Snouts in the Trough: Export Credit Agencies, Corporate Welfare and Policy Incoherence
By Nicholas Hildyard
...continued

It's All Too Beautiful

Set up to assist companies to export capital and project-related goods and services, ECAs provide companies with insurance against the main commercial and political risks of operating abroad, in particular, of not being paid by their creditors. The system is simple. To obtain an export credit guarantee, the exporter takes out insurance with an ECA, which undertakes to pay the exporter for the exported goods should the importer default on payment. If it does have to pay up, the ECA passes on any debt that is not covered by the premiums it has received to the government of the importing country, adding it to the stock of bilateral debt owed to the ECA's home government.16 Ultimately, therefore, it is the poor of the South who end up paying the bulk of the bills.

Many of the projects backed by ECAs would not go forward without their support, since private sector banks and insurance firms are simply unwilling to underwrite the high financial risks involved. Yet, even where the companies involved have failed to take due financial diligence or have been accused of corrupt practices, ECA support ensures that the companies involved are bailed out. In July 1998, for example, the Pakistani government cancelled a deal with BC Hydro, a Canadian company, alleging corruption; part of the loss was swallowed by the project's "senior lender" Canada's Export Credit Agency, the Export Development Corporation (EDC).17

For companies and the banks that finance them, the advantages are obvious. As Midland Bank executive Stephen Kock in charge of arms deals and a former MI6 "asset", puts 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 Iraqis 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."18
Services provided by ECAs include: providing "Buyer Credits" in the form of 100% unconditional guarantees to banks who make loans available for overseas purchases of goods and services; underwriting the losses of commercial banks if the agreed interest rates on loans for overseas projects prove insufficient to cover their costs "plus a reasonable rate of return"; and covering losses resulting from specified political risks, "such as a foreign government seizing or confiscating an investment, suddenly imposing restrictions on profits leaving the country or the outbreak of civil war".19

Back in Favour

In the 1980s, ECAs fell out of favour with industry, largely because they were considered too bureaucratic.20 But now they are the most commonly-used means of featherbedding risky Third World business contracts (see Box: Public Risk, Private Profit). Between 1988 and 1996, the worldwide value of new export credit loans and guarantees increased four-fold - from $26 billion to $105 billion a year.21 By 1996, ECAs were supporting $432.2 billion worth of exports (about 10% of the world total)22 in the form of guarantees, insurance and loans - a 40% increase on the figure for 1990.23 While much of this credit involved short- term transactions, an estimated $70 billion a year was for medium and long-term cover,24 with approximately half of the new commitments going to large infrastructure projects in power generation, telecommunications and transport, predominantly in the South.

ECA support for such projects is now so large that, according to Bruce Rich of the US- based Environmental Defense Fund, ECAs are now:

"the single largest public financers of large- scale infrastructure projects in the developing world, exceeding by far the total annual infrastructure investments of multilateral development banks and bilateral aid agencies."25
Heffa Schucking of the German NGO Urgewald observes that:

"If you are an environmental activist and you are fighting a project that will destroy a river, a forest or displace a community in a developing country, chances are that the project you are up against is being backed by an Export Credit Agency."26
Recent examples include:

the massive Three Gorges Dam on the Yangtze River in China for which an estimated 1.3 million people will have to move (see Appendix 1);
the Maheshwar dam in Madhya Pradesh, India which has provoked widespread public protest in the area affected (see Appendix 1);
the San Roque hydropower and irrigation dam in the Cordillera region of the Philippines, the last in a series of three dams on the Agno river which have severely disrupted the lives, economy and environment of the region's Ibaloi people over the past 45 years (see Appendix 1);
five dams on the Mekong in Laos, many of which will be undertaken by the private sector on a Build, Operate and Transfer (BOT) basis;
the Urucu gas and oil project in the western Amazonian region of Brazil which will cut through some of the least disturbed rainforest in the region (see Appendix 1); and
the Paiton power project in Indonesia (see Appendix 1).

ECAs to the Rescue

One reason for the explosive growth in the export credit business during the 1990s lies in moves to liberalise the global economy and in the resulting privatisation of infrastructure development and public services. Whereas in the past, infrastructure projects were largely planned, commissioned and financed by public authorities using public money, often in the form of loans from MDBs and other international bodies, the trend now is towards private sector financing and ownership.

