Export Credit Agencies and Environmental Standards: An Invitation to Join the DialogueBy Peter Bosshard December 2006
The growing importance of China Exim Bank
In China, approximately one fifth of humanity lives on only 7% of the world’s cultivable land. The country does not have sufficient reserves of oil, timber or mineral resources to sustain its rapid economic growth. Foreign investment and trade contracts help to secure the resources which China lacks at home. Exports also help to overcome the permanent employment crisis which China’s rapid rural transformation has created.1
In line with the country’s "going out" strategy, China joined the World Trade Organization in 2001. Since this date, China’s foreign trade has grown by 20 percent every year. The country is expected to become the world’s second-largest exporter after the United States in 2006 or 2007.
China’s export credit and guarantee agencies -- in particular China Export-Import Bank and Sinosure -- have played an important role in fostering the rapid expansion of Chinese trade and overseas investment. In 2005, China Exim Bank approved loans with a volume of RMB 158.6 billion (approximately $20 billion).2 Established only in 1994, the institution has grown to become the world’s second or third largest export credit agency.
Through export credits, loans and guarantees, China Exim Bank promotes Chinese exports and facilitates the participation of Chinese companies in international construction contracts and other investment projects. Among other sectors, China Exim Bank focuses on projects, such as oil pipelines, that provide access to raw materials, and on investments that help cement friendly diplomatic relations. The institution also serves foreign policy goals by extending concessional loans, the official instrument of Chinese development assistance. Concessional loans are concentrated on projects and countries that are of strategic importance for China.
China Exim Bank’s portfolio includes large investment projects such as the rehabilitation of the Benguela railway in Angola, copper mines in Congo and Zambia, a hotel complex in Sierra Leone, and hydropower dams in Burma, Congo, Ethiopia, Laos, Sudan, and Zambia.
The positive potential of China’s global role
The rapid emergence of China as a leading source of goods and finance offers many advantages. It allows poor countries to diversify their trade, investment and aid relations. China offers consumer and investment goods that are usually more affordable for poor societies than Western exports. Chinese companies address needs -- including for example for affordable anti-malaria drugs -- that have traditionally been ignored by Western producers. The Chinese government can use its growing economic and political clout to press for more equitable international relations -- for example a change of the voting rights at the World Bank and the International Monetary Fund.
China is prepared to enter into joint-ventures with companies from other Southern countries, which Western companies often don’t do. China also allows borrowing governments to access international finance without having to accept economic policy conditions that primarily reflect the interests of Western corporations. The only political condition that borrowers have to accept is support for the "one China principle" of reunification with Taiwan.3
At the recent summit of the Forum on China-Africa Cooperation in Beijing, President Hu Jintao said: "Treating each other as equals is crucial for ensuring mutual trust. We both respect the development path independently embarked upon by the other side."4
China’s approach of reciprocity and mutual respect is much appreciated by partner governments. A senior Nigerian government official said: "Being a developing country, they understand us better. They are also prepared to put more on the table. For instance, the western world is never prepared to transfer technology -- but the Chinese do."5 Sahr Johnny, Sierra Leone’s ambassador to China (and a noted science fiction writer), remarked: "We like Chinese investment because we have one meeting we discuss what they want to do, and they just do it."6 And Alfred Mutua, a spokesperson for Kenya’s government, noted: "The Chinese do not peg their economic activity or aid to political conditions."7
Western observers have expressed concern about the impacts of China’s economic growth and expansion on the global environment, for example in terms of greenhouse gas emissions. This criticism is however directed at the wrong target. In 2005, China consumed 6.6 million barrels of oil per day, while the United States consumed 20.8 million barrels per day.8 Per capita, the US still consumed almost fourteen times more oil than China. The threat of China joining the club of Western consumer societies demonstrates that the development model that was devised by Western companies, governments and financial institutions is not globally sustainable, and needs to be changed.
The environmental footprint of export credit agencies
Export credit agencies are a primary source of public finance for poor countries. In recent years, such institutions are estimated to have extended medium and long-term credits to the tune of $50-70 billion per year. This is more than total foreign aid funds.
