Military Exports (Hansard, 2 February 2000)

§ Dr. Vincent Cable (Twickenham)
I express my appreciation through you, Mr. Deputy Speaker, for Madam Speaker's having given me the chance to initiate the debate, which is topical on two levels. First, the systems of the Export Credits Guarantee Department are currently being reviewed. Secondly, it is topical in terms of the debate on the arms trade. There have been recent controversial cases involving Indonesia, Zimbabwe, Pakistan and other countries. The debate provides an opportunity to bring the two issues together.
I wish to argue that the use of the ECGD to support British arms exports undermines our ethical foreign policy, that it is a bad use of taxpayers' money, that it undermines development and that it adds unnecessarily to the shroud of secrecy that surrounds Government business. I have agreed a division of labour with my hon. Friend the Member for Richmond Park (Dr. Tonge); I shall concentrate on economics and my hon. Friend will concentrate on ethics, in which she is much better qualified than I am.
I shall start with an anecdote. Almost exactly 25 years ago, I was a Foreign Office official in the Latin American department. I was a first secretary, and much of my time, along with my colleagues, was spent running round worrying about General Pinochet and the chaos in Argentina. Among other things, the British arms industry was very active selling goods to Latin American Governments, who were mainly dictatorships. On one occasion, I think that it was Yarrow which was in the middle of trying to secure a large contract with Ecuador. I was approached by the Ministry of Defence and the Department of Trade, which thought that it would be a good idea if the Foreign Office lobbied the Treasury. The Treasury had dug its heels in and said, "We are not willing to give export cover through the ECGD for Ecuador."
I sent what I thought was a rather convincing minute to the then Foreign Secretary, now Lord Callaghan, which included phrases that I thought would appeal to a Labour Foreign Secretary. It was all about jobs on the Clyde. Somewhat to my surprise, he sent a rather curt minute, which read, "I am sorry but I have absolutely no intention of writing to the Treasury on this matter. I think that it is a bad use of British taxpayers' money to be suggesting that it should be used to subsidise toys for admirals in Ecuador." I felt rather snubbed at the time but I think, on reflection, that it was an extremely wise judgment and one that increased my respect for Lord Callaghan.
Many of the arguments of those days reverberate today, and essentially they are the arguments that I am advancing. The context is one in which the arms 182WH industry is a relatively small but quite important part of Britain's export business. It makes up about 2.5 to 3 per cent. of it. However, it has a much larger profile in terms of the ECGD. When I was involved, it was about 10 per cent. of ECGD business, and that continued throughout the 1970s and 1980s. In the 1990s, it increased to more than 20 per cent. Last year, more than half the business written by the ECGD involved the armaments trade. It has become extremely important.
The key factor is that, however we dress up the language, the trade is subsidised. It is often said that the ECGD operates on a self-financing basis, but, in underlying economic terms, it does not. It is important to set out the reasons for that, and I rely quite heavily on some very good analytical work done by the centre for defence studies at the university of York, by Professor Keith Hartley and Steve Martin among others. The point they make is that taxpayers' subsidy for arms exports through the ECGD consists of various elements. One is an interest subsidy, which operates in some instances. There is a difference between the interest rate paid by the customer and the interest rate charged by the banks, and the ECGD covers that difference.
In addition, and probably more important, the ECGD provides political risk insurance. There is a market for such insurance, but, in many instances, the cost would be prohibitive. In effect, the ECGD provides a subsidised rate.
Another perspective is public investment. If London Transport or the Post Office were borrowing money for a new investment, the Treasury would expect them to earn a return of about 6 per cent. in real terms. The ECGD is not expected to earn that return. Instead, it is expected to break even. With a little work on a calculator, it is clear that the present value of a loan—it is the difference between a 6 per cent. return and a nil return—can be substantial when large sums are involved.
That is a generous interpretation, because the public accounts show that the ECGD is not even breaking even. Last year, there was a net deficit of £217 million. The Government's three-year public accounts projections include an expected deficit of more than £800 million in 2001–02. We are talking about something that is clearly sub-economic, and that applies to the armaments business in particular.
Attempts have been made—I have referred to the York economists—to quantify the cost to the taxpayer. The figures are obviously imprecise because there are no definitive numbers, but the economists have come up with figures that seem plausible. They have estimated that about £240 million a year is the cost to the taxpayer of arms exports alone, within the ECGD's portfolio. They have taken account of the losses over the past 10 years and applied 30 per cent. of them, which is the estimate of the rough proportion of arms business to the total. Having thought about the figures, I find that estimate rather conservative. For example, 40 per cent. of the ECGD's outstanding debts stem from arms business. Therefore, 30 per cent.—

§ Mr. Gerald Howarth (Aldershot)
The hon. Gentleman has initiated an extremely important debate and I am sorry that I was not present at the beginning of his remarks. It is extraordinary that there are no Labour Members present apart from the Minister, who looks bereft.
183WH I trust that the hon. Gentleman will not examine only one side of the balance sheet. Will he look at the other side too? That would show that, without these defence exports, Britain could not afford to buy equipment for its armed forces that had been manufactured in the United Kingdom. The economies of scale would be such that it would be prohibitively expensive.

§ Dr. Cable
The hon. Gentleman is correct in an economic context. I accept that. There is a balance of views in terms of reducing the cost of procurement, to which the hon. Gentleman has correctly pointed. There are also debits which I have not mentioned. There are many Ministry of Defence costs involved in the selling process. Much equipment should probably have been bought abroad on economic grounds, but it is manufactured here because of the support that the industry receives from the arms export business. The York studies to which I have referred suggest that, when all the economic factors are taken into account, including the important point that the hon. Gentleman has raised, the outturn is a substantial negative.

§ Mrs. Angela Browning (Tiverton and Honiton)
Does the hon. Gentleman agree that there is a slight distortion in the statistics inasmuch as, for 1998–99, the figures show that more than half of ECGD funding was defence related? However, that was a one-off because it was the result of the Asian financial crisis. When account is taken of a longer period, we see that the average annual funding is about 13 per cent. When we talk about percentages and what is funded via the ECGD, recent years have shown blips and distortions, which perhaps give a rather different picture from the norm.

