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Debt Relief (Developing Countries) Bill

Volume 718: debated on Thursday 8 April 2010

Second Reading (and remaining stages)

Moved by

My Lords, I am delighted to be able to act as sponsor of this Bill, which was passed in the other place yesterday, and I pay tribute to the Members in another place who worked hard to secure its passage there. In particular, Andrew Gwynne chose to put the Bill forward after securing a high position for it in the ballot for Bills. Sadly, he was unable to speak to it because of illness, so I also pay warm tribute to Sally Keeble, who both presented it on Andrew Gwynne’s behalf and piloted it through its various stages. The Bill has attracted widespread cross-party support in Parliament, and has also been very widely supported outside, particularly by NGOs and voluntary organisations that are interested in development and debt relief for the poorest countries in the world. I congratulate the Jubilee Debt Campaign in particular on all its work and efforts on this matter.

The Bill’s main aim is to curtail the activities of what have come to be called vulture funds—commercial entities that buy developing countries’ sovereign debt at discounted prices when those countries are in economic distress and aggressively litigate to recoup the debt’s full value, thereby causing financial difficulties and consequent severe economic, and indeed social, hardship in the countries concerned. Not only do such activities by vulture funds strike many people as indefensible, it is also a huge problem that the activities of such funds run directly counter to the debt relief schemes and initiatives such as the HIPC—heavily indebted poor countries—initiative that many countries, including the UK, have operated successfully in recent years.

As a House of Commons brief on this Bill states, the activities of vulture funds undermine debt relief initiatives such as HIPC. Ironically, as debt relief improves the financial situation of a developing country, it increases the prospect of repayment of the debt owned by the vulture funds. Where litigation is successful, the resources that are freed up by debt relief and intended for poverty reduction and development are diverted instead to the vulture fund, which very often receives more than it paid for the previously discounted debt that might otherwise have been written off.

There have been several instances of this. Zambia, in the 1990s, tried to reach a settlement on a loan that dated back to the 1970s, but a fund purchased the debt for the knock-down price of $3.3 million and proceeded to pursue Zambia through the UK courts for the full amount of the debt, plus interest and fees, demanding an astonishing $55 million in total. My honourable friend Sally Keeble made this point very effectively in the other place. In the end, the courts awarded $15.5 million, but that was five times the amount that the fund had paid for the debt, and that money would have paid for 30,000 primary school places in Zambia. In a similar case in Liberia, the funds were awarded $20 million on a loan that also dated back to the 1970s and was worth $6 million. That $20 million represented 5 per cent of the Liberian Government’s entire budget. As Dr Cephas Lumina, the UN Human Rights Council’s expert on the effect of foreign debt, said:

“It is illogical to cancel poor country debt and at the same time allow unconscionable ‘vulture fund’ claims”.

The Prime Minister, when Chancellor, recognised this problem as long ago as 2002 when, in a speech to the United Nations, he called on the UN to consider giving assistance to any heavily indebted poor country that was being sued by a vulture fund, stating:

“Whenever a country has to defend a legal case it has to divert considerable time, attention and resources away from focusing on poverty reduction, health and education and we must do everything we can to stop this shameful practice”.

Clauses 1 and 2 define the debts to which the Bill applies. Basically, they refer to debts that are included or expected to be included under the HIPC programmes: the debts of the 40 most heavily indebted poor countries in the world. Clauses 3 and 4 reduce the proportion of the debts that are to be recovered to the level that corresponds to the HIPC initiative. I should point out that those amounts are assessed internationally according to a set assessment procedure.

The Bill is quite tightly drawn. It does not affect new lending, but basically deals with historical debts. It allows creditors to get back a share of their money, which they would otherwise be very unlikely to get, but it allows them a return and is therefore consistent with development goals and the HIPC initiative. I accept that the Bill comes to us very late, but it has been discussed and debated in the other House. Indeed, as a result of discussion in Committee there, the Conservative Opposition tabled an amendment, which was passed, to include a sunset clause whereby the Act will expire after one year unless the Government and Parliament decide through the affirmative procedure either to extend it for another year or to make it permanent.

