Westminster Hall Sitting of 2 November 2000

Preamble
[SIR ALAN HASELHURST in the Chair]

Export Credits Guarantee Department
[Relevant documents: Third Report from the Trade and Industry Committee, Session 1999–2000 HC52 and the Government's response thereto HC 849.]
Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Sutcliffe.]
2.30 pm
Mr. Martin O'Neill: I am pleased to have the opportunity to introduce this debate on the report that my colleagues and I on the Select Committee on Trade and Industry published some time ago on the future of the Export Credits Guarantee Department.
The Select Committee system, which has achieved a new status akin to the unofficial Opposition in recent years, has tried to introduce into our opaque system of scrutiny some openness and transparency. It was no accident that when the Department of Trade and Industry indicated that it wanted to conduct an inquiry into the mission statement and objectives of the ECGD, my colleagues and I thought that it would be a good opportunity to parallel the inquiry. We invited the respondents to the Government's request for views to meet us and discuss their concerns. We were fortunate in obtaining a wide spread of opinion and at some of our hearings we were able to gauge opinion across the board from industry, non-governmental agencies, financiers and so on. By and large, the ECGD received a reasonable rating and was thought to be a useful part of the Government's bureaucracy and administration.
It might be fashionable to suggest that it has taken an unconscionable time for this debate to take place, given that we produced our report on 11 January. However, I shall not take that route because I understand all too well that the Government were operating on a different time scale from the Committee.
The report on the Government's response was produced just before the House rose for the summer recess in July, only a little later than we might have anticipated. We have only just returned from the summer recess and we have been reasonably fortunate in obtaining this debate so early, so I shall not complain about that.
During the past 12 months, the ECGD has attracted attention, particularly of non-governmental groups in the United Kingdom, as a result of its association with the Ilisu dam project in Turkey. I shall refer to that shortly and some of my colleagues on the Select Committee and I will take the opportunity to visit the dam when we go to Turkey.
It might be useful to put on the record the services offered by the ECGD. It provides insurance and finance facilities. There are four generic insurance or guarantee projects and cover for exports of capital goods and services against non-payment or contract frustration. There is a fixed rate export finance scheme operating
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fixed interest rates for loans to cover purchases of United Kingdom exports. That is set under Organisation for Economic Co-operation and Development consensus rules.
Before I continue, I should like to ask the Minister to explain why a scheme such as the fixed rate export finance scheme, which is widely accepted and appreciated by industry, now seems to be under a degree of threat. It has been suggested that it is to be withdrawn. If that is the case, will the Minister tell us under what time scale the withdrawal process will operate? One of the more valued aspects of the ECGD would appear, in some people's eyes, to be under a degree of threat.
Cover is also provided for political risk on overseas equity and loan investments. That operates under the ECGD overseas investment insurance scheme. It is another reassuring service provided by the export credits agency. There is also an export insurance policy covering capital goods, major services and construction projects. It is important that we ensure that our people who are going out and trading in the world have a degree of certainty that they will not lose because of customer insolvency, late payment, contract non-compliance or circumstances involving an element of political risk. Those issues are certainly addressed by the services of the ECGD.
The ECGD offers guarantees to commercial bank lenders, with a 100 per cent. guarantee on all sums lent to overseas buyers. It also offers the supplier credit financing scheme, which allows UK companies to sell bills of exchange to their bank, once goods have been sent, or promissory notes once they have been accepted by the buyer. These facilities are all important in the stimulation and sustenance of trade.
The lines of credit that can be provided for several schemes and contracts simultaneously afford an important degree of flexibility. Project financing schemes in which the repayment of the costs of the project will come from its operation are particularly worthy of mention because they allow exporters a degree of flexibility. The exporters know that the money will be forthcoming once the project is up and running, but until that happens and earnings are accruing, there is no means of paying off the project loan. It is important for them to be able to obtain that degree of support and underwriting. That is a testimony to the flexibility of the ECGD. It was clear from the responses that we obtained from the industrial community that the ECGD has a good name internationally for innovation and flexibility.
The export credit agency world is highly competitive. The status of the international consortiums that pursue the big projects and potentially dangerous contracts can change quite easily. Instead of having a lead British company, one might end up with a Swiss or a French one taking the lead because the ECA in question was the most flexible and offered the best rates. We recognise that that is done under an umbrella of OECD consensus arrangements, so the possibility no longer exists for companies and countries to undercut each other or to provide additional assistance. Policing by the World Trade Organisation and other bodies now underpins that.

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This is an international business. There are about 39 other ECAs across the world. The G7 members are probably our closest collaborators and therefore, by definition, competitors. If our businesses are to operate abroad and, more important, to consolidate links in the supply chain into the heart of British manufacturing, Britain has to be one of the major guarantors, with the ECGD providing the cornerstone of the support. It is often convenient for British international operators to join other partners from other countries. However, if they do so in a subordinate position, UK plc could suffer as a result of small and medium-sized enterprises, dependent on the big fish, being denied access to markets. The matter should be seen in a business and manufacturing context. It is important to get the funding in place at the right time.
Mr. John Butterfill: Does the hon. Gentleman accept that on several occasions there have been fairly unconscionable delays—caused largely, but not exclusively, by Treasury interference in the process—that have led to the lead ECA being changed from our own to one of the others, thus damaging British industry?
Mr. O'Neill: The hon. Gentleman, my colleague on the Committee, has anticipated my next point. ECAs operate under certain constraints, such as the budgetary constraints that are imposed by the nature of the public sector borrowing requirement. There is a limit to the amount that any country could, or should, be prepared to underwrite for business. It is only fair that criteria must be set down. No prudent underwriter in any kind of business would over-extend the credit that he was prepared to offer.
I worked in an insurance office for some years, and I remember that it was said of our actuarial colleagues—perhaps the most sophisticated group of underwriters—that they were people who found accounting too exciting. Underwriters are extremely cautious by nature, and it is correct that national underwriters should be so in respect of commercial undertakings of the kind that we are discussing. An ECA should be cautious.
However, there is an unnecessary degree of Treasury interference—that was one of the least attractive elements of the evidence that we received repeatedly from business advisers and others. Any broadening and deepening of the export credits arrangements will probably come not from an increase in public expenditure, but from a more formal and more flexible arrangement with the public sector.
At one time, the ECGD's activities covered all export credit arrangements—it had a virtual monopoly. That has changed. For short-term business, the private sector has adopted a healthy approach, underwriting the least risky of risks. It has perhaps been a wee bit too cautious about getting involved in medium-term business. This is not a matter of ideology—public sector versus private sector. On the big projects, with large sums of money at stake or a greater than normal risk, the sovereign state's underwriting is a priority.
Mr. Nick Gibb: In taking evidence from the private sector, did the hon. Gentleman not find that it had an appetite for taking more of the work that is currently undertaken by the ECGD?
Mr. O'Neill: Provided that the work is not too risky. The private sector was quite interested in taking over some other parts because it was emboldened by its experience in short-term business. Private firms were prepared to move into medium-term business. I gained the impression that there was not much resistance to that. Even in countries such as the Netherlands and France, which have privately run export credit guarantee arrangements, the bottom line is still provided by the Government. Whether it is carried out through a Government Department or through private financial institutions, the buck stops with the Government. People will not believe that the arrangements are copper bottomed unless the national Government's role is clear.
I see no fundamental problem with financial institutions wanting to extend their role. The bona fides are there for everyone to examine. Equally, however, if that happens, it should enable the Government to be more adventurous and deal with problems more quickly. It is not all down to the bureaucratic obstructionism of the Treasury, which is reported in the document and which I leave others to develop if they want to. It is equally important to recognise the first come, first served basis, which could cause difficulties if an application—regardless of how pressing it might be—is made at the wrong time of year. Some people will have to wait in the queue because only so much money is available for underwriting.
The need previously imposed on the organisation to wash its face annually has now been changed. We are now talking about a triennial rolling programme, which is more flexible and sensible. Sometimes the horses that we have backed economically do not even get to the starting gate, let alone the finishing line. We have recently been committed to providing financial support for projects in south and east Asia, which never saw the light of day. The freedom enjoyed by the ECGD at that time was such that it was unable to move to areas outwith the designated ones. If some contracts were not lost, they were certainly put in danger.
PSBR constraints and private sector involvement are key issues. The Select Committee accepted—and the Government have not demurred from this—that the National Economic Research Associates report made a case for collaboration, but that there remained a role for the Government to intervene where there was market failure. The Government are not only the insurer of last resort, but the ultimate arbiter of assessing how major problems can be resolved. The Select Committee believes that the Government's role should be viewed with a degree of flexibility.
We were, however, clearly unhappy about the dead hand of the Treasury. The scabrous fist of the Chancellor and others at times has a desperate effect. We made several criticisms about interference. It is not worth going through them all today, but will the Minister explain what is happening about the implementation of the KPMG report? That would be helpful.