The projects funded by export credit agencies often have significant social and environmental impacts. These projects include thermal power plants that emit greenhouse gases; dams and reservoirs that forcibly displace hundreds of thousands of people; pulp and paper plants that cause large-scale deforestation; and mining projects, oil pipelines and chemical facilities that can create serious toxic hazards, to name just a few. Official export credits have also underwritten projects that fostered corruption and created unsustainable debt burdens.
Until recently, most export credit agencies had not adopted any binding policies on how to deal with the social and environmental impacts of their projects. Civil society groups are concerned that this will lead to an environmental "race to the bottom", in that companies and the export credit agencies that back them will compete for export and investment contracts based on who is prepared to accept the severest social and environmental impacts.
In the Jakarta Declaration of May 2000, 347 NGOs from 45 countries proposed a comprehensive package of reforms for export credit agencies. Among other measures, the Declaration calls for "binding common environmental and social guidelines and standards no lower and less rigorous than existing international procedures and standards for public international finance such as those of the World Bank Group and OECD Development Assistance Committee. These guidelines and standards need to be coherent with other ongoing international social and environmental commitments and treaties, for example, the conventions of the International Labor Organization and the United Nations Convention on Biological Diversity."9
Starting in December 2001, most export credit agencies of the OECD countries followed the Recommendation on Common Approaches to the Environment and Officially Supported Export Credits.10 Under this agreement, the export credit agencies of the OECD commit to undertaking environmental impact assessments for projects with potentially significant adverse environmental impacts. When undertaking environmental reviews, the agencies commit to "benchmark projects against host country standards, against one or more relevant environmental standards and guidelines published by the World Bank Group, the European Bank for Reconstruction and Development, the Asian Development Bank, the African Development Bank and the Inter-American Development Bank".11
The Common Approaches to the Environment are currently being revised by the member governments of the OECD.
Environmental impacts of China Exim Bank projects
China is not a member of the OECD, and China Exim Bank has not signed on to the Common Approaches to the Environment. There is no question that like other export credit agencies, China Exim’s projects have potentially massive environmental and social impacts. The Merowe Dam Project on the Nile in Sudan is a prominent example.
The Merowe Dam is the largest hydropower project currently under construction in Africa. Once completed in 2008/09, its reservoir will be 200 kilometres long, and will have the capacity to produce 1,250 megawatts of power. The total cost of the project is budgeted to reach $1.2 billion. The main construction contracts went to a consortium of Chinese hydropower companies, and the main financiers are China Exim Bank, the Sudanese government, and bilateral financial institutions from Arab countries.
The project is currently displacing 50,000 people from the fertile Nile Valley to arid locations in the Nubian Desert. The communities which have already been displaced say they have not been properly compensated for their losses, and have seen their poverty rates increase rapidly. The environmental impact assessment for the project is of poor quality, and has never been reviewed by Sudan’s Ministry of Environment.12 This contravenes national law. People affected by the project are frequently protesting against their displacement, and security forces have killed several protesters who demanded better lands for their economic rehabilitation.13
In response to the serious human rights abuses in Sudan, China’s deputy foreign minister Zhou Wenzhong said: "Business is business. We try to separate politics from business. Secondly, I think the internal situation in the Sudan is an internal affair, and we are not in a position to impose upon them."14 There are indications that governments like to work with Chinese investors and financiers precisely because this allows them to ignore international standards regarding the environment, human rights abuses, and corruption.