I hope that the passing of that amendment will help to reassure Members of your Lordships’ House, who may be understandably concerned about the shortage of time in which to consider these issues, as they have been about other measures, and that they will at least realise that the Bill’s effect will be fully evaluated in Parliament after a year. I hope that informed decisions about its long-term future can then be taken. The sunset clause addresses some of the concerns about last-minute legislation and also, in a way, picks up on the very important points which my noble friend Lord Rooker made yesterday about the wash-up procedure.

Finally, the Bill begins to tackle the distressing situation that sometimes allows vulture funds in effect to make excessive and unjustified profits from developing countries and therefore creaming off the relief and aid which British taxpayers, our international partners, and other more ethical commercial creditors provide. It builds on the excellent record of the Government in debt relief and in enlightened aid and development policy, and is an important measure that we should be proud to implement today. For that reason, I hope that it can be accepted today in your Lordships’ House.

My Lords, I am very grateful to be able to speak briefly in the gap and to follow the noble Baroness, who, along with her colleagues in the other place, has performed a valuable service to developing countries. She introduced this apparently uncontentious but important Bill, which has had a remarkable passage through another place and has somehow survived to find an after-life in this House. I certainly did not expect to see it here today.

As someone who has supported the Government’s heavily indebted poor countries initiative in the past, I congratulate the Jubilee Debt Campaign, as the noble Baroness did, on its perseverance over many years on vulture funds. It is nothing less than immoral extortion to deal in debts that are held by countries such Liberia, which she mentioned, which have suffered more than we can imagine from civil war and other situations. It is the people there, not the elites, who have suffered, and the elites are the ones who may have incurred the debt in the first place.

I well remember the role played by the churches and aid agencies such as Christian Aid in the original HIPC campaigns. It is not often that a voluntary organisation conducts street protests against City firms in one month and is rewarded by a Bill virtually to abolish these funds in the next. It is very rare indeed that a Private Member's Bill survives the wash-up, and we shall no doubt hear from the Conservatives how they, after having been vilified by Labour campaigners for scuppering the Bill, ultimately saw the light.

Finally, perhaps I may commend the latest report of the All-Party Group on Debt, Aid and Trade on aid effectiveness. The quality of aid, with this continual commitment of 0.7 per cent of GNP, I believe deserves more urgent attention in both Houses from politicians of all parties after the election.

My Lords, as we approach a general election in which there will be much emphasis on our own economic situation, we must not hide from ourselves or the electors we seek to serve the far more desperate situation of so many countries. We are very grateful to the noble Baroness for introducing this Bill, which will be another step forward in relieving the desperate plight of some people. It is something that we have not experienced and cannot imagine. I would suggest that there is nothing worse than grinding poverty, which can lead to so many other unacceptable facets. It leads to crime, desperate illness, disease and even war. People will do anything to survive.

In accepting this Bill and in commending it, I hope that we will be saying to our candidates and others to put this high on their agenda in the coming election. We will be very much concerned with our own situation, but this Parliament, over the centuries, has had a noble record of realising the needs of others and of trying to relieve their desperate situations. It gives me tremendous pleasure from these Benches to say that we welcome this Bill. We hope that it will alleviate the dreadful situation of these 40 nations which are suffering in a way that is far beyond any experience or imaginings that we might have.

My Lords, I thank the noble Baroness, Lady Quin, for introducing this Bill. We are now nearing the end of wash-up and we find ourselves with a rather odd Bill, which implements an international aid policy on which there is international agreement and on which the Treasury carried out a formal consultation.

However, the Government did not bother to find government time for it in the parliamentary timetable. Instead, the Treasury followed the well worn route of a hand-out Bill. In fact, the only Private Members’ Bills that I have ever handled in my capacity as a shadow Treasury Minister in your Lordships' House have been hand-out Bills from the Treasury, which seems to have form on that. I have to correct that: there was one exception, but that was my own Private Member’s Bill, which needless to say was not a handout from the Treasury.

As we have heard, the Bill comes to your Lordships' House not through the normal processes of scrutiny of Report and Third Reading in another place, because those stages were achieved only by virtue of the Government finding space in wash-up in another place yesterday. Of course, the Bill will become law only because the Government have found a space in wash-up today. The noble Baroness, Lady Quin, has kindly agreed to sponsor this Bill in its final stages as a Private Member's Bill, but the House should be under no illusion that this is none other than a government Bill in Private Member’s clothing.

