Oral evidence: UK Export Finance, HC 1804
Oral evidence, 19 March 2019.
Chair
Welcome to our final panel on UK Export Finance. To begin with can I ask our guests to introduce themselves, starting with my left please?
Matthew Crewe
Matthew Crewe, Managing Director of a business called Green’s Power that is based in Wakefield. We are manufacturers of all equipment for the power sector, which involves renewables and conventional fuels.
Chair
Renewables and what, sorry?
Matthew Crewe
Conventional fuels.
Chair
Can you sit a bit forward and make sure you speak into the microphone please, thank you, because we have Hansard in the room taking a report of everything and that is why we do the intros. Thank you, Matthew.
Guto Davies
Guto Davies, Managing Director at EFS or Energy Financial Services at GE Capital within the General Electric Company. My role is to support our industrial businesses and our customers to find financing solutions for the technology that we provide.
Chair
Where are you physically based?
Guto Davies
I am in London.
Chair
Thank you.
Andrew Wiseman
Andrew Wiseman, I am a solicitor by training and I am here as Chair of the Export Guarantees Advisory Council, which is an expert Committee that advises UK Export Finance and its Ministers.
Chair
Can I thank you for the help you have given this Committee in the past on EU environmental law, which has been very helpful to our deliberations.
Andrew Wiseman
Thank you.
Chair
Perhaps I can start with a question to Mr Crewe and Mr Davies, could you describe how you heard about the support available from UKEF and talk us through the application and approval process?
Matthew Crewe
I heard about UKEF through effectively talking to our local UKTI contact, who came to us probably four or five years ago to tell us about the programme and explain the wider activities of UKTI but picked this out as a specific area for us to consider. In terms of the programme, we put it in place in 2016. The first time we looked at it we really struggled to get the thing off the ground, we stopped and then—
Chair
Why?
Matthew Crewe
We struggled with it because at the time our bank was not really prepared to support the extra 20% on the bond side. Our business was in a fair position but had some borrowings and our bank effectively said no to it at that point in time. The second time round our fortunes were much better, the business was debt free and in those sorts of times the banks tend to be a little bit more accommodating. At that point they were throwing the scheme at us and happy to back it so it worked very well.
Chair
How much did you receive and for what?
Matthew Crewe
We have received about £1.2 million for bond support. That helped us to free up working capital to run the business and grow the business, which we have done. That support has effectively taken away the need to place 100% cash behind the guarantees that we give our customers.
Chair
What were you making for your customers and where are the customers?
Matthew Crewe
Our customers are all over the world. We are making heavy steel equipment that goes behind a boiler. It is called an economiser, it takes the waste heat off the boiler and that waste heat is then used for a second purpose, either heating water or providing further energy. It is a relatively environmentally-friendly product, taking the waste away and doing something else with it. It is heavy industrial equipment.
Chair
Did you come across any issues that might help account for the low proportion of renewable projects? Do you know anything about the renewables scene?
Matthew Crewe
We do work in—you could call some of it “renewable”—the waste-to-energy side of things. To be honest, it was all morphed together within the package. It was all about the efficiency of the projects, not necessarily whether they were renewables or not.
Chair
Thank you. Mr Davies?
Guto Davies
GE obviously has interest in a number of industrial spaces. In the UK oil and gas power, aviation and healthcare are the primary ones. The projects we are involved in are typically large infrastructure and capital-intensive projects. Certainly over the past few years, since the start of the financial crisis, there has been a growing need from large infrastructure projects for contractors and manufacturers to bring financial solutions to help the projects progress. It has been inherent in the power sector for quite some time, and more recently during the oil crisis it came into that sector as well. We have been working with UKEF quite extensively over the past five years on a number of projects that we have.
Chair
Since 2014?
Guto Davies
2014-15.
Chair
Not before then?
Guto Davies
Not really required before then. Some of that would be a lack of awareness and some of it is a significant change in philosophy that UKEF has taken on during recent administrations, with a strong drive to promote the products and the services it has. Historically it was very aviation-focused. The leadership team has done a very credible job in diversifying the sectors it is exposed to today, I guess to help balance the portfolio of risk it has, and also to continue to support the other manufacturing sectors it is currently supporting. We are a global company. We have a lot of manufacturing capability across the globe so we work quite extensively with export credit agencies, multilateral banks, development financial institutions as well as the commercial capital markets to find solutions for our customers. We work with them to find the optimal solution to allow their projects to move forward. As I say, we have had a relationship with UKEF for quite some time. It has supported a number of projects for us in the oil and gas, power and aviation sectors. We are actively in discussions with it now about how it can help potential inward investment for us in the healthcare sector. That would allow us to potentially open up additional markets, particularly in Sub-Saharan Africa right now.
Chair
Thank you. Did you encounter any issues during your assessment process that would account for the low proportion of renewable projects? You are not in the renewable space, are you?
Guto Davies
Not in the UK but we do have quite large renewable manufacturing capabilities.
Chair
Where is that?
Guto Davies
Predominately in Germany for the onshore side, with some capabilities in Spain and China. In the offshore space, which GE has recently