Index for this article:

Summary
It's All Too Beautiful
A Race to the Bottom
Words but Little Action

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

A Race to the Bottom

Whilst agencies such as the UK ECGD continue to operate without mandatory environmental 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.50 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".51

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.

Thus Ex-Im's five biggest corporate beneficiaries this decade - AT&T, Bechtel, Boeing, General Electric and McDonnell Douglas (which has been purchased by Boeing) - have collectively cut more than 300,000 jobs in the last 10 years. Indeed, a study by the US General Accounting Office concludes:

"Government export-finance-assistance programs may largely shift production among sectors within the economy rather than raise the overall level of employment in the economy."53
A study by the Congressional Research Service goes further:

"Most economists doubt . . . that a nation can improve its welfare over the long run by subsidizing exports. Internal economic policies ultimately determine the overall levels of a nation's exports."54
[Sidebar - Dams, Arms, Nukes, Dirt and Smog]

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. In the Russian Far East alone,55 recent OPIC and Ex-Im loans have variously supported:
Investment insurance from OPIC for two forestry projects, one financed by the Global Forest Management Group (GFMG) and the other by Pioneer, both US-Russian joint ventures. The projects both involved logging primary forests and exporting the raw logs to Japan, although GFMG has since ceased its logging operations. Neither company had obtained the necessary environmental certificates required under Russian law for logging operations. The companies also refused to make public the Environmental Impact Assessments that they were required to undertake as a condition of receiving OPIC finance and insurance. These were later obtained by a US NGO which sued OPIC under the US Freedom of Information Act. Independent site visits to GFMG project found that large areas of primary forest had been stripped and that there were problems with the regeneration of second growth forest.
Export credits from Ex-Im for millions of dollars worth of US-built pulp mill equipment to Roslesprom, the Russian State Timber Industry Company. A memorandum of understanding has also been agreed to underwrite export credits for logging equipment. Roslesprom's director has since been forced to resign amid allegations of corruption.
Financial guarantees from OPIC for the Sakhalin II Oil and Gas Project off Sakhalin Island. Critics of the project warn that "inadequate oil spill response preparations threaten endangered grey whale populations, priceless stocks of wild salmon, pristine shorelines and the livelihoods of fishermen in Sakhalin and Northern Japan."
Financial support from OPIC for the Kubaka gold mine in the Russian Far East. In 1997, the coffer dam which holds toxic tailings from the mine was found to have sprung leaks, threatening major pollution of the surrounding environment. The dam was later found to have been built to a different design to that presented in the project's publicly-released environmental impact assessment.
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."56 In 1997, notes a recent report by the Washington-based Institute for Policy Studies (IPS):

"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; 41 per cent of OPIC's entire assistance portfolio (both insurance and project finance) was committed to projects in the power generation and oil and gas sectors."57
Ex-Im too has invested heavily in fossil fuel projects. From 1992-1998, the two agencies between them underwrote $23.2 billion in financing for oil, gas and coal projects around the world: over their lifetimes, these plants will release 29.3 billion tons of carbon dioxide a figure which, IPS notes, is "slightly greater than all global emissions for 1996."58

IPS argues that such lending will increase climate change and therefore "runs counter to the US Congress' stated goal of garnering greater participation by developing countries in slowing the rapid pace of fossil fuel combustion and the increasing reliance on fossil fuels as an energy source in developing countries." 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.59 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.60

Because the US will also be affected by the climatic instability caused by the continuing use of fossil fuels, OPIC's and EX-IM's support of fossil fuel projects suggests what IPS terms a "less than full implementation" of the US National Environmental Protection Act, which applies to US government-backed projects outside the United States that lead to significant and adverse environmental impacts in the United States. Such legislation would require OPIC and Ex-Im to take into account the global environmental impacts of each fossil fuel project it funds, rather than just the specific local impacts. Yet the wording of their environmental guidelines allow them to skirt the requirements of the Act.