We do not oppose this Bill. Indeed, we strongly support its aims in seeking to ensure that heavily indebted poor countries obtain relief from the burden of debt which they cannot realistically support. We have espoused this course for many years. Indeed, when we were in government it formed part of our policies and I expect that we will have the opportunity to display our credentials in this regard again soon.

However, we have concerns at the way in which this Bill has been rushed through, in particular without having proper scrutiny in your Lordships' House. It had a good Committee stage in the other place, but it is always right to think that Bills have the quality of scrutiny of which your Lordships' House is rightly proud. It is easy to approach a Bill such as this and to take comfort in the belief that it will do nothing but good in relieving the debt burden on heavily indebted poor countries and that the so-called vulture funds can be easily despised for seeking to enforce contractual terms.

I have not had enough time to look in depth at the detailed papers sent to me about the issues involved, which was largely because I did not believe that I would see this Bill reaching your Lordships' House. But from briefly looking at them over the past couple of days, some careful and well reasoned arguments have been put about the need for well functioning debt markets to be able to rely on contracts being honoured and debts being capable of being enforced.

This Bill and corresponding legislation in other countries is very likely to reduce the availability of private sector involvement in debt for heavily indebted countries in future. It is also likely to involve a premium for the risk involved in dealing with those countries and therefore be more expensive. Our old friend, unintended consequences, may well mean that other countries, which are not currently highly indebted poor countries, might have less access to finance or access only to expensive finance because they might be deemed to be likely to fall into a category which would be covered by this kind of legislation in future.

In the past, the Treasury has asserted that it believes that it is unlikely that any of this will occur. But that remains to be seen, especially if the result of this Bill becoming law is to make the debt covered by it worth next to nothing in the market. There are also concerns about the conformity of the Bill with the European Convention on Human Rights, which is amply demonstrated by the fact that three of the 11 pages of the Explanatory Notes are taken up with trying to deal with the issues that have been raised. We clearly do not have time today to delve into those intricacies, but it may be the case that this will end up being settled in the courts.

Perhaps the biggest issue about the Bill, which would have benefited from being examined in detail in your Lordships' House, is whether the remedy—the reduction of the debt of highly indebted countries—will in fact lead to an increase in the funds for economic management or for the relief of poverty in those countries. There is too much evidence that greed, corruption and sheer bad management will account for most of any resources released as a result of this Bill. Indeed, the countries which stand to benefit are at the bottom end of Transparency International’s corruption index.

If we had had the opportunity to scrutinise this Bill in your Lordships' House in our normal way we could have examined these issues in more detail. I emphasise again that we do not oppose the principle of alleviating the debt burden on heavily indebted poor countries, but we need to ensure that when we interfere in markets we will achieve the kind of good outcomes that first inspired the Bill. If we are not to achieve those outcomes by this Bill, we should seek other solutions to achieve the same ends.

My honourable friend David Gauke unsuccessfully tabled in another place an amendment requiring the Treasury to produce a report within a year on the impact of the Bill on the availability and cost of lending and on the monetised value created by the Bill. It would also have considered the impact on the choice of law or jurisdiction on contracts as one other fear—an unintended consequence of the Bill—is that the UK’s otherwise excellent reputation as a good legal system in which to do business will be harmed. Unfortunately, my honourable friend’s wise amendment did not find favour in another place and we shall not have the opportunity today of exploring the value of that approach.

As the noble Baroness, Lady Quin, said in her introductory remarks, my honourable friend David Gauke did, however, do the Bill a great service in successfully moving what is now Clause 9. This allows for more consideration of the efficacy of the Bill in a year's time and gives the Treasury the opportunity to bring before Parliament either the confirmation of the Bill permanently or to give it another 12 months of life, or, if that is the choice, to let it lapse. This goes some way to dealing with the difficult issues that are likely to or may arise from the Bill—I cannot say what will be the result of the Bill.

Unfortunately, we will not have a Committee stage to tease out how the benefits will be realised and how they will be weighed in the scale against the costs or the possible costs that may arise. But we have Clause 9, which gives us great comfort that in our haste to do the right thing by heavily indebted poor countries we also have some backstop against unintended consequences. We support the Bill.

My Lords, as anticipated by the noble Baroness, Lady Noakes, I confirm the Government’s full support for the Bill. I thank my noble friend Lady Quin for her leadership on the Bill here and her clear explanation of the rationale underlying it.