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It seems that the sight of the Treasury in retreat was a false dawn. It may have retreated a wee bit, but it has circled the wagons and is holding out once again. There was widespread criticism of the Treasury's unhelpful approach, which, whether wittingly or unwittingly, was not conducive to the good standing of the ECGD or those who sought its assistance.
We should consider other matters relating to the ECGD, such as its good projects in difficult markets scheme. Had this debate taken place 10 days ago, I wonder what the news would have been. There is an unwritten rule in our public administration system that the prospect of hanging—in whatever form—serves to concentrate the departmental mind. Thus, contracts that have been pursued interminably are somehow completed out of the blue when a debate or Select Committee hearing is forthcoming.
We welcome the construction of the Russian pipeline under the Black sea to Turkey. It has proved an incredibly complex undertaking, but we are somewhat worried that it takes two years for the first of such projects to see the light of day. Joined-up government seems a wee bit difficult to achieve in this area. I congratulate the ECGD on getting the contract through, but why did it take such an incredibly long time? Were there internal bureaucratic problems or misgivings about Turkey? My Select Committee colleagues and I are involved in trade as well as industry, and we shall visit Turkey, which is a candidate member of the European Union, in the next few months. We therefore want to know whether there were problems on the Turkish side or on the Russian side, or whether bureaucracy was at fault.
There are two further areas that I should like to discuss. I am not sure that the ECGD's response to environmental and developmental standards is anything more than a token one, and I remain unconvinced that the established criteria are as rigorous as they ought to be. There have been delays, and someone has recently been appointed to deal with them, which is encouraging. However, we need to be convinced about matters relating to the greening of Government, as it were. To what extent has the ECGD embraced such concepts? I must tell the Minister that some form of agreement within the Government on these matters is not enough by itself; there has to be an international initiative, so that common standards can be set. The OECD should be persuaded to give a lead in establishing international consensus on environmental standards. In adopting the moral high ground and securing an agreement, we must not be disadvantaged by others who choose their own standards. In this, the best should not be the enemy of the good. I should like to think that if our own house is just about in order—I still have misgivings about that—we should be entering the international debate and trying to secure consensus of a kind that would not disadvantage us in relation to our most obvious competitors.
I should like to think also that environmental standards would be applied to defence contracts. For too long we have glossed over some aspects of the matter and we need to examine carefully the way in which the ECGD operates in relation to defence as a whole. It is a long time now since I was deeply involved in defence matters, but when I was, I was always struck by the fact that people to whom one sells arms are invariably keen
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to pay for them. They know that if they do not, the supply will dry up. I taught in an inner urban school and one day we were talking about the payment of bills. I asked, "Which bill must you always pay?" One of the kids said, "My dad always pays the telephone bill." This was in the days before mobile phones. I said, "Why is that?" and he said, "Because it's the only way he can keep in touch with the bookie." There is an element of that in the supply of arms.
I am never convinced that export credits are all that necessary in all defence contracts. Those concerned have a vested interest in being well defended, and if they want a degree of defence that calls for expenditure of the order that we are considering, they should be able to pay for it, or other ways should be found of dealing with it. The budget in question, which is always under constraint, should not be stretched and stressed in quite the way that it is with respect to some clients to whom we sell defence equipment.
I have no great objections to many of our defence sales. I am not arguing against them. However, the big guys who sell armaments by and large know that they can afford what they are doing. The little elbow room that they are given by Government might be better directed at other parts of the British manufacturing economy or British business generally. They could receive assistance in that way.
I am also concerned about the Turkish situation and the Ilisu dam. When my colleagues and I go there we shall consider how environmental criteria that the ECGD sets itself will be applied. We recognise that human rights issues arise and relate in many ways to the environmental question, with respect to the displacement of people and their rehabilitation. The issue of relocation in general needs to be considered. We have not set our face against the project. Like the Minister, we take the view, after a subsequent hearing on Ilisu, that unless certain standards are met, the project should not proceed. However, I realise that the jury, in the form of the international study to which the Minister has committed himself, is still out. We want to know the outcome.
The Committee supports the ECGD in its report. We want it to be a genuine, free-standing, arm's length agency with the degree of independence to which it is entitled. It has always been something of a hybrid. It has been answerable to the Department of Trade and Industry. It has been interfered with. Some Departments think that they should have a say, but do not, and others are glad that they do not. There needs to be a bit of status building and we should like to think that that will happen before too long. We recognise the importance of the Government's commitment to a new mission statement and of their continued sounding-out of this matter. It is vital to achieve the right result, because there is only one opportunity in every 10 years to carry out this exercise. I am not too impatient about the time that it takes, but I hope that this will not go on indefinitely.
We took the view that to be a successful agency, the ECGD should enjoy autonomy. It should be accountable to Ministers in Parliament and have the commercial freedom that is implied by getting the Treasury out of the way. It should also be transparent. Some of the misgivings that have been expressed, particularly by non-governmental agencies and

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organisations, have resulted from the lack of information and transparency. Equally, there must be the competitiveness that requires the agency, on behalf of British business, to take on those other export credit agencies across the world that are, understandably, trying to get a share of the business.
While the Minister has been conducting his latest sounding process there have been signs that gaps in the agency are being filled. I welcome David Allwood's appointment as an environmental specialist. The consultation on business principles, matters of openness, debt sustainability, human rights, sustainable development, good governance and business integrity are welcome. One could ask why they were not there before, but, as we know, there is often rejoicing in heaven when one sinner repents. There may be sinners in Victoria street and elsewhere who are beginning to repent.
The ECGD is an institution that we would harm at our peril. It supports British business and enables us to get contracts. It ensures that not just high profile, large companies, but small companies down the chain are involved in an international market. That cannot be bad for British business. But we must also recognise that the world and our own society demand far more of our institutions than they demanded before. We want them to be competitive and successful, but we want them also to represent not just the best in British manufacturing and engineering, but Britain operating as a principled nation on the world stage. We are working for the best interests of the world economy and thereby helping our own people too.
3.2 pm
Mr. John Butterfill: I agree with much of what the hon. Member for Ochil (Mr. O'Neill) said. The ECGD has been doing an extremely good job. It has been constrained by certain elements that have already been mentioned. It performs an important role for British industry and commerce. It is a role that can be improved, but it has served the country well in the recent past.
I particularly welcome the role of Sir David Wright as a member of the advisory board. Close liaison between the ECGD and British Trade International, which I gather is now called Trade Partners UK, is important and can only help us for the future. I am also pleased to welcome the Minister for Trade, in his present role. As a former chairman of our Select Committee, he knows the details of the problem only too well. A man of his ability and integrity will be an asset to the role that he now fulfils. I hope that he can assist us further with some of the matters about which we are not terribly happy.
Many of us were somewhat disappointed in some areas of the Government response. The hon. Member for Ochil referred to our conclusion that the criteria for the ECGD should be autonomy, accountability, commercial freedom and transparency in competitiveness. It was therefore disappointing that the best that the Government could come up with was to say that normal Cabinet Office criteria would apply. That is not enough in this case, nor is it an adequate response to the Committee's thoughtful and considered report.
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I remain anxious about autonomy. The hon. Member for Ochil referred to the dead hand of the Treasury and we took much evidence that showed that many applications to the ECGD for help were delayed by Treasury intervention, which cannot be allowed to continue.
The KPMG report is now available, somewhat belatedly. If such a report were needed, it should have been embarked upon some time ago. At least we now have it, and the issues that need to be tackled have been identified. The Minister must tell us when those issues will be addressed and when the proposals will be implemented so that the ECGD can act autonomously, subject only to overall economic criteria being supervised by the Treasury. In the meantime, until there is full autonomy, the right hon. Gentleman must tell us what will be done to minimise delays, because they are still occurring and that cannot be allowed to continue.
On reinsurance, it is true that more can and should be done with the private sector. I hope that the Minister will tell us what progress has been made.
I do not know how good projects in difficult markets are defined. As the hon. Member for Ochil said, why is Turkey considered a difficult market? Why did it take two years for the pipeline project from Russia to Turkey to be accepted? As far as I know, that is the only project under these criteria that has been accepted to date, but I hope that the Minister will tell me that I am wrong. Turkey should not be a difficult market; it is a member of NATO, a reliable ally, a country with which we have had close trading relations for a long time and a nation that has applied to join the European Community.
I gather that some of the problems with the Ilisu dam related to the dead hand not of the Treasury but of the Foreign Office. Much correspondence has passed between the Foreign Office and the Department of Trade and Industry on that subject. We want to know what is in that correspondence. What is the nature of it? Why were there so many delays? I understand that the Secretary of State for Trade and Industry said that he was prepared to release the correspondence into the public domain, but that the Foreign and Commonwealth Office vetoed the suggestion. Perhaps the Minister will enlighten us on the subject when he replies to the debate. Has the Foreign Office vetoed release of the correspondence and, if so, why? If it has not, when will we be allowed to see it?
It is right that there should be environmental assessments of projects that we are financing. It is also important that environmental standards are applied equally by the ECAs of other countries; thus the participation of the ECGD in the international forums that discuss such matters is vital—it is vital, too, that our assessment process for environmental standards is at least as speedy as that of other nations. We shall not do ourselves any good if the time that we take to make such assessments is far longer than that taken by competitor nations and as a result we suffer the same disadvantages that we are hoping to eliminate in the case of the Treasury.
It has been suggested that the reinsurance facility may be withdrawn. Exporters certainly want it, and it is impossible to see how the process will continue unless the Government are prepared to be the reinsurer of last resort. Can the Minister tell us exactly what is intended?

