Scotland’s debt future

Scotland: a New Start on Debt and Exports

“One of the ambitions we have is to see Scotland as a good world citizen … not just in military or in peacekeeping operations, but also in terms of our international obligations of aid policy and technology transfer - which perhaps above all is where Scotland can make a good contribution to this planet.”

Alex Salmond, First Minister of Scotland, February 20121

Introduction The UK Government is owed approximately £2.5 billion2 in loan repayments, much of which has been the result of irresponsible lending. Loan procedures have lacked transparency and insufficient consideration has been given to uses to which loans will be put. Despite rounds of debt cancellation in 1996 and 2005 many countries remain burdened by debts: populations are often still suffering as a result of the poor decisions of UK lending agencies - most notably UK Export Finance (UKEF)3 - by being forced to repay unjust loans at the expense of development. Jubilee Scotland is calling on the Scottish Government to tackle this injustice with: - A pledge that any Scottish export

credit agency would be mandated to support sustainable and ethical overseas projects rather than being a generator of new unjust debts.

- Commitment to a comprehensive

audit of all developing country UKEF debts inherited by Scotland from the UK, and the cancellation of any of these debts found to be unjust.

The UK Picture: Unjust Exports, Unjust Debts Current figures indicate that the UK is owed approximately £2.5 billion in loan repayments from developing countries, 95 percent of which has been generated by the operations of a secretive government body called UK Export Finance.4 UKEF exists to protect UK exporters from risks associated with non-payment for their services and products, to give them the confidence to invest overseas in high risk projects or locations. When deals ‘go bad’, the exporter can expect payment through UKEF, with that money then being designated as debt owed to it by the developing country where the deal has failed,5 thus generating more poor country debt. Estimates suggest that developing countries currently owe UKEF over £2bn for debts like these.6

A large proportion of UKEF's exports are related to fossil-fuel related industries (picture: Creative Commons)

“Our mainstream stuff is oil and gas, aerospace and defence.”

Steve Roberts-Mee, then Director

of Communication at UKEF, November 20107

UKEF’s structures and procedures facilitate not simply the build up of new debt, but the build up of new unjust debt. A majority of the UKEF's portfolio - over 75 per cent of observable transactions8 - relate to the arms trade, aerospace or fossil fuel-related industry. Despite working in these sensitive areas, UKEF often operates with extremely limited transparency.9 The fact that many UKEF ventures are still inaccessible to public scrutiny is extremely worrying when even the deals we do know about are implicated in catalysing human rights violations, climate change, and unchecked corruption,10 as the following examples illustrate: (1) Egypt The UK is owed £100 million by Egypt. Whilst the UK Government reports that there are no details held on the goods or services supplied and the nature of the contracts by which these were secured, Jubilee Debt Campaign has found evidence in the National Archives to show loans for arms made to the regime of Hosni Mubarak and his predecessor Anwar Sadat. In 1979 and 1980, UKEF backed loans of £85 million for Egypt to buy Rapier missiles from British Aerospace plc (BAe), and in 1985 and 1986 supported £250 million more of loans for further arms sales, including a tank factory near Cairo and a military city west of Alexandria.11

Protesters call for an end to the Mubarak dictatorship in Egypt. (Photo: Ian Murphy, Creative Commons)

(2) Sudan Sudan currently owes UKEF £650 million. With interest rates of between 10 and 12 per cent since 1984, the debt has been grossly inflated. Estimates are that the original debt was somewhere in the region of £55 million, with about 90 per cent of what is owed today being the result of interest and penalties. Jubilee Debt Campaign have calculated that - if interest rates had been kept at typical levels for the ECGD - the debt today would be nearer to £167 million.

Voters queue to decide the future of South Sudan (picture: UN/Tim McKulka) Importantly, most of the debt owed by Sudan originated in the 1970s and 1980s, with the West lending money to support the dictatorial regime of Gaafar Nimeiry during the Cold War and on the assumption of gaining access to Sudanese oil. The supply of credit continued even while Nimeiry pushed the country into civil war, violated the Addis Ababa Agreement, dissolved the South Sudan government and imposed Sharia law across the country, including the predominantly Christian regions of the south.12 Having paid the price at the time for these human rights abuses, the Sudanese people are still paying the debt. (3) Indonesia Indonesia owes UKEF over £500 million, much of which was incurred through the selling of weapons to General Suharto. During his first year in office, Suharto presided over the killing of between 500,000 and 1,000,000 activists, and went

on to conduct a 24-year occupation of East Timor.13

Hawk jets like these were sold by the UK to Indonesia’s General Suharto (Photo: Creative Commons) From 1994 until his resignation in 1998, approximately half of Suharto’s military equipment was purchased from the UK. Indonesia looks set to continue servicing this unjust debt for another decade while 61 per cent of its population continues to live on less than $2 a day.14 _________________________________ A coalition of UK agencies, whose breadth indicates the range of public concerns provoked by UK Export Finance,15 is working to reform UKEF and cancel that share of its debt which is revealed - through a fair and transparent audit - to be unjust. This campaign - Clean Up Britain's Exports (CUBE) is mirrored by support inside the House of Commons: a Ten Minute Rule Bill introduced by Lisa Nandy MP calling for reform16 received cross-party support in Westminster, and Early Day Motion 622: Export Credit Guarantee Department has been signed by just under 200 MPs17. The government is beginning to respond to the pressure, sending a team to Cardiff to facilitate retrieval of previously hidden information about UKEF - welcome progress, though still far from the fair and transparent audit required by debt campaigners and other members of the coalition.