Kenya’s Alfred Mutua, who applauded that the Chinese government did not peg economic cooperation to political conditions, also observed: "You never hear the Chinese saying that they will not finish a project because the government has not done enough to tackle corruption."15 And Sierra Leone’s ambassador Sahr Johnny, who praised that Chinese investors "just do it", went on to say: "There are no benchmarks and preconditions, no environmental impact assessment."16
In 2005, 46 workers died in an accident at a Chinese copper mine in Zambia. The accident triggered violent protests and complaints that Chinese investors are exploiting workers and do not respect safety rules. In 2006 Michael Sata, a former cabinet minister, ran a presidential campaign based on anti-Chinese sentiments. While he was ultimately defeated, he won a strong majority of the votes in the regions where Chinese investment is concentrated. The export of Chinese consumer goods has also created resentment in countries such as South Africa and Lesotho, where cheap textiles from China have shut down many local garment factories.
The protests in Sudan and Zambia are warning signs. Like the former colonial powers and the United States, China may one day be viewed as an exploiter rather than a friend if Chinese investors do not respect the interests of poor people in Africa. Victor Mallet, a journalist of the Financial Times, warned in a recent commentary: "Unless it injects some responsibility into its dealings with Africa, China will not be hailed, as President Robert Mugabe of Zimbabwe hopes, for establishing ‘a new global paradigm’. Instead, it will be remembered as an ally of rogue states, a pillager of tropical forests and a friend of murderers and tyrants."17
Under President Hu Jintao, the Chinese government has begun to emphasize the need to maintain social equity and cohesion in a period of rapid economic growth. There are signs that the government is also translating this emphasis into concern for social equity and environmental protection on a global scale.
In his opening speech at the Beijing summit of the Forum on China-Africa Cooperation in November 2006, President Hu Jintao said that China would strengthen cooperation with Africa to "promote balanced and harmonious global development".18 The Action Plan that was adopted at the summit announced that "China will give high priority to African concerns of environmental protection and sustainable development".19 The African Policy which China adopted in January 2006 also resolved that "China will actively promote China-Africa cooperation in climate change, water resources conservation, anti-desertification, bio-diversity and other areas of environmental protection".20
Li Ruogu, the Chairman and President of China Exim Bank, took up the theme of harmonious development in his institution’s annual report for 2005. In his introductory message, the Chairman committed that China Exim Bank would contribute "to the strong support for sustainable economic and social development and the harmonious coexistence of human and nature". "We will spare no efforts (…) to contribute to establishing a harmonious society in our own country and a harmonious world at large", Chairman Li Ruogu concluded.21
According to experts from other financial institutions, China Exim Bank adopted environmental procedures in November 2004. These procedures are said to broadly follow China’s domestic environmental regulations. They reportedly require environmental due diligence in the preparation of projects, and the compliance of projects with the laws of the host countries. China Exim Bank has so far not published its environmental procedures.
The Chinese government has always stressed its respect for national sovereignty, and its non-interference in the domestic affairs of other countries. This principle does not need to conflict with policies that safeguard the protection of the environment. China’s representative at the World Bank frequently insists that the Bank needs to respect the national sovereignty of its borrowing governments. He has however always approved the environmental safeguard policies that the Bank is using for its own projects.
Similarly, China Exim Bank is an instrument of China’s foreign and commercial policy, and adopting guidelines for its projects does not undermine the sovereignty of other nations. Just as the Chinese government has the right to insist on the "one China principle" as a precondition for economic cooperation, it is its sovereign right to adopt and strengthen the environmental policies of China Exim Bank.
International Rivers Network is a founding member of ECA-Watch, an international civil society network that monitors export credit agencies and their impacts on the environment and affected people. IRN believes that all export credit agencies should adopt common standards that safeguard the protection of the environment and the interests of people project-affected. Export credit agencies should not engage in an environmental race to the bottom by competing for projects based on who is prepared to accept the severest environmental impacts.
International Rivers Network supports the efforts of China Exim Bank to contribute to a harmonious society in China and a harmonious world at large. IRN is interested in sharing its experience regarding international environmental standards and policies. It would like to engage in a dialogue about appropriate environmental standards of export credit agencies with China Exim Bank, other government agencies, academic institutions, civil society groups and the media in China. IRN is interested in cooperating with Chinese partners to promote such a dialogue through workshops, case studies, and other publications.
For further information, please contact:
Peter Bosshard, Policy Director