§ 9.7 a.m.
§ Mr. Robert Taylor (Croydon, North-West)I apologise to you, Mr. Deputy Speaker, and to the Minister for raising a new subject at this hour, but I hope that the House will agree that in view of the amount of money involved in Class IV, 11 of the Supplementary Estimates the matter is worthy of close scrutiny.
In the preamble to the Supplementary Estimates the Chief Secretary to the Treasury states that:
where substantial overspending can be foreseen at an earlier date, Supplementary Estimates may be presented in December to anticipate part or all of the Spring requirements.I emphasise the word "substantial".I hope that I shall not be accused of being over-zealous in querying additional expenditure. The Supplementary Estimate in question increases the original Estimate by £208,464,000 from 1883 £299,441,000, making a total of no less than £507,905,000.
Such is the encouragement given today to increasing exports that expenditure on exporting is virtually regarded as non-controversial, and the figures are seldom the subject of scrutiny or debate. However, I should like to be reassured by the Minister that our enthusiasm is not getting out of control and that prudence has not been thrown out of the window.
Perhaps this is the right moment for me to declare what might be regarded as an interest. I am a director of a small private company which has been responsible within the last 12 months for exports in excess of £500,000. My company has taken advantage of many of the facilities provided by the British Overseas Trade Board and by the Export Credits Guarantee Department.
Since my speech is of a probing nature I hope that hon. Members will not accuse me of any improper motive.
For the sake of emphasis I repeat the figures. We have previously agreed expenditure to the Export Credits Guarantee Department of £299,441,000. We are asked to add a further £208,464,000, making a combined total for the year of £507,905,000. Those sums are devoted to the Export Credits Guarantee Department.
I am very much obliged to the Minister for his presence here for this short debate. He was due to open an office of the ECGD in Croydon last week. Unfortunately, pressure of parliamentary duties prevented his attending. The people in Croydon very much regretted, but fully understood, his absence. In his absence the opening ceremony was undertaken by Mr. Robert Fell, who is the head of the ECGD but who is shortly to leave to become the chief executive of the Stock Exchange. As an exporter I feel it would be right to express the appreciation of many exporting firms to Mr. Fell for his outstanding work while head of the ECGD and to wish him well in his new career.
This is an unfortunate moment to leave a department when, on a Supplementary Vote, the original Estimate of £299,441,000 is almost doubled. With the exception of the health and social services vote the amount to be allocated to the ECGD is greater than any other amount 1884 to have been discussed during the last 10 hours of debate on these Supplementary Estimates. It is a substantial amount, and we must look at it with great care.
Ignoring the amounts under £1,000,000, we are left with three sub-headings under this expenditure. Section B refers to payments under guarantees other than bank guarantees. The additional sum required in this case represents an increase of more than 100 per cent. of the original Vote. An extra £8,262,000 is required on top of the original figure of £8,166,990. If this is extra to bank guarantees, does it refer to accounts which have not been settled by overseas customers? If so, may we have a breakdown of the total figure of £16,428,990, industry by industry? Those figures would be helpful, although I appreciate that they may not be available to the Minister during the debate. What proportion of that figure covers bad debts? Is part of it covered by bad debts that are unlikely ever to be settled?
I do not know whether it is appropriate to raise on this part of the Vote the question of the premiums of the ECGD. This week, the Department has announced increases in the insurance premiums. If these are to cover this part of the Vote, I should like to ask whether the increases are sufficient to balance the books and whether in the Consolidated Fund next year this item is likely to disappear.
I turn next to Section C, which refers to the cost of refinancing fixed rates of export lending. This has increased from £314,999,980 to £449,999,980. That is an increase of no less than £135 million, or 43 per cent. of the original Vote. It is a staggering sum, considering that we are dealing with figures which were produced only recently. They were produced earlier this year, and the high prevailing rates of interest have not really changed in the interim period. Will the Minister explain why the original Estimate was so inaccurate and so wide of the mark?
Then I come to this other very large sum under C4, the amount of £85,874,000, which is a completely new line of expenditure. Apparently it is to be paid to the commercial banks to make up the difference between the amount of interest that they are charging their customers for exporting contracts and the current interest rates. This is another very large sum. It is a great deal of money.
1885 If the difference between current interest rates and the rates at which the banks are lending to exporters is 5 per cent.— with current rates at about 13 per cent. it is reasonable to assume that money was made available to exporters at 8 per cent. —it would mean that the amount lent by the banks to exporters under this head was £1,717 million.
