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Backing the Bad Guys

Noreena Hertz

1st December, 2004

As the world’s poorest countries sink further and further into debt, Western corporations grow fat from government-backed projects that fuel conflicts, harm the environment and have built-in kickbacks.

On 5 February 2003 then US secretary of state Colin Powell presented a dossier to the UN Security Council with reasons for why the world should go to war against Iraq. One reason was the existence of a chemical weapons plant, ‘Chlorine Plant Falluja 2’, situated 50 miles outside of Baghdad, which the US claimed was a key component in Iraq’s chemical warfare arsenal and which even the cautious Hans Blix, the former UN chief weapons inspector, had sad might need to be destroyed.

Given that the dossier was also used by Britain to justify the invasion of Iraq, it is somewhat ironic that it was the British government that had been responsible for building the £14m factory 17 years before. In 1985 the Export Credits Guarantee Department (ECGD), a government agency that funds or insures British corporations wanting to do business in high-risk areas overseas, had provided insurance to a British subsidiary of the German company Uhde Ltd so that it could set up the plant in Iraq.

Did the British government know that this plant it was underwriting with British taxpayer money could be used to develop chemical weapons? Uh, yes. At the time, senior government officials wrote that there was a ‘strong possibility’ that the plant was intended by the Iraqis to make mustard gas. The Ministry of Defence warned that the factory could be used to make chemical weapons, noting that the chlorine it would produce could ‘be used in the manufacture of phosphorus trichloride, a key nerve agent precursor’. Foreign Office minister Richard Luce went so far as to express concern that this deal would ruin Britain’s image if news of it were to get out, and counselled: ‘I consider it essential everything possible be done to oppose the proposed sale and deny the company concerned ECGD cover.’ Nevertheless, the Tory trade minister at the time, Paul Channon, revealed all too clearly where the government’s priorities lay: ‘A ban would do our other trade prospects in Iraq no good,’ Channon said.

Those ‘other prospects’ turned out to be lucrative arms deals. For example, ECGD insurance worth £42m enabled the radio manufacturer Racal to ship several sophisticated Jaguar V radios to Saddam Hussein’s army in 1985, radios that enabled Saddam to overcome enemy jamming on the battlefield. In 1987 Marconi was given ECGD funding to sell Armets – the Artillery Metrological System, the purpose of which is to facilitate accurate artillery fire – to the Iraqi army. And in 1988 Tripod Engineering was given ECGD backing to sell a fighter pilot training complex to the Iraqi air force, and Thorn EMI got ECGD insurance for a contract to ship Cymbeline mortar-locating radar to the Iraqi army. The British government even continued to issue export credits to Iraq after British journalist Farzad Bazoft was executed by Saddam in 1990.

And it wasn’t just the British whose export credit agencies (ECAs) were underwriting sales by domestic companies to dubious and dangerous projects in Iraq during Saddam’s reign, or even financing the entire deals themselves. Pretty much the whole world was at it.

At the same time as the British were smoothing the way for Uhde, the White House, for example, was pressuring the US Export-Import Bank (Ex-Im) to approve financing for a new oil pipeline in Iraq, a pipeline that US engineering giant Bechtel would build if the deal went ahead. ‘The State Department has exerted strong pressure on Ex-Im to make additional credits available… for this pipeline,’ noted Bechtel official HC Clark in an internal memo in February 1984. This despite the fact that the horrors of Saddam’s reign were well-known, and reports of his gassing of thousands of Iranian troops with chemical weapons during the Iran-Iraq war had received public attention.

With Donald Rumsfeld, then Ronald Reagan’s Middle East envoy, and George Schultz, secretary of state at the time (and a former Bechtel president), both playing key lobbying roles, in June 1984 Ex-Im’s board of directors approved a preliminary commitment of $484.5m in loan guarantees for the pipeline project.

Much like a department store that provides its own charge card so that customers can buy the store’s own products on credit, government Export Credit Agencies facilitate loans for overseas governments or companies to buy the lending country’s own products. The more loans the ECAs facilitate, the happier the domestic firms from the ECA’s home country are, but also the more debts the foreign countries run up.

