HL Deb 23 February 1988 vol 493 cc1123-9

7.42 p.m.

The Parliamentary Under-Secretary of State, Department of Education and Science (Baroness Hooper)

My Lords, I beg to move that the Multilateral Investment Guarantee Agency Bill be now read a second time.

On 2nd February, the Bill was read a first time in your Lordships' House, having previously received its Third Reading without any amendments in another place. It was warmly welcomed on all sides as an important and valuable addition to the UK's already substantial armory in the struggle against worldwide under-development. The Government propose to ratify the convention establishing, and thereby become a member of, the Multilateral Investment Guarantee Agency, MIGA for short, which the Chancellor of the Exchequer signed on behalf of the UK on 9th April 1986. Before we can ratify, and become a member of MIGA, however, legislative provision is needed to give effect in domestic law to some of our obligations under the convention. The Bill is designed to provide that legislative provision.

I should like to begin by giving your Lordships an idea of what MIGA will do once it has come into existence, and what its aims and objectives are. MIGA will be an international organisation, operating as part of the World Bank group, with the aim of encouraging foreign direct investment in developing countries. It will offer the developed nations an opportunity to encourage private sector development by stimulating the flow of investment capital which that sector needs.

Private investors are sometimes wary of making long-term investments in developing countries. MIGA will offer protection against non-commercial risks, and thus make investment in these economies a more attractive prospect. To date 63 countries have signed the convention, 12 developed and 51 developing; twenty-five have ratified, of which 17 are from the developing world. In order for the convention to enter into force, five developed and 15 developing countries (representing between them at least one third of the allocated shareholding set out in Schedule A to the convention) must ratify. The 25 countries which have so far ratified have about 27 per cent. of the allocated capital. As we wish the UK to be a founder member of the agency, I hope the Bill will pass speedily through your Lordships' House so that ratification can proceed. The UK was one of the first developed countries to sign the convention and we have already contributed a great deal to the launch of MIGA. We now want to play a significant part in its crucial formative stages.

Since MIGA's objective is to encourage the flow of foreign direct investment to developing countries by offsetting non-commercial risks, its major tool in pursuing this end will be the issue of contracts of guarantee, which are in effect insurance policies. Four types of risk will be covered: the risk of loss due to restrictions imposed by the host government on the transfer and conversion of currency; the possibility of expropriation of assets by the host government; loss due to breach of contract in defined circumstances by the host government and loss caused by war, military action or civil disturbance. Only new investments will qualify for cover with MIGA. They will have to be economically sound, and consistent with the host country's development objectives and priorities; and the enterprise concerned will have to be run on commercial lines. It should, for preference, be in the private sector.

However, MIGA's role as a catalyst for investment in developing countries will not begin and end with insurance. MIGA will also seek to encourage investors to look to developing countries through a range of promotional activities, including the dissemination of information on investment opportunities, research on investment issues, and the provision of advice and technical assistance to member countries as requested by them. MIGA is also expected to provide an important forum for policy co-operation between capital-importing and capital-exporting countries.

The principle of co-operation will be central to the operations of MIGA. As well as fostering co-operation between donor and recipient nations, it will also co-operate with other related international development organisations, helping to foster a coherent approach to assistance to the private sector throughout the donor community. For example, we envisage close co-operation betwen MIGA and our own ECGD.

Britain will hold about 5 per cent. of MIGA's total shareholding. This share will determine the number of votes we have in the Council of Governors. The convention has balances incorporated in it to ensure that both developed and developing countries are fairly represented on the board of directors.

The agency is intended to be financially self-sufficient. Initial contributions from member states will cover the costs of starting up; subsequently, it is expected all administrative costs and insurance claims will be met from premium income and other revenues, such as return on invested funds. Our financial obligations will be the cost of our allocated shares—probably just over $52.5 million. Of this, 10 per cent. will be payable in cash and 10 per cent. in promissory notes, to be drawn down only if needed. The remaining 80 per cent. will be callable.

If enacted, the Bill before your Lordships will deal with three main matters: first, the payment of our initial subscription to MIGA and the possibility of certain additional payments; secondly, certain privileges and immunities for MIGA, its property and personnel; and thirdly, it will provide for the registration and enforcement of awards from arbitration proceedings held under the convention, and the powers of the courts in connection with such arbitration.

MIGA will therefore promote the flow of investment capital and technology to developing countries in a number of ways. It will help to direct much-needed capital to the private sector, a target it is not always easy to attain through more conventional aid channels. Its assistance will be consistent with our belief that private flows to developing countries should, in the long term, be mainly in the form of project or equity investment, rather than of bank lending for general balance of payments support. It is my belief that MIGA represents a significant step forward in the field of aid to the private sector in developing countries and that this Bill will allow the UK to play a full part in the new agency. I commend it to your Lordships.

7.50 p.m.