§ Dr. Cable
There are blips and distortions, which is why I said a few moments ago that I would not regard the figure that I quoted as a mechanical slide-rule projection of what will happen in future.
It is useful, however, to think about some of the reasons that might trigger future defaults. I had not seen the detailed figures until I prepared for the debate, but a large part of British outstanding export credit debt is owed by Indonesia. That arises from the Hawk contract, which involves £750 million. About £50 million of that has already been written off. I understand that the Indonesians are continuing to service their interest. It is not difficult to imagine circumstances in which the Indonesian political environment might completely unravel. We know that there is a virtual civil war in several parts of that country. I can envisage circumstances in which all the outstanding debt would have to be written off.
A large part of the lumpiness to which the hon. Member for Tiverton and Honiton (Mrs. Browning) refers relates particularly to contracts with Saudi Arabia and Brunei. It may be that, in 10 or 20 years' time, those countries will be stable and continuing to pay their debts. However, one of my last jobs in the oil industry before entering Parliament was to examine the public finances of Saudi Arabia. It was not a terribly happy scene. The Saudis have enormous private assets overseas, but their public sector financing is vulnerable. I shall be surprised if they remain solvent for the next 184WH five or 10 years, particularly if the oil market becomes adverse to their interests. There are blips—the hon. Lady is right—but it would be unwise to be complacent about the ECGD's capacity to continue to have its debts serviced.
In addition to taxpayer costs, there are a couple of other reasons why one should worry about this part of ECGD business. One is the impact on development. Even someone as hard-headed as Mr. Camdessus of the International Monetary Fund has argued that it is undesirable for western countries to use the ECGD, or a comparable export credit agency, to provide debt-related financing to many developing countries. The simple reason is that they acquire a fixed interest obligation, not a productive asset.
The logic of that is accepted by the Chancellor of the Exchequer. Under the Mauritius agreement, the Government have agreed that export credit guarantees for armaments will not be applied to, I think, 63 developing countries; initially, it was 40.

§ Mr. Gerald Howarth
The hon. Gentleman raises an interesting point. Is he aware that the Chancellor's much vaunted ethical dimension to export credits is totally, utterly and completely meaningless? Of the 63 countries that he says will no longer be eligible for credit guarantees in respect of defence exports from this country, only one has received ECGD defence credits since 1987: Kenya, which accounted for, I think, £60 million. It is complete and absolute nonsense. The Chancellor is posing as a friend of the third world. It is totally hypocritical.

Mr. Deputy Speaker
Order. It would be easy for the hon. Gentleman to get into the debate without long interventions. They are not helpful.

§ Dr. Cable
I was aware that most of the countries were off cover. I had not realised that the position was as extreme as the hon. Gentleman describes. He makes a valid point. If the Chancellor accepts the logic of withdrawing export credit cover for armaments to low-income countries, why will that not be applied to all low-income countries, including those on cover? Indeed, why will it not be applied to all developing countries? All sorts of inconsistencies are creeping into the admittedly more developmentally minded approach that the ECGD has adopted under the Government.
There are all sorts of anomalies, which the Minister could perhaps explain. For example, as of the end of last year, all exporters have been required to fill in a questionnaire on environmental sustainability, but armament exporters are spared that chore. Why? If it is a serious restriction, why will it not be applied to them?
In addition to the cost to the taxpayer and the impact on development, export credit guarantee support of arms exports creates an additional tier of secrecy in a part of Government that should be more open. The ECGD annual report of 1997–98, when about one quarter of British exports through the ECGD were armaments, devoted two and a half paragraphs to arms exports. That was rather less than was devoted to a public transport project in Panama. Last year, when the share of arms in the ECGD's portfolio grew to 50 per cent., the coverage in the annual report contracted to two lines. That is absurd.
185WH Many Members who table parliamentary questions often find that the answers are cryptic in the extreme. It is an area of secrecy, which is not necessary. Major General Sharman, chairman of the Defence Manufacturers Association, has said as much. He sees no reason why there should not be much more openness.
The Minister may be able to explain why it is not possible to break down—perhaps he will—British arms exports through the ECGD by country and by contract. Why cannot we be told which British companies benefit, in order of merit? There is an assumption that British Aerospace benefits most, but it would be useful to know. Why can we not know? Can we not be given a breakdown of the business by country, by contract and by sums of money? Can we not be given a breakdown of the debt outstanding to the ECGD by country, by project and by sums of money? All that would help us to understand what is going on. The fact that we are not given that information, or not given it easily, creates an impression that something is going wrong, when it may not be.
The conclusion is that continuing to support arms exports through the ECGD is unattractive. There is quite wide political consensus on that point. A short time ago, we tabled early-day motion 191, which 95 Members have supported, most of them Labour Back Benchers. On the other side of the political spectrum, one of the most scathing and penetrating criticisms of the way in which the ECGD operates was provided by the hon. Member for Chichester (Mr. Tyrie), as he now is, who was special adviser to two Chancellors and who exposed many of the arguments that I have advanced.
Moreover, one of the most articulate criticisms of the use of the ECGD for export credit cover is provided by the free market economist Sam Brittan, who clearly believes that people who believe in competitive markets should not support the practice. Across the spectrum, there is growing criticism of the practice.

§ The Parliamentary Under-Secretary of State for Trade and Industry (Dr. Kim Howells)
Is the hon. Gentleman referring to Sam Brittan's article in the infamous free market New Statesman?

§ Dr. Cable
I was, but before Sam Brittan defected to the New Statesman, he was saying much the same thing in the Financial Times. I do not know his politics, but I have read his eloquent writings, which are very much in a free market vein and with much of which I agree. My point is that the criticism is eclectic. It is not driven from any particular standpoint.
I go over some of the arguments that are advanced for not stopping the practice. The first is about jobs. There is, of course, a compelling argument here. None of us wants to be flippant about people's jobs. It is estimated that roughly 150,000 jobs, mainly in the aerospace industry, are effectively subsidised by ECGD export credits for arms: roughly £2,000 a job. It is not clear why those jobs should be subsidised, rather than others. We go back to the argument about why we have such selective intervention by the taxpayer, but if the Government feel that a particular segment of manufacturing industry needs public support—perhaps it does; perhaps there is a special argument about capital goods, although I am not sure what that is—why can that not be dealt with by developing the civil side of the ECGD business instead?
186WH If the Minister talks to the Confederation of British Industry or the Engineering Employers Federation, he will find much frustration—it relates partly to the point that was made by the hon. Member for Aldershot (Mr. Howarth)—that many countries are currently off cover. A good recent example was a big public transport contract with Iran, which other export credit agencies were willing to support and the ECGD does not. If there really is a feeling that the ECGD should be used to promote British exports and jobs in that sector, why can that not be done by rebalancing the portfolio in favour of civil products?

§ Mrs. Browning
The hon. Gentleman will have noted with some interest—which is why I am surprised at his last comment—the third report of the Select Committee on Trade and Industry on the future of the ECGD. One of its conclusions states: Some suggest that defence exports close out other exports; we have received no evidence to indicate that ECGD is biased towards defence-related exports, nor that there is a substantial default rate.