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Our report was published in January and the hon. Member for Ochil said that he did not think that it was bad that we did not receive a response from the Government until the end of July. I think that it is appalling that we had to wait more than six months and that the response arrived when Parliament was going into recess, so the issue was kicked into the long grass. Only now, in November, do we have the opportunity to debate our report and the Government's response. Why did the Government take so long to say so little? Again, I am interested to hear what the Minister has to say, although I accept that it is not his personal responsibility, as he assumed his present role relatively recently.
The initial Government response was that they still insisted on an annual break-even for the ECGD. I think that that has now been relaxed and that they allow for a triennial basis. It is encouraging that the Treasury at last realises that in the real world people work on other criteria than an annual basis.
3.12 pm
Dr. Jenny Tonge: I am sorry that my hon. Friend the Member for Twickenham (Dr. Cable) was prevented from leading for our party in this debate by a delay in reaching the Chamber due to personal circumstances. He probably knows more about the subject than anyone else here, so I hope that he will intervene later. I became interested in the subject in my role as Liberal Democrat shadow Secretary of State for International Development—I always hesitate before remembering my exact title.
The subject of the debate is dear to development and important to developing countries. I am well aware that there is a conflict, however. When I say anything about the arms trade, I am always told that there is a need to protect British jobs. I accept that but, as the hon. Member for Ochil (Mr. O'Neill) said, we are not talking about many jobs. The people involved could easily be deployed in other industries. I wish that the previous Government had concentrated a little more on turning swords into ploughshares and thought of alternatives to the arms industry. That also applies to this and succeeding Governments. I accept that that is probably a female view and that we must recognise the jobs interest when we consider export credit guarantee assistance to support British industries. The issue has broad effects for our economy and impacts tremendously on our policies on development and developing countries. There is a huge dilemma there, with which I shall deal in a moment.
Everyone wants developing countries to have modern facilities and energy—for example, oil wells, if they have oil—and to develop in the way in which we have developed in the past 200 years. However, a balance must be struck between those and human rights and environmental interests. That is a difficult balance to strike when considering development issues.
There is also the risk to the taxpayer. In a previous debate in this Chamber, I was told repeatedly by the Minister—I think that it was an out-of-hours debate—that there is no cost to the taxpayer and that it is a break-even situation. I simply do not understand or believe that.
Dr. Vincent Cable: If an export credit agency breaks even, that does not mean that it is
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operating commercially. If the ECGD were operating like London Underground or the Post Office, it would be expected to earn a 6 per cent. return. No private-sector coal mine or textile factory would stay open indefinitely on a break-even basis. Therefore, a subsidy must surely—implicitly—be involved.
Dr. Tonge: My hon. Friend has just proved my point. His argument is difficult to answer—I certainly cannot do so—but I hope that the Minister will explain why there is no cost to the British taxpayer in export credit guarantees, especially when 95 per cent. of third-world debt is related to export credits. If we are to wipe out that debt, as part of our initiative on debt relief—which was very welcome and on which the Chancellor is to be congratulated—there must be a cost to the taxpayer somewhere. I look forward to hearing the Minister's explanation.

I am particularly interested in the criteria for granting export credit guarantees. The Select Committee report deals with that question. The hon. Member for Ochil said that he suspects that they are little more than a token. In fact, they are like the Organisation for Economic Co-operation and Development guidelines that are often quoted to us, which multinational companies always follow when they are operating in third-world countries. We all know that those guidelines are voluntary, and I suspect that the criteria for export credit guarantees are also voluntary. Will the Minister tell us who monitors them? Who can tell us whether they are being adhered to? Who knows what goes on once the ECG has been granted and the project gets going? Who carries out the audit and the monitoring and provides feedback so that we know that our money is being properly spent?
Human rights considerations are also involved. They relate to the way in which workers are treated, and the way in which people are displaced. A British company is involved in the extraction of oil in southern Sudan, and people are being killed, maimed and driven from their lands. They have nowhere to go and no consultation has taken place. Although we play only a small part, we are a party to what is going on there. We know that the OECD guidelines are not being met in all sorts of projects throughout the world. I ask again: who knows whether the ECGD criteria are being met?
Environmental impact assessments are another interesting factor. How binding are they? In my constituency, we have the threat of terminal 5 at Heathrow airport. There does not appear to have been an environmental impact assessment for that. Who, therefore, carries out such assessments for all these projects abroad before they are granted ECGs? How do we know that they have been carried out effectively?
There is also the debt consideration. A huge consideration for developing countries is whether they will ever be able to pay back the money underwritten by the ECGD. Should we encourage them to take out further loans in the form of ECGs to pursue other projects? That is a thorny question, because therein lies the debt of the future that we shall have to relieve.
The Liberal Democrats feel very strongly about ECGs for arms. They should be given only in exceptional circumstances, especially to developing countries. Everyone accepts that countries have

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legitimate needs for defence equipment for their own defence and to build up their armed forces. However, those criteria have by no means been met in the past, and I suspect that they will not be in future. Indonesia is the example that springs to mind.
I could not fail to mention the Ilisu dam, especially given yesterday's rally in Parliament square—it has been mentioned twice already. It is becoming a scandal that, if it is not soon resolved, will cause much dismay to many people and much criticism of the Government. Huge environmental considerations are involved. Many people, mainly Kurds, will be driven from their lands, with no proper assessment having been made of where they are to go or what will happen to them. Hasankeyf, a valuable and ancient site, will be totally destroyed by the building of the dam, and what does the Foreign Office think about the prospect of water wars between Iraq and Syria?
Those arguments have been rehearsed in this Chamber and elsewhere, yet we are still receiving no answers from the Government. I remind the Minister that the mission to the area that was organised by the non-governmental organisations during the summer reported back that none of the criteria for granting ECGs to Turkey for the Ilisu dam have been met and that it would therefore be very wrong to go ahead with the project.
I have attempted to express my concerns about ECGs, Mr. Deputy Speaker. They have an ethical dimension and go to the heart of the Government's foreign policy, and we need some answers.
Mr. Eddie O'Hara: Order. Before I call the next speaker, I should point out that, much as I appreciate the thought of being elevated to the position of Deputy Speaker, especially as there is a vacancy for the job, I should be addressed as Mr. O'Hara in this Chamber.
3.22 pm
Mr. Stephen O'Brien: Thank you, Mr. O'Hara. It is a pleasure to be in this Chamber, despite the lack of people. You, the Chairman of the Trade and Industry Committee and I share an "0- before our surnames. As a proportion of hon. Members present, that must be a record for a debate in the Palace.
I am grateful for the opportunity to speak in the debate. I congratulate the Committee and its Chairman on a balanced report on the suggested future role of the ECGD, and associate myself with the remarks of my hon. Friend the Member for Bournemouth, West (Mr. Butterfill).
My interest in the role of the ECGD was sparked in 1994, when I took part in a trade mission to Argentina and Brazil led by the then Minister for Trade, Sir Richard Needham. In those days, I was an international business man, and my prime interest was inward investment into those countries. There were a large number of British exporters on the mission, as well as a senior ECGD representative and some talented and supportive DTI personnel. It became clear then, and in the course of my subsequent business dealings before I
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entered the House just over a year ago, that the ECGD has been, and is, successful in a highly competitive international market.
That leads one to ask what is in need of change. There is merit in what the ECGD is doing, and we should ensure that that is recognised. It does a good job generally, and is crucial in enabling British business to penetrate riskier markets at some points in their cycle and in product development. It is vital for the support of seed-corn businesses, when trust through committed business relationships is the highest currency for building a presence and creating opportunity in difficult markets. In the long term, if the seed corn is right, opportunities to secure expertise, technological development and a return on research and development in this country can be taken advantage of and built upon.
I want to put on the record the fact that, in my experience, the staff at the ECGD are experts with a real motivation to help. I have met only the highest quality staff, but they have been hampered by constraints. They are leaders among export credit agencies, but it is a perception and perhaps a reality—that is why we are discussing the matter—that interference from the heavy hand of the Treasury risks putting us at an international competitive disadvantage instead of providing a solution and creating opportunities.
This is a good time to take stock and to think about the ECGD's mission. I note that the Government agree in their response that any changes to the ECGD's mission or status should take account of the competitive position of UK exporters and investors. They concluded that its core aim should be to continue to support the UK economy
by fulfilling its statutory purpose of facilitating trade by insuring UK exporters and overseas investors against medium and long term payment and political risks.
They then qualify that with their argument on the break-even position in a broader financial framework and the other criteria that should be taken into account. That begs the question: what is driving the desire for a change? If the Treasury is concerned, on behalf of British taxpayers, about a sizeable loss as a result of, for example, the Asia crisis, we must examine what happened. First, the Asia crisis was the same for all export credit agencies, so it was an equal hit internationally and competitively. How much did the ECGD lose as a result of the Asia crisis? The Minister may have the facts and figures. I suspect that the loss was small, but that may be the hook on which the Treasury is trying to hang a change.
Furthermore, as the hon. Member for Richmond Park (Dr. Tonge) said, there seems to be a widespread suspicion that the ECGD has become a tool of large aircraft, aerospace and defence manufacturers and perhaps the telecommunications companies, although they use the ECGD less. I believe that that suspicion is ill founded. In recent years there has been a dramatic shift in the industrial sectors, whose penetration of export markets from the United Kingdom, particularly in big projects, are most successfully represented by UK firms.
In 1994, when I was on the South American mission, the power generating sector was by far the most represented, but it hardly features today. Business today