The Government’s support for the Bill is motivated by twin purposes: first, that the legislation proposed will help to achieve our aims for international development; secondly—this is crucial—it is also economically justified. The Bill retains and reinforces creditors’ rights to recover a fair proportion of their debts; it acts to further equality among creditors in circumstances where there is no prospect for all of them to be repaid in full; and there are clear reasons to expect its benefits to substantially outweigh any costs. I welcome the recognition of this by the Opposition and Liberal Democrats in the other place that has led to the Bill receiving cross-party support. I hope noble Lords will agree that this is carefully considered and valuable legislation which we should ensure becomes law.

The Bill has its roots in the unique and exceptional international effort to relieve the unsustainable debt burden on the 40 heavily indebted poor countries—the so-called HIPCs. By the mid-1990s these countries were, on average, paying more to service their debt than on health and education combined. They also had little or no prospect of ever repaying their debts in full. These countries account for much of the world’s most severe poverty. They have a total population of over 600 million but an average annual income per person of less than $530. It was clear that their unsustainable debts posed a serious barrier to development. As a result, and with a considerable measure of UK leadership, the international community took a series of decisive actions to tackle the problem and reduce the debts of the HIPCs to sustainable levels.

The HIPC initiative established in 1996 and strengthened in 1999 provides the key framework. The World Bank and IMF assess countries’ progress in making reforms that will improve financial and economic management and enable the benefits from debt relief to be effectively directed at reducing poverty and enhancing economic growth. They also calculate the level of debt relief that an eligible country needs from all creditors—bilateral, multilateral and commercial—to reduce its debts to a sustainable level.

Once they assess a country as having made the necessary progress, all creditors are expected to provide a common level of relief. Many do so. All the major multilateral creditors and the principal bilateral creditors that are members of the Paris Club do this as a matter of course—indeed, some, including the UK, go further and voluntarily provide 100 per cent debt cancellation to countries completing the HIPC initiative—but the majority of commercial creditors also decide to participate in the HIPC initiative and provide the level of reduction expected.

The problem arises from the minority of commercial creditors that instead litigate for the full value of debt owed and seek to extract its payment. To do so exploits a market failure in the sovereign debt market—the co-ordination problem among creditors when a debtor is unable to fully repay. As there is no analogue to insolvency law for sovereign debt, all creditors retain a legal right to full repayment even though there is no likely prospect for all creditors to realise this right.

Through the HIPC initiative, the majority of creditors have recognised the unsustainability of the debt burden facing HIPCs and have provided the degree of debt reduction necessary to resolve it. However, this has opened the door to other creditors free-riding on the relief, litigating and recovering the full value that they would have been unable to secure had others not provided debt relief. This behaviour is economically inefficient and inequitable and leads to damage to those countries’ prospects for development. I am all the more concerned by this as the resources implicitly siphoned off include the debt cancellation and development assistance provided by UK taxpayers.

The Government have already taken a range of measures to limit this problem. We support and part-fund the World Bank’s buy-back of commercial debt, which enables many of the commercial creditors willing to accept terms compatible with the HIPC initiative to receive that payment and settle their claims. We have committed funding to the new African legal support facility that will help countries facing litigation for full repayment to contest their cases robustly. We, along with other members of the Paris Club and the European Union, have committed not to sell on our own debts to others, so ensuring that they cannot end up with litigating creditors. However, despite these actions, the problem of some creditors litigating for and recovering the full value of the debts owed by HIPCs remains. As long as it is both legal and potentially highly lucrative to do so, it may well continue to hamper the development of HIPCs.

The most recent and reliable information on the scale of the problem, provided by the World Bank’s annual survey of HIPC Governments, reported that there are 14 known active or unresolved cases of creditor litigation against HIPCs worldwide with a total value of $1.2 billion. In a vivid example from last November, the High Court gave judgment for $20 million against Liberia in a claim brought by two commercial creditors against the country allowing them to seek to enforce full repayment in the UK. The average Liberian earns only $170 a year and 13 per cent of children die before their fifth birthday. Plainly their Government cannot afford to see some of the resources they expect from debt relief going to repay creditors above HIPC terms.