§ Dr. Cable
As the hon. Lady implied in the first sentence of her quotation, there is a debate as to whether there is a real opportunity cost. It is an open debate. As there are well-developed lines of communication with the big armaments exporters such BAe, it is easier to continue to support the arms business. Of course it receives much political support as well through Ministers and intergovernmental relationships, but I should have thought that, with a major effort, there is no reason why the balance of the portfolio should not be shifted and why dependence on arms export trade should not be reduced.
The next argument advanced could be encapsulated in the question, "Why should Britain do it on its own?", and in the belief that, if it is a desirable policy, we should do it as part of a multilateral initiative. There is some sense in the argument. However, I sometimes fail to understand why we take the view that we should not stop harming ourselves unless other countries agree to do the same. It is a fallacy pervading much of trade policy.
In many respects, the Government have given the lie to that argument in their debt relief initiatives. British Governments—not only the current one, although the current Chancellor has done much very good pioneering work on debt relief—including the two previous, Conservative Chancellors, have gone out on their own on debt relief for low-income countries. It is part of the multilateral initiative that we should relieve debt before other countries do so, and we implicitly accepted that, by our writing off some of our debt, the Japanese, the Germans and the Americans might recover their debt rather sooner. Therefore, if policy is right, it is better to implement it both unilaterally and multilaterally. I argue for doing both in parallel.
Some people argue that there are countries that, for perfectly good reasons, want to acquire our armaments, and that there are perfectly good reasons for letting them have them. I am not a pacifist and see good reasons why many developing couples might wish to arm themselves.
India, for example, is a democratic country—at least as democratic as we are—and is well run, with a relatively successful economy and a reasonable standard 187WH of governance. It is threatened from at least two directions and might wish to acquire British arms. However, if it does wish to acquire British arms, there is no reason why it should not buy them on the market. If we want to help India as a developing country, we could help it through the aid programme. There is no justification for keeping the ECGD's role in all of this as a disguised way of helping India or other worthy developing countries to acquire the armaments that they need for their defence.
I believe that Britain should cease to provide ECGD credit cover for armaments by phasing it out. We should do so on our own, but simultaneously try to develop a multilateral initiative. I hope that, as a first step in the debate, the Minister will open up the whole subject and lift some of the secrecy enveloping it.
9.52 am

§ Mr. Gerald Howarth (Aldershot)
I am delighted to speak in this debate, although I have to confess that initially I had not intended to do so. Last week, I saw on the Order Paper that the hon. Member for Twickenham (Dr. Cable) had been successful in securing this debate, on an extremely important subject, and so it did not come as a complete surprise to me.
I was very interested in the hon. Gentleman's comments. He comes from an oil background and will know probably better than I that Britain's most important and largest defence export arrangement is the Al-Yamamah contract with Saudi Arabia, which is based substantially on the oil market. It is a complicated transaction, but essentially involves defence exports for oil. My view of the contract—to which I shall return later—is not as pessimistic as his, as I think that there are important lessons to be learned from it.
My background, before being elected to the House, includes 12 years in international banking. I now represent the Aldershot constituency, which includes Farnborough, where the headquarters of what we now have to call BAe Systems are located. Formerly, the company was known to us all as British Aerospace, and I suspect that—despite the efforts of the company's management—it will continue to be called British Aerospace.
Nevertheless, BAe Systems is not only Britain's most important defence contractor, but is now the third largest defence contractor in the world. It is therefore an extremely important company not only to my constituency, but to the whole of the United Kingdom.
My association with British Aerospace goes back over many years, but was particularly close when I was in the City, in international banking, and acutely aware of the importance of defence exports. I had discussions with British Aerospace about various projects on which it was seeking to secure support.
I am bound to tell the hon. Member for Twickenham that he is living in cloud cuckoo land if he thinks that there is a realistic prospect of withdrawing ECGD support for export sales without a markedly damaging effect on Britain's most successful manufacturing industry—the aerospace industry. The reality—as was 188WH brought home to me every time I discussed these matters with British Aerospace and other defence contractors—is that other defence manufacturers around the world enjoy the support of their domestic equivalent of the ECGD, whether it be COFACE, in France, or the American organisation, the name of which I cannot remember—

§ Dr. Cable
Ex-Im bank.

§ Mr. Howarth
No; it might be federal military sales. In any case, United States industry benefits from the financial support of the United States Government.
I therefore tell the hon. Member for Twickenham that—however much I am impressed by his adherence to free market economics, which is a belief not always expressed by Liberal Democrat Members; I certainly welcome the philosophy that he has expounded—the practical reality of the world in which we live is that if we withdrew support, we should be doing great damage to our own defence manufacturing base, which is a very important component of the United Kingdom.
The hon. Gentleman lightly dismissed defence manufacturing as 2 to 3 per cent. of Britain's economic activity, but the fact is that it employs 400,000 people in the United Kingdom.
Although the Minister is not supported by a great many other Labour Members today, he is a formidable man in his own right and is worth 10 of his Labour colleagues. I have no fear that he will not be able to rise to the challenge that he has been offered by the hon. Member for Twickenham. Nevertheless, the truth is that many Labour Members represent constituencies in which defence contracting is a very important component. I am honestly surprised that none of those Labour Members are participating in this debate, because they are always evident in the House for Defence Question Time.
How do I address you, Mr. Chairman?

§ The Chairman (Dr. Michael Clark)
I am just discussing that very point, Mr. Howarth. I think that it would be correct if you called me Dr. Clark.

§ Mr. Howarth
I am delighted to be guided by you, Dr. Clark. Now that I know how properly to address you, I shall continue.
For an hon. Member who, like me, was elected to the House in 1983, rested between engagements—between 1992–97—and returned to the House in 1997, to the most privileged seat to which I could ever aspire, Aldershot, home of the British Army and birthplace of British aviation—I think that I am a round peg in a round hole—one of the most astonishing and fascinating features of being in the House is to see how the Labour party has changed.
Dr. Clark, you will remember that, when you and I were first elected to the House, ranged against us were all those Campaign for Nuclear Disarmament people, beating swords into ploughshares. What are we faced with today? We are faced with one Labour Member after another standing up and demanding that the Government buy bigger and better weapons, preferably from their own constituency.

§ Mrs. Browning
I totally agree with the point that my hon. Friend has just made. However, perhaps he will add a caveat—that among the Labour Members of the European Parliament, perhaps in the person, for example, of Mrs. Glenys Kinnock, we hear the old Labour-CND message still coming through.