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is vastly more fluid in its ability to transfer sourcing. It is easy for the telecoms sector to switch production from one country to another, and the cost of credit is invariably the differentiator. The Italians and French now have the edge in the power generating sector compared with five years ago, but the UK has a strong position in the aircraft, aerospace and defence sectors and we want to ensure that that position is maintained. Who knows what will happen in the next five years? We could have the edge in satellites and robotics. We do not know. That shift in the market and the background to it must be addressed and accepted.
Another myth is that the ECGD should focus more of its support on small and medium-sized enterprises. That aim is admirable and laudable, but it displays a lack of understanding of the dynamics of the industrial value-added chain. I would argue, as does the British Exporters Association—this addresses a point made by the Chairman of the Select Committee—that the needs of SMEs are met through their role as sub-contractors to prime UK contractors, and such "primes" will front the relationship with the ECGD. Therefore, although the ECGD is supporting SME exports, the data is not recorded. Indeed, I doubt whether there is sufficient business for SMEs to act as prime contractors in their own right. The banks would not welcome such business—the ECGD would doubtless be keen to take note of the lead given by banks in this respect—given the fixed costs associated with undertaking ECGD business, irrespective of contract size.
The Minister for Trade (Mr. Richard Caborn): They would say that, wouldn't they?
Mr. O'Brien: Indeed. The Minister says, "They would say that, wouldn't they"—in a Mandy Rice-Davis sort of way—and we must accept that there will be a tension. It is a marketplace, and the boundary that will determine where the Government should step in is not permanent. It is a wavy line, and we accept that bankers are always going to push it to their advantage. However, SMEs benefit greatly from being sub-contractors to prime contractors. The accusation that the ECGD exists purely to support a few defence and aerospace companies is unfair.
Mr. O'Neill: The point that I was trying to make was that the degree of risk in many defence contracts is not as great as some would have us believe. There is a displacement effect, and access to facilities is denied to a cash-limited organisation such as the ECA. Therefore, it is unable to provide full assistance because it occasionally supports defence contracts that might not need support, but which have always received it and expect to get it.
Mr. O'Brien: I certainly accept that point. To be frank, there is also a politico-commercial point. To some extent, the ECGD—albeit as an arm's length agency—ties the Government into relationships in that sector. As a result, the confidence of all parties involved is affected. I accept that there is a capacity issue, but it is a moot point whether, if released, it would be taken by SMEs, given the fixed cost base and the way in which bankers operate.
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I have thought carefully about the purpose of the ECGD, and we are faced with a conundrum. I recently received an e-mail from a banker on this subject. Although, as the Minister said, we must take such comments with a market pinch of salt, we should nevertheless note them. The banker said that his clients need a clearer steer on ECGD support when bidding for projects. At present, clients can be frustrated to discover that the whole evaluation process may turn into a farce, as they see it. As a result, they have no idea where they stand. Even a "yes" would be a start, subject to the ECGD being comfortable about environmental and productive issues, but that would not help a UK exporter who needed to submit a committed tender by a specific date. The conundrum is that we want the ECGD almost exclusively to support UK exporters, but the Treasury—quite understandably—wants to mitigate the risk and potential loss on the taxpayers' behalf.
Without modernisation and appropriate facilities in this Chamber I am unable to make a Powerpoint presentation, which would allow me to explain this matter by referring to a traditional, bell-shaped graph. The ECGD has traditionally taken the risk portion that is positioned at the far right-hand side of the bell graph. However, the Treasury is pushing the ECGD to consider spreading its risk portfolio into the larger part of the bell, which is currently occupied by others. Is that the right way to proceed?
I can see that the Treasury might like to increase its activity in those lower risk areas, by spreading its pool of risk. There is a perfectly normal insurance—based argument for lessening risk by participating in a broader pool. However, apart from the underlying philosophical argument, one must ask why it should be necessary to stray into an area that is already pretty well served by the private sector—by the banks, the insurance market or the bond issuers. As the hon. Member for Richmond Park said, there is an underlying Treasury subsidy, which could represent unfair competition in that market, as ECGD could try to move into the relevant sphere of business. The ECGD should remain in the sphere of activity in which it is most likely to add value. That is, by definition, the most uncommercial area, with the highest risk for the longest term. That would be in the national interest.
I want to comment on another aspect of the matter, wearing my very small hat as vice-chairman of the all-party Jubilee 2000 group, which works on promoting the relief of third-world debt—very often in the same countries as those involved in contracts covered by ECGD. A third-world Government may be reluctant to renege on a sovereign-to-sovereign debt. A real issue arises about the Government's role. Arguments may have taken place in the past about whether the whole of ECGD should be privatised, but a fair counter-argument is that sovereign-to-sovereign debt has a greater power to focus the minds of those who might renege than would the prospect of letting down private banks. That is relevant to the operation of the ECGD, and possibly a justification of Treasury subsidy.
I emphasise that the ECGD should focus on its job as a funder and insurer of last resort for the highest risk projects, in support of UK exporters. It is the role of other arms of Government to put constraints on its activities. It should not become the policeman, in place of other departmental responsibilities. A temptation has

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arisen—and I note an example from what I believe to be the draft Liberal Democrat manifesto—to promise to end
subsidies for arms sold to foreign regimes by ending the practice of the Export Credit Guarantee Department using British taxpayers' money to support arms exports.
That is misplaced with regard to the ECGD, and is relevant to the proper operation of the export licensing system and the determination of public policy through the normal governmental arms and Departments.
A major concern, even in the Government's response to the Select Committee report, is that confusion exists on this issue. The confusion is about whether we are considering a funding and insurance arm of Government, which is in the national interest, or a role in addition to that as policeman and watchdog, whether operating uniquely or in partnership with other Departments. The Department should not need to perform that role if all the other Departments and mechanisms of government are established.
Mr. Butterfill: Does my hon. Friend agree that it would be curious if we were prevented from selling arms to a democratically elected Government who were threatened by internal revolution or external aggression? Surely at the very least we should want to protect democratically elected and responsible Governments?
Mr. O'Brien: We would all probably consider it unobjectionable, subject to the particular circumstances, to try to assist democratic countries that wanted to uphold democratic rights by way of the normal defence arrangements. I hope that those criteria are not exceptional.
Dr. Cable: Does the hon. Gentleman agree that, although it is often correct to supply arms to a democratic Government seeking to defend themselves, as the hon. Member for Bournemouth, West (Mr. Butterfill) suggested, that is different from incurring risk and, implicitly, loss on behalf of the British Exchequer by providing export credit guarantees? The university of York computed figures for the Defence Committee suggesting that the cumulative losses incurred on defence contracts in the past were about £200 million a year.
Mr. O'Brien: I do not know of those figures. The right way forward is to ensure that our industries have proper support to access markets wherever they are available. Objections to arms sales should be dealt with through the export licensing arrangements. The hon. Gentleman mentioned a cumulative loss to the British taxpayer in a particular sector. Again, we should consider the operation of the licensing programme.
The experts and operators in the ECGD are supposed to have greatest expertise on funding and insurable issues, rather than on the political criteria used in the exercise of public policy, which is, quite properly, the responsibility of the DTI though the licensing system. I dare say that the Minister will refer to that.
Dr. Tonge: I do not agree with the hon. Gentleman, but I accept his argument that the ECGD should not
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have any involvement other than to back up the loan in arms sales. Does he agree that other Departments have little control over where this country puts its money? The Ilisu dam case will not go through the arms export control mechanism, so there must be some controls when we grant ECGDs.
Mr. O'Brien: I suspect that we must let the issue rest, because some parties want strongly to link the operation of the ECGD with political issues. My argument, which I hope I have made clear, is that the ECGD should be more the tool of UK exporters. The Government have other and better opportunities for ensuring that public policy is exercised in the fields to which the hon. Lady referred.
It is impressive and right that the British Exporters Association endorses the principles, rather than the mechanisms, behind concerns for the environment, human rights and the wider agenda. However, it is felt that there are other and better arms of Government to deal with them.
I think and hope that competitiveness is the common ground between us. As the Chairman of the Select Committee said, there must be a worldwide approach. We must have engagement with international bodies, which my hon. Friend the Member for Bournemouth, West mentioned, or at least within the Organisation for Economic Co-operation and Development, so as to maintain—in the time-honoured but critical phrase to all business—a level playing field. UK exporters would not want the country to take such a lead and be so far out in front that it did itself damage. However, it is perfectly laudable and right that the UK should not only keep pace, but be a pace setter.
Whatever happens, it is the Government's and Parliament's role, through the Select Committees, to ensure that there is a reality check and that we do not deliberately take a stance that damages the UK's competitiveness. Many people live on this small island, so they must be able to maintain an essential manufacturing base. If the ECGD were less competitive, multinational companies would switch supply away from the UK, which would be regrettable and is to be avoided.
I referred to third-world debt relief. Debt forgiveness programmes should be limited to amounts that can be written off by the Government; they should not include amounts owing to UK exporters that are not insured. That is very much a banker's perspective, but it is a realistic approach. It is, quite properly, open to debate as a matter of policy by Members of Parliament. It could provide a means of securing agreement among international bodies, and could further an all-party approach to promoting debt relief.
It is proposed that ECGD becomes capitalised. How much capital would it be allowed? Would it be enough to cater for its on-going requirements? Given the difference between the capital allocation allowed for France and for Iran—I employ a typical banker's model—what will be the capital allocation for ECGD? One fears that ECGD will be behind rather than in front of the game in that respect, because the private sector has already been there. The issue is particularly pertinent in view of light aircraft and defence projects in the current arena.
One should not forget that UK exporters enormously value advice from commercial banks on structuring expertise, local buyer country intelligence and

