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Export Credits -- For Whom? For What?

by Nicholas Hildyard

first published 20 October 2000

Summary

Export Credit Agencies (ECAs) are the dinosaurs of public finance institutions. Whereas International Finance Institutions like the World Bank have introduced (albeit weak) mandatory sustainable development guidelines, ECAs (with notable exceptions) have resisted adopting legally-binding environmental, human rights and development rules. International NGOs are calling for major reforms. Unless ECAs can demonstrate a public purpose, ensured through mandatory sustainable development standards, the subsidies they provide have no legitimacy - and their days may be numbered.

This is a presentation to the Euro Environment 2000 Conference, held in Aalborg, Denmark from 18-20 October 2000.

Contents

Introduction

My focus today is Export Credit Agencies - publicly-backed government agencies that give financial guarantees to companies operating abroad - but my theme is somewhat broader. We have heard much from other speakers on the challenge of sustainable development and the efforts that business is making to rise that challenge. But what of the efforts that business is making to evade the challenge? Here the recent history of export credits has much to teach us. It is that recent history that I want to explore today.

A Tale of Two Meetings

But, first, I would like to start with a "Tale of Two Meetings". Both took place in June this year - within days of each other - and both were meetings at which I was present.

The first took place in a small village near where I live in Dorset, in the South-West of Britain. The second in the ancient city of Hasankeyf in the Kurdish region of South-East Turkey.

The first meeting was held in the village hall to discuss plans to plant genetically-engineered test crops in a nearby farm. The second to raise concerns about the planned Ilisu dam, a hydroelectric project that will flood Hasankeyf and forcibly evict 78,000 Kurds from their lands. Export credit agencies from eight countries are currently considering support for the project.1

At the first meeting, there were no police and no permission was required from any government agency to hold the meeting. At the send, no one knew until the very last minute whether or not the Governor of the region, which is under Emergency Rule, would allow the meeting the go ahead - or whether police would be sent in to break it up.

At the first meeting, local activists handed out a petition opposing the trials. At the second, all petitions were banned.

At the first meeting, press were present and people were free to say what they wanted. At the second, no press interviews were permitted, secret police took notes of what people said and there was a ban on any Kurdish music being played. Many were afraid to speak out against the dam: this, after all, is a region in which dissent is ruthlessly crushed, disappearances and extra-judicial killings are common and where torture is so routine that, according to the European Court of Human Rights, it should be considered state policy.

An Insight into the Greening of Industry?

The meeting in Hasankeyf tells us much about political oppression and the lack of democracy in Turkey. But it also tells us much about the companies involved in the project - and the depth of their commitment to "sustainable development".

ABB, for example, is a company that prides itself on its environmental policy. Over the years, it has issued numerous statements supporting the need for sustainable development. In 1994, for example, it stated: "ABB is committed to sustainable development. Protection of the environment is among our top corporate priorities. We address environmental issues in all our operations and public policy." Or, as Goran Lindahl, the then CEO of the company, put it: "We should not sell crap anywhere".

The company has also played -- and continues to play -- a leading role in the World Business Council for Sustainable Development, an industry initiative to promote environmental "best practice". Indeed, ABB claims that, in accordance with its environmental protection policy, "all the work we are doing meets or exceeds local environmental standards and legislation."

Yet ABB was one of the first companies to become involved in the Ilisu project - this despite the project having no environmental impact assessment and no resettlement plan for those who would be evicted by the dam's reservoir. To be sure, the company is now no longer in Ilisu, having sold its hydropower division, but why did it even consider the project? Why did it remain in for so long? And what does its history of involvement tell us about the company's paper commitments to sustainable development? Or about its corporate governance?

Human Rights? Not My Department?

Ilisu also reveals much about the commitment of western governments - and in particular industry Ministries - to sustainable development.

In the UK, for example, the Labour Government is nominally committed to pursuing an ethical foreign policy. "Sustainable development" is also government policy. Yet, as Ilisu reveals, words do not always translate into action.

Consider the following exchange which took place in the UK House of Commons between Richard Caborn, the UK Trade Minister, and the UK Select Committee on International Development. Caborn is being questioned on the UK Government's conditional approval of a $200 million export credit, through the UK Export Credits Guarantee, to Balfour Beatty, the UK company that would lead the construction consortium for Ilisu. What assessment, the Committee wanted to know, has the Department of Trade and Industry (DTI) made of the impact of the dam on conflict in the region, which for years has been wracked by a brutal armed conflict between the Kurdish Workers Party (PKK) and the Turkish security forces. Caborn replies ...

Caborn: "We take human rights very seriously indeed. In fact, the people who disabuse human rights, the record is there that we would not be supporting that type of regime. Clearly the criteria is laid down for that..."