Although total net private capital flows to the Third World and Eastern Europe have declined since South-East Asia's economic collapse in 1998, falling from a record $328 billion in 1996 to $140 billion in 1998,27 private sector flows are expected to regain their previous levels and outstrip public transfers of funds once again as the driving force of infrastructure development in the countries of Asia, Latin America and (to a lesser extent) Africa. In the mid-1990s, the private sector financed about 10-15% of infrastructure investments in the Third World, with the World Bank predicting that private investors could soon be providing as much as 70% of infrastructure investment. Although private sector financing for infrastructure projects in the developing world fell to less than $20 billion in 1999, the expectation is that it will soon recover to earlier levels.28

The increasing "privatisation" of infrastructure development has meant that construction and engineering companies have been forced to take on financial risks which, in government-sponsored projects, were previously borne by the State - risks which, in the absence of taxpayer support, potentially threaten shareholder profits and may make raising the necessary finance more difficult. Banks, in particular, have proved extremely reluctant to back large-scale private sector infrastructure projects without the backing of investment insurance, since most such projects are increasingly financed on a so-called "non- recourse" basis - in the event of a default, the investors have no claim other than on the assets of the project itself.29 Although in the boom years of the early 1990s, a significant number of project financiers (perhaps believing their own free-market propaganda) thought they could avoid investment insurance, primarily by using bond issues rather than bank loans to finance their projects, many have had their fingers badly burned, particularly in South-East Asia. As the former Chief Executive of the UK ECGD observes:

"In the year or so up to the end of 1997, there had been growing euphoria both that political risks were a thing of the past and also that any kind of project could be structured as a project financing on a viable basis and that, for example, it did not matter if the project was on the Isle of Wight or [in] Chad. Others thought that it was irrelevant whether the project concerned raw materials which could be extracted and sold for foreign currency or drinking water for consumption by people who had no experience of paying anything for water, let alone the true economic cost."30
Not surprisingly, project financiers are increasingly insisting on some form of investment insurance before they will invest in new private sector infrastructure projects. Raising investment insurance through the private sector, however, is often difficult, particularly where the project is in a country with a low credit rating. As a result, project developers are increasingly looking towards publicly-funded bodies, such as ECAs and Investment Insurance Agencies (IIAs), for support. In the view of banker Martin Copeland of Deutsche Morgan Grenfell:

"ECA support is absolutely critical in countries for which there are no substantial credit limits available at banks."31
Indeed, in the energy sector, many commentators now believe that the future of privately- financed power projects is uncertain unless governments are prepared to give support in the form of investment guarantees. "The lenders cannot do it themselves on an uncovered basis", says Larry Bressler, Vice President of the Sanwa Bank Ltd of New York. "There is a need for export credit and multilateral agencies."32

Multilateral agencies, however, are no longer the easy milchcows they once were. Although MDBs, historically the biggest sources of public money for Third World projects, supply many of the same export credit services as ECAs,33 their funds for private sector support are limited.

More important, under pressure from environmentalists and development activists, the majority of development agencies, such as the World Bank, have introduced new environmental and development standards, which, though far from stringent and often not observed,34 nonetheless impose a range of environmental and social conditions on project developers. Environmental impact assessments are now mandatory for many categories of project; the participation of affected groups is increasingly encouraged; and project developers are (in theory) bound by a raft of rules governing projects involving involuntary resettlement, indigenous peoples, wetlands and forests.

In some cases, agencies such as the World Bank have found the political fallout from funding certain infrastructure projects (such as dams) so damaging that they have all but ceased to support them.35 As Roberto Piccioto, Director of the Bank's own Operations Evaluations Department, recently put it, "growing public awareness of social and environmental impacts of large [hydropower] projects" has made the "risk premia of supporting such schemes `prohibitive'."36

Unsurprisingly, industry is increasingly irked by what it sees as bureaucratic red tape - it took six years to agree a loan from the International Finance Corporation (IFC), the private sector arm of the World Bank, for a power project on the Hub River in Pakistan - and institutional cowardice, with leading developers such as Enron, the US power company, publicly chastising the MDBs for protracted implementation times and excessive regulation.37

Yes, We Have No Standards

With MDBs no longer playing the game as industry would wish, many companies have turned to national ECAs to featherbed their Third World projects. As Project Finance, a leading trade journal, reports, ECAs are "back in fashion", with "[project] lenders and sponsors citing the export credit agencies as the solution to the funding gap in project finance."38

The attractions of ECAs are multiple:

First, the services they offer - investment guarantees, insurance against political risk and export credits - are precisely those required to secure the private sector investment now needed to get projects off the ground;
Second, those services come without any of the environmental and social conditions demanded by MDBs; and Third, ECAs have an institutional culture that is secretive, protective of business interests, generally blind to social and environmental concerns, and rooted in the clubby world of City back-scratching.

With rare exceptions - the US Export-Import (Ex-Im) Bank and the US Overseas Private Investment Corporation (OPIC) being cases in point - most 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. This is despite clear language in the Final Communiqué of the June 1997 Denver Summit Meeting of G7 leaders, which Prime Minister Tony Blair attended as Britain's Prime Minister, committing the UK government to:

"help[ing] promote sustainable practices by taking environmental factors into account when providing financing support for investment in infrastructure and equipment."39
There are no formal policies, for example, that require environmental impact assessments for ECGD-backed projects or export deals; no requirements to ensure that rigorous safety measures and emergency accident response plans are in place for projects involving hazardous facilities, such as nuclear power or chemical plants; no requirements to ensure that those forcibly evicted as a result of a project will be adequately compensated and resettled; no requirements to consult with local people or concerned non-governmental organisations; no requirements to release documents that are relevant to assessing the social and environmental impacts of a project; no requirements to give timely advance notice of upcoming projects so that affected peoples can voice their concerns and objections; and no requirements to publish details of funded projects. Unsurprisingly, the ECGD is backing a wide range of projects with egregious social and environmental impacts (see Appendix 2).