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associated commercial loans. If the ECGD were to enter into this field—beyond the wavy curve, to return to an earlier pictorial description—would all that be available as part of the package? UK exporters want to ensure that the ECGD's aim for transparency does not conflict with their undertakings of commercial confidentiality.
Will the Minister explain whether, if the ECGD is capitalised, the Treasury will allow it to have delegated authority to conduct business as it sees fit? The ECGD needs to refer projects to the Treasury when the underlying risk is below investment grade. Many observers believe that if the ECGD were permitted to decide internally on applications for risk down as far as BB level, it would cover the majority of ECGD business and would therefore confer the independence and autonomy that it requires.
I intended to explore the issue of risk return, but it was dealt with earlier. In conclusion, although all institutions must move within the markets, within the terms of public policy and within the mandates of Governments, I do not believe that the ECGD can or should change unilaterally without reference to other export credit agencies around the world. It would be wrong to introduce major changes without considering all the issues. The Select Committee report has provided a good steer, but more substantive responses from the Government would be helpful. Thus far they have provided only a short response.
I hope that the Government will reflect on my arguments and that their watchwords will be that the ECGD should focus, above all else, on areas where it adds value in the high-risk, high-tenor market. If it is granted proper autonomy, it should have the flexibility to respond in a proper, market-sensitive way in the best interests of UK exporters.
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Mr. Nick Gibb: We have had a good debate which may even have seemed exciting to anyone who left accountancy, as I did, because it was too exciting.
The ECGD's document and the Secretary of State's foreword to it give the impression that the review was forced on the Government by rules set by the next steps initiative, which required all Departments to review their status every five years. Ministers seemed to have no desire or motivation for the review and no agenda that they wanted to pursue. There are many words in the document, but little desire is expressed to move things on. Ministers appear only to have gone through the motions.
As my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) said, the ECGD performs an important role for industry and commerce. The insurance of export risk is an important business for Britain, which has a history as a great trading nation. It is also an important element of business in the City of London.
As the Select Committee states, the ECGD, set up in 1919, was the world's first export credit agency. Since then, there have been huge changes in the capital markets of the world, especially in the past 20 years. That is why, as the hon. Member for Ochil (Mr. O'Neill) said, in 1991 the previous Government privatised the short-term credit insurance arm of the ECGD, which
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was acquired by the Dutch company, NCM Credit Management Worldwide. That company has expanded the business in a colossal way since 1991. According to the evidence to the Select Committee, in the United Kingdom alone it insures about £30 billion of business annually against the risk of non-payment. That compares with the ECGD's £3 billion of annual risk insured. Of course, there is a huge difference between the short-term risk undertaken in the private sector and the longer-term risk in more difficult territories undertaken by the ECGD.
Since the privatisation of short-term risk in 1991, the private sector has developed enormously and responded well to the new opportunities that the privatisation afforded them. The disappointment with the review is that it fails to take into account, or even to refer to, the developments. In the past few years, there have been considerable, almost seismic, changes in the world's capital market with new technologies, innovative products and better forms of communication. However, as my hon. Friend the Member for Eddisbury (Mr. O'Brien) said, there are political risks in a number of countries. That might be a sovereign debt risk or the risk of confiscation of assets by the regime—following the windfall tax on utilities, that is a risk that some American investors believe applies in Britain under a Labour Government. That aside, political risk can also involve a restriction on exchange controls and on taking money out of the country once it has been invested. As far as certain countries are concerned, such risks are beyond the scope of the private sector at a price that would be commercially viable.
There is, however, a swathe of business that lies between the short-term risk and high political sovereign risk which the private sector could adequately take on and which it may be able to do more cheaply and more innovatively than the ECGD. It could certainly do so more speedily than the ECGD does at present.
Having said that, there are some encouraging words in the review. Paragraph 1.31 states:
An ECGD should rigorously scrutinise any opportunities for contracting out functions, particularly any new functions to assess whether this would represent value for money and bring an improvement in service delivery.
Later, the report states:
The ECGD should build on its success of working with and complementing the commercial banking and insurance sector. ECGD should build on the success of the privatisation of its short-term business.
The report continues:
The ECGD should use the private market to manage risks through active Treasury management using hedging, capital markets and reinsurance instruments where this is cost-effective.
These are interesting words, but they lack substance.
The Government's response to the Select Committee report was a little more forthcoming. It said that
the Government accepts that it is not in the UK's economic interest for ECGD to compete with the private sector, but in order to maximise private sector capacity to take on risk, it should be in its interest to take on more of what ECGD does. ECGD should continue to work in partnership with private sector providers and should seek to fill gaps only where there is a genuine market failure and where it makes economic sense to intervene.
Paragraph 20 of the Select Committee report seems to show that that market failure relates principally to defence sector exports. The free market seems to have

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less appetite for arms export than the state—something on which the left might wish to ponder. That paragraph is a key statement of Government policy. The question remains whether that intention will be delivered.
NCM, a major player in this market, wrote to the Secretary of State on 9 August. The letter says:
We were disappointed to receive from ECGD a letter—which indicated that whilst ECGD would be ready to work with the private sector on such projects Ministers had decided that it would be better to do that after substantial progress had been made on ECGD's agenda for change.
We continue to believe that there is a real and valuable contribution that the private sector can make to ECGD business. We do not believe that this will happen unless ECGD both encourages the private sector and makes room for the private sector to grow. None of this will even begin to happen unless ECGD begins a dialogue with the private sector and from what ECGD has said to us that appears unlikely to happen for some considerable time.
There is a concern and a suspicion that there is an element of empire protection within the ECGD and that key officials are dragging their feet in opening up more work for the private sector. An answer to that would be most welcome. Will the Minister also answer my hon. Friend the Member for Bournemouth, West, who asked what progress had been made by the ECGD in doing more with the private sector, particularly on the reinsurance front?
Will the Minister also expand on the capitalisation framework referred to by my hon. Friend the Member for Eddisbury, the key element of which he intends to put in place by April next year? The review document says:
ECGD is also aiming to have formulated by April 2001 the policy framework for a full capitalisation system to be introduced by April 2002 including the establishment of a trading fund.
The footnote says that the key characteristic of a trading fund is that it operates outside the vote system. Will the Minister say a little more about that and what safeguards there are to ensure that high-risk trading ventures are not undertaken at a possible loss to the taxpayer?
The hon. Member for Twickenham (Dr. Cable) pointed out that if the ECGD were required to return 6 per cent. on its capital—the same point is made by Samuel Brittan in a series of articles although he refers to a return of 8 per cent—the break-even position would represent a loss. I should be interested to know how that matter is being addressed by the resource accounting process. Perhaps the Minister could address that, too.
Paragraph 22 of the Select Committee report refers to the recent losses incurred by the ECGD arising from business in south-east Asia and Russia. It says:
There is a question to be addressed concerning the time scale over which ECGD's break-even objective should be mentioned. Under WTO guidelines there is no definition of the time scale.
Has any member of the WTO complained about these losses?
Finally, the review document is very glossy. It is full of fine words and sentiments but it lacks the bold initiative to create a truly modern ECGD regime that Britain, the world's second largest overseas investor and the fourth largest economy, deserves. The question we
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must now ask is whether the words will be followed by the kind of action they imply. I am sorry to say that the evidence to date is that they will not.
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The Minister for Trade (Mr. Richard Caborn): If I may say so, I thought that the end of that speech from the official Opposition was slightly disingenuous.
I accept genuine criticism about the delay that has occurred since January, when the report was submitted after the consultations finished at the end of last year. It took us until July to produce our response. It has not been easy. There have been wide-ranging discussions, as we wanted to ensure that all views were taken on board. To that end, we have also consulted other Departments. This is not only an ECGD document, but one that concerns the Government more generally. Many of the points raised in this debate, in the Select Committee and through other representations needed serious consideration to see how we should move the ECA forward.
We are grateful to the Select Committee on Trade and Industry for producing its report in January. It has helped us to clarify some of the points raised in the contributions to the consultation. It was a well-informed and timely contribution to the review of the ECGD's mission and status, and I believe that we have taken into account all the Committee's concerns in the review report that was laid before the House on 25 July. I shall deal at the end of my speech with any points that I have not covered, and any hon. Members who then wish to respond may do so if they can catch your eye, Mr. O'Hara.
When the Secretary of State and I launched the ECGD review in July 1999, we were aware that it played an important role in underwriting between £3.5 billion and £4 billion-worth of UK exports and overseas investment each year. The figure fluctuates each year; I believe that last year it was about £5 billion, and slightly less the year before. We saw the review of the ECGD's mission as an important opportunity—contrary to what the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) suggested—to take a fundamental look at what the ECGD's role should be, and to make sure that it is ready to meet the challenges of the 21st century, of which there are many.
We particularly wanted to take a fresh look at the relationship between the ECGD's trade facilitation activities and the Government's wider international objectives. I should like to put that into context. British Trade International has been mentioned this afternoon. That represents a significant step taken by the Government to bring together for the first time the Foreign and Commonwealth Office and the Department of Trade and Industry to work together for UK export promotion and development. We have put an effective system in place, although I shall not go into details. It forms part of the bigger picture, in which the Government are trying to provide United Kingdom exporters with the best possible service. This is not an afterthought or a bolt-on. It is part of the integral approach that we have taken by providing good facilities to our exporters.
The ECGD covers about 3 per cent. of total exports from the United Kingdom. It is a financial facility to assist our exporters in the more difficult markets—their

