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Debt Relief (Developing Countries) Bill

My Lords, as anticipated by the noble Baroness, Lady Noakes, I confirm the Government’s full support for the Bill. I thank my noble friend Lady Quin for her leadership on the Bill here and her clear explanation of the rationale underlying it. The Government’s support for the Bill is motivated by twin purposes: first, that the legislation proposed will help to achieve our aims for international development; secondly—this is crucial—it is also economically justified. The Bill retains and reinforces creditors’ rights to recover a fair proportion of their debts; it acts to further equality among creditors in circumstances where there is no prospect for all of them to be repaid in full; and there are clear reasons to expect its benefits to substantially outweigh any costs. I welcome the recognition of this by the Opposition and Liberal Democrats in the other place that has led to the Bill receiving cross-party support. I hope noble Lords will agree that this is carefully considered and valuable legislation which we should ensure becomes law. The Bill has its roots in the unique and exceptional international effort to relieve the unsustainable debt burden on the 40 heavily indebted poor countries—the so-called HIPCs. By the mid-1990s these countries were, on average, paying more to service their debt than on health and education combined. They also had little or no prospect of ever repaying their debts in full. These countries account for much of the world’s most severe poverty. They have a total population of over 600 million but an average annual income per person of less than $530. It was clear that their unsustainable debts posed a serious barrier to development. As a result, and with a considerable measure of UK leadership, the international community took a series of decisive actions to tackle the problem and reduce the debts of the HIPCs to sustainable levels. The HIPC initiative established in 1996 and strengthened in 1999 provides the key framework. The World Bank and IMF assess countries’ progress in making reforms that will improve financial and economic management and enable the benefits from debt relief to be effectively directed at reducing poverty and enhancing economic growth. They also calculate the level of debt relief that an eligible country needs from all creditors—bilateral, multilateral and commercial—to reduce its debts to a sustainable level. Once they assess a country as having made the necessary progress, all creditors are expected to provide a common level of relief. Many do so. All the major multilateral creditors and the principal bilateral creditors that are members of the Paris Club do this as a matter of course—indeed, some, including the UK, go further and voluntarily provide 100 per cent debt cancellation to countries completing the HIPC initiative—but the majority of commercial creditors also decide to participate in the HIPC initiative and provide the level of reduction expected. The problem arises from the minority of commercial creditors that instead litigate for the full value of debt owed and seek to extract its payment. To do so exploits a market failure in the sovereign debt market—the co-ordination problem among creditors when a debtor is unable to fully repay. As there is no analogue to insolvency law for sovereign debt, all creditors retain a legal right to full repayment even though there is no likely prospect for all creditors to realise this right. Through the HIPC initiative, the majority of creditors have recognised the unsustainability of the debt burden facing HIPCs and have provided the degree of debt reduction necessary to resolve it. However, this has opened the door to other creditors free-riding on the relief, litigating and recovering the full value that they would have been unable to secure had others not provided debt relief. This behaviour is economically inefficient and inequitable and leads to damage to those countries’ prospects for development. I am all the more concerned by this as the resources implicitly siphoned off include the debt cancellation and development assistance provided by UK taxpayers. The Government have already taken a range of measures to limit this problem. We support and part-fund the World Bank’s buy-back of commercial debt, which enables many of the commercial creditors willing to accept terms compatible with the HIPC initiative to receive that payment and settle their claims. We have committed funding to the new African legal support facility that will help countries facing litigation for full repayment to contest their cases robustly. We, along with other members of the Paris Club and the European Union, have committed not to sell on our own debts to others, so ensuring that they cannot end up with litigating creditors. However, despite these actions, the problem of some creditors litigating for and recovering the full value of the debts owed by HIPCs remains. As long as it is both legal and potentially highly lucrative to do so, it may well continue to hamper the development of HIPCs. The most recent and reliable information on the scale of the problem, provided by the World Bank’s annual survey of HIPC Governments, reported that there are 14 known active or unresolved cases of creditor litigation against HIPCs worldwide with a total value of $1.2 billion. In a vivid example from last November, the High Court gave judgment for $20 million against Liberia in a claim brought by two commercial creditors against the country allowing them to seek to enforce full repayment in the UK. The average Liberian earns only $170 a year and 13 per cent of children die before their fifth birthday. Plainly their Government cannot afford to see some of the resources they expect from debt relief going to repay creditors above HIPC terms. This clear market failure has prompted the Treasury to consult on legislation to limit the proportion of a debt which a creditor could recover, and now to support this Private Member’s Bill. Discussion of the Bill has quite properly examined closely the justification for legislation which will affect the extent to which existing debts can be enforced. We all recognise that the principle of legal certainty that a contractual right can be fully enforced is an important one which provides an underpinning for smoothly functioning financial markets. However, the circumstances relating to HIPCs’ historical debts are far from usual. There is no realistic prospect that all creditors can enforce their contractual rights in full. A high degree of debt relief to reduce creditors’ claims to their true economic value is a financial necessity. Indeed, the typical market value of HIPCs’ commercial debt is around or below the level to which the HIPC initiative expects claims to be reduced. Bringing about this necessary and equal reduction is the purpose of the HIPC initiative as administered by the IMF and the World Bank. In this situation there is a compelling case for legislation that supports a restructuring that is fair among creditors and which, by eliminating free riding, improves economic efficiency. We also note the extent to which the Bill recognises and supports the legitimate interest of creditors and the safeguards it includes to protect against negative impacts on financial markets. First, the Bill sustains a creditor’s right to litigate for repayment. This legal underpinning for sovereign lending remains key. Secondly, the Bill is tightly targeted; it specifically excludes new lending and is limited to the debts of the HIPCs, which compose a very small proportion of emergent market finance. Thirdly, it seeks to improve a creditor’s prospects for prompt recovery of the proportion of a debt which can be repaid consistent with the HIPC initiative. Clause 6 provides an incentive for debtors to settle claims on these terms by excluding them from the scope of legislation if they fail to do so. Finally, the amendment to provide for a sunset clause means that the Bill would lapse after one year unless Parliament decides, by affirmative resolution, to extend it. I am confident that this Bill will not have a negative effect on development finance but, if it did, Parliament could allow it to lapse. I conclude that we face a choice. We can today pass a Bill that would do much to protect 40 of the world’s poorest countries from the actions of a minority of commercial creditors who exploit the relief provided by others. We can help ensure that the debt relief and development aid provided by the UK helps to tackle poverty rather than provide profit for investors. We can do so through a measure which is carefully designed, based on sound economic logic as fully as it is on a moral principle, and which we can and must reconsider after a year to confirm that it has been of net benefit. Alternatively, we could shy away from a decision and leave those countries’ development exposed to the attacks of litigating creditors while we considered the issue again. I am grateful for the most informative contribution of the noble Earl, Lord Sandwich, and for those from the noble Lord, Lord Roberts of Llandudno, and the noble Baroness, Lady Noakes. I think that there is marked unanimity in the House in our support for this measure. There were occasions when I found myself at odds with the Front Bench of the opposition party and the Liberal Democrats over issues of legislation, but it is a delight that, on this occasion, we can find ourselves of common mind. Perhaps I may say in closing how much I have enjoyed and benefited from the engagement of the Front Benches of the Conservative Party and of the Liberal Democrats on issues relating to finance and the economy, and thank them for the kindness that they have shown me during my first parliamentary session as a Minister. I hope that we can all agree, however, that the argument for passing this Bill is clear and that we will give it our full support.