These figures strain credulity, even allowing for the fact that the total sum may refer to a longer period than the current financial year, which I understand is likely. Is the Minister saying that approximately this sum has been lent by the banks to exporters at substantially preferential rates of interest? If so, over what period of time is this commitment to be outstanding, and will the grants appear in the Consolidated Fund next year and the year after?
I quite understand that the Minister will not wish to anticipate anything that he is likely to say in the Second Reading of the Export Guarantees (Amendment) Bill, which we await. But, if I am correct in my understanding, until that Bill becomes law, the Export Credits Guarantee Department is not entitled to make grants of any sort and, therefore, in a sense we should be voting this £85,874,000 for an illegal purpose. If the Bill does not become law, I believe that that is the case. The ECGD is not entitled to use that money by way of grant.
If I am right, I should have thought it appropriate for a footnote to be made to the presentation of this class to point out to hon. Members that this amount is being voted for a purpose not yet approved by Parliament. I would have thought that that would have drawn to the attention of more hon. Members the fact that this expenditure requires careful consideration.
I shall not delay the House for much longer. In page 40 of the Supplementary Estimates it is stated:
These sums take into account interest due to ECGD on the refinanced portion of such lending and any net amounts due to ECGD are included in Extra Receipts Payable to the Consolidated Fund.What is the point of that note unless some indication is given to the House of the approximate amount which will return to the Consolidated Fund? Will the Minister 1886 give some indication either now or at a later date what that figure is likely to be?Finally, I turn to a small matter which summarises my reasons for raising the issue of this expenditure. In page 39 the House will note that the international subscription to the Union d'Assureurs des Credits Internationaux has increased by a small sum. I understand that the association exists to get international interest rates for exporters on a similar level throughout the world. If the country is involved at the moment in subsidising interest rates to exporters by £449 million, as is indicated in C1, and by a further £85 million by way of grants as indicated in C4, is the Minister satisfied that the association is being successful in its efforts? It seems that the association has singularly failed if it is necessary for the House to vote such substantial sums to keep interest rates on a fairly even keel. I suggest that the interest rates being paid to exporters are far below the levels at which they should be.
I should like the Minister's assurance that he will urge the association to take action to bring interest rates up to a reasonable level, thus saving the taxpayer a great deal of money, of which, perhaps, we shall see the benefit in future Consolidated Funds.
§ 9.24 a.m.
§ The Under-Secretary of State for Trade (Mr. Eric Deakins)I am grateful to the hon. Member for Croydon, North-West (Mr. Taylor) for raising the subject of the ECGD and for going into such detail. The hon. Gentleman has given me an opportunity to say something about the activities of the Export Credits Guarantee Department which does not normally figure in our debates. It remains our firm claim that the facilities that the department makes available stand comparison with those available from any similar organisation in other major exporting countries.
The hon. Gentleman has raised a number of points of detail, with which I shall deal in the course of my speech. The Supplementary Estimate for the department can best be considered in the light of the increasingly large scale of the department's operations. I believe that the following figures will illustrate that. Exports covered by the department rose by about 40 per cent. in the first 1887 six months of this financial year compared with the same period last year. The department covered £3,080 million worth of business compared with £2,193 million in the first half of 1973–74. That represents about 36 per cent. of total British exports, compared to 35 per cent. for the previous year.
In particular, there was a big and very welcome rise in the ECGD's short-term business declared to the department which rose by over a third to £2,496 million. In addition, the department's buyer credit business, where it guarantees loans made to overseas buyers to purchase British capital goods, also increased significantly. In the first six months of this financial year buyer credit guarantees issued totalled £482 million compared with £122 million in the same period last year. Advances made under ECGD guarantees to banks in respect of export finance also rose. In the first six months of this financial year advances totalled £919 million—an increase of 32 per cent. So much for figures. They do, I think, amply illustrate both the very large sums which are involved and the significant amount of exports which the ECGD insures.
This increasing scale of operations is also demonstrated by the rise in the ECGD's total commitments. These stood at £7,811 million at the end of September 1974 compared with £5,992 million a year earlier.
There is, perhaps, sometimes a certain confusion between the ECGD's credit insurance operations and its refinancing operations. It may be useful, therefore, if I briefly distinguish between these, since not only are they functionally and operationally separate but the financial considerations involved are quite different.
Let me deal first with the credit insurance operations. The underlying concept here is quite simple. The ECGD receives premium from exporters from which it pays its administration costs, meets current claims and makes provision for future claims. The department, as part of its parliamentary obligations is expected to earn its keep. In other words, it is required to break even, taking one year with another, and to operate—over time —at no net cost to the Consolidated Fund.