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activities represent about 3 per cent. of total exports, and, as the hon. Member for Bognor Regis and Littlehampton mentioned, involve about 20 per cent. of capital goods, which is also significant. However, let us keep our eye on the bigger picture, which is the percentage of the United Kingdom's total export goods.
British Trade International is the holding company for Trade Partners UK and Invest UK—the two bodies that make up BTI. We are trying to increase our exports by increasing those services to UK exporters. It is significant that every 1 per cent. increase in exports contributes just under £2 billion to the UK economy. We therefore take these matters very seriously. Contrary to what the hon. Gentleman was saying about our being forced into this position, we have made this an integral part of our service to UK exporters.
We also want to consider how we should balance the benefits of ECGD support against risks to the taxpayer. We must do that, as a responsible Government. Although there have been major studies of the ECGD's role in the past, none has been quite so wide ranging or attracted so much public attention as this review.
The Select Committee on International Development has also taken a close interest in the ECGD's role in relation to developing countries, and rightly so. There was public consultation, which took views from the ECGD's customers and other interested parties. A number of supporting studies were also carried out and published alongside the mission and status review, some of which have been mentioned during the debate.
The ECGD worked closely on the review with officials from other Departments. I pay tribute to the quality of the staff at the ECGD, especially to Marion Maddox and her team, who have produced a piece of quality work that will set the framework for several years to come.
I welcome scrutiny of the ECGD's role. Over the past year or so, it has faced intense criticism from some quarters, much of which is not well founded and gives little acknowledgement of the benefits that the ECGD can bring—not only to the UK's economy in the form of jobs for many thousands of firms in the supply chain, but to overseas countries that would not get much-needed investment were it not for the ECAs.
I am determined to tackle the perception that the ECGD is a force for evil, because I believe that it is a force for good. In taking that argument on, we want to shine a strong searchlight on the ECGD's operations to make it more transparent and to publish much more information, so that the full story is there for people to see. I accept that only a few people understand export credit guarantees. In the mid-1990s, when I had the privilege of chairing the Trade and Industry Committee, we considered the whole question of ECGs. It is a technical matter, but it need not be regarded as such. It is a facility to aid British exports, and that is how it should be regarded in the public domain. We must talk in lay persons' language, rather than jargon, so that people understand.
The ECGD is rightly praised by business for being one of the most innovative and flexible ECAs, but it needs to reform and modernise. That problem was tackled by the mission and status review. We need to make changes in key areas, many of which were usefully highlighted in the Committee's report. The review was
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published before the recess. It sets out 38 conclusions representing a wide-ranging agenda for change, all of which the Government have accepted.
I shall run through some of the key features of the new direction that we have set for the ECGD. First, on the ECGD's core purpose, the new mission statement confirms that it should continue to provide insurance cover and guarantees to help UK exporters to win business and UK firms to invest overseas, bringing benefits to the UK economy. That is significant, because there was a big debate in the Treasury about whether that facility is necessary. The case had to be argued, was argued forcefully, and has now been accepted across the board.
The review confirmed that the private market is not consistently able to take on medium and long-term risk in non-OECD markets. UK firms also need to compete effectively against exporters from other countries supported by Government-backed ECAs.
In reality, ECAs represent an artificial market on which there are controls, such as those imposed by the World Trade Organisation, which are more refined in the OECD countries. That artificial market is subsidised in various ways, for which there must be ground rules. If we did not have it, many developments around the world would not happen. We must co-operate to ensure transparency and a level playing field. That is what we are attempting to do through the review and our role in international institutions.
There is a clear business case for the Government to continue to intervene to fill the gap in the marketplace. However, we also want to encourage the private market to develop so that the ECGD can continue to explore ways of getting it to share risk and expand its appetite for non-OECD medium and long-term risks. We will establish that dialogue over the next 18 months to two years, as we put in place the fundamental changes that will be brought about by the new mission and status review.
Mr. Gibb: Would it be possible to start the process a little sooner so that the private sector can work with the ECGD earlier, without waiting 18 months to two years?
Mr. Caborn: The hon. Gentleman says that we are dragging our feet, but that is not so. We have held a series of discussions with the private sector but, before entering detailed discussions, we want to resolve the funding arrangements with the Treasury so that we know the outcome of the mission statement. It is not right to enter those detailed discussions at the moment.
The private sector will not be able to use the state as a lender of last resort, but will have to take the risk, as it did with short-term risk. However, the Government want to work in partnership with the private sector. As I develop my speech and explain how the mission statement will be implemented, it will become clear that it is important to put some matters in place before entering detailed discussions with the private sector.
The second key issue is that a new risk management framework will be introduced. Taxpayers must be confident that the ECGD will continue to operate on a break-even basis with strong risk management discipline and appropriate financial objectives. As the Trade and Industry Committee said, the ECGD's

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financial performance must be measured over a long period, but there has been much confusion about that. Its financial performance has been positive for business underwritten since it privatised its short-term operations in 1991. Few realise that it is a substantial contributor to the Exchequer. It has recovered much of the money that it paid out in claims on pre-1991 business from countries that have been able to pay their debts, and has written off large amounts owed by the poorest countries with great debt.
We have agreed that a strengthened risk management system should be introduced. That arose from the KPMG report, to which the hon. Member for Bournemouth, West referred, and its positive recommendations. A capitalised framework will be introduced, and the ECGD will move towards operating its business under a trading fund. That should enable the ECGD to have operational autonomy in making its risk decisions, allowing the Treasury to pursue the role of strategic oversight. That should address a number of the concerns that the Committee rightly expressed.
Mr. Butterfill: When is that process likely to be achieved?
Mr. Caborn: Discussions are going on now with the Treasury, and we have laid out the principles in the mission statement. The Treasury would like us to introduce the process sooner rather than later, and we want some steps to be taken before 1 April 2001 with completion by 2002. It is important that discussions with the Treasury are completed as quickly as possible.
There is a genuine desire to ensure that what we agree with the Treasury and other Departments will work. They see the advantage of an effective ECGD that can play a role not only in the United Kingdom but in the international community. I hope that we can resolve the issues with the Treasury sooner rather than later, with a move towards the establishment of a fund in 2001 and completion by 2002.
I know that business is concerned that the new framework may constrain the ECGD further and make its services uncompetitive with other export agencies. That was referred to during our discussions, particularly those with the Treasury. I assure this Chamber and business representatives that the ECGD's overall risk appetite and financial objectives will remain broadly the same. The ECGD will not be required to charge its customers higher premium rates to pay a return for the use of Government capital. To do so would be stupid, and would take the ECGD out of the marketplace. If it becomes too expensive for our people to export, they will be put at a disadvantage.
We need a sensible arrangement with the Treasury, and we must ensure that there is a level playing field in relation to other export agencies. We must not tie one hand behind the ECGD's back. I understand the concerns expressed by business, and I give an assurance that the arrangements will be broadly the same. That should give comfort to those operating in the export market.
The third major change in the ECGD's new mission statement makes it explicitly clear that its support for projects must take into account the Government's wider
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international policies, including those relating to sustainable development, human rights, good governance and trade. The ECGD is currently consulting on a draft statement of business principles—taking a leaf out of the Commonwealth Development Corporation's book—which will guide business practice under the new mission statement. The business principles will cover matters such as openness, debt sustainability, human rights, sustainable development, corporate governance and business integrity.
Those principles will be published and regularly reviewed, so that customers and other interested parties will know where the ECGD stands. They will answer some of the questions that were posed this afternoon, and about which business is a little confused. Business is being consulted on the mission statement, which will embody those principles, and as a result there will be greater certainty.
Dr. Tonge: Will there be monitoring and assessment to ensure that firms stick to those business principles?
Mr. Caborn: If the hon. Lady had waited for my next sentence, her question would have been answered. From 2001, the ECGD's annual report to Parliament will cover its performance against the business principles, as well as its financial outturn. All hon. Members will have access to that report, as will the general public. It will be up to the parliamentary authorities to decide whether the report should be debated in the House or scrutinised by the Trade and Industry Committee, and we will provide the relevant information if it is needed.
This is a major step forward. It is right that the ECGD should promote the Government's policies more actively, and in ways that are consistent with its core aim. It should also use its leverage to support projects that are economically sound and to promote the Government's international policies. I do not pretend that such principles will always be easy to apply, and the issues relating to individual cases will need to be balanced very carefully. I am also conscious of the need to ensure that UK firms are not put at a competitive disadvantage by being burdened with unnecessary processes and additional costs.
I am delighted that the ECGD has taken steps to boost its expertise by appointing an adviser on business principles. The adviser has worked on this subject with the Commonwealth Development Corporation, and therefore brings relevant experience. Although I am sure that the policy is right and very much in tune with the responsible approach that many major firms currently take, I understand and share the concern of business that the ECGD's policy and process for handling sensitive cases should not get ahead of other ECAs. The Secretary of State for Trade and Industry and I want the ECGD to compete with the best of other ECAs and set an ambitious agenda for multilateral reform, so that our exporters are able to compete on a level footing.
I shall briefly list some other changes through which the ECGD will try to strengthen its operations. Yesterday, I announced a package of improvements to the ECGD's products for SM Es. That is the start of a campaign to widen the ECGD's customer base, working in conjunction with British Trade International, the Small Business Service and the regional development