Pictured (from left to right) on 27 April 2011 after presenting Ten Minute Rule Bill: Zac Goldsmith Conservative MP for Richmond Park, Sheila Gilmore Labour MP for Edinburgh East, Lisa Nandy Labour MP for Wigan, Bob Russell Liberal Democrat MP for Colchester and Eilidh Whiteford Scottish National Party MP for Banff and Buchan. The Opportunities for Scotland (1) A World Class Export Credit Agency At present, Scottish exporters are still required to go through UK Export Finance for export credits to support in internationalising their activities. With the most significant barrier to exporting identified by Scottish companies being finance18 - and with the different profile of Scottish exports compared to other members of the UK -19 it is highly possible that the Scottish government will mandate a department to take on the export credit guarantee role and provide a statutory financial facility.

A Scottish export credit agency could capitalise on Scotland's expertise in renewable energy (photo: Creative Commons)

One of the ways this might be achieved is through an extension of the mandate of Scottish Development International (SDI), which already provides a number of services to these exporters, including 'help with export preparation, market research and visiting potential markets, setting up operations, finding opportunities, networking and skills development.'20 Jubilee Scotland would further recommend that - in line with Scotland's stated drive to contribute to an environmentally sustainable future, any Scottish export credit agency would champion the highest achievable global standards for export credit agencies at an international level with regard to human rights, the environment and development, by incorporating the following elements into its mandate: � a ‘duty of care’ clause to ensure that

human rights and environmental impacts are assessed and given full consideration, as well as a transparent disclosure policy to make its dealings more public,

� a prohibitions list of activities that will

not be supported by the Scottish Export Finance because they are not conducive to sustainable development,

� a management and monitoring

system to ensure Scottish Export Finance complies with wider government policy on human rights, the environment and sustainable development,

� a management and monitoring

system to ensure that clients of Scottish Export Finance comply with policies and conditions,

� an annual report to Parliament on

the adverse impacts of supported projects, including the actions being taken to mitigate their impacts,

� a transparent, real-time disclosure

policy providing proactive provision of information on all projects including impact assessments, consultation processes, and monitoring and evaluation of projects,

� debar companies previously

convicted of corruption from receiving support for a period of five years after the date of conviction.21

In adopting these policies, and by coming out of the shadow of UKEF, Scotland will have the opportunity to support renewable economies and green exports, and to facilitate the transition to a sustainable role in the global economy. (2) Audit and Cancellation of Scotland's

Unjust Debts As well as taking steps to prevent future bad loans, the Scottish Government should commit to a strategy for the audit and cancellation of any existing bad loans transferred from UK Export Finance's current portfolio. Repudiating debts on the basis of injustice would not be unprecedented. In 2006 Norway cancelled debts that had been created by its own Export Credit Agency, which it subsequently recognised to have been so poorly conceived as to be unjust. As the Norwegian Debt Campaign states however, for such behaviour to set a precedent, ‘more countries have to follow.’22 Scotland can follow this precedent. The complexity of financial transactions may mean that much of the UK’s credits and debts would be divided on a pro rata basis.23 In the case of UKEF debts, however, it is vital that there is a full and transparent audit of the debts. This would firstly enable debts to be divided up between the countries based on where the exports which benefited from the original loan were made.24 Debts arising from Scottish exports could be owed to Scotland, and debts from loans which supported other UK nations exports would

be owed to England, Wales and Northern Ireland. Further, by demanding the precise details of any loans that created 'developing country debt', this would ensure that Scotland does not become responsible for any unjust debt. The Scottish government should therefore ask for a comprehensive audit of any UKEF credits being taken on, and commit to cancelling any of these unless fully satisfied that they are not unjust in origin. In the audit and cancellation of these debts, Jubilee Scotland would encourage the Scottish Government to adopt the following three principles: a) Established civil society criteria for injustice of a debt: In his 'Defining Illegitimate Debt' overview, the economist Joseph Hanlon takes account of the several different sets of criteria put forward for categorising unjust or illegitimate debt, and creates a condensed list of four key principles:

‘i) Unacceptable loans: This would include loans which were odious, were given to known corrupt officials, and were for obviously bad projects.

ii) Unacceptable conditions: This

would include usurious interest rates and policy demands which violate national laws.

iii) Inappropriate loans: This would

include consumption loans and loans given where grants would have been more correct.

iv) Inappropriate conditions: This

would include policy lending linked to unsuitable policies.’25

b) International experience in auditing and cancelling debt: The Scottish Government could be guided not simply by the precedent of Norway but also by the example of Ecuador, which in