30 second pass. Caborn continues

Caborn: "Nobody has raised a question as far as ECGD cover is concerned. Remember, that is the point we are dealing with ... There is nobody who has come back and raised the human rights questions in terms of this dam and the awarding of ECGD cover."

15 seconds pass. Caborn continues

Caborn: "In terms of human rights, you have asked me a question and I have given you the answer. The DTI is not responsible for human rights."

The entire exchange took less than 90 seconds. Ninety seconds in which human rights slip from top of the government's agenda to an issue that is of no concern to the Department of Trade and Industry. As an insight into the UK government's commitment to sustainable development - which surely includes upholding human rights - the exchange could not be more revealing.

Standards? What Standards?

Ilisu also tells us much about industry's evasion of standards intended to ensure sustainability - and about governments' complicity in this, not least through providing export credit support for projects which other agencies would not even consider.

ECAs are now the single largest source of taxpayer support for infrastructure development projects in the developing world and in Eastern Europe - underwriting projects worth several times the entire annual funding distributed by all the Multilateral Development Banks put together.

One reason why industry is increasingly turning to ECAs is that they represent the nearest thing that companies (or rather a small coterie of companies with an inside track to the agencies) are likely to get to a free lunch. Where projects risks are considered too high by private sector insurers, ECAs step in, covering risks that the market is unwilling to bear. The companies get their contracts: the losses are picked up by the taxpayer. The attraction for companies is obvious. As one commercial Banker has put it:

"You see, before we advance monies to a company, we always insist on any funds being covered by the [UK] Government's Export Credits Guarantee Department ... We can't lose. After 90 days, if the [buyers] haven't coughed up, the company gets paid instead by the British Government. Either way, we recover our loan, plus interest of course. It's beautiful."

In effect, ECAs enable companies to have their cake - and eat someone else's.

ECAs also enable companies to evade the increasingly stringent standards that Multilateral Development Banks (and other sources of public money for infrastructure development) now impose on project developers. The reason is simple: unlike MDBs, the vast majority of ECAs have no human rights, environmental and development standards whatsoever. In Britain, for example, the ECGD is required under the 1991 Export and Investment Guarantee Act to take account of all economic and political factors that might adversely influence a loan. It has no legal obligation, however, to consider the environmental impacts of its investments or the contribution they will make to development; no obligation to ensure that all its projects comply with a set of mandatory human rights, environmental and development guidelines; and no obligation to screen out projects with adverse social and environmental impacts.

Ilisu, for example, would not stand a cat's chance in Hell of receiving funding from the World Bank. Indeed, the project flouts five World Bank guidelines, including those on resettlement, on 18 counts. Whereas Ilisu was rejected by the World Bank even before it was formally submitted for consideration, the ECAs involved were only too willing to take it on - and, in the case of Italy and Switzerland, grant provisional approval (the UK has said that it is "minded" to support the project, whilst others are still considering it). If the ECAs have now imposed conditions which must be met before export credit support will be granted, it is only because of the public outcry that has arisen in their home countries against taxpayers' money being used for such an egregious project.

Paper Reforms

Ilisu is just one of numerous environmentally and socially destructive projects being backed by ECAs. Others include nuclear power stations, pulp and paper mills, mining projects and coal-fired power plants.

Such projects have prompted an international campaign by environment and development groups worldwide to reform ECAs - the principle demand being the introduction of mandatory environment and development standards.

Under pressure from campaigners, some progress has been made. The G7 has called for OECD Export Credit Agencies to agree common standards by 2001. And within the OECD itself, the Export Credit Working Group has (after five years of procrastination) agreed a workplan for agreeing common environmental standards. Some ECAs have already announced new standards.

These are welcome moves. However, almost without exception, the standards that have been agreed amount to little more than hot air. In the UK, for example, a year long review of the ECGD's "Mission and Status" has led the government to announce that, in future, ECGD support for projects "should take account of the Government's wider international policies to promote sustainable development, human rights and good governance throughout the world". An accompanying set of "business principles" commits the ECGD to "ensuring that ECGD does not contribute to human rights abuses or violations."

On the face of it, UK campaigners would have much to celebrate. In reality, however, the Business Principles amount to little more than fine words - and fall far short of the agenda for reform set out by non-governmental organisations both in the UK and internationally.

In particular, the new Business Principles lack enforcement mechanisms or indeed the staff to police them. The ECGD's environmental screening procedures, for example, amount to no more than a questionnaire: no criteria are laid down that would direct staff as to which projects to screen out, or indeed which projects should be positively encouraged. Likewise, the business principles are not backed by any mandatory, binding standards - or by any staff incentives and penalties that would encourage their application. In addition, no role is given to affected communities in the decision-making process on projects. There is no requirement for the ECGD to consult project-affected communities and those adversely affected by ECGD-backed projects will still be denied automatic means of redress.