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agencies to spread the message to the regions. I hope that smaller companies will react positively to this initiative.
The ECGD should offer support to as many exporters in as many industrial sectors as possible—provided that the ECGD, rather than private sector insurance, is appropriate. Although the ECGD is often perceived as helping only a handful of big companies-a perception that we have heard again this afternoon—many smaller exporters already benefit from direct support from the ECGD. For example, in the past month the ECGD announced that it had supported a small firm called Gall Thomson, from Great Yarmouth, which sold an order of anti-pollution equipment for Mexico worth $740,000. That is not a big order for the ECGD. The body also supports Angloco Limited from Batley in Yorkshire, which last year won the "Best Exporting Company" title in British Trade International's export awards for smaller businesses for a £2.5 million order of firefighting equipment for the Government of Barbados.

The ECGD is important to the medium-sized company, although perhaps not vastly so in the scale of things. I have recently returned from Aberdeen, where I visited people from British Petroleum—350 small and medium-sized supply companies for that organisation are trying to strengthen their supply chain. Clearly, those SMEs are seeking additional opportunities in, markets in which they operate in conjunction with the bigger contractors. The agency could assist them in that regard, although I agree that the biggest support for companies of that type will be the supply chain. However, it is our duty to make the facility more sensitive and user-friendly to those companies, if we can.
Mr. Stephen O'Brien: What the Minister said begs a question that he may not be able to answer today, but perhaps the answer could be injected into the review. As part of the encouragement given to small and medium-sized businesses, might a regime of differential pricing be contemplated?
Mr. Caborn: I do not know about differential pricing, although it is something that we could consider. We are considering introducing differential procedures so that, when a £500 million facility is being covered for a big contractor compared to one of £2.5 million, the same criteria—or, rather, the same procedures—are not applied. Procedures can be moved quickly, as they often need to be. For the first time in a long time, we are going through the various organs serving small and medium-sized companies such as the Small Business Service and the regional development agencies and encouraging them to be proactive in terms of that new facility.
I want more exporters to be helped in the way that I have described. That will provide additional material support for them as they struggle to overcome immense social problems by allowing them limited resources. The ECGD will consider its product range again and encourage overseas multinationals and buyers to source from the United Kingdom.
To modernise its service delivery, the ECGD will be doing more to develop its e-business functions and strengthen its service standards. By working with the Department for International Development and others, the ECGD should also be able to play a more prominent
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and positive part in the poverty reduction and sustainable development programmes of the poorer developing countries. It will continue to play a central role in implementing international and national debt forgiveness policies, including the United Kingdom's unilateral 100 per cent. debt relief policy, which the Chancellor announced last December. Officials from the ECGD were helpful in the Paris Club in bringing me their technical expertise and ensuring that the programme progressed. Sometimes, it is not acknowledged that we use the expertise of those officials to assist in the development of the third world.
In March, the Secretary of State for Trade and Industry announced that the ECGD would not seek any further payments from Mauritania, which was the first country to be given relief under the United Kingdom scheme. Since then, a further nine countries have qualified for United Kingdom relief: Benin, Bolivia, Burkina Faso, Cameroon, Mali, Mozambique, Senegal, Tanzania and Uganda. That brings total United Kingdom relief to those 10 countries to $750 million.
The ECGD is committed to writing off more than $1 billion of debt owed by the heavily indebted poor countries by the end of the year. That will have a twofold benefit. First, it will underpin the efforts of those countries to achieve economic sustainability. Secondly, it will provide additional material support for them as they struggle to overcome immense social problems by allowing limited resources to be diverted from debt servicing to health care, education and similar poverty relief measures.
To put the matter in the context of our wider approach to trade, we have argued forcefully in the European Union that the heavily indebted poor countries, which represent less than 1 per cent. of world trade, should have tariff-free and quota-free access to the European markets. That suggestion has been accepted. One of the major subjects for discussion at the World Trade Organisation in Seattle was how we could bring into play the poor countries to ensure that they had access to the developed world's markets.
As we reduce the debt, conditions are attached. The new resources go to health, education and the development of those countries' economies. Part of the virtuous circle will be for the goods and services from those countries to enjoy quota-free and duty-free access to the developed world's market. That is a sustainable virtuous circle for those developing economies.
Once debt relief has provided a new basis from which those countries can move forward, the focus will turn to the provision of new ECGD support. Of course, when considering what new credits to offer to countries that are emerging from indebtedness, ECGD's focus will be on debt sustainability. It is in no one's interest to recreate the old debt problems that we inherited, which collectively, we are trying to resolve.
Dr. Tonge: The Minister is generous in giving way. He may not be able to answer my question now, but perhaps he will write to me. Uganda has achieved completion point for debt relief and presumably has now had all its debt wiped out, including the ECGD's.

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At what point will it be considered for more ECGs? I understand that the Bugagali project to replace the Jinja dam would probably qualify for such a grant.
Mr. Caborn: If the hon. Lady will bear with me, I shall deal with that.
The ECGD announced at a recent seminar—held jointly with the Department for International Development and attended by my right hon. Friend the Secretary of State for International Development, exporters, representatives of overseas Governments and NGOs—that it was to use Uganda as a pilot for the new more proactive approach to which I referred. The ECGD will try to identify Uganda's needs, collectively with the various stakeholders there and put together cover packages in a way that is consistent with the development plans for the country. There will be a requirement not to recreate an unsustainable debt burden.
As a practical example of what can be achieved, I recently announced an aluminium smelting project in Mozambique. It is producing metal six months ahead of the scheduled dates, which shows how the ECGD overseas investment insurance can help poor countries to develop their economies.
It has always been possible to perceive the ECGD as a force for evil, because it has been depicted as having a role in the arms race. Now we can cite many instances of its being a force for good, without which countries such as Uganda and Mozambique would not be able to proceed with the development of their economies, which leads to a win-win situation in the development of the trading regimes that we want.
The ECGD does not normally support defence sales to the poorest and most indebted countries. Priority is given to exports that support economic and social recovery and the development of the country. On 11 January, my right hon. Friend the Chancellor of the Exchequer extended the ban on the use of export credits for non-productive expenditure to 63 countries. The United Kingdom already leads the way with its productive expenditure policy and we shall work towards bringing other countries into line with our position. We have been working within international organisations to ensure that our policies will be accepted across the international community. Bit by bit, we are moving into that arena.
Some people are genuinely critical of past support for poor, especially HIPC, countries when it has been a race to the bottom. That can be stopped only if there are international standards to which we all subscribe and apply. Via the World Trade Organisation, the Organisation for Economic Co-operation and Development, the International Monetary Fund and the World Bank, we are building a framework for operation that is gradually being accepted by all the major countries that are developing ECAs. I am proud to say that the UK has been in the lead. I was involved a few months ago with the OECD on the development of multinational co-operation on anti-bribery measures.
I shall return to the Ilisu dam in more detail later. The five criteria that we set out were in line with the OECD's internationally agreed criteria. As I said, little by
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little,we are creating a framework whereby we can stop the race to the bottom and use the facilities in the most creative and productive way. That represents a win-win situation.
On ECGD support for defence exports, let me make it clear that it has always operated in line with Government policy—providing cover only where appropriate licences have been issued and remain valid. It will continue to do so. Strengthened Government arrangements are also being introduced. The role of the Export Guarantee Advisory Council is being radically reformed, so that it advises the ECGD on the policies and procedures needed to fulfil the new mission—not on individual risk decisions. Outside directors will also be appointed to strengthen the ECGD's management board.
On the perception that ECGD is secretive, I spoke earlier about it reporting its performance against business principles. It will be improving its transparency by publishing more information about its operations, processes and systems, while respecting the legitimate confidence of its customers and other parties to commercial transactions. The ECGD is also undertaking more consultation with customers and other parties that have an interest in what it does. It will collect and publish more information on the benefits that it provides to the UK economy and UK firms in the supply chain, as well as the benefits for developing countries.
All that is important and I have started writing to all Back Benchers. When the ECGD has been involved in orders, a letter is sent from my Department, setting out the details of the order and what jobs are developing. The same applies to specialist groups of Back Benchers as well as Government groups. We want people to understand the ECGD's role in the 21st century. The drive to greater openness should serve to shine a strong searchlight on its operations.
I shall attempt to answer some specific questions. First, I was asked about the Ilisu dam. As my right hon. Friend the Secretary of State made clear on 22 December, several conditions—relating to resettlement, water flow, water quality and the preservation of cultural heritage—will need to be satisfied before any decision to provide ECGD support can be taken. That remains the case today. Those conditions, particularly on resettlement, will be measured against OECD criteria.
We should remember that Turkey was a founder member of the OECD and was party to the codes that were laid down. We should also remember that Turkey wants to accede to the European Union and that it uses only 15 per cent. of the power used by some other member states. One area of the country is very poor. Resettlement must conform to international standards. Displacement will take place, but the figures vary. We should also recognise that 5 million people could gain from this type of development. The Swiss are the lead credit agency. If we walk away from the problem, it will not resolve the power deficit problem of that mission. Our position is clear. As long as the project conforms to international standards and Turkey accepts that, it is the right way to move forward.
It can seem arrogant for people to tell others what they should or should not do in respect of their development. Our involvement comes at a price—that

