Debt Relief (Developing Countries) Act 2010 (Permanent Effect) Order 2011

Lord Sassoon Excerpts

Tuesday 17th May 2011 Grand Committee

Moved By

[Lord Sassoon]

That the Grand Committee do report to the House that it has considered the Debt Relief (Developing Countries) Act 2010 (Permanent Effect) Order 2011.

Relevant documents: 20th Report from the Joint Committee on Statutory Instruments.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, the draft order before us today makes permanent the effect of the Debt Relief (Developing Countries) Act 2010. Perhaps it will assist the Grand Committee if I briefly explain the background to this order.

The Debt Relief (Developing Countries) Act 2010 prevents creditors of heavily indebted poor countries—the so-called HIPCs—recovering in UK courts an amount of debt in excess of that consistent with the HIPC initiative. The 2010 Act contains a sunset clause, which means that it will expire on 7 June 2011 unless an order is made to extend it. The Government support the order for two reasons. First, making the 2010 Act permanent will help achieve our aims for international development. Secondly, evidence suggests that the 2010 Act has had some benefit on HIPCs and no evidence has been found of unintended adverse effects.

The Government are committed to debt relief for the poorest countries. The coalition programme for government states that the coalition will accelerate the process of relieving HIPCs of their debt and review what action can be taken against vulture funds.

The HIPC initiative aims to ensure that no poor country faces a debt burden it cannot manage. Multilateral, bilateral and commercial creditors are all expected to provide the debt relief required to restore external debt sustainability to HIPCs. The majority of creditors provide debt relief consistent with the HIPC initiative. The 2010 Act tackles the problem of the small minority of commercial creditors that free-ride on the relief, litigating and recovering the full value of their debts plus accumulated interest and any associated charges owed to them. This behaviour is inequitable and economically inefficient. The resources implicitly siphoned off by such creditors include the debt cancellation and development assistance funded by UK taxpayers.

The sunset clause was added to the Act because there was a degree of uncertainty about the impact of the legislation. This inclusion was important given the lack of parliamentary time to scrutinise the Bill when it was passed last year and the lack of available evidence at that time about its likely impacts. I should pay tribute at this point to the noble Baroness, Lady Quin, for her sponsorship of the Bill last year. I am delighted to be opposed by her for the first time this afternoon—although I hope that her opposition will not run to opposing the draft order before us. I am grateful to her for indicating that it will not.

It is important that we have had, and have taken, the opportunity to assess the impact of the Act. The Government have consulted a wide range of organisations, including many of those that contributed to the 2009 public consultation—representatives of the international financial institutions, HIPC country Governments, the financial services sector, lawyers and civil society. There is no information to suggest that the Act has adversely affected the availability and cost of lending to HIPCs or other low-income countries. The tightly defined and limited scope of the legislation seems to have prevented this. Additionally, no evidence has been presented to the Government to suggest that the legislation has had an adverse impact on the UK as a centre for financial services or that it has resulted in changes in the choice of law and jurisdiction for financial contracts. However, evidence suggests that the 2010 Act has benefited HIPCs. This is illustrated by the recent case of Liberia.

In June 2010, Liberia received substantial debt relief under the HIPC initiative, including 100 per cent cancellation from the UK. Most of its commercial creditors also provided debt relief, assisted by a buy-back operation of commercial debt under the World Bank’s debt reduction facility in April 2009. In November 2009, the High Court gave judgment for $20 million against Liberia in a claim brought by two commercial creditors that had not participated in the debt buy-back operation. This allowed them to seek to enforce full repayment in the UK of an amount that was then equivalent to about 5 per cent of Liberia’s national budget. However, one year later, by which time the 2010 Act was in place, the two remaining commercial creditors agreed to a second World Bank debt buy-back operation. Consequently, Liberia will have to pay back only 3 per cent of the amount owed—an amount consistent with the HIPC initiative. It seems clear that the 2010 Act was one factor that prompted this settlement.

The order that we are debating makes permanent the effect of the Debt Relief (Developing Countries) Act 2010. Making the legislation permanent will help to achieve the Government’s aims for international development. As I explained, the 2010 Act has already been shown to have had a positive impact on HIPCs, preventing the diversion of resources provided through debt relief, which are intended to support development and poverty reduction; and no evidence has been found that it has had unintended adverse effects on low-income countries or on the UK. I therefore commend it to the Committee.

[Lord Roberts of Llandudno]

My Lords, it is a pleasure for me on behalf of the Liberal Democrats to welcome the order and to thank those whose foresight brought it about. The Debt Relief (Developing Countries) Act 2010 had a sunset clause, as we have heard, which is now removed. The Act will become permanent, as it should.

In the original discussion on the 2010 Act, it was noted that it was a victory over the “vultures”—the private companies that bought bad debts and then demanded interest that ensnared poor countries in even greater poverty. They lost the battle; I am delighted about that. I will give one example. Donegal International bought $15 million-worth of Zambia’s debt for $3.3 million. It then demanded $55 million in the United Kingdom courts. It was eventually awarded $15.5 million. Even that was a profit of $12 million. However, this now will end. I pay tribute to the Jubilee Debt Campaign and to the churches, which all gave tremendous support for this debt relief step. The end of the sunset clause is in many ways the beginning of removing the threat from heavily indebted poor countries. Now possibly they will be able to breathe a little more freely and more hopefully. Once again I say that we are delighted to support the order.

--- Later in debate ---

[Lord Sassoon]

My Lords, I welcome the constructive, focused and brief discussion that we have had this afternoon. Let me address the points that have been raised. First, I thank my noble friend Lord Roberts of Llandudno, particularly because he did not ask me any questions, which makes my life easy.

I again pay tribute to the noble Baroness, Lady Quin, for having brought the legislation forward. She referred again to the questions that my noble friend Lady Noakes asked last year. It was right that my noble friend raised those questions; they were absolutely the right questions to ask about the Bill. The consultation process has addressed and targeted getting answers to those questions and has come up with absolutely the right answer. The cost of the consultation is all taken up in the time of Treasury officials within the existing team that deals with those matters, so there is no material incremental cost as a result of the consultation. As the noble Baroness recognises, if we had not had the consultation process now, it would probably have needed to be substituted by additional time to bottom out those questions a year or more ago, so there has been no material additional cost; it has been absorbed within the Treasury's normal expenditure.

On the noble Baroness’s other question about the Government's commitment to the 0.7 per cent aid target, a few minutes ago in the Chamber, I heard my noble friend Lady Browning being asked that precise question and giving a vigorous and unequivocal answer that the Government remain absolutely committed to the target, and I can only repeat what she said.

In closing, I believe that it is important that the order is approved today, and I am grateful for the Committee’s support. The order makes permanent the effect of the Debt Relief (Developing Countries) Act 2010. It will ensure that creditors of HIPCs cannot recover an amount of debt in excess of that consistent with the HIPC initiative. That will prevent the diversion of resources provided through debt relief which, as I said in my opening speech, are intended to support development and poverty reduction. We must retain our focus on those critical matters. I therefore commend the Motion to the Committee.

Motion agreed.