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Sunday, April 03, 2005

Export Credit Agencies and their reform

Communities around the world are alert to the potentially negative impacts of international financial institutions (like the WTO and the World Bank) on the environment and human rights. Yet lesser known outfits called export credit agencies account for the single biggest source of debt in the developing world, and unlike the World Bank and WTO, taxpayers are paying for them.

What is an export credit agency?

Export Credit Agencies, commonly known as ECAs, provide government-backed loans, guarantees and insurance to those corporations from their home country that are seeking to do business abroad, especially in countries where the financial and political risks are high. (ECA Watch).

But they are more than banks. In addition to loans and loan guarantees, ECAs provide something called political risk insurance. Political risk insurance protects overseas assets against breach of contract by a foreign government or state owned company; refusal or inability of a foreign government to make scheduled loan payments or payments under a guarantee; seizure, confiscation or expropriation of assets by a foreign government; war, revolution, insurrection or terrorist attacks that damage assets or force the shutdown of foreign operations; a currency crisis which prevents the conversion or transfer of currency; or measures taken by a foreign government to prevent repossession or re-export of physical assets.

"'We are insuring Canadian investors against civil war or nationalization." That's how Ron Giles, a spokesman for Export Development Canada, the Canadian ECA, described his office's work 10 years ago. (Inter Press Service, April 3, 1996).

Export Development Canada's political risk insurance aims to reassure banks and investors by covering 90% of eligible losses.

As a Midland Bank executive in charge of arms deals in the UK once put it quote

"'You see, before we advance monies to a company, we always insist on any funds being covered by the [UK] Export Credit Guarantee Department...We can't lose. After 90 days, if the Iraqis haven't coughed up, the company gets paid instead by the British Government. Either way, we recover our loan, plus interest of course. Its beautiful'"[i] (ECA Watch).

Export Development Canada also insures accounts receivable against non-payment by US and other foreign customers. Accounts receivable insurance covers failure to pay; bankruptcy or insolvency; refusal to accept the goods; cancellation of import or export permits; problems with currency transfer.

ECA Watch, an NGO campaign to reform export credit agencies with members in 32 countries and the European Union believes that ECAs "compete intensely with ECAs from other countries that do the same."

They point out that ECAs are "quick to back projects that other ECAs and multilateral development banks will refuse on environmental and social grounds" (ECA Watch).

The most spectacular and therefore the most frequently cited case is the Three Gorges Dam in China. In 1996, the German, Swiss and Canadian ECAs outdid one another to help finance the project even though the World Bank and US Export Import Bank refused to provide support on environmental grounds. (ECA Watch)

Peter C. Evans, who recently published a PhD dissertation on ECAs in the MIT Political Science department sees it differently. He argues that

the Arrangement [on Guidelines for Officially Supported Export Credits] is best understood as a cartel comprised of the leading suppliers of state backed trade finance. Supplier states comprise the rich industrial countries that 'produce' official export finance or 'give' foreign aid to finance the exports of capital goods, military equipment and agricultural products sought by buyer states. Buyer states are generally developing countries, which have limited ability to pay in cash or self finance these imports.... By colluding to limit competition through jointly agreed upon rules, supplier states increase their market power vis-à-vis buyer states. The Organization for Economic Cooperation and Development (OECD) became the forum of choice for the Arrangement because it permitted secrecy and selective membership that better aligned the interests of supplier states against buyer states" (Evans Abstract).

Both views entail serious allegations and the truth may be more complex than either. Serious investigation and debate is certainly warranted.

The Jakarta Declaration (2000)

Since the competition to finance the Three Gorges Dam, warts and all, NGOs from around the world have campaigned to reform ECAs. The goals and demands expressed in submissions this January to the OECD Working Group on Common Approaches in Paris have not changed much since the Jakarta Declaration of May 2000. The Jakarta Declaration was agreed to following an international meeting on ECA reform in Indonesia and by now has been endorsed by over 300 NGOs.