Baroness Ewart-Biggs

My Lords, I thank the Minister for her very good and clear presentation of what is obviously not a controversial Bill. I give it the support of this side of the House. As the noble Baroness said, it is a Bill which will give ratification to the convention establishing the Multilateral Investment Guarantee Agency and we wish it a safe and speedy passage on to the statute book. We also congratulate the Government on being a founder member of the convention.

We give our support to this Bill because we recognise the importance of co-operation between official aid, private charities and commercial companies. We believe in the validity of public and private partnership to promote growth and development in third world countries. We very much hope that MIGA will help to persuade the private sector more readily to invest in those countries and restore the loss of finance that has occurred in so many of them in recent years.

Nevertheless, it is important to recognise that foreign investments cannot replace the crucial role of official development assistance, for it is the poorest countries which, after all, are the least likely to attract private investment and which will therefore remain largely dependent on aid. For example, Africa does not, and might never, loom very large on boardroom agendas. An example is that between 1980 and 1983 Africa obtained only 3 per cent. of world overseas investment and in 1985 only 1 per cent. of the United Kingdom's foreign investment went to Africa.

I say that only because, while welcoming this measure to encourage private investors to the third world, it is to be recollected and also regretted that Britain has fallen so low in the league of international generosity. In 1979 our level of aid stood at 0.52 per cent. of GNP and it has subsequently dropped to the lower figure of 0.32 per cent. of GNP. I believe that it would be right for the Government to give a better example to the companies that we hope will take advantage of MIGA.

From my own point of view, formed from my occasional travels to the Sudan on behalf of UNICEF and SOS Sahel—an NGO concerned with social forestry projects which are of great importance in the sahelian belt at the moment—I recognise a desperate need to focus development on human needs. Surely it is true that investment in people must be seen not only from a humanitarian viewpoint but also as a prerequisite for sustained economic growth. The recent UNICEF publication called Adjustment with a Human Face puts this very well. One of its authors, Richard Jolly, states: Much evidence already exists of the economic returns to investment in human resources. To fail to protect young children at the critical stages of their growth and development is to wreak lasting damage on a whole generation, the results of which may well have effects on economic and welfare for decades ahead". This analysis must present an economic case which is vital to the promotion of foreign investment in the third world; for in the end the strongest guarantee of security for foreign investors in any country is a secure, well-nourished and healthy population. MIGA can certainly play its part, but without sustained effort by the international community to promote human welfare, the present decline in overseas investment is unlikely to be reversed.

I make one final point. We hope that MIGA will ensure that the investment it supports is of the highest quality. In recent years the World Bank has suffered justifiable criticism for the environmental shortcomings of some of its larger development projects. The new World Bank president has addressed these worries and seems willing to improve project appraisal to take account of the impact on the environment. MIGA must follow the bank's example and refuse to guarantee any investment that fails to meet stringent development and environmental criteria. We hope it will encourage investment in the best projects in the most difficult countries where entrepreneurs fear to enter. We shall watch its progress under the guidance of the World Bank with very much interest and we welcome this Bill which makes it possible.

7.55 p.m.

Lord Walston

My Lords, I too am grateful to the noble Baroness for her clear exposition of this Bill. She has in a very brief space of time gone through the Bill and explained it extremely clearly. She has answered many of the questions that I should otherwise have asked. I am grateful also to the Government for their part in this agreement and I am delighted that it has taken place. I hope it will take only a very short time for this Bill to become law.

I agree, of course, with the noble Baroness, Lady Ewart-Biggs, in her emphasis on other forms of aid, particularly aid from governments, especially on a non-interest bearing basis. In the poorer countries of the world—and, my goodness, there are many of them—there are hundreds of thousands, in fact billions of people who are just scratching a living and barely leading a reasonable life as a result solely of poverty and the malnutrition which is caused by poverty.

Having said that, the fact that I do not spend any time in elaborating on it does not mean to say that I am not a wholehearted supporter of all efforts to bring more investment into the third world over and above the basic investments which must come from governmental sources. This agency is clearly a good one and a simple one, but we must not have too great hopes about it. It will not achieve a revolution in development. However, for all that it is a worthwhile operation.

I have only two minor questions which I should be grateful if the noble Baroness could answer. The agency, of course, will itself be deciding whether a particular form of investment is to be covered by the type of insurance offered by the agency, but, in arriving at that decision, will the recipient country, if I may so describe it—the country in which the investment is to be made—have any say in what the form of investment is; or will it be, as it were, imposed by the agency?

It is conceivable that there are certain types of investment which, from the business point of view, the agency would consider reasonable but which the country in which the investment is planned does not rate highly or, for one reason or another, would prefer not to have within its borders. Will such a country have any say or power of veto over such decisions when they are made?

Secondly, quite understandably, many developing countries are very short of foreign currency and they already have regulations which tax the repatriation of dividends and capital. They do not prohibit it but they tax it at rates of 2½per cent. 5 per cent. and even 25 per cent. Will that type of tax be subject to any cover which is offered by the agency? What is the situation if, perhaps because of a change of government in the recipient country or because of different financial stringencies arising, existing taxes on this type of repatriation are increased? I should be grateful if the noble Baroness could elucidate.

