Eurodad Charter on Responsible Finance

1. Eurodad Charter on Responsible Finance Gail Hurley, European Network on Debt and Development (EURODAD) Dutch Ministry of Finance 25 June 2008 Contact: ghurley@eurodad.org gailmlhurley@gmail.com

2. Responsible lending: a hot topic Ecuador’s official debt auditcommission • Question to lender: How could you draw-up such a skewed loan agreement? • Question to borrower: Why did you sign an agreement on such unfavourable terms? Sign here please!

3. Responsible lending: a hot topic Key Drivers • Post HIPC and MDRI: policy debate has shifted to how to avoid the rapid re-accumulation of unsustainable and irresponsible debt in beneficiary nations • Increased prominence of a number of “new lenders” (China, India, Brazil, Venezuela, South Korea, Kuwait, Saudi Arabia) • Free-riders: Vulture fund action has graphically underscored need for contractual changes to curb litigation by vultures

4. Current responses insufficient and limited Current measures just don’t make the grade • WB-IMF debt sustainability framework for low-income countries • 2006 Equator Principles: voluntary code of good conduct for commercial bank lenders • OECD: principles andguidelines to promote sustainable lending practices in the provision of export credits to low-income countries • Social and environmental safeguard policies (e.g. World Bank, IFC etc.): some mandatory, others discretionary • G20 Charter on Responsible Lending: voluntary code of conduct

5. Current responses insufficient and limited Current measures just don’t make the grade • WB-IMF debt sustainability framework for low-income countries: • Assesses a country’s capacities to repay • Provides no assessment of “quality” of finance on offer • Voluntary coordination tool for lenders

6. Current responses insufficient and limited Current measures just don’t make the grade • OECD: principles andguidelines to promote sustainable lending practices in the provision of export credits to low-income countries • “ECG Members will observe applicable minimum concessionality requirements of LICs to the IMF and IDA” • “For those countries without concessionality requirements to the IMF and IDA, ECG Members agree that the provision of official export credits should take into account the results of the most recent IMF/World Bank country-specific debt sustainability analyses” • “ECG Members will refrain from providing support for unproductive expenditures” • “Provide data on transactions supported to IDA-only countries for review on an annual basis in order to, inter alia, assess ECG Members’ success towards ensuring that official export credits to low-income countries are consistent with the aims of the debt sustainability framework”

7. Current responses insufficient and limited Current measures just don’t make the grade • Why did countries become so dramatically over-indebted? Provision of poor quality finance, often extended for political purposes, badly invested by borrower, scant regard for social, environmental concerns by lender and borrower, loan pushing and defensive lending practices • Noises over a ‘race to the bottom’: • “the competition of the Chinese banks is clear […] they don’t bother about social or human rights conditions” (Philippe Maystadt, President, EIB in November 2006)

8. One and the same? • Prudent lending? • Sustainable lending? • Responsible lending?

9. What Instead?Eurodad Responsible Financing Charter • Clear ex ante and ex post rules of the game: only way to enforce (and reward) responsible lending and borrowing behaviour • Internationally recognised standards for responsible lending and borrowing to apply to all loans issued to sovereign states or covered by a sovereign guarantee

10. Eurodad Responsible Financing Charter: Key principles Legal and financial terms and conditions: • Purpose and amount of loan: aid effectiveness & poverty focused. Loan must be driven by national needs assessment and growth strategy • Mutual obligations and predictable disbursement: The borrower commits to spend the funds as stipulated in the loan agreement. The lender commits to deliver the funds predictably as stated • Assessment of financial position of borrower and assumptions used to calculate how borrower will reimburse the loan • Fair interest rates and penalties policies (reasonable and fair upper limit); • Compliance with relevant national and international legislation; • Fees and charges: loan must give details of any fees charged as part of transaction (purpose, amount, recipient). Side-letters not permitted • Conflict of interests: The loan document should also spell out any additional role the lender has played in relation to the loan • Restrict right to sell loan on secondary market

11. Eurodad Responsible Financing Charter: Key principles Transparency and accountability • Parliamentary and citizen participation and consent: (provision of adequate time and information in appropriate format) • Full public disclosure of information (press, radio, web etc.): Loan document should be available to citizens on request • Loan contracts must be available in main national languages

12. Eurodad Responsible Financing Charter: Key principles Protection of human rights and the environment • Respect for human rights: activities financed must not violate human rights treaties • Positive independent ex ante long-term integrated impact assessmentof viability of project and details of how risk will be shared between signatories • Loan must comply with social, labour and environmental standards as embodied in international agreements • Independent evaluation and audit

13. Eurodad Responsible Financing Charter: Key principles Procurement • Government procurement processes must be open and transparent: loan must carry clear details of those carrying out any work • Loan must carry details of any host government agreements, production-sharing agreements, power-purchase agreements or any agreement to repay the loan in goods or services provided by the borrower • Local capacity-building: procurement procedures should support the capacity-building of local companies and institutions

14. Eurodad Responsible Financing Charter: Key principles Repayment difficulties or disputes • Change in circumstance: The loan must recognise that there will be cases where a dramatic change in circumstances – beyond the will of either borrower or lender – means that the borrower is no longer able to meet its financial obligations on the loan • Fair and transparent arbitration procedure: Loan document should provide for an independent and transparent arbitration procedure in cases of repayment difficulties or dispute • Cross-default: Loan document must not contain any cross-default or similar clause • The details of any loan refinancing agreements must be public

15. Conclusion • Ultimately both lenders and borrowers need to be held accountable for their decisions: clear ex ante and ex post rules of the road needed to ensure responsible behaviour • Move away from traditional top-down conditionality approach: citizens South & North are provided with tools to hold their governments to account • “We have experienced many lender conditionalities, the time has come for borrower imposed conditionalities”, Minister of Finance, Tanzania, April 2008 commenting on Eurodad’s Charter

16. Conclusion Borrower country support for Eurodad’s Charter • Commonwealth HIPC Finance Ministers have called for careful consideration of Eurodad Charter • “Ministers recognised that prudent borrowing and lending practices required concerted action on the part of borrowers, lenders and the international community at large. They emphasised the need for lenders to act responsibly taking into account the future debt repayment capacities of borrowers and also to adhere to lending ethics. In this regard, Ministers welcomed the statement by Eurodad on their proposed Charter on Responsible Lending, whose aim is to ensure that the terms and conditions are fair, that the loan contracting process is participatory and transparent, that human rights and the environment of recipient nations are respected and that repayment difficulties and disputes are resolved fairly and efficiently. The Charter also urges both lenders and borrowers to recognise that they share responsibility for ensuring long term future debt sustainability. Ministers urged careful debate and consideration of the proposals at the forthcoming High Level Forum on Aid Effectiveness in Accra, Ghana and in the run up to the UN Financing for Development Summit in Doha.” • Commonwealth Finance Ministers from Cameroon, Ghana, Guyana, Malawi, Mozambique, Sierra Leone, Tanzania and Zambia, at the Commonwealth HIPC Finance Minister’s meeting, Washington DC, April 2008

17. Potential EU responses • A race to the bottom?: “the competition of the Chinese banks is clear […] they don’t bother about social or human rights conditions”(Philippe Maystadt, EIB President, Nov 2006) • Or clearer differentiation of European finance through responsible principles and practices? • Support for an international dialogue on the issue and improvement on Eurodad’s principles • Unilateral adoption of the main principles embodied in Eurodad’s Charter

18. Thanks • Contact: Gail Hurley • Email:ghurley@eurodad.organdgailmlhurley@gmail.com