1888 There can be little doubt that the ECGD has, throughout the years, met this obligation. However, breaking even is becoming an increasingly difficult thing to do. Not only is the ECGD faced with increasing costs, the risks it accepts are increasing as both individual buyers overseas and whole markets are hit by inflation and general uncertainties. The department expects these increased risks to be reflected in the pattern and level of its claims payments. Let me take one example—claims paid on private buyer insolvency and default under the ECGD's section 1 commercial underwriting were fairly steady at about £8.6 million in both the financial years 1971–72 and 1972–73. In the financial year 1973– 74 they rose steeply to more than £16 million.
In addition, where long credit is involved, the ECGD will have commitments at risk for many years. And in a rapidly changing world, the premium originally charged by the department cannot fully reflect the deteriorating situation.
It is perhaps against this sobering background that the increases in the ECGD short-term premium rates announced this week should best be viewed. These will take effect from 1st April 1975. Let me stress four points. First, premium rates have not been increased since the war— indeed, they have been pretty steadily reduced. Second, whilst the increase of about 15 per cent. may sound very large, it is perhaps put into perspective when expressed in real terms. In other words, the average rate will go up from about 23p per £100, to about 26p per £100. This, for example, compares with a not untypical rate of about £1 per £100 in 1946—and this for a much more restricted form of insurance cover. Third ECGD rates are still amongst the very lowest available to exporters anywhere in the world. Fourth, the increased rates are part of a package which will provide exporters with a very much simpler system for premium calculation. This will involve a single rate for all their short-term exports, irrespective of destination or payment terms. We believe that exporters will very much welcome this system and will find it considerably easier and cheaper to administer.
However, why were increases necessary now? There are two main reasons: first, 1889 expectations of a difficult period ahead in terms of increasing market and buyer claims; second, the fact that the ECGD's accounting system has recently been reviewed. Whilst it is still in a transitional period of a move from an annual cash flow basis to a more sophisticated— and, we believe, more realistic—basis involving provisions for future income and out-turn requirements, it is clear that short-term business has not been paying its way. Some increases were, therefore, essential both to reflect the present position and to provide for the future—and, perhaps, to illustrate the significance of short-term business to the ECGD's operations, I need only tell the hon. Member that of the £4,789 million business insured by the ECGD in the last financial year, £3,700 million was short-term business, that is, on less than six months' credit.
Let me stress that there is no question in the Supplementary Estimate of the ECGD asking for a Vote from public funds to pay its claims—in the sense of there being some short-fall between its premium income and its claims payments. In other words, even on the basis of the figures before us, the provision for outgoings on claims, and so on, is more than offset by the provision for incomings in terms of increased premiums and recoveries.
Far from being a loss maker, the ECGD is often accused of charging too high premiums and of building up massive balances. This, I think, illustrates one of the reasons why annual cash flow accounting is misleading. At the end of March 1974, the ECGD's Section 1 balance stood at about £111 million, but as against this its Section 1 liabilities stood at £4,922 million. In addition, much of the premium received by the ECGD in the last financial year is in respect of business which will remain on its books at risk for many years ahead. Balances are essential to the Department to ensure that it can keep its obligation to Parliament to break even.
The hon. Member raised the question of Section 2 premium rates business. The figure of £8 million extra and £16 million in total does not represent irrecoverable debts. Some may be recovered, some will not be. We have, for example, a debt agreement under which we shall be covering some of the Chilean debts, and 1890 this has already been signed. We expect to make other recoveries from other countries where we are doing Section 2 business.
Everything that I have said so far relates to the department's credit insurance operations. Let me turn now to the question of refinancing. It has been the policy of successive administrations to ensure that, in general terms, British exporters are not placed at a disadvantage with their overseas competitors as regards export credit and export finance. Export finance in this country has traditionally been supplied by the clearing banks. The ECGD has facilitated the provision of such finance by its guarantees to banks and its support of buyer credit operations.
Most major exporting countries operate a system of some kind to provide fixed rate finance for their exporters. In recent years, these export rates have not kept pace with other interest rates. Unless our exporters were to be placed at a significant disadvantage, our rates had to be kept broadly in line with the rates of others. This is not, of course, a cost-free exercise and neither would it have been reasonable to expect the commercial banks to provide fixed rate lending for exports at rates well below commercial market rates.
It is against this kind of background that the refinancing arrangements were worked out in 1972 between the then Government and the banks. Details of the arrangements were, of course, published.