§ Mr. Howarth
My hon. Friend is right. I gather that the Labour Members of the European Parliament are part of what is called the Socialist group. That word has been expunged from the new Labour dictionary, so what they do is probably a source of discomfort to the Prime Minister and the other promoters of new Labour. I suspect that you will call me out of order, Dr. Clark, if I carry on with that argument.
There has been a fascinating change in this country. There is a consensus on the importance of defence and defence exports. There are three reasons why defence exports are not just good for the United Kingdom, but essential. Those reasons go beyond the desire to protect 400,000 jobs in the UK. I made that point to the hon. Member for Twickenham because I felt that he was belittling the contribution of defence contracting to the United Kingdom's industrial base; but I am not in the business of giving subsidies to keep jobs in a particular sector. That would be inconsistent with my philosophy and that of my party over the past 20 years.
The first reason is that, without defence exports, we could not afford to buy domestically produced aeroplanes, missiles, heavy artillery and similar equipment, because there would be no economies of scale. I shall illustrate that with one example. As the country wrangled over what was going to succeed the Tornado combat aircraft—we now know that it is to be the Eurofighter—there was serious concern at British Aerospace, because the production run was coming to an end with nothing to put in its place. What happened? The Al-Yamamah contract with Saudi Arabia provided a large enough order to keep the production line open. Saudi Arabia then made an attrition buy—a technical expression in the trade for replacing lost aircraft that crash, fall out of the sky or are shot down—of a further 12 Tornado aircraft. That kept the production line going until the Eurofighter—or the Typhoon, as we now call it, which is a much better name—came on stream.
If we had simply relied on domestic demand for Tornado aircraft, the unit cost would have been prohibitive. The Public Accounts Committee would have said that it was ridiculous and that we should have bought some other aircraft off the shelf, such as the F 16 from the United States. That would have left us dependent on the United States for the supply of critical equipment and would have cut us off from the supply of the next generation of combat aircraft. As a result of the defence export services provided by the Ministry of Defence and the fantastic effort of the Government—even the Foreign Office—and industry coming together in concerted UK activity, we were able to sell Tornado aircraft to Saudi Arabia, bringing the unit costs down and keeping us in the business of producing high-tech combat aircraft.
The second reason why defence exports are essential is that they help our foreign policy objectives. Supplying our friends with military equipment is a practical way of demonstrating our support. That is not a euphemism for propping up corrupt regimes. Few countries can match 190WH our commitment to liberty, our devotion to democracy and our belief in fair play. Few countries play cricket and even fewer play cricket like we do, unfortunately. Other countries fall short of the standards that we set.
Defence exports help us to influence events in critical parts of the world. This Government, like their Conservative predecessors, are keen to demonstrate Britain's influence in the world. The Prime Minister is extraordinarily keen to play soldiers around the world. I do not object to the principle of that, although I have some doubt about his motives. By supporting defence exports, we are able to make friends and influence events around the world. Some of the key countries to which we export, such as Malaysia and Saudi Arabia, are very good allies of the United Kingdom. Defence exports help to strengthen those ties.
The third reason is that defence exports enable us to exert further influence. If we supply critical defence equipment to a country where the Government change and the new regime behaves unacceptably, those exports give us a hold over them. I am astonished that, while the Foreign Secretary trumpets an ethical foreign policy, when he had the chance to influence events in Indonesia and Zimbabwe, he signally failed to do so. There has been a huge amount of wringing of hands over Indonesia, but the Foreign Secretary has allowed the Hawk contract to go ahead. In my view, last year was the time to say, "No more." That would have enabled us to exercise influence, but the Government chose not to do so.
It is appalling that the Government will continue to supply Hawk parts to Zimbabwe—a country that, in the league table of corruption and incompetence, must surely be if not at the top then at least in the top 10. The idea that we have an obligation to continue to supply spare parts to the disgustingly corrupt and incompetent Mugabe is profoundly offensive. The Government should have said, "If you go ahead and nationalise the land of white farmers in your country, do not expect a single spark plug for any of your Hawk aircraft, 'cos we ain't gonna supply it. Talk some common sense and run your country in a proper fashion and we will resume the supply."

§ Dr. Howells
I agree with much of what the hon. Gentleman says about Zimbabwe. I was there recently and saw the appalling politically motivated spiral of decline in a country run largely by incompetent people. However, I have figures showing that between 1987 and 1994 the previous Government supplied Zimbabwe with £61,584,983 of defence of equipment. Did the Conservatives see the decline coming, or was the Government of Zimbabwe okay in those days?

§ Mr. Howarth
I shall probably surprise the Minister by saying that I would not have done that had I been a Minister, but, as he probably knows, I have a slightly different view of Zimbabwe. I think that it should still be called Rhodesia. I find it ironic that people should complain about the current system there or make excuses for Mugabe when some of us remember the days 191WH when it was properly run. In those days, there was freedom for those who were law-abiding and the country was prosperous.

§ Dr. Jenny Tonge (Richmond Park)
Will the hon. Gentleman give way?

§ Mr. Howarth
I think I know what the hon. Lady is about to say.

§ Dr. Tonge
I am sure that the hon. Gentleman does. Some time ago, during a debate on Sudan, the hon. Member for Louth and Horncastle (Sir P. Tapsell) said that it used to be a great country with "the blues ruling the blacks". Is the hon. Gentleman suggesting that we should take back all the old British empire countries and run them directly from London? Would that please the hon. Gentleman?

§ Mr. Howarth
The hon. Lady poses an interesting question. To be quite candid, the answer is, in part, yes. It is a complete absurdity for us to imagine that we can continue in the present fashion, where corrupt and incompetent dictatorships around Africa continue ruining the lives of their people and demanding money from the international community, from agencies such as the International Monetary Fund and from us. However, that is a subject for another debate.
I shall conclude, as I know that my hon. Friend the Member for Tiverton and Honiton (Mrs. Browning) has some important remarks to make. I have given three reasons why it is absolutely essential that we recognise the role of defence exports. It is a most honourable profession that greatly benefits the British people, British industry and the countries that we support.
In regard to the Al-Yamamah contract, having been the parliamentary private secretary to Baroness Thatcher, I do not think that people recognise just what a fantastic deal that was. The personal chemistry between the noble Lady and King Fand of Saudi Arabia was probably responsible for securing more jobs than any other contract in the history of these islands.
In answer to the hon. Member for Twickenham, who based his remarks principally on the role of ECGD, I would be most reluctant to withdraw from the British defence industry the availability of ECGD support. It would make us totally uncompetitive overseas, so we would be cutting off our nose to spite our face.
I was amazed to hear the Chancellor of the Exchequer trumpeting the announcement that 63 countries would be denied the availability of ECGD support for defence exports, when only one of them had ever benefited or was likely to benefit anyway. I found it extraordinarily—

§ Mrs. Browning
Bogus.