Furthermore, these deals are underwritten by the ECAs: when they go sour (following the invasion of Kuwait in August 1990, for example, the Iraqi government stopped honouring its contract with Uhde) the agencies pay the corporations almost all the monies owed to them and assume the burden of debt themselves. That debt is then added to the outstanding bilateral debt owed by the debtor nation to the country from which the ECA hails. Thus, around 95 per cent of the debt owed to the UK government by developing countries is export credit debt, while 65 per cent of all debt owed by poor nations to official creditors is owed to ECAs.

Saddam’s Iraq made Western arms dealers very happy. Most of the $26 billion plus currently owed by Iraq to the British, the French, the Germans, the Japanese and the US was run up in the 1980s after Saddam came into power. Undoubtedly, this debt resulted mainly from military equipment procurement and weapons programmes.

Now the Iraqi people are being told to repay this debt. Or at least that proportion of it that creditors feel they will realistically be able to squeeze out of them. The nation that suffered so much under Saddam that its cause became one of ‘liberation’ is being told to repay debts that were racked up with the express encouragement of Western companies and Western governments for purposes of oppression, violence and genocide.

Why exactly are the governments of the developed world providing these loans? In some cases to serve their geopolitical interests, but more often to serve the different, though related, interest of their domestic corporations. The ECGD, for example, explicitly states that its goal is to ‘help exporters of UK goods and services to win business and UK firms to invest overseas by providing guarantees, insurance and reinsurance against loss’.

ECAs also serve the interests of commercial banks. As Stephen Kock, a former Midland Bank executive in charge of arms deals, put it: ‘Before we advance monies to a company we always insist on funds being covered by the ECGD... We can’t lose. After 90 days if the importing countries haven’t coughed up, the company gets paid instead by the British government. Either way, we recover our loan, plus interest, of course. It’s beautiful.’ Especially beautiful because the ECGD typically pays banks about 0.75 per cent per annum on the total value of any ECA-backed loans it has provided, thus giving banks an incentive to advance capital to British exporters. While 0.75 per cent per annum may not sound that much, on a $500m project it amounts to around $3.8 million. And that is on a completely risk-free loan: the equivalent of lending to the Bank of England. No wonder banks spend serious amounts of money cosying up to big corporations: they want to be the bank through which companies secure their ECGD-backed loan.

From the point of view of Western corporations, export credit arrangements are great because they enable them to pass some of the risk of doing business in developing countries onto their own governments. By providing lower fees, premiums and interest rates than the private market can, and by backing transactions that the private market would refuse to back, ECAs are implicitly subsidising their domestic exporters.

Export credit arrangements also offer companies the added bonus of harnessing government interests to their own. Once corporations have export credit guarantees they can rest assured that if things go wrong their government will protect their investments. ‘Ex-Im can be a powerful ally,’ Edmund B Rice, president of the US corporate lobbying group the Coalition for Employment through Exports, has said. ‘You’ve got the full weight of our US embassy, our ambassador, the Treasury Department and the State Department all coming in.’

No wonder corporations lobby hard for ECAs to continue their work. The US’s Overseas Private Investment Corporation (Opic) is a similar agency to Ex-Im, but one that focuses solely on the developing world. When there was a move to eliminate it in the late 1990s, Kenneth Lay, the now disgraced former CEO of Enron, wrote a letter to every single member of Congress staunchly defending the institution.

But why do Western governments want to serve corporate interests in this way? Typically, because they are so caught up in the ‘business interest serves national interest’ myth that they don’t stop to question it. They should. First, most economists remain highly sceptical that a nation can improve its long-term welfare by subsidising its exports. Second, subsidies radically reduce the incentive for exporters to do all they can to ensure that the countries they are selling to will make good on their debts: in much the same way that many more homes would be built in flood-prone areas if their owners were compensated for flood damage by the government, ECAs provide exporters with incentives to maximise their exports in the knowledge that they will be bailed out if their deals go bad. And third, export subsidy policies tend to be very costly for the exporting countries: many ECAs have made huge losses over the past two decades, with only the ECA-backed companies benefiting.

The lion’s share of the subsidies is not, however, usually paid for by Western taxpayers, despite the high failure rate of ECA projects. That burden more commonly falls on the peoples of the developing world, who have to face the consequences of increases in their national debt as a result of importers not paying up. One thing that makes the interest paid on export credits particularly onerous for developing countries is the fact that it corresponds to commercial rates of interest, not the lower rates incurred by bilateral or multilateral loans from organisations like the World Bank, the International Monetary Fund or regional development banks.