As my right hon. Friend the Secretary of State for Trade noted in reply to a Written Question on 21st November, the contingent liability to the banks which has arisen under these refinancing arrangements accumulated as a result of a gap in the powers of the ECGD. Legislation to fill this gap received its first reading on 2nd December and it would, I think, be wrong to anticipate the opportunity for debate which this Bill will present on Second Reading.
A revised refinancing arrangement has been agreed with the banks which will ensure that finance at interest rates fixed by the Government in the light of the rates available from our major overseas competitors will continue to be available. Again, I believe it would be wrong to anticipate debate on this. The provision 1891 of £86 million in the winter Supplementaries represents the contingent liability to the banks.
These Supplementary Estimates are the authority to make this payment to the banks and the new powers embodied in the Bill will prevent the situation occurring again. It is a payment for purposes approved by Parliament.
The winter Supplementaries also provide for additional refinancing loans of £135 million. This arises from the fact that it is extremely difficult to forecast future levels of refinancing. There are a number of reasons for this. Exactly how much the ECGD will be called on to refinance depends, first, on the level of exports sold on two years' credit or more, secondly, on the size of the banks' current account balances—the threshold beyond which exports, and shipbuilding, can be refinanced is 18 per cent. of the average level of these balances over the previous 12 months—and, finally, on the timing of shipments of the exports and thus on when the banks actually provide the finance under the ECGD's guarantees. The earlier estimate was the best forecast of departments and the banks, but it has not proved to be adequate.
The provisions for both the grants and the loans cannot, of course, be financed from the ECGD's credit insurance operations. They are in a direct sense the cost of operating the refinancing arrangement necessary to ensure that adequate finance is available for our exports and that British exporters are able to offer competitive rates.
These figures serve to illustrate the significance of the cost of providing export credit. But we must bear in mind that international competition for exports can scarcely have been fiercer than it is now and the responsibilities and importance of export credit institutions have never been greater.
For this reason the United Kingdom through ECGD, is very actively trying to work out arrangements with the export insurance and export finance institutions and agencies in the major trading countries to keep export financing competition reasonably balanced, to harmonise export credit rates and to set out limits within which competition on terms might best take place. These negotiations do not 1892 take place only in the organisation which the hon. Gentleman picked out as one to which we make a subscription, which has been increased. They take place in a wider context, among OECD countries an particular, at ad hoc international meetings. The negotiations, in effect, recognise that there are limits beyond which it is not worth Governments going in order to support exporters in their search for export business.
Lest this seems like the establishment of some kind of international cartel, let me stress that it will, in our view, have the great advantage of shifting much of the competition back to other sales attractions such as quality, basic price reliability, after-sales service and delivery dates. This can hardly be against the interest of overseas buyers. What we are striving for is not an exporting world without competition but one in which the competition is balanced between the various factors and not unduly concentrated on the single factor of credit. These efforts bore fruit recently when international agreement was secured to a minimum rate of 7½ per cent. for credit over five years.
I have confirmed that the ECGD is actively striving for co-operation with the credit insurers of other supplying countries, but this can never mask the fact that such countries are our competitors. The facilities available to their exporters—like the facilities available to our exporters— are part of a package. In other words, some individual facilities available to foreign exporters may be better or more generous than the ECGD gives—but the reverse is certainly true. For example, the percentage of cover given by the ECGD is often higher than that available from others, the waiting period during which claims are examined is usually shorter, and our premium rates are almost always lower.
On balance, I should have no hesitation in claiming that the package of cover available to British exporters stands comparison with that available from any country in the world. This is not to claim that ECGD is perfect or that its package of facilities could not be improved. It is always willing to consider ways in which its cover could be improved or adjusted to reflect changes in the world trading scene. Indeed, a number of such changes are currently under review. The ECGD tries, as I have stressed, to match 1893 what other credit insurers are doing. This is, however, a general objective and not an infallible or invariable guide. Credit giving is not a cost-free process and for the Government, as for exporters, there are lengths to which it is simply not worth going in order to obtain export businesss.
The ECGD, like its opposite numbers in other countries, has a statutory, economic and social—as well as a common sense—obligation to ensure that its exporters remain competitive in terms of financial arrangements with exporters from other countries. Only in this way can our exports be maintained and increased, our essential imports paid for, and our ability maintained to play our full international rôle in aid and other fields.
I am obliged to the hon. Gentleman for raising this subject and for giving me the opportunity to say a few words on it.