Indeed, the IPS report reveals a range of areas where OPIC and Ex-Im guidelines fail to protect the environment and people or to ensure transparency and accountability. In the case of OPIC, for example, there is no requirement to calculate power plant emissions until after a project has been approved; no requirement to assess the cumulative emissions that are likely from power plants or their relative global impacts; and no requirement to carry out environmental assessments on power plants which are under 200MW in capacity. Moreover, says IPS, "OPIC's current and proposed disclosure policies for environmentally sensitive projects are grossly inadequate for a publicly-backed organization." Many upcoming projects listed by OPIC - a "Philippines residual fuel-fired power plant" being one example - give the public no substantive information about their likely impacts.

A New Debt Crisis?

The failure of ECAs to take account of the environmental and development impacts of their projects has inevitably meant that many have failed socially, environmentally and financially.61 Indeed, the very nature of exports credits encourages businesses to take unwarranted financial risks at the public's expense, while enjoying the full benefits if a project is successful. As Michel Van Voorst of Eurodad, a Brussels-based NGO, notes:

"This is a clear case of moral hazard: exporters are incentivised to maximise their exports, in the knowledge that they will, at public expense, be bailed out of deals that go bad. This also distorts pricing: the financing terms of deals do not reflect the real level of risks, with the illusion of cheap financing encouraging unnecessary borrowing."62
[Sidebar - Urucu Gas and Oil Project, Amazonas, Brazil]

Where companies make claims for losses covered by ECAs, the liability passes to the ECA, which, in turn, passes the losses on to the importing country. The claims thus end up being added to the stock of bilateral debt owed to the ECA's national government, the peoples of the South ultimately picking up the bill. In effect, Northern governments are using Third World money to subsidise their exports, the chief beneficiaries being the shareholders of some of the richest companies in the world.

Export credit- related debts now constitute a major drain on the foreign exchange earnings of developing countries. Many have been unable to fulfil their repayment obligations and have been forced to the Paris Club, the international forum in which creditor countries meet with debtor countries to reschedule debt repayments. Although severely indebted poorer countries qualify for debt reduction of 67% under the so-called "Naples terms", such reductions are only approved if the debtor country has a "satisfactory" three-year track record of implementing IMF structural adjustment programmes and has cleared its arrears with the Paris Club. Critically, however:

"The reduction is only applied to eligible debt, that is, all debt incurred before the country's first visit to the Paris Club. Debts contracted after this so-called cut-off date are excluded. For instance, in 1995, Uganda (cut-off date 1982) received a 67 per cent reduction of its eligible bilateral debt stock. This represented only a 2 per cent reduction of its total debt."63
In cases where export credit debts are reduced or written off, the tab is picked up by tax payers in the ECA's home country. This, however, is rare.

Some financial commentators now warn that, just as the debt crises of the 1970s were caused by reckless lending by Northern banks to the South in the search for quick and spectacular profits, so the failure of many private sector-financed (but publicly insured) infrastructure projects in the 1990s could be transformed into a serious sovereign debt problem for many Southern countries. In order to attract private investors, many governments in South- East Asia and Latin America, for example, have committed themselves to billions of dollars worth of contractual obligations (not least incurred through ECA-underwritten investment guarantees) to protect investors and lenders against foreign exchange risks. In many South- East Asian countries, these contractual obligations have now been triggered as a result of the recent economic collapse: unless they can be restructured, they are now due in one lump sum. As the Financial Times warned in the immediate wake of the South-East Asian economic crisis: "Combine this structure with significant current account deficits and the scene becomes reminiscent of the sovereign debt environment of the late 1970s and early 1980s."64

Worldwide, export credit-generated debt now accounts for 56% of the debts owed by the Third World to official creditors and 24% of their total debts, including debts owed to private banks.65 As Eurodad notes: "A few countries, such as Gabon, Algeria and Nigeria owe more than 50 per cent of their total debt to export credit agencies."66 Moreover, because export credit-related loans are usually made at less concessional rates than other official loans, "they figure disproportionately in a country's debt service profile".