If it could be shown that developing countries were better off because of ECA-backed projects, a reasonable case could be made that the resulting debt burden was worth it. In many cases, however, the promised benefits never materialise, and a large number of projects do not even see the light of day. A former employee of HSBC told me how in one 12-month period every single one of the export credit agency deals he worked on at the bank went bankrupt.

Billions of dollars worth of ECA loans end up lining the pockets of corrupt government officials. For example, the construction company Acres International is just one of the many firms to have received support from the Canadian ECA Export Development Canada (EDC). In September 2002 a Lesotho court found Acres guilty of paying $260,000 in bribes to Mr Masupha Sole, the former CEO of the notorious Highlands Dam Project. Besides being riddled with corruption, the Highlands Dam Project displaced hundreds of subsistence farmers and directly and adversely affected the lives of approximately 27,000 people.

Indeed, it is commonplace for the prices of projects that receive ECA funding to be massively inflated so that they can cover the related ’commissions’. The corruption-fighting NGO Transparency International has shown how it is common practice for the value of an ECA contract to be inflated by between 10 and 20 per cent to account for the ‘commissions’ (otherwise known as bribes) necessary to secure deals.

Moreover, the projects ECAs choose to fund are often highly contentious. Take the Bataan Nuclear Power Plant in the Philippines, the largest and most expensive construction project ever undertaken in that country. The plant was built in 1976 for more than $2 billion with loans largely provided by Ex-Im, loans that are still costing the Philippines $170,000 a day to service and which will continue to do so until 2018. (In the Philippines GDP per capita is $4,000, 40 per cent of the population live below the poverty line and annual per capita expenditure on health is only $30.) And all that expense for a plant that never worked. ‘Filipinos have not benefited from a single watt of electricity,’ said the country’s former national treasurer Leonor Briones. But maybe the people of the Philippines should count their blessings: the plant’s design was based on an old two-loop model that had no safety record of any sort, and the facility was built along earthquake fault lines at the foot of a volcano.

Not only do ECAs finance self-aggrandising or misguided projects and corrupt elites; they are, historically, rarely subject to any kind of regulatory safeguards. Most export credit agencies, for example, have no legal obligation to screen out projects with adverse environmental and social impacts, no obligation to ensure that their projects comply with human rights, environmental and development guidelines, and no obligation to consider the environmental impact of their investments or the contribution they will make to local development. Attempts to get G8 countries to agree on minimal social and environmental standards for their ECAs have resulted only in a non-binding arrangement, with companies now being asked to fill out questionnaires on their environmental and social impacts. However, no procedures have been implemented to allow independent verification to take place.

What this means in practice is that many of the projects ECAs end up financing (favourites include big infrastructure and resource-extraction projects such as mines, dams, oil refineries and nuclear power plants) continue to be environmentally damaging and socially undesirable. The Three Gorges Dam project in China is a perfect example. Here is a project that will force the relocation of 1.3 million people and drown 13 cities. It has been characterised by large-scale corruption and massive construction flaws and has been protested against by numerous Chinese scientists, engineers and journalists. Yet it has already received almost $1.5 billion in loans guarantees and insurance from various European ECAs. As one senior British official mused: ‘There was some problem about moving peasants there, wasn’t there?’

Although the US’s ECAs are more strongly regulated than their European counterparts (Bill Clinton imposed mandatory standards in 1992 and 1997 preventing them from investing in ‘projects that require large-scale involuntary resettlement’ or in ‘large dam projects that disrupt natural ecosystems or the livelihoods of local inhabitants’), Ex-Im and Opic have invested heavily in projects with dubious environmental credentials. From 1992 to 1998, for example, the two agencies underwrote $23.2 billion in financing for oil, gas and coal projects around the world. Over their lifetimes, these plants will release 29.3 billion tons of carbon dioxide: the equivalent of the amount of CO2 produced by 24 billion round-trip New York-Heathrow flights, an amount that would require the planting of 48 billion trees for it to be offset.

One of the American ECAs’ biggest clients during the 1990s was Enron. Backed by Opic, Enron’s Cuiabá pipeline from Bolivia to Brazil cuts directly through the world’s largest remaining dry tropical forest, and also part of the region’s Pantanal wetlands, damaging 39 indigenous and several non-indigenous communities on its way – as well as devastating the environment. The pipeline was a project the World Bank said it would not have financed. Many of Opic’s own staff recognised it was in violation of the agency’s own guidelines. Yet no one stopped it. Indeed, this is typical of the kind of project backed by Ex-Im and Opic.

