Ann McKechin MP

Labour Member of Parliament for Glasgow North

Tackling Vulture Funds: Regulation of Lending to Developing Nations

19 June 2007

You can read Ann's contribution to the Westminster Hall debate on Lending to Developing Nations below.

Ann McKechin (Glasgow, North) (Lab):

I ... welcome the Government’s strong commitment to debt cancellation, which builds on the considerable public and parliamentary pressure for progress that we have seen over the past 10 years. There has been much talk over the past few weeks about the Prime Minister’s legacy from the past 10 years. With great justification, it can be claimed that the triumphs of the Prime Minister’s premiership, which benefit millions of people, include championing debt relief to the world’s poorest nations, winning what was at times a difficult battle to persuade the international community of the merits of debt relief and securing the multilateral debt relief initiative at Gleneagles, which, along with the existing heavily indebted poor countries initiative, has now cancelled the multilateral debts of 24 nations. As chair of the all-party group on debt, aid and trade, I, like many other colleagues in the House, welcome the Government’s strong commitment to debt cancellation, which builds on the considerable public and parliamentary pressure for progress that we have seen over the past 10 years.

Debt cancellation has been a successful element in the fight against global poverty and economic injustice. For example, an independent study in 2001 found that 10 African countries that had received debt relief through the HIPC initiative had increased spending on health care by 70 per cent. and spending on education by 40 per cent. in just four years. Meanwhile, military spending had remained static. An IMF working paper from 2006 found that reducing debt service for low-income countries had a significant impact on social spending. However, a number of concerns have been raised over recent months about progress on debt relief and particularly about prior debts and new lending. I therefore want to take this opportunity to raise those issues with my hon. Friend the Minister and to seek his assurances on a number of points.

My hon. Friend will be aware of the court judgement that was handed down in London in February in respect of a claim against Zambia by the US company Donegal International, which is owned by Michael Sheehan. The claimed related to debts that that impoverished southern African nation incurred more than a decade ago, mainly as a result of buying agricultural machinery from Romania during the cold war. In 1999, Donegal bought the Zambian debt, which had a face value of about $40 million, from Romania for less than $4 million. Appropriately, companies such as Donegal are known as vulture funds because they seek to make a profit by buying up bad debt cheaply and then trying to recover the full amount, often by suing through the courts.

In this case, the courts were critical of the evidence provided by Donegal, but nevertheless found that there was a valid contract and awarded the company a reduced amount of about $15 million. This year, Zambia expects to save $40 million in debt relief through HIPC and other initiatives, but paying Donegal International $15 million will severely limit the impact of that relief. The people who will suffer will be the very poorest, who will be denied basic health and education services in a country where the average life expectancy is a shockingly low 34 years—less than the age of myself and my hon. Friend.

It is hard to know the full extent of such lawsuits because companies do not publicise their actions. As a recent report about the case on the BBC’s “Newsnight” showed, these people work in the shadows and do not welcome the light of publicity. However, the Jubilee debt campaign in the UK has identified at least 40 lawsuits, many of which are still outstanding, that commercial creditors have brought against heavily indebted poor countries and which had reached decision point by September 2006. The debts known to be subject to litigation in those cases amount to a staggering $1.9 billion—more than the approximately $1.5 billion in commercial debt that those countries expect to be cancelled.

As I am sure that my hon. Friend accepts, public and creditor confidence in debt cancellation rests on the understanding that the resources that are released will be used for poverty reduction, not to pay large sums to commercial creditors who seek to make substantial profits from some of the poorest countries in the world. The Chancellor has been openly critical of the operations of vulture funds—with reason—but it is essential that such criticism is matched by distinct action to combat the problem so that we can assure the thousands of people, including constituents, who have called for debt relief that it will continue to reach those most in need.

The Government are already providing legal advice to debtor countries to allow them properly to defend any court action, and that is welcome, but it is vital that such advice is available at the earliest opportunity. In the Zambian case, the negotiations with Donegal International took place over three years, and the Zambian Government probably made some mistakes in the early part of the negotiations in acknowledging the debt.

I urge the Government and other donor Governments to consider introducing legislation that requires the creditors of sovereign debtors to participate in collective action Perhaps my hon. Friend can advise me, therefore, whether any thought has been given to setting up a rapid-response legal-technical facility that is independent of the Bretton Woods institutions and which can help low-income countries to pre-empt and avoid such lawsuits.

I urge the Government and other donor Governments to consider introducing legislation that requires the creditors of sovereign debtors to participate in collective action, whereby all creditors must provide comparable terms in respect of any rescheduling or relief that has been agreed by a majority of the creditors. That would be similar to the regulatory principles that already apply to individual debtors in the UK, which require all creditors, for example, to abide by any debt relief plan that is agreed by creditors representing 75 per cent. of the value of the debts. In addition, many potential law suits will be based on UK contract law, and I urge the Government to introduce legislation similar to that in the USA prohibiting the purchase of debts solely for purpose of litigation.