In the case of the UK, 95% of the debt owed by the South to the UK Government is in the form of export credit debt. Indonesia, for example, owes £800 million to the ECGD; Algeria, £63 million; China, £2,352 million; and Iraq, £652 million (including debts incurred for weapons supplied prior to the Gulf War). All told, at the end of 1997, the outstanding debts on loans guaranteed by the UK Government through the ECGD to the world's 41 Heavily Indebted Poor Countries (HIPCs) stood at £4,685 million.67 Figures supplied to the House of Commons library by the ECGD in 1998 showed that the UK is due to receive £923 million in repayment of export credit debt between the years 1998 and 2031 from the 26 HIPCs which have agreed payment schedules.68 If interest on the debt is taken into account, the total figure would amount to £1,383 million.

Many of the export credit debts owed to the UK ECGD were incurred through loss- making arms deals;69 others through poorly conceived projects; and still others in the pursuit of foreign policy objectives with little regard paid to the financial viability of the projects supported. The ECGD, for example, operates a special account known as "Account 3" from which guarantees are issued to countries that are considered uncreditworthy and which therefore fall outside the ECGD's normal approval criteria. A senior ECGD official acknowledges that Account 3 projects are "political" loans. One example cited was "Russia, where we provided support politically. [The Government told us] `let's help Yeltsin . . . that was started by the Government for political reasons."

It's the Poor Who Pay the Price

Those who pay the price for such geo-politicking, however, are not the companies which receive the export credits and investment insurance guarantees handed out by the ECGD and other ECAs, nor the politicians who make political capital out of the "rescue packages" and "development assistance programmes" they are able to announce, but poorer people the world over who end up bearing the costs of the debt through cuts in public expenditure, poorer services and higher prices for basic needs.

Neither is that debt burden purely financial: the support of ECAs for dictatorial regimes has also subjected the citizens of many countries to internal repression.

Moreover, the use of ECA credits to establish new markets for Northern companies has been a major force in promoting a development model that favours the North over the South, fuels inequality, exacerbates environmental degradation, marginalises poorer groups and fuels poverty. As Titi Soentoro of Bioforum, an Indonesian NGO, notes of Indonesia:

"ECAs played a key role in supporting the Suharto regime's system of economic and political monopolies. The regime's military security approach assured low costs for land appropriation and a relatively docile and inexpensive labour force. Foreign investors, often supported by ECA finance, competed to align themselves with the powerful business interests close to the Suharto family for example by offering free shares to Suharto's children and other relatives and business associates. In return, investors were assured access to lucrative sectors of the Indonesian economy and were able to receive `assistance' from Indonesia's armed forces when it came to clearing people off their land for their projects, stifling labour unrest, or preventing mobs from storming their polluting factories."70
Unsurprisingly, campaign groups in the UK and elsewhere are calling for the cancellation of export credit debts incurred through "political" loans or where ECAs were cavalier in their support of financially-dubious projects. Indeed, as a report by the UK House of Commons Library points out, cancelling the HIPC debt owed to the ECGD would:

"have a considerably smaller effect on the Exchequer than is perhaps implied by the headline figures on the level of third world indebtedness".
According to the report, the Exchequer is due to receive £932 million between 1998 and 2031 in repayment of principal from the 26 HIPCs which have outstanding debts with the ECGD and which have agreed payment schedules. Cancelling these payments would cost the Exchequer less than £30 million per year. If, as the report suggests, some 80% of the debt is unrecoverable, then the cost to the Exchequer falls to a mere £6 million a year. "Clearly", remarks the House of Commons Library, "when set against the size of the general government expenditure, the effect on the Exchequer of cancelling sums owed to ECGD by the 26 Heavily Indebted Poor Countries (HIPCs) seems fairly insignificant and easily manageable."71