldives in November. I also applaud the President’s announcement in May about his ambition for the Maldives to become the world’s first carbon neutral country by 2020. That is the kind of ambition we want from other players.
In terms of adaptation funding, the UK continues to support the least developed countries fund and the special climate change fund, and we encourage the Maldives to seek further support from both those funding mechanisms. The United Nations framework convention on climate change adaptation fund is due to become operational early in 2010, and we hope that the Maldives will be able to benefit from funding very soon.
I will deal specifically with the hon. Gentleman’s concerns about student visas. I was unaware of that issue before this debate, but I will be more than happy to take the matter up and see whether we can make progress across Government with all the agencies that bear responsibility for the issue, to see whether we can remove some of the unreasonable, unnecessary obstacles and red tape that prevent student visas from being processed in a more efficient way. I will write to the hon. Gentleman and make him aware of how we intend to approach the matter, and I will keep him fully informed.
There is no doubt that the Maldives is heading in the right direction. We applaud the fact that President Nasheed and his colleagues are making significant progress in consolidating what is a new democracy. The Maldivian Government have shown domestic leadership and vision on the reform agenda, but at an early stage they also showed international leadership on climate change. The UK is a staunch friend of the Maldives, and we shall continue to help and support it along its path. As friends, we shall encourage it to make further progress on sustainable economic development and human rights, so that the Maldives can secure its position as a progressive and democratic country.
It seems to me that the reconciliatory approach taken by the President, with its lack of vengeance and revenge for some of the human rights abuses that he and many of his associates suffered, is of great credit. One could argue that it follows the model demonstrated by Mandela when he assumed leadership in South Africa; it shows the importance of reconciliation, of building bridges and of not looking backwards. I end today’s debate by paying tribute to the President for that; the United Kingdom will stand alongside his Government in dealing with the economic, social and climate change reforms necessary for the future. We look forward to remaining a staunch friend of the country.
Question put and agreed to.