I would also be grateful if my hon. Friend indicated whether creditors have given consideration to refinancing the debt reduction facility—a fund based at the World Bank that allows International Development Association-only countries to repurchase commercial debt at a substantial discount. That would allow us to extend the facility to HIPC-eligible nations that have not yet reached decision point and ensure that it covers other categories of debt, such as debts owed to other low-income country creditors.

In the longer term, we all need to recognise that there are still unresolved issues from the current debt crisis, and if we do not tackle them properly, they could re-emerge to create a new crisis as new lending increases. In addition, many of the poorest nations possess considerable natural resources, which are increasingly attracting interest from a wide range of foreign investors. However, worries are building up that much of that investment will fail to benefit the poorest citizens unless it is properly regulated and the benefits are targeted at development.

Some have argued that vulture funds simply do what markets do best and that they are just another financial instrument providing a service to those who want to sell off unpaid bonds or securities and minimise their risk. That may be so, but an unregulated market will not protect the weakest, and such practices will certainly not benefit those who struggle to live on less than $1 a day.

One way to tackle such problems is to support, and press for the development of, a just, independent, transparent and comprehensive system for working out international debt, perhaps through an international law on sovereign debt. Such a system would take account of the origins of debts, as well as of their current impact and sustainability, while placing the same moral and legal obligations on companies as it did on Governments. Anne Krueger, the former deputy managing director of the International Monetary Fund, has called for reforms based on principles common to corporate bankruptcy laws so that countries can be given legal protection from creditors and allowed time to negotiate proper restructuring.

One way to tackle such problems is to support, and press for the development of, a just, independent, transparent and comprehensive system for working out international debt, perhaps through an international law on sovereign debt. Central to such issues is instilling the concept of responsible creditor and lender behaviour. Consideration of creditors’ shared responsibility for the creation of debts will help to indicate the principles that should govern new lending and the behaviour of existing creditors, as well as the proper extent to which outstanding debts should be cancelled. Responsible lending to sovereign borrowers, which should also take into account the granting of export credit guarantees, requires respect for the principles of public accountability, transparency and co-responsibility. To achieve that, lenders should reassure themselves that the borrowing Government are legitimate and accountable to their people in respect of the contracting and use of the loan, and clearly defined checks and balances, such as compulsory parliamentary scrutiny, should be in place. Both lender and borrower should be encouraged to report fully and transparently, ensuring public access to the amounts, terms, purposes, use and repayment of loans.

The lenders should assure themselves that the loan or credit is not for a clearly illegitimate purpose, such as for the purchase of arms to be used against civilian populations. Any loans to finance projects should require conformity to the relevant international labour, environmental and other standards, and be conditional on satisfactory impact assessments on social needs and environmental aspects.

It is welcome news that the G8 Finance Ministers have recently announced their intention to support the development of a charter of responsible lending. However, as I am sure my hon. Friend will agree, it will require further work to ensure that any high-level voluntary charter is given substance and force through the adoption of detailed guidelines by multilateral, bilateral and commercial lenders. I believe that the UK and other Organisation for Economic Co-operation and Development Governments can take a lead and show their intention that they expect the charter to be the industry standard, by making ratification of such a charter a condition of eligibility for an export credit guarantee. I hope that my hon. Friend can give me some reassurance about the Treasury’s intentions for progressing with such a charter.

Finally, there needs to be acceptance by creditors of their shared responsibility for some of the old debts that are still being serviced by low and lower-middle income countries, at the expense of spending on essential services. Many of those debts arose from the self-interested or irresponsible decisions of the creditors in relation to oppressive former regimes; for purposes that would not benefit the people of the recipient country; on extortionate terms; or for projects that failed because of bad lender advice.

Our constituents rightly demand that our aid commitments reach the world’s poorest, and the Government need to tackle the problems with action as well as words. The HIPC initiative could be interpreted as an acceptance, to some extent, of the unsustainability of some debts, but there has still been no systematic attempt to investigate how those problems arose and what steps should be taken to prevent similar problems in the future. I encourage the Treasury, following the recent example of the Norwegian Government, to initiate a system of debt audits, particularly for loans that are still being repaid to this country by Kenya and Indonesia, and to consider whether cancellation is warranted where the UK has been responsible in the past for poor or harmful lending—so-called odious debts.

I am the first to acknowledge that the issue is very complex and that changes will never be easy; but then neither were the debt cancellation deals that the Government have fought so hard for over the past decade. Our constituents rightly demand that our aid commitments reach the world’s poorest, and the Government need to tackle the problems with action as well as words. I hope that my hon. Friend can today provide us with some reassurance on those points.

The Economic Secretary to the Treasury (Ed Balls):

It is an honour to serve—for the first time, I think—under your chairmanship, Mrs. Dean. I congratulate my hon. Friend the Member for Glasgow, North (Ann McKechin) both on securing today’s debate, on such an important and topical subject, and on her commitment to the cause of social justice around the world and her work in driving forward progress by Governments on the millennium development goals. It is because of the campaigning work of my hon. Friend and other parliamentary colleagues, and campaigners in her constituency and throughout the country, that we can make progress on many of these issues in international discussions. I commend her for all of the effort that she has made.
  • You can read the whole debate on Parliament.uk, follow the link below.

From Hansard - Parliament's record

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