§ Mr. Howarth
Exactly. I look forward to hearing the Minister's reply to the debate. I am sure that he will agree that it is important for the United Kingdom to continue to support our defence industry, which not only generates jobs and wealth, but is a source of tremendous innovation and excitement.
192WH 10.14 am

§ Dr. Jenny Tonge (Richmond Park)
First, I congratulate my hon. Friend the Member for Twickenham (Dr. Cable) on his success in introducing an Adjournment debate on this important subject. Last week, I tried to get a debate on arms exports and an ethical foreign policy, so I shall concentrate rather more on the ethics, which I consider to be an even more important subject. I congratulate my hon. Friend on his excellent and well-informed speech.
I was also interested in the speech by the hon. Member for Aldershot (Mr. Howarth). I see the beginnings of an entirely new Conservative party policy. The shadow Cabinet has been reshuffled and now the hon. Gentleman is proposing not only that we pull out of Europe, but that we break our ties with the United States and re-form the British empire. I expect his next proposal will be that we send an expeditionary force to Washington.

§ Mr. Gerald Howarth
I thank the hon. Lady for giving way. How on earth can she make those assertions on the basis of what I said? I made no suggestion that we should cut ourselves off from the United States—far from it. I made no remarks about withdrawing from Europe or re-establishing the British empire. I simply said that one or two countries could well benefit from the expertise that we used to give them and under which they flourished.

§ Dr. Tonge
The hon. Gentleman must realise that I have every right to extrapolate his ideas and develop them.

§ The Chairman
Order. This is not a debate about empire. Will hon. Members please get back to the subject in hand.

§ Dr. Tonge
I apologise, Dr. Clark. I could not resist making that point.
I have do not have the background to speak on the economic arguments in relation to the ECGD and arms exports: my profession is the medical profession, which has been severely humbled in recent days. My only connection with the subject is that, until a few years ago, there was a big British Aerospace factory—which used to be the old Hawker factory—in the Richmond Park constituency. So my interest is not a current one.
I understand the economic argument that has been made for arms exports and the arms industry. I am not a pacifist; I do not want to stop arms exports. I understand that they are part of the real world. However, I question some of them—especially those that are supported by export credit guarantees—that involve countries whose economies may be in a parlous state or unstable. Suppose that the export credit guarantees are never paid off and the arms sales result in an extremely expensive war—they did in the case of Iraq—and a military campaign to which we have to contribute; and suppose that our Government have to provide humanitarian aid and then development aid to rebuild a country that has been destroyed by war. In such cases I question the economic arguments advanced by the hon. Member for Aldershot. They may be good in 193WH the very short term, but ultimately it seems to me a crazy policy which places a heavy burden on the British taxpayer.
Let us consider the jobs argument. Of course there would be job losses if the arms industry contracted, but if we cut out only the part of the industry that supplies arms under export credit guarantees, it might not affect such a large proportion of total arms exports. People who work in the arms industry are generally highly qualified and employable. Every year, hundreds of thousands of people change jobs or retrain, so I do not find the jobs argument insurmountable.

§ Mrs. Browning
The hon. Lady will know that I represent a seat in Devon and that military issues are of great importance in the south-west. I remind her that for many years I have listened to the right hon. Member for Yeovil (Mr. Ashdown), who has Westland Helicopters in his constituency. The helicopters produced there are used both for peaceful and for military purposes. The right hon. Gentleman advocated a rather different view of job losses at Westland and in the west country.

§ Dr. Tonge
So would many Members with arms manufacturers in their constituencies, but, at some point, we shall have to bite the bullet. People in many industries have to consider retraining. One example is the farming industry, on which the hon. Lady used to speak on behalf of her party. I do not see why the arms industry should be immune. I would also remind her that my right hon. Friend the Member for Yeovil (Mr. Ashdown) is no longer our party leader and is quite entitled to express his opinion.
The other argument advanced by the hon. Member for Aldershot—the old adage that if we do not do it, someone else will—was ably dealt with by my hon. Friend the Member for Twickenham. Sometimes, we must take a lead on these issues. We took a lead on debt. Indeed, the previous Conservative Government took a lead on debt, which was followed up by the Labour Government. Both British Governments in recent years have spoken and acted honourably on debt. Why can we not do the same in relation to the arms trade? Why can we not take the lead? No wonder this country does not know where it is going if we cannot make a stand occasionally.
The Government have made some fine attempts to give moral leadership. I was in the Locarno room—a wonderful place—in the summer of 1997, and found it difficult to control my emotions as the Foreign Secretary described his new foreign policy with its ethical dimension. He told us how the world would be changed and that Britain would be a good boy after all.
On many occasions, I have heard how passionately the Secretary of State for International Development feels about the prevention of conflict and about the need to restrict arms sales to countries which are unstable or are in need of development. I suspect that she is frequently overruled.

§ Dr. Howells
As the Minister who has to sign off all the arms export deals that we send out—and I have been in this job since a year ago last July—I point out to the hon. Lady that there has never been one on which we have not consulted the Foreign and Commonwealth Office 194WH and the Department for International Development. We have done that for every export and have never received one—

§ Dr. Tonge
indicated dissent.

§ Dr. Howells
The hon. Lady may shake her head, but I am the guy who has to sign off those exports. Never once have we received from the DFID or the FCO an objection to anything that we have signed.

§ Dr. Tonge
I thank the Minister for that intervention, but I was really referring to the annual report on arms sales. During the last Session, I was a member of the Select Committee that reviewed the annual report. I think that some arms exports to Eritrea were refused by the DFID, but that was overruled by the Department of Trade and Industry—or whoever it was. The Minister is not correct. Decisions are overruled. Indeed, when the annual report on arms exports is produced, the Secretary of State for International Development does not sign that report as other Ministers do, even though she is a member of the Government.

§ Dr. Howells
I have learned much since I entered the Government about how difficult and complicated government is. Surely, the hon. Lady must realise that, as the DTI is responsible for sponsoring exports, one Minister has to sign them off. There cannot be an arrangement whereby every Minister in every Department signs off every export contract. That would be nonsense. Surely the hon. Lady has enough experience to understand that.

§ Dr. Tonge
I do indeed understand the point, but in the context of the Government's declaration that they would have a foreign policy with an ethical dimension, and that they would adhere to the UK and the EU code of conduct on arms sales. I shall explain how they have not done so. I stick to my guns: whichever Minister signs off the sales, he or she should take into consideration the opinion of the Department that is concerned with development and the prevention of conflict. If that is not done, there will be more trouble for this country and more expenditure in the long term.