The ECGD is not required to follow even the World Bank's (weak) guidelines for screening and monitoring projects, nor the guidelines recommended by the Development Assistance Committee of the OECD, nor the guidelines drawn up by the OECD to influence the conduct of multinational companies - all guidelines which the UK helped develop and to which it is formally committed.40 Its mission is entirely focused on promoting UK trade by "help[ing] exporters of UK goods and services to win business, and UK firms to invest overseas, by providing guarantees, insurance and reinsurance against loss."41 The only criteria that it employs for assessing projects and investments are "its normal underwriting criteria to ensure that the provision of support . . . involves an acceptable risk."42 Although, in some instances (and generally only as a result of public pressure), environmental and social factors are taken into account in this underwriting process, the risks assessed are those posed to the financial and political viability of the project, not the risks that the project poses to the environment and to people.

Indeed, it is indicative of the ECGD's approach to the social and environmental impacts of its investments that senior officials appear at a loss to understand environmentalists' concerns over the Three Gorges Dam in China, which would drown 13 cities and force the relocation of 1.3 million people. Commenting on the project, one senior officer mused, "There was some problem about moving peasants there, wasn't there?"43

Secretive and Unaccountable

Although the ECGD has since commissioned a study "to examine the question of how export credit agencies can best take environmental factors into account",44 it has refused to make the document available for public comment. Likewise, although the Department of Trade and Industry has assured NGOs that "the ECGD is strengthening and deepening its procedures for assessing the environmental impact in the broadest sense of the projects which it supports", no details have been released to the public and there has been no consultation with leading UK environmental and development groups, let alone project- affected peoples.

Even parliamentarians seeking information on the environmental and social impacts of ECGD projects have been stonewalled. In February 1999, for example, Cynog Dafis MP requested a complete list of ECGD export credits and insurance agreements since 1995. In response, the Minister for Trade and Industry told the House of Commons:

"ECGD does not report individual guarantees without consent of the firms concerned and, in view of the number of guarantees involved, disproportionate cost would be involved in obtaining this."45
The ECGD has also refused to release copies of an environmental impact assessment undertaken by a Swiss consultancy firm of the Ilisu dam in Turkey (see Appendix 2). The Swiss Government's review of the assessment was given to the ECGD in July 1998. Neither the study nor the review has been published, however. Balfour Beatty, the British company that is hoping to construct the dam, has been reported as being against the publication of the assessments on the grounds that they are only "preliminary environmental assessments".46 The UK Government argues that the assessments cannot be released because "they are not our property."47 So much for New Labour's election promise that "transparency and accountability are our watchwords."

A Gentleman's Club

Secrecy apart, the ECGD's attraction to industry is further enhanced by the self- referential, club-like nature of its oversight procedures. Under the 1991 Export and Investment Guarantees Act, for example, an Advisory Council was established "to provide advice to the President of the Board of Trade, at his [sic] request, in respect of any matter relating to the operation of the Export Credits Guarantee Department."48 The Council does not make decisions on individual deals. However, it makes recommendations on which country markets are opened, closed or put on "alert" in terms of exposure and lending.

The ECGD itself recommends new advisory councillors, who are then "independently" vetted by the Department of Trade and Industry before being approved by the Minister. Council members are chosen "on the basis of their breadth of knowledge and experience" and include "senior and distinguished people from the banking, commercial and industrial sectors." In 1997, for example, the Council included the finance director of GEC, the chair of the BICC Group and the Managing Director of Rolls-Royce Industrial Power Group. Although all council members "serve in a personal capacity" and are expected to remove themselves from the room where they have an interest in the issues under discussion,49 many work for (and, in some cases, run) the very companies that receive the lion's share of the ECGD's financial support. GEC, BICC and Rolls-Royce, for example, all ranked amongst "the top ten main contractors" receiving export credit guarantees in 1995-96, with Rolls-Royce ranking third in the list a year later.

Whilst there is no suggestion of impropriety on the part of any members of the Advisory Council, past or present, the opportunity for back-scratching must always be present. As a senior ECGD official has acknowledged off the record:

"We rely on honesty really. But it's a difficult one. We need people who operate in the marketplace, who understand how the export world works, how the financial world operates . . . I can't say to you they don't abuse their positions, but there is no evidence to say that they have done. There again, it would do them no harm in knowing how the ECGD operates. Conflict of interest comes about only on the occasions when the council decides [what countries] come on or come off cover. A council member might think `hmm, that's very interesting'. It is something no system can stop. You couldn't think up a system that can stop it."
No minutes of the Advisory Council's deliberations are made public, and no representatives from development or environmental bodies sit on the Council.