As Iraq illustrates, arms sales are another category of exports that account for large percentages of ECA loans. In the UK, between 30 and 50 per cent of all export credits are allocated to cover sales by UK arms exporters. This percentage is extremely high, particularly when one considers that defence exports only account for approximately 3 per cent of total UK exports. Similarly, in France a third of export credits go to subsidising arms exporters.

Export credit agencies provide a shocking illustration of one of the most serious imbalances in today’s world: not the geopolitical one in which countries with monies to lend wield power over those that need to borrow; nor the imbalance within developing countries that can allow Third World leaders to take out loans without their being held to account for their use; but an imbalance that lies at the core of developed nations themselves: an imbalance of power between corporate interests and the public interest, between economics, politics and society.

Western countries use ECAs for 80 per cent of their investment in developing countries. The agencies subsidise corporations and provide risk-free bonuses for the commercial banks lending the investment capital. There is no quid pro quo at all that the businesses favoured should employ the peoples of the subsidising government, invest in its country or fulfil any national interest.

The story of the ECAs is also a story of barefaced hypocrisy. The rich world censures developing nations for their high levels of military expenditure, yet continues to provide the funds so that these countries can buy their arms. The Europeans deify multilateralism and sign up to a range of environmental conventions – Kyoto, the UN Convention on Biodiversity, and so forth – supposedly to protect natural resources and slow down climate change, yet Europe’s ECAs finance the very fossil-fuel and energy intensive projects that will lock in higher emissions in the developing world (thus recreating there the same environmentally unsound development path the rich countries themselves followed). While in the US the justification for rejecting Kyoto is supposedly in part because the protocol does not require emissions limits for developing nations, countries in which American ECAs are financing the building of environmentally unfriendly power plants. The developed world unapologetically uses its ECAs to subsidise its exporters, yet demands in the name of ‘free trade’ that developing countries do not protect their producers in any way at all; and, in the name of investment, it saddles the developing world with yet more repayment of debt, and debt at the higher rates of the commercial banks rather than the lower rates of the bilateral or multilateral loans.

Export agencies ram home the Janus-faced nature of the West: the developed world espouses concern for human rights, transparency and environmental issues on the one hand, yet on the other bankrolls projects that are at complete odds with any such concern; it is wedded to multilateralism, which it defines in a way that serves the narrowest of corporate interests.

So it is that the world’s poorest countries sink further and further into debt while Western corporations grow fat from government-backed projects that fuel conflicts, harm the environment and have built-in kickbacks. Rather than being a tool for development, ECA funds often serve to feed the vicious cycle of corruption, underdevelopment, conflict and debt.

This is an extract from Noreena Hertz’s IOU: the debt threat and why we must defuse it, 2004, Fourth Estate, £16.99

 

Public finance for the private sector

Export credit agencies like the US and Japanese Export-Import Banks, the German Hermes Guarantee, the Italian SACE, the Swiss ERG, the French Coface, the Canadian EDC or the British Export Credits Guarantee Department are the largest source of public finance for private sector projects in the world. Between 1982 and 2001 they supported $7,334 billion worth of exports and $139 billion of foreign direct investment primarily to countries of the developing world. In 2000 alone ECAs provided a total of $500 billion in guarantees and insurance to companies operating in developing countries, and issued $58.8 billion worth of new export credits.

As overseas aid continues to fall, the importance of ECAs to developing countries continues to increase. Between 1988 and 1996 the worldwide value of new export credit loans and guarantees increased fourfold with approximately half of the new commitments going to the developing world. Eighty per cent of financing for projects and investment in developing countries today comes from ECAs. And export credits are now at levels of between two and three times the amounts of aid provided by the World Bank, regional development banks and countries of the developed world.

This is a trend that is likely to continue. The 2002 G8 Africa Action Plan stated: ‘We commit to... helping Africa attract investment, both from within Africa and from abroad, and to implementing policies conducive to economic growth – including by... facilitating the financing of private investment through increased use of development finance institutions and export credit and risk-guarantee agencies...’

This article first appeared in the Ecologist December 2004

 

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