§ Dr. Howells
rose—

§ Dr. Tonge
I shall not give way again, because I want to make progress.
I refer to the Government's response to the International Development Committee's report on conflict prevention. I was a member of the Committee. The report included the recommendation that the Government extend indefinitely its moratorium on the use of export credits for unproductive expenditure and urge the Government to exert further pressure for the adoption internationally of such a commitment. The Government responded rather cryptically: The Government welcomes the Committee's support for the Mauritius Mandate"— to which my hon. Friend the Member for Twickenham referred. The Government remains committed to limiting our export credits to Heavily Indebted Poor Countries"— 195WH the hon. Member for Aldershot pointed out that that was no great matter— to those for productive expenditure. The Government were not upholding the foreign policy with an ethical dimension about which we had heard so much. They were not even upholding the commitment not to sell arms to countries where there was an identifiable risk that the equipment might be used for internal repression or for aggression against another country. I shall return to that matter later in my speech.
This foreign policy has been trampled over by the Government's response to arms exports—whether or not they are supported by export credit guarantees. The Government have recently stated that they would not resume the sale of arms to Pakistan—everyone agrees that Pakistan is extremely unstable and no one knows how matters in that country will progress—but they will consider each sale case by case. They get themselves out of the hoop in that way.
As we have already heard, the decision has been taken to resume selling arms to Indonesia, when that country is subject to huge internal upheavals. We have not yet sorted out East Timor; East Timorese refugees are still being held in West Timor and are not being allowed to return home. All that is happening, and even though the Indonesians have not paid off previous export credits, we are selling them more equipment—presumably backed by more export credits.
Three quarters of the countries in sub-Saharan Africa are engaged in armed conflict, or are confronted by a significant threat from armed groups. Arms exports to the region almost doubled last year. Excluding South Africa, spending on arms in sub-Saharan Africa increased by 14 per cent., at a time when the region's economic growth rose by less than 1 per cent. in real terms.
There are at least 11,000 Zimbabwean troops in the Democratic Republic of Congo. Zimbabwe, Namibia, Angola and the President of Congo are all fighting a war against Rwanda, Uganda and the Congolese rebels. There is a terrible mess in the Democratic Republic of Congo, and Zimbabwe is involved in it.
The estimated cost of the war for Zimbabwe is £1 million a day. That is in a country whose economic situation is regarded as extremely serious. The country is heavily in debt. There are record levels of unemployment; the inflation rate is 57 per cent; and an AIDS epidemic has reduced life expectancy to less than 50 years. Despite all that, we are selling arms to Zimbabwe. As the hon. Member for Aldershot said, what a foolish decision that was.
Furthermore, to return to the Minister's point, those sales are not compatible with the European Union code of conduct to which we have signed up. Both in criterion 4 and criterion 8—I carefully dug them out last night—we fail vis-a-vis Zimbabwe. We are not obeying the code of conduct by resuming arms sales to that country. Whither, then, our ethical foreign policy?
When are the Government going to regain the moral leadership of which we had such high hopes early in this Parliament, for goodness sake? Are we to go on 196WH indefinitely feeding wars and human misery? Will that new foreign policy with an ethical dimension never be reinstated?
One of the researchers reminded me of some lines from Milton's "Paradise Lost": So here the Archangel paused, Betwixt a world destroyed and a world restored. I want to see a world restored for the sake of my children and my grandchildren. I feel strongly about that. I am not a pacifist, but I want the world restored. To do that, we must bring back the ethical dimension that the Government have lost. We can make a start by stopping the subsidy on arms exports.
10.30 am

§ Mrs. Angela Browning (Tiverton and Honiton)
May I say how pleased I am to contribute, on behalf of the Conservative party, to this debate? Clearly, matters have been raised over which we must accept that there is a philosophical divide. There is a difference between the views of the Liberal Democrat speakers and those that I shall set out and the points made by my hon. Friend the Member for Aldershot (Mr. Howarth). Quite where the Minister stands remains to be seen, but I shall leave him to make his case.
On 27 July 1997, the Secretary of State for Foreign and Commonwealth Affairs said: The Government is committed to the maintenance of a strong defence industry, which is a strategic part of our industrial base, as well as of our defence effort. Those sentiments were also underlined in the strategic defence review, which said: The British defence industry is outstandingly successful and a vital national asset. In the recent defence White Paper, the Government committed themselves to ensuring the survival of a successful British defence industry". The hon. Member for Richmond Park (Dr. Tonge) is clearly disappointed with the Labour Government. I do not want to say too much about that because it is for the Minister to respond to her disappointment. However, from the statements that I have quoted, the Government appear genuinely to want to support our arms industry. They realise the economic and strategic importance of defence manufacture in this country, and we wholeheartedly agree with them on that. However, I agree with the hon. Lady in that those statements do not relate to statements made elsewhere about a so-called ethical foreign policy, particularly as it relates to arms. I shall come to that point shortly.
The defence industry is important. I listened carefully to the hon. Lady when she said that she was not a pacifist. However, if her argument were taken to its logical conclusion, it would surely lead not just to the withdrawal of Government financial support through export credit guarantees, but to this country's not supplying arms at all. Who finances arms sales is an academic issue if one's philosophical position is that it is bad to supply arms to certain countries or to supply certain types of arms.

§ Dr. Tonge
On a point of explanation, I made no suggestion that we could not sell arms to countries such as our fellow members of the European Union or to 197WH stable countries in the rest of the world. My point was that we should adhere to the European code of conduct on arms sales and not sell arms to unstable countries or when they could be used for aggression or internal repression.

§ Mrs. Browning
The principle of where the arms are sold must be taken into account and it is, indeed, taken into account through the licensing process. However, the hon. Lady will recall, as I do only too well, that, at times of conflict in our own lifetimes, we have sold arms to some of our nearest and dearest neighbours only to find them used against us. Her proposition is no guarantee that there would not be what she would regard as unfortunate recycling or that we would not be the target of our own bullets.
As a percentage of gross domestic product, the United Kingdom has the world's second largest defence industrial base, employing—and this is important—355,000 people, who make up approximately 10 per cent. of the UK's manufacturing and industrial work force. That translates as 11 per cent. of the country's industrial and manufacturing output, equating to 50 per cent. of the aerospace and shipbuilding manufacturing that takes place in the UK and 40 per cent. of the electronics industry.
I declare a constituency interest. Electronics companies in my constituency supply the defence sector and they are at the cutting edge of technology. I have had no hesitation in supporting the work that they do and their attempts to bid for contracts. I have given them my full support.
The primary function of the defence industry is to supply military equipment to the UK armed forces. Problems with supply of essential war material during the Falklands and the Gulf wars have underlined the importance of an adequate domestic defence industrial base. However, the industry cannot be sustained by Ministry of Defence procurement alone; exports are essential to its survival. In recent years, defence exports have been a British success story, with the UK regularly taking more than 20 per cent. of the world defence export market. Defence exports reduce the MOD's procurement costs by allowing longer production runs and lower unit costs.
At this stage, I wish to point out that Members who are interested in defence matters are concerned at reports about the standard of equipment that has been supplied to our armed forces. Cost is a factor, but the quality of what we provide to our armed forces is of primary importance.
The commercial exploitation levy adds between £350 million and £400 million to the defence budget. More importantly, a third—approximately 130,000—of defence industry jobs depend on exports, with more than one third of production going abroad.
It has been alleged that the defence industry receives an unfair preference when it comes to ECGD cover. The most often cited figure is the one that I gave to the hon. Member for Twickenham (Dr. Cable) in an intervention. The 1998–99 figures shows defence cover at more than half the total of ECGD funding for that year. That figure, as we know, was the result of the Asian financial crisis and it is important that it does not distort the figures for previous and subsequent years in which 198WH cover dropped to as low as 13 per cent. The average figure for defence cover in the period 1988–89 to 1998–99 is just under 28 per cent. The Select Committee on Trade and Industry concluded that there is no evidence to indicate that ECGD is biased towards defence-related exports". Other countries provide far greater assistance for their defence industries. Both France and Germany provide direct financial assistance to their defence companies and both countries are far more generous when it comes to export cover. My hon. Friend the Member for Aldershot was right to mention the United States. Defence procurement and the provision for defence manufacture in the United States is important and we must bear in mind the huge global market in second-hand defence equipment that comes from the United States. In itself, that has an effect on the price of defence procurement around the world. However, the United States helps its exporters with long-term subsidised loans as part of the foreign military sales scheme.