This clear market failure has prompted the Treasury to consult on legislation to limit the proportion of a debt which a creditor could recover, and now to support this Private Member’s Bill. Discussion of the Bill has quite properly examined closely the justification for legislation which will affect the extent to which existing debts can be enforced. We all recognise that the principle of legal certainty that a contractual right can be fully enforced is an important one which provides an underpinning for smoothly functioning financial markets. However, the circumstances relating to HIPCs’ historical debts are far from usual. There is no realistic prospect that all creditors can enforce their contractual rights in full. A high degree of debt relief to reduce creditors’ claims to their true economic value is a financial necessity. Indeed, the typical market value of HIPCs’ commercial debt is around or below the level to which the HIPC initiative expects claims to be reduced. Bringing about this necessary and equal reduction is the purpose of the HIPC initiative as administered by the IMF and the World Bank. In this situation there is a compelling case for legislation that supports a restructuring that is fair among creditors and which, by eliminating free-riding, improves economic efficiency.

We also note the extent to which the Bill recognises and supports the legitimate interest of creditors and the safeguards it includes to protect against negative impacts on financial markets. First, the Bill sustains a creditor’s right to litigate for repayment. This legal underpinning for sovereign lending remains key. Secondly, the Bill is tightly targeted; it specifically excludes new lending and is limited to the debts of the HIPCs, which compose a very small proportion of emergent market finance. Thirdly, it seeks to improve a creditor’s prospects for prompt recovery of the proportion of a debt which can be repaid consistent with the HIPC initiative. Clause 6 provides an incentive for debtors to settle claims on these terms by excluding them from the scope of legislation if they fail to do so. Finally, the amendment to provide for a sunset clause means that the Bill would lapse after one year unless Parliament decided, by affirmative resolution, to extend it. I am confident that this Bill will not have a negative effect on development finance but, if it did, Parliament could allow it to lapse.

I conclude that we face a choice. We can today pass a Bill that would do much to protect 40 of the world’s poorest countries from the actions of a minority of commercial creditors who exploit the relief provided by others. We can help ensure that the debt relief and development aid provided by the UK helps to tackle poverty rather than provide profit for investors. We can do so through a measure which is carefully designed, based on sound economic logic as fully as it is on a moral principle, and which we can and must reconsider after a year to confirm that it has been of net benefit. Alternatively, we could shy away from a decision and leave those countries’ development exposed to the attacks of litigating creditors while we considered the issue again.

I am grateful for the most informative contribution of the noble Earl, Lord Sandwich, and for those from the noble Lord, Lord Roberts of Llandudno, and the noble Baroness, Lady Noakes. I think that there is marked unanimity in the House in our support for this measure. There were occasions when I found myself at odds with the Front Bench of the opposition party and the Liberal Democrats over issues of legislation, but it is a delight that, on this occasion, we can find ourselves of common mind.

Perhaps I may say in closing how much I have enjoyed and benefited from the engagement of the Front Benches of the Conservative Party and of the Liberal Democrats on issues relating to finance and the economy, and thank them for the kindness that they have shown me during my first parliamentary session as a Minister. I hope that we can all agree, however, that the argument for passing this Bill is clear and that we will give it our full support.

My Lords, I thank noble Lords from all parts of the House who have spoken in this debate and who have so effectively given their support to the Bill. Support has come from the Cross Benches, the Liberal Democrats, the Official Opposition and in the words that have just been spoken by my noble friend the Minister.

The noble Baroness, Lady Noakes, said that the Treasury had form on hand-out Bills. However, I maintain that this Bill is the work not just of government; in many respects, it introduces provisions put forward in another place in a Private Member’s Bill—it was a Ten-Minute Rule Bill. It is a government and Private Member’s Bill combined, if such a thing were possible, because of the support given to it from both Front Benches and Back Benches. I thank the Minister and his officials for their helpfulness towards me and my colleagues in another place in dealing with some of the issues in the Bill.

The noble Baroness, Lady Noakes, mentioned the need for well regulated markets and expressed concern about unintended consequences. I hope, however, that she will accept—as I think she did—that the sunset clause will enable us to re-examine those issues in due course. While I hope and believe that the legislation will prove its worth, there will none the less be an opportunity to examine it properly at that subsequent stage. For all those reasons, I hope that the Bill enjoys success today.

Bill read a second time. Committee negatived. Standing Order 47 having been dispensed with, the Bill was read a third time and passed.