2008 became the first country to launch an official audit into its own debt, resulting in the cancellation of those parts of it deemed to be unjust. Both Norwegian and Ecuadorian officials have shown great willingness to share their approaches and experiences, and Jubilee Scotland will be able to encourage and facilitate any liaison or co-working with officials from these countries.26 c) Debt cancellation not to come out of aid budgets: The UK Department for International Development has admitted in a communication to Jubilee Debt Campaign that 'any debt cancellation for Sudan would contribute to meeting the UK government’s aid targets.'27 Debt cancellation in such cases serves to massage aid figures without addressing the underlying injustice associated with the debt. When Norway cancelled its unjust debts, the Government took the decision to simply draw ‘a red line across the debt’28 not taking those debts from its aid budget.29 Jubilee Scotland would urge the Scottish Government to adopt the same principle in tackling the UK's legacy of unjust lending. Conclusion Current debates over Scotland’s future present an opportunity to redefine its role on the world stage, and consider how it could promote itself internationally as a just nation. In the context of this discussion, Jubilee Scotland is calling for two pledges: a pledge to an audit of all UKEF debt inherited from the UK with the cancellation of any debts deemed to be unjust; and for any Scottish Export Finance agency that is created to be governed by principles of transparency and fairness, to ensure against the accumulation of future unjust debt from Scotland. In the international struggle for debt justice, Scotland has an opportunity to set the pace. April 2012

Citations 1 Al Jazeera, Frost over the World, 18-2-12 2 Divided between £2.4 billion to UKEF, £34

million to DfID and £43 million to the Commonwealth Development Corporation

3 Also known as the Export Credit Guarantee Department (ECGD)

4 CUBE (2011) Clean Up Britain’s Exports: Manifesto for reform of the Export Credits Guarantee Department p2

5 ibid p2 6 http://cleanupexports.org.uk/about/ 7 Christian Aid (2011) Climate Check: An analysis

of the government’s delivery of its low carbon commitments

8 Jubilee Debt Campaign (2011) The Department for Dodgy Deals: Ending the UK’s support for toxic debt

9 To take the example of the 2009-10 financial year, despite repeated Freedom of Information requests, over $4million worth of credits remains unexplained.

10 ibid pp3-4 11 Jubilee Debt Campaign (2011) Vince Cable's

department demanding payment for arms sales to Mubarak http://bit.ly/tRnHPC

12 Jubilee Debt Campaign (2011) South Sudan Should not be Born Into Debt - http://bit.ly/Jx0weT

13 Carmel Budiardjo/TAPOL (2001) State Terror in Indonesia, Past and Present

14 Jubilee Debt Campaign (2011) The Department for Dodgy Deals: Ending the UK’s support for toxic debt pp13-14.

15 Current active partners include Amnesty, Campaign Against the Arms Trade, Jubilee Debt Campaign and WWF.

16 http://services.parliament.uk/bills/2010-11/exportcreditsguaranteedepartmentregulationandreporting.html

17 Tabled July 2010. At time of writing, 198 signatories. http://www.parliament.uk/edm/2010-12/622

18 The key barrier for 33% of respondents - from Economy, Energy and Tourism Committee (EET), Exporting and Economic Growth (September 2010) p12

19 For example, Scotland's traditional trading partners are in Europe rather than emerging markets, and there is a much heavier presence pro rata of chemicals and manufacture in export portfolio - for more details on this see Economy, Energy and Tourism Committee (EET), Exporting and Economic Growth (September 2010) p13

20 http://www.sdi.co.uk/about-sdi/our-services.aspx

21 adapted from CUBE manifesto 2011 22 ibid p10.

23 A recent report by the David Hume Institute –

while acknowledging the difficulty of this task - suggests a possible calculation based on a number of factors:

‘there are a number of ways in which one may calculate Scotland’s share e.g. by population or GDP or Scotland’s share of either UK public sector spending or employment. Scotland accounts for 8.4% of the UK population and 8.3% of UK GVA; but 9.5% of UK public spending and 9.9% of UK public sector employment’ David Hume Institute (2012) Issues Facing an Independent Scotland – Scotland’s Share of UK Public Debt, p1

24 The principle of dividing up debts based on who benefited has been used in other secessions. For example, the debt owed by the former Yugoslavia was divided between states on the basis of which was the final beneficiary of a loan, with debts unable to be allocated split on the basis of tax revenues, export earnings, population and territory.

25 Joseph Hanlon (2007) Defining Illegitimate Debt

26 The development of a 'panel' of expertise on this subject could proceed in parallel with the development of any Scottish arbitral debt panel.

27 Jubilee Debt Campaign, Ministers planning to massage aid figures when cancelling unjust debt, http://bit.ly/rxfM2v December 2011

28 ibid p8. 29 The Norwegian Debt Campaign (SLUG) (2007)

Why Norway took Creditor Responsibility – the case of the Ship Export campaign p3

Limited Company No. 220549 Scottish Charity No. SC031827

Website: www.jubileescotland.org.uk Convenor: Rev. Elisabeth Cranfield

Limited Company No. 220549, Scottish Charity No. SC031827Website: www.jubileescotland.org.ukConvenor: Rev. Elisabeth Cranfield