§ Dr. Cable
Is the hon. Lady advocating that we try to match such contributions or does she agree with her parliamentary colleague who was the special adviser to the previous Prime Minister and who said: It is illogical to indulge in a competition to give away our own exports through an auction of subsidies … companies should reduce costs and make themselves competitive, not rely on state aids. Does the hon. Lady agree with that?

§ Mrs. Browning
Given my earlier remarks about the primary importance of defence manufacture to underpin our domestic requirements, if taxpayers' money has to be used to underwrite the guarantees through the ECGD, I thoroughly support its use. There is no doubt about that. We did that in government and we shall continue to support its use. We must consider the sector and its strategic importance to the UK's military and defence provision.

§ Mr. Malcolm Savidge (Aberdeen, North)
The hon. Lady referred to what happened under the previous Government, but am I not correct in thinking that, in 1997, the bad debts to the ECGD included military support that had been given to China, Indonesia, Iraq and Nigeria, which at the time was under a dictatorship? When she says that she is happy for taxpayers' money to subsidise the defence industry, does she not feel at all uncomfortable with those examples?

§ Mrs. Browning
No, I do not. Although I do not have to hand detailed information about every one of those countries, I do not agree with the hon. Gentleman for the simple reason that, under the process by which ECGD cover is given, at the time when the cover is underwritten and signed off as the Minister described, every grant is considered on its merits and the balance of risk. The nature of the scheme means that there will be times when that risk is such that the Government have to step in. That is a matter of balance.
199WH I refer the hon. Gentleman to the third report by the Select Committee on Trade and Industry on the future of the Export Credits Guarantee Department, which covers that matter in detail. It is not over-critical of the process.

§ Mr. Gerald Howarth
Is not the answer to the question asked by the hon. Member for Aberdeen, North (Mr. Savidge) that he has selectively listed countries that have at some time been in default, whereas many other countries that have been beneficiaries of defence exports for which ECGD credit has been available have continued to honour their obligation, and their premiums are helping to defray the cost of meeting the credits on those countries that are defaulting?

§ Mrs. Browning
My hon. Friend describes the process correctly. As I said at the beginning of my speech, there is a philosophical divide. If one is opposed per se to public money underwriting or providing a safety net for such transactions, clearly one will not find any formula under which those transactions are acceptable. That is what divides us in the Chamber today.

§ Mr. Savidge
I am not talking about being opposed per se to subsidising our defence industry. However, many people in this country might feel slightly unhappy if they knew, for example, that we had subsidised Saddam Hussein's military build-up. That is why I chose the countries that I mentioned in my intervention. I could have listed other countries, and many people in Britain would be disturbed to find that taxpayers' money was being used to subsidise the build-up of those countries' military might.

§ Mrs. Browning
The hon. Gentleman will know the history of the situation as well as anyone else in the Chamber. When those arms were sold, the political situation, particularly between Iraq and Iran, was very different from the present situation. He cannot expect any Government, of whatever political persuasion, to second-guess what might happen several years later as a result of a change in political leadership or situation.

§ Dr. Howells
In response to the point made by my hon. Friend the Member for Aberdeen, North (Mr. Savidge), I have been reliably informed—I hope this helps the hon. Lady—that there never was any ECGD cover for defence business in China or Iraq.

§ Mrs. Browning
I am most grateful to the Minister. We could make a very good team on this subject, and I offer him my services unreservedly in case he ever needs to call on me as a running mate in future debates on the matter.
Export sales have helped the UK to retain essential capabilities at a time of a huge defence budget reduction and a reduction in the defence equipment market overall. The ECGD's work to underpin strategic industries in this country is extremely important.
It has been argued that the ECGD is not the right organisation to evaluate the development or ethical implications of defence exports. It does not have the 200WH expertise or the staff to carry out the necessary background research. That was recognised by the International Development Committee, which said: Criticisms of arms exports to particular countries and of the application of human rights criteria are being considered in detail"— in the course of its inquiry. It continued: ECGD should not have to second-guess or duplicate the system for the scrutiny of export licence applications. We agree with that. Legitimate ethical and other matters should be considered in the scrutiny of licence applications, and they are not the primary responsibility of the ECGD.
The Conservative party is committed to a strong defence industry. We are conscious of the need to consider the impact of defence exports, particularly in the developing world, but such consideration can best be done through the licensing process, not through the deliberations of the ECGD.
The debate overall has clearly concerned a division between the Liberal Democrats and their friends in the Cabinet. I say to the Minister that, although the debate has clearly arisen from a philosophical divide, we, too, are concerned about the way in which the ECGD operates within the DTI.
I draw the Minister's attention to two points from the third report of the Select Committee on Trade and Industry. It says: There is some evidence of a lack of joined-up thinking between ECGD and parts of the DTI. I do not know when the Minister intends formally to respond to the report. The report also states: One ex-underwriter stated that 'ECGD services are little understood within DTI and FCO'". Those are criticisms by a Committee of the House, which has studied the matter in great detail. We want the ECGD to work effectively and to continue to underwrite risk, particularly in this important sector.
I should be grateful if the Minister, in his concluding remarks, assured us that those matters are being addressed and gave us a little more detail about how he evaluates the views of the Ministry of Defence and his Department in supporting our defence industries. My hon. Friend the Member for Aldershot and others have outlined what seem to be bogus remarks from the Foreign Office about the Government's so-called ethical foreign policy.
10.47 am