And, indicative of the real depth of the UK commitment to ECA reform, the UK remains "minded" to back the Ilisu Dam - despite government ministers admitting that the project falls foul of the spirit of the new business principles.

A Race to the Bottom

Whilst agencies such as the UK ECGD continue to operate without mandatory environment and development standards, there is strong pressure on other national ECAs to resist taking unilateral action to raise their standards. To do so, governments argue, would mean that their national industries would lose out on new overseas contracts.

The same argument is now being deployed by industry in an attempt to strip away or weaken the standards that some ECAs have introduced. In the US, for example, both the US Ex-Im Bank, the country's official Export Credit Agency, and OPIC, the publicly-backed US investment finance and insurance agency, adopted mandatory standards in 1992 and 1997 respectively. OPIC standards now categorically forbid any investment in "projects that require large-scale involuntary resettlement" (defined in terms of the movement of more than 5,000 people) and a ban on support for "large dams projects that disrupt natural ecosystems or the livelihoods of local inhabitants".

In 1998, however, Republican Senator Frank Murkowski attempted to introduce legislation that would have prohibited Ex-Im from withholding finance for projects supported by any other G7 country. Murkowski argued that US exporters were losing contracts overseas because other ECAs do not impose similar standards to those of Ex-Im and OPIC. Without new legislation, Murkowski maintained, US companies would be "left in the dust while the environment suffers anyway."52

Although Murkowski's proposed legislation failed to make it to a vote during the last US Congress -- and has not be "re-offered" to the newly-elected Congress -- industry strongly supported his proposals, arguing that Ex-Im's standards are incompatible with its primary objective: protecting US jobs.

Environmental and development groups, however, charge that it is not US jobs that are protected but US corporations and their shareholders. They point out, for example, that most of the companies that have received large amounts of Ex-Im support have ruthlessly shed jobs through downsizing or shifting production abroad in order to exploit cheaper labour costs.

Upwards, Not Downwards

Rather than downgrading Ex-Im's standards, argue environmental and development groups, the need is for stronger guidelines, in addition to internal incentives including career penalties, to enforce them. Although the standards currently used by Ex-Im and its sister organisation, OPIC, are a step in the right direction, they are still insufficient to prevent the funding of egregious projects -- notably in the mining, forestry and oil and gas sectors.

OPIC's support for coal-fired power stations and oil and gas development in the South and the former Soviet bloc has also come in for criticism, with environmental groups charging that such funding is "engendering a structural reliance on fossil fuels ... that threatens the welfare of people in developing countries who are ... at greatest risk as the climate grows more unstable." In 1997, over 70 per cent of OPIC's direct project finance was in the electric power generation and oil and gas development sectors, with a commitment of $539 million in loans out of a total of $707 million.

In many countries, less carbon-intensive energy options are available, from natural gas to solar, but these are not being backed by the two agencies. In the case of the corruption-ridden Paiton Power Project in Indonesia, backed by Ex-Im and promoted by such Washington insiders as Henry Kissinger and Warren Christopher, such alternatives were recommended by the Indonesian government's own power consultants. Paiton, however, still went ahead.

Export Credits For Whom?

Currently, ECAs are the dinosaurs of the publicly backed international finance institutions, supporting projects that have little place in the 21st century. Indeed, without binding environment and development standards that would give them a clear public purpose, it is dubious whether the subsidies they provide can be justified.

Reform is now clearly on the agenda. But it will not come without pressure - not only from the NGO community but also from progressive elements of business. NGOs have set out an agenda for reform that is backed by increasingly vigorous campaigning at the national and international level. These demands have been articulated in the so-called Jakarta Declaration, signed by over 300 NGOs internationally.

I urge you to support that Declaration, which calls for ECAs to adopt mandatory environmental, development and human rights standards, and to join a campaign which, if successful, could substantially change the direction of much of the foreign direct investment currently causing such environmental and social destruction in the South.

Many of you work with companies which enjoy the support of ECAs. You are in a position to take the issues up with them. You are also in a position to reassess the projects for which you are asking support. Indeed, your support for the ECA reform process may be taken as a litmus test of your company's own commitment to sustainable development.

Put simply, it is time to turn the rhetoric of sustainable development into action. Export credit reform is one area crying out for your urgent attention.

Notes and References

1 The Export Credit Agencies are from: Austria, Germany, Italy, Japan, Portugal, Switzerland, the UK and the US. Sweden's ECA was also involved but Skanska, the company applying for a credit, withdrew from the project in September 2000.