UKEF vs. Global Witness: Determining the Role and Status of Export Credit Agencies for Sustainable Development

On 9th December 2020, the United Kingdom National Contact Point [UK NCP] for the OECD Guidelines for Multinational Enterprises [OECD Guidelines]] rejected a complaint filed by the international non-governmental organization Global Witness against UK Export Finance [UKEF] for failing to address climate concerns by providing credit to fossil fuel industries worldwide.

In a controversial statement, the UK NCP rejected the complaint on the grounds that UKEF, as an export credit agency [ECA], does not fall under ‘multinational enterprises’ and therefore does not have to adhere to the OECD Guidelines regarding the same. This rejection is in contrast with several other NCP decisions regarding the inclusion of ECAs under guidelines for multinational enterprises. This decision by UK NCP poses important questions that this blog post serves to answer. Firstly, it tries to analyze the status of ECAs under the OECD Guidelines and instruments of other organizations like the World Trade Organization [WTO]. In light of this, this post also argues that a clear definition of ‘multinational’ enterprise will provide a feasible solution to these contradictory approaches taken by different countries for reconciling the status and tasks of ECAs in international forums.

Background of the complaint

Global Witness, an international NGO, registered a complaint under the UK NCP against UKEF, an export credit agency, and a department of the UK government. The complaint essentially focused on bringing UKEF under the umbrella of the OECD guidelines. Chapter VI of these guidelines regulate the activities of such organizations, and strives to adhere them to the ‘wider goal of sustainable development’. The complainants argued that covering UKEF under these guidelines would enable them to commit to the obligations under the Paris Agreement, which aims to strengthen the global response to climate change and focuses on sustainable development. Since UKEF has been providing 97% of its energy support in the last decade to fossil fuel industries, it has contributed towards carbon emissions all around the world. This approach essentially undermines the obligations of the UK under the Paris Agreement.

In response to this complaint UKEF, like several other ECAs around the world, asserted that it is not a ‘multinational enterprise’ for the purpose of the OECD Guidelines, as it does not carry out any ‘commercial activity’. It is important to note that similar cases against such ECAs were brought in Korea, the Netherlands, and other states, where the same stance was taken by those agencies.

The UK NCP rejected the complaint and upheld the argument of UKEF that it does not come under a ‘multinational enterprise’ and determined that “the complaint would not contribute to the purpose and effectiveness of the guidelines”. There are two reasons for this rejection, as granted by the UK NCP. Firstly, UKEF does not carry out any commercial activity. Secondly, that it does not have a separate corporate personality. By calling for a “case-to-case” basis criteria for establishing the status of an ECA, the OECD has managed to create a dichotomy where ECAs not engaging in a “commercial activity” are exempted from the guidelines. This often results in a loophole used by states to fund projects abroad without scrutiny applicable to similar enterprises of other states.

Defining Multinational Enterprises under the OECD Guidelines

Confusion has arisen because the term “multinational enterprises” is not defined under the Guidelines. One of the ways through which it can be ensured that ECAs like UKEF does not negatively impact sustainability is through their inclusion under the Guidelines on Multinational Enterprises. Ideally, the definition of a multinational enterprise should involve any state- or privately-owned body that undertakes operations, either indirectly or directly, and impacts the economics, trade, environment, rights, and liabilities of stakeholders in different countries. The reasons why it should be defined, and why ECAs should be included under it are explained below.

  1. Lack of Clarity and Consensus on the Status of ECAs

Annex I on concepts and principles of the OECD Guidelines clearly states that an “enterprise could be private or state-owned”. The nature of the activities carried out serve a key role in determining whether such export credit agencies come under these guidelines. In some instances, such as in a complaint that was rejected by the Korean NCP, the ECA was not considered to be a multinational enterprise as a loan provider. It was stated that as a mere loan provider to exporters, the Dutch ECA could not be considered a multinational enterprise, but if it were carrying out a “commercial activity” the decision would have been different. Para 10 of the commentary  to the General Policies of OECD Guidelines state that ‘State-owned multinational enterprises are also subject to the same recommendations [of the Guidelines] as privately-owned enterprises, but public scrutiny is often magnified when a State is the final owner’. This reference was also included in the Dutch NCP’s decision on Both Ends vs ADSB. In this decision, the Dutch NCP included ADSB under the OECD guidelines, deeming it a multinational enterprise functioning under the government. When confronted with the same defenses, the UK NCP however declined to include the UKEF under the said definition.