Finally, I hope that this agency, its operations and the Bill itself when it becomes law (as I hope it will) receive wide publicity because there are many would-be investors in this country particularly among small businesses. They would be interested in expanding overseas, particularly in the third world, but they are deterred by their ignorance of the political and economic situation. The support given to them by this form of insurance could well enable them to take renewed interest and to make an investment. I urge the noble Baroness and the Government to give wide publicity to this new initiative as soon as it becomes law.

8 p.m.

Baroness Hooper

My Lords, although few in number this evening, the quality of the observations made demonstrates once again the interest and knowledge of Members of your Lordships' House on a wide variety of topics. I am very grateful for the support shown for the Bill by both speakers and I shall attempt to deal briefly with the questions that were raised.

The noble Baroness, Lady Ewart-Biggs, happily welcomed the idea of a combination of private and public endeavour. She suggested that we had fallen low in the league of international generosity. She quoted the 1979 British aid figure at 0.52 per cent. of GNP and the fact that it is now only 0.32 per cent. The internationally-defined figure for 1975 was perhaps not a very sound base because it was exaggerated by large deposits of promissory notes to multilateral agencies. In fact, on an encashment basis, the figure would have been 0.42 per cent. Aid was in fact brought up to the 1982–83 level by 15 per cent. from the 1978–79 figures when the priority then was to control public expenditure. Since then aid has more than maintained its real value and it is now planned to increase it in real terms. I should like to reassure both the noble Baroness and the noble Lord, Lord Walston, that this step forward in international overseas aid support is intended to be complementary and not to replace existing aid.

The noble Baroness also asked us to ensure that investment should be of the highest quality. I believe that this ties in with the point raised by the noble Lord in relation to advice on the investments to be made and his fear that it might be imposed. I should like to reassure both the noble Baroness and the noble Lord on this point. The arrangements to be made by the various committees and bodies within the agency will, we hope, ensure the highest quality of investments and that the highest priorities are followed in making them.

MIGA will not impose contracts of guarantee without the agreement of the host country. In fact Article 15 of the convention refers to this. The noble Lord also asked a question as regards the repatriation of dividends and the tax to be imposed. It is my understanding that the object of the agency is to cover this kind of risk. It is to help to encourage the private sector to invest in countries where formerly, because of such risks, they have hesitated to do so.

As regards the noble Lord's final point about adequate publicity, it is intended as soon as the trigger figures come into operation to get the agency established. It will be widely publicised through a variety of organisations as well as to the private-sector industries that will be involved.

I should like to add a general note with reference to the question of the boundary between the public and the private sectors and overseas aid, which has long been the subject of debate in a mixed economy. In recent years the boundary in many Western industrialised countries has been shifting. To a much greater extent than seemed possible only a decade ago, there is agreement today on the need for a greater role for private initiative. I believe that this feeling is spreading in developing countries too. The president of the African Development Bank recently said: We in Africa are facing a great challenge. We believe that the creation of a conducive environment for the private sector as an important agent of economic growth is essential". There are many constraints on the development of the private sector in developing countries, and it would not be appropriate for me to go into all of them here and now. But one clear obstacle has been the shortage of equity funding. MIGA is designed to tackle just that problem by fostering direct foreign investment. This investment can provide valuable resources—technical skills and technology, as well as capital—for private sector development. No one would pretend that MIGA is going to solve all the problems of the private sector in developing countries. But let us acknowledge that it is a valuable step in the right direction and work together with our colleagues in other countries for continued good progress in other areas.

MIGA is important for another reason. The volume of private capital flows to developing countries has declined sharply in recent years. The main reason for this is that bank lending has fallen, because the banks have been reluctant to commit new money to countries which have serious difficulties in servicing their existing debt. In addition to this, many developing countries themselves are understandably anxious to avoid, if they possibly can, accepting new sovereign debts. This makes the need for other private flows—particularly to the private sector, and above all of a productive and wealth-creating kind—all the more acute. We believe that private direct foreign investment, although it cannot presently be expected to assume the volume of bank lending, is a useful alternative. MIGA will give it an added impetus. It is difficult for governments and other official agencies to do more than create the conditions in which private flows can take place. But in acknowledgement of the crucial role that private finances can play in the development process we must do all we can to foster these conditions.

This is why we are anxious that the Bill should proceed as rapidly as possible. I again thank the noble Baroness and the noble Lord for their words of welcome for the Bill.

On Question, Bill read a second time, and committed to a Committee of the Whole House.

Viscount Long

I beg to move that the House do now adjourn during pleasure until 8.30 p.m.

Moved accordingly, and, on Question, Motion agreed to.

[The Sitting was suspended from 8.8 to 8.30 p.m.]