Home

The Case for Removing Arms from the ECGD’s Portfolio

by Ann Feltham, Campaign Against Arms Trade

first published 23 May 2002

Summary

Military exports account for just 2% of the UK’s visible exports, yet, from 1997-2002, they received 30% of the export credits approved by Britain’s Export Credits Guarantee Department (ECGD). The ECGD does not scrutinise military exports for their environmental and social impacts -- and it appears that official export credits for civilian exports are subsidising military exports. The ECGD and other Export Credit Agencies (ECAs) should end support for arms contends this presentation at an NGO Seminar on Export Credit Reform, House of Commons, London.

Contents

 

For campaigners on export credit issues, cover for military goods is very different from that for other sectors as we are not trying to reform the system. Rather we are pressing for an end to export credits for such goods altogether.

 

At the moment, in the UK, arms sales take up a disproportionate about export credits.

Military exports account for around 2% of UK visible exports yet, over the last five years, it has absorbed 30% of ECGD support. This is understandable as one very large military purchase or construction project can skew the figures. In 2000/1, for instance, the trainer/fighter aircraft for South Africa were covered by a guarantee of nearly £1,700 million. This is 49% of the total for all the guarantees issued in that financial year.

Another reason for the disproportionate amount of cover for military exports, might be the nature of the business - accountants KPMG, in their Risk Management Review for the ECGD, said commercial banks avoided underwriting large military deals to avoid the risk of the adverse impact on their reputation.

A second point is the question of hidden subsidy. This was raised by National Economic Research Associates in its report for the ECGD which suggests that the premiums do not include all the costs involved and that, therefore, export credits are subsidised. But more than this,

It seems that export credits for civil exports could well be subsidising military ones

The ECGD points out that exporters pay a premium and that, since 1991 when the ECGD was restructured, these premiums have more than covered the cost of any defaults on payments. The ECGD has made a contribution to the Exchequer, rather than the other way round.

However, taking cover for military goods in isolation, premiums paid between 1991/2 and 2000/1 total £238 million, the claims paid £977 million and the interest rate support £42 million. If, overall, the books balance, it does not seem that this is the case with military goods. My colleague, Michael Bartlet, from the Religious Society of Friends, will go into more detail on this.

 

Ultimately, if countries default on payments for military equipment, the tax-payer ends up paying the bill.

In perhaps the best known case, that of the sale of Hawk aircraft to Indonesia, the payments have been rescheduled. At the moment the ECGD expects to get the money back. However, the tax-payer could still end up paying. After all, the ECGD acts an insurer where the private sector thinks the risk too great. It may not be Indonesia which defaults, it could be Saudi Arabia. It is not impossible that a revolution against the extremely repressive regime there might usher in a government which refuses to pay its bills.

Military goods not subject to the same checks

The ECGD does not subject military exports to the same checks with regards to the environment, resettlement and the like to which other goods are subjected. The Government argues that the export licensing process covers these aspects. Whilst some may be, others are not.

The UK is not alone in supporting export credits. For instance, in France, more than a third of the guarantees given by COFACE are for arms.

In the USA, which accounts for about half of all the world's transfers of major weapons systems, most guarantees are not given by the main export credit agency, the Export-Import Bank, but through the Foreign Military Financing Program and the Defense Export Loan Guarantee Program. This, at least, makes the fact that the export credits are subsiding arms exports completely open and transparent.

The many organisations from around the world who signed the Jakarta declaration on Export Credit Agencies have called for an end to export credit support for military exports. CAAT would like to see an end to UK support as well as the UK government taking the lead to end such support internationally.

Additional statement by Religious Society of Friends

The Religious Society of Friends has a settled opposition to support for the arms trade. This is on the basis both of the harm arms may cause in warfare and also in the distortion they cause to the economies of developing countries with the diversion of resources from productive expenditure.

Quite apart from these issues of principle there are solid economic grounds for the withdrawal of ECGD from the underwriting of arms related contracts. This is of particular concern where current policy appears to conflict with ministerial statements of principle.

The involvement of Export Credits Guarantee Department is a prerequisite for the execution of many contracts for the sale of arms abroad. For many years concerns have been expressed that ECGD has been used to subsidise the arms trade. ECGD and Ministers responding on its behalf have countered, that it essentially involves insurance and that criticisms suggesting that it provides subsidies to the defence sector are misconceived. The issue has been complicated because in its accounts, premiums and payments have not been disaggregated so as to show profit and loss for individual sectors.

The significance of figures provided in response to parliamentary questions is that they present premiums; recoveries and losses disaggregated for the Defence sector. To give figures for 1999/2000, in relation to the export of arms, ECGD paid out claims of £152 millions but recovered only £9 millions. Against that the Premiums were £27 million. Over a ten year period while premiums in this sector amounted to £213 million claims paid out were £667 million, over three times that figures. In not one of these ten years have premiums earned exceeded payments made. Figures for the years 2000/2001 and provisional figures for 2001/2002 do nothing to suggest that there has been any change in this pattern

It is hard to see how such sustained losses, over a period of ten years, can be explained except by a deliberate policy of subsidy. If they do represent subsidy, this appears to be clearly at odds with the findings of the Select Committee on Trade and Industry Third Report: "ECGD is required by Ministers to operate with a reasonable confidence of breaking even. Premium levels are set to cover costs and risk and a "reserve margin" is added to the premium rate to deliver confidence of break even required."

The case of ECGD withdrawal from the underwriting of arms exports is one that is rooted in morality, transparency and economics alike.

Michael Bartlet - Religious Society of Friends