The OECD has managed to create confusion on the role and work of ECAs in the international forum. Through its reports, it has hinted at including ECAs under the Guidelines for Multinational Enterprises. Similarly, various NCPs have adopted this approach, distinguishing between different ECAs and determining their commitment under the guidelines. A clear-cut definition of what constitutes a multinational enterprise is more important, since major ECAs not only manage to escape the application of the OECD Guidelines but their liabilities and obligations under the Agreement on Subsidies and Countervailing Measures (ASCM) as well. This factor should have ideally been considered by the UK NCP before determining the status of UKEF.

  1. Non-Inclusion of Big ECAs under the WTO Agreement on Subsidies

Unlike other smaller ECAs, UKEF and other developed states’ ECAs do not come under  ASCM of the WTO, which means that by deciding that UKEF does not come under the definition of a multinational enterprise of the OECD Guidelines, the UK NCP has provided another escape route to UKEF and its unsustainable funding practices. The ASCM imposes a restriction on any export subsidy similar to those granted by the ECAs under paragraph (k) of Annex I of the agreement. However, 10 states that are a part of The OECD Arrangement on Guidelines for Officially Supported Export Credits (“the Arrangement”) do not come under the ASCM, as they fit the ‘safe haven’ clause of paragraph (k) of Annex I of the agreement. The clause stipulates that an export credit practice that is in line with interest rate provisions of an international undertaking, in which there are at least 12 participating members of the ASCM, is not considered to be an export subsidy. The countries under the arrangement are Norway, Australia, Canada, The United Kingdom, the European Union (except for The Czech Republic, Poland and Hungary), Korea, Japan, New Zealand, Switzerland,  the United States. This enables them to escape the provisions on export subsidies. Therefore, the most powerful economies of the world and developed counties are not under the purview of the ASCM, which prevents the importer country from imposing any countervailing duties on the state where an ECA is functioning.

This ‘safe haven’ clause is an escape route provided to big and developed countries and allowing the Arrangement to function without taking into account the interests of other members of the WTO. The arrangement sets interest rates on export subsidies etc., based on negotiations, peer pressure, and talks only. Developing countries are not a part of these negotiations, which means that they are forced to accept the rates and regulations set by the developed countries. It not only puts them in a disadvantageous position but also devoid of any countervailing measures as well.

Should UKEF Be Considered a Multinational Enterprise?

ECAs like UKEF do not fall under the OECD guidelines or the ASCM. This means that they can continue to impact developing countries ecologically and socially without incurring any form of disputes from the affected countries. Disputes under paragraph (k) have been going on for a long time. For example, in the Canada – Brazil Aircraft case, Brazil tried to impose subsidies similar to the Arrangement, but the Appellate Body deemed it illegal under Item K of the ASCM. It is unlikely that under the Arrangement powerful nations would consider developing countries’ interests over their own financial ones.

Many national ECAs have recognized themselves as a part of the OECD guidelines, either directly or indirectly, by pledging to adhere to the obligations under it. The OECD has itself recognized the role of investment transactions and entities related to it, in terms of Responsible Business Conduct under the guidelines. Governments are now actively expected to adhere and implement the guidelines in the most responsible manner. Export credit and ECAs are repeatedly mentioned in the Guidelines’ Annual Report of 2019, which clearly implies that the OECD and its member states considered the inclusion of ECAs under the guidelines to contribute to better effectiveness and implementation. Moreover, the nature of the work undertaken by ECAs involves stakeholders from different countries and affects the economic, environmental and social aspects of the countries on the receiving end of their direct and indirect investments. Since the OECD has indirectly included ECAs under its reports, and considers ECAs an important part of the Guidelines, the purpose would be served better if the definition of a “multinational enterprise” is expanded to include ECAs like UKEF that are state-run, irrespective of their commercial nature..

Conclusion

The OECD Council on the recommendations of the Working Party on Export Credit and Credit Guarantees recently adopted Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence (“the common approaches”) in 2016. The common approach lays down guidelines for adopting social and environmental due diligence standards to be undertaken by the ECAs. However, these guidelines are not binding, and an NCP-like structure is not provided for interested parties to question non-observation of the guidelines, which undermines their efficacy to some extent.

Due to the lack of effective regulation under the ASCM and the OECD Guidelines ECAs like UKEF have been provided with avenues to escape international environmental law obligations. For a sustainable and better future, developed countries like the UK need to limit finance to harmful and unsustainable fossil fuel industries in developing and underdeveloped countries. Moreover, due to their role and nature, the effectiveness of the Guidelines in a national context depends largely upon the NCPs. In order to ensure that ECAs do not become a tool to circumvent the Sustainable Development Goals, NCPs need to reduce the distinction created between state-run and other ECAs around the world and be more accommodative in their interpretation of what constitutes a Multinational Enterprise.