§ The Parliamentary Under-Secretary of State for Trade and Industry (Dr. Kim Howells)
I congratulate the hon. Member for Twickenham (Dr. Cable) on securing this debate. We have heard interesting observations. I shall try in the few minutes left to answer some of the major questions, but first I must underscore the points made by the hon. Members for Tiverton and Honiton (Mrs. Browning) and for Aldershot (Mr. Howarth) about the importance of the sector.
As someone who has lived through the death of a large industry—the coal industry—I know that such transformations are extremely difficult. A decade and a half later, we are still suffering the problems of transition. There is also a read-across, which no one has mentioned; for example, the ability to manufacture advanced aircraft has a read-across to civil aircraft.
201WH I do not know whether the hon. Members for Twickenham and for Richmond Park (Dr. Tonge) are opposed to the production of civil aircraft. I do not know whether the Greens have leaned on them to that extent, or whether they have modified their policy. I should like to hear about that.
There has always been a read-across between industries. That is clear when one considers the great aircraft manufacturers, including Boeing and, in this country, British Aerospace. The Government are not about to surrender that industry, and we do not need to.
I want to clear up a couple of important points made by the hon. Member for Richmond Park in her passionate plea. No hon. Member, whether Liberal, Labour or anything else, has a monopoly on feeling passionate about the world being reconstructed rather than destroyed. I have young children, and I do not want them, or anyone else's children, to go through another war. The very notion that the Government's policy is contributing to an escalation of conflict in the world flies in the face of events.
I do not know who has been spinning against the DTI over recent months, but it irks badly. I notify all Departments of all licence applications that I receive. If those Departments want to comment on them, they can do so. I take no decision on any contract unless the Foreign and Commonwealth Office and the Ministry of Defence have seen it. If the Department for International Development also wishes to comment on any licence application, it can do so.
It is untrue, for example, that DFID's advice on Eritrea licences was overruled. In the Government's response to the International Development Committee report, it is clearly stated that DFID's advice was not overruled on the cases identified by the Committee. I reinforce that point. The hon. Member for Richmond Park did not want to give way to me on that point, which was interesting. Perhaps she does not want the facts to get in the way of good rhetoric and a passionate story. If I were signing off deals that clearly breached human rights issues, and so on, I would find it very difficult to live in my house. My wife would know about it very quickly; the hon. Lady is not the only one to feel such passion.

§ Dr. Tonge
Will the hon. Gentleman confirm that the Foreign Office and the Department for International Development have never had reservations or objected to the granting of a licence that the DTI has then overruled?

§ Dr. Howells
If there are disagreements between Departments on any licence application, the matter goes to ministerial level and stays there until there is agreement. That is the way in which such matters ought to be sorted out: it is joined-up government and takes account of all the difficult issues concerning present, likely and marginal conflicts that are awkward to judge. The hon. Lady should have the good grace to understand that. She shakes her head, but clearly does not want to hear the truth. Very often, as politicians, we do not want to hear the truth, but I have just given it to this Chamber. DFID's advice is never ignored. I do not know who has been spreading the word that it has. I thought that it was perhaps from our own ranks, but it might be from the Liberal Democrats.
202WH We have heard a great deal about the burden that the ECGD places on the taxpayer and the ways in which it is having to carry much of the finance that is made available to cover exports. That is not our reading of the situation. As the hon. Member for Twickenham said, there is a break-even clause. In fact, we expect ECGD to do a good deal more than break even.
I turn to the basis of the hon. Gentleman's case: the study at York university. The study was based on information that was several years out of date; made some heroic assumptions; averaged ECGD claims and assumed that defence business was in proportion, country by country, to civil business—but it was not. Past major claims markets, such as Nigeria, Poland and Brazil, involved very little—none in the case of Poland—defence business. Furthermore, in being so out of date, the study failed, in using the figure of £239 million, to take account of either the £1.6 billion received by ECGD in recoveries over the past three years or its vastly improved performance over the best part of the past decade. That is a very important point.
Let me now address the question whether ECGD gives defence business priority over other businesses. The decision on whether ECGD provides cover to a country is based on a risk assessment. If that assessment is favourable, cover is available on a first come, first served basis to all eligible exports, whether civil or defence. There have been no instances of defence business crowding out civil business. That point must be made, and clearly.
Two years ago, the Chancellor of the Exchequer announced that ECGD cover should be available only to 41 heavily indebted poor countries—HIPCs, as I learned last night—for exports that support their economic and social recovery and development. On 11 January, he announced the extension of the productive expenditure criteria—a wonderful phrase—to a further 22 countries. The UK's unilateral stance on the policy has not to date been followed. The hon. Member for Richmond Park should take that into account as well. She paid some tribute to it, but far from enough.

§ Mr. Gerald Howarth
The Minister is extraordinarily brave to deal with this subject. What prospect has the UK ever had of selling arms to Vanuatu?

§ Dr. Howells
The hon. Gentleman is quite right; he can have a poke at that one. Let me give him another. One of the countries on the initial HIPC list that I saw last night is Vietnam. That country very badly needs some arms to protect its exports and imports from pirates, gun-runners and smugglers. Are we to deny Vietnam exports? Of course we cannot. The country is on the list; the system is complicated: it is not black and white, as the hon. Members for Richmond Park and for Twickenham implied it was.
I am afraid that such real situations occur all too often in this world. I am not about to refuse to sign off such an agreement if it means that heroin will pour into this country from places such as Vietnam because it has been denied the ability to defend its trade, towns, estuaries and rivers from smugglers and pirates.
In the three remaining minutes, I shall turn to the two circumstances in which ECGD cover is denied. Under UK policy, those circumstances are, first, where it is 203WH clear that exports of particular goods should not be made to a country, and, secondly, where a country is assessed as unlikely to be able to pay. Any extension of those categories risks imposing our own views on other sovereign nations—an important point that nobody has mentioned in today's debate. Export credits are not aid but commercial loans that we expect to be paid in full and on time. It is not right for us, as a rich and powerful nation which is able to defend itself, to tell others who have a right to self-defence and security and can afford to pay that they cannot spend their money on those things.
Why does the ECGD rely so heavily on export licensing? If the UK decides that certain goods should not be exported to a country, the policy is enacted through the export licensing scheme. The presence of a valid export licence is a condition of ECGD cover. If a licence has been granted, the Government have no objection to the export and there is no reason for ECGD cover to be withheld.
I shall finish on the following point because I know that the next debate is about to begin. The Secretary of State for Trade and Industry set up a review last year into the ECGD's mission status. It is expected to be concluded around Easter. I shall ensure that the views that have been expressed in this debate—a very useful debate—are put to that review. I do not wish to prejudge its outcome. I very much hope that hon. Members present will contribute to it because it is valuable and timely.
10.59 am
Sitting suspended.