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standards are agreed internationally. This country would be worse off without its dams, but they were constructed many years ago. Countries are at different stages of development. We must be careful not to be too arrogant, saying that we know better than everyone else so our standards should always prevail. Five criteria must be met and the standards have been agreed to international levels. It will be a transparent process. We shall measure the criteria and take our decision.
Mr. Butterfill: Can the Minister throw any light on correspondence between his Department and the Foreign and Commonwealth Office? I asked about the apparent readiness of his Secretary of State to release it and the reluctance of the Foreign Office to do so.
Mr. Caborn: Yes, I can. There is no disagreement between us and the Foreign Office: we are at one. We are part of joined-up government and we move in concert after wide consultation. We have not agreed to release the correspondence between the Foreign Office and the ECGD. We are in agreement with the Foreign Office that the Government response should answer concerns about its role. I do not know what papers the hon. Member for Bournemouth, West (Mr. Butterfill) has been reading.
Mr. Butterfill: I thought that the Minister believed in open government.
Mr. Caborn: As the hon. Gentleman knows, we are an open Government. He has been in government and he knows how Governments operate. When there are discussions between two Departments, the decision is open to scrutiny, examination and challenge. As the hon. Gentleman well knows, however, we do not put the ministerial correspondence into the public domain. That would not be in the interests of good government. I am sure that the hon. Gentleman understands that probably better than most here this afternoon.
The blue stream gas project from Russia to Turkey involves $120 million of UK goods and services. The problem has been with Russia, not Turkey. Moreover, it is not solely a UK project: Italy is involved. It is a consortium of ECAs and the Italians are the lead agency. I can write to hon. Members to give them more information about the problems if they wish. They have taken some time. Getting the ratings and some assessment of the credit risk for Russia has not been easy.
Mr. O'Neill: I am concerned that that was only the first such project. Are there any others in the pipeline and will the teething problems with this project enable us to move more quickly on future projects?
Mr. Caborn: I hope so. The regime in Russia has settled down somewhat. My right hon. Friend the Secretary of State has been there this week. A number of people have been there to discuss how we can assist in reconstruction. We asked the ECGD officials to make a realistic assessment. That is what KPMG told them. They are doing so and are coming back to us. There has been a high political risk in Russia, which is probably
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settling down, and so I hope that the experience that we have gained from this scheme will assist us and make future decisions easier.
Mr. Butterfill: I am grateful to the Minister for giving way once more. As our Committee will shortly visit Turkey, it would be helpful if he confirmed that, although the project came in the category of good projects in difficult markets, Turkey is not considered a difficult market.
Mr. Caborn: Yes. Turkey is on cover. The rankings of those that receive ECGD cover are followed. The situation with the gas line has been slightly misinterpreted, because of the Russian end. We have considered a number of issues. There are housing schemes following the earthquake in Turkey, and we have been able to use facilities there.
The hon. Gentleman has just jogged my memory. We can help countries such as Turkey to improve their standards. Thames Water built a dam on the fault line in Turkey to standards above those asked. It did not breach in the earthquake and our civil engineers deserve credit, because they made a realistic assessment of the problems that could emerge with a fault line. They received support from the ECGD. Everyone commended the dam because it did not breach, which would have caused a terrible disaster. Such stories are never told in the papers or on television, but damn good projects by British engineers provide high-quality facilities around the world. We can be proud of that.
Mr. Butterfill: That is helpful, because we shall visit the earthquake zone as part of our task. The right hon. Gentleman may be interested to know that another good example of British engineering is the large silos designed by Mouchel and Partners, a British firm. They also survived the earthquake intact, whereas everything around them fell.
Mr. Caborn: One can only hope that the hon. Gentleman's comments and mine will be reported in the usual way through the press. He also asked about Treasury interference. I hope that negotiations will be completed and that the scheme will be fully operational by 2002.
Several hon. Members have mentioned reinsurance. I can only reiterate what we said in response to submissions. The UK led the way in privatising the ECGD's short-term credit business, subject to retaining a reinsurance role in a handful of markets. That success helped to develop the private credit insurance market, reducing contingent risk to the taxpayer without jeopardising UK export performance. The ECGD's report on the provision of its reinsurance for export sold on short payment terms is published alongside the mission and status review report. The Government have agreed that the ECGD should continue to provide short-term reinsurance, with the ultimate aim of helping the short-term export credit insurance market in the UK to be competitive and free standing without Government reinsurance.
The main conclusions of the reinsurance review are that the ECGD should eventually aim to withdraw from offering insurance for short-term business. Until demand ebbs away, the ECGD will carry on providing reinsurance as the insurer of last resort.

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The Chairman of the Select Committee asked whether fixed-rate export finance would be withdrawn. The scheme will not be withdrawn. However, in common with other countries, we are trying to eliminate such provision. That is the object of the exercise that has been agreed internationally. We are trying to withdraw subsidies, in line with international agreements and managing risk in accordance with the best commercial practices. The private sector should take on such work when it is possible. We want to ensure that there is a level playing field; therefore, the withdrawal will be with international agreement.
The Chairman of the Select Cttee mentioned environmental standards in an international context. The ECGD has continued to lead on such matters. We can be proud of this country's leading role in the international arena, especially in the Organisation for Economic Co-operation and Development discussions to develop a framework for a common approach by ECAs to environmental issues.
It has been agreed that the ECGD should energetically pursue multinational negotiations to preserve the competitiveness of United Kingdom exporters. Significant progress has been made by the OECD working party on export credits and credit guarantees in the past 12 months towards fulfilling the mandate set by the OECD Ministers at the G8 Heads of Government meeting. An OECD action statement on the environment was agreed in February. We are setting the international agenda and leading with the best, although I agree with what my hon. Friend the Member for Ochil said about being too far in front.
My hon. Friend also mentioned the cost to taxpayers. The ECGD breaks even—it is not regarded as having a subsidy—in accordance with OECD and World Trade Organisation requirements. Again, it is a matter of
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having a level playing field. The ECGD is not charged 6 per cent. or 7 per cent. on its returns, but that is agreed internationally by the WTO and the OECD, which lay out the framework in which the export credit agencies operate. If the ECGD were to be burdened with that charge, it would be uncompetitive compared with the other ECAs.
The ECGD has an obligation to break even in three years and, to date, has paid surplus moneys back to the Treasury. To prove the point on defence exports, it was said that we were losing about £230 million a year. That is not true. Having considered the ECGD overall claims payments in the period immediately after 1986-the recession—I believe that that assertion completely ignored the payments made subsequently against the loans and transactions. We continue to draw some of what was rescheduled back to the Exchequer. I suppose that in one respect the figures used were true, but if one looks at the bigger picture of the total contract and the money that is now coming into the United Kingdom, one sees that it is not true to say that we are losing £230 million a year.
I have covered most of the points that were raised. I thank the Select Committee for its report, which has helped us a lot. I hope that our mission statement will help a new ECGD to evolve that will play a significant part in exports and be fully integrated into the new procedures and structures. We should bear in mind that every 1 per cent. increase in exports from the United Kingdom is worth nearly £2 billion to the United Kingdom economy. We shall continue to modernise and keep under review everything that can be done to assist in that aim. We shall keep international standards for ECAs in mind and continue to take the lead in the international institutions.
Question put and agreed to.
Adjourned accordingly at eleven minutes to Five o 'clock.