It calls for public access to information and consultation by ECAs and the OECD ECA Working Party; binding common environmental and social guidelines and standards; explicit human rights criteria; binding criteria and guidelines to end ECA abetting of corruption; a commitment only to finance economically productive investments; comprehensive debt relief for developing countries. (ECA Watch) Today we focus on the corruption and transparency reforms.

"According to Transparency International, 'Bribing foreign officials in order to secure overseas contracts for their exports has become a widespread practice in industrial countries…'" (Qtd ECA Watch).

"Almost all ECAs have the potential to underwrite bribes directly, whether knowingly or not, because the cost of commission payments made by companies to win a contract -long recognised as a route through which bribes may be paid - is included in the overall sum that they underwrite.... " (Hawley Financing corruption 05).

"… many ECAs do not check, let alone require, that contracts they back are won through competitive tender or transparent procurement methods. ECAs have given support for projects, in some instances, despite publicised allegations of corruption and concerns raised by other donor agencies, and have failed to investigate bribery allegations when they have arisen. Companies embroiled in corruption scandals have meanwhile continued to receive ECA support, and faced little sanction. Unlike the MDBs, few ECAs say they will use debarment as a sanction for bribery, and none has ever done so in practice.13 Finally, ECAs have historically lacked transparency. Until recently, few ECAs disclosed publicly the projects that they supported and, even today, disclosure is patchy" (Hawley Financing corruption 05).

"… nine ECAs, including those of Canada, Germany, Italy, and Sweden, still do not require companies to provide any details of the commission payments they underwrite 19" (Hawley Financing corruption 05).

"Only the Swiss, New Zealand, Danish and Canadian ECAs, however, say they would debar [i.e., blacklist] companies convicted of corruption, and Canada would not do so if the company puts in place anti-corruption management procedures" (Hawley Financing corruption 05).

Lisa Peryman at the Odious Debts project claims that "...the Canadian government decided it wasn't important to send a clear message to Acres and other Canadian corporations that bribery doesn't pay and announced it would continue awarding public contracts to Acres through federal agencies, such as the Canadian International Development Agency and Export Development Canada" (Peryman Feb 18 05).

Transparency is a related problem.

ECAs don't generally disclose the impacts of their projects to the public. "The Common Approaches do not require ECAs to consult with affected communities and civil society in the development of the projects they finance." ECA Watch finds that this failure "runs counter to decades of experience in the field of sustainable development and is antagonistic to democratic principles" (ECA Watch

The Export Development Canada website is quick to point out that "EDC is not subject to federal access to information legislation."

EDC's statement of "Principles Governing EDC Disclosure," is negative and defensive. It emphasizes balancing mere desire against need, i.e., "the desire for more information" against "the need to respect our customers' commercial interests" (EDC Principles).

The statement identifies three principles: First, "EDC is committed to increasing the transparency of its business activities when the issue of accountability is relevant and in the absence of a compelling reason for confidentiality" (EDC Principles).

Second, "EDC will ensure that the form, content and timing of disclosure pursuant to this policy will not impede the effective execution of its mandate" under section 10 of the Export Development Act to support and develop, "directly or indirectly, Canada's export trade and Canadian capacity to engage in that trade and to respond to international business opportunities."

Third, "Confidential information [defined as "information that is either related to commercial competitiveness or unrelated to public accountability"] will not be disclosed" (EDC Principles).

It should be clear that EDC has no particular enthusiasm for transparency. EDC has enjoyed its privileged exemption from freedom of information legislation and complies when it has to with a recommendation issuing from the Government of Canada's review of EDC's mandate to increase disclosure to the public on the scope and variety of its activities. EDC's revised disclosure policy became effective on May 1, 2002. It is "not retroactive and will apply only to new business" (EDC

EDC's practice is not to disclose any information on individual insurance transactions because to do so might encourage the making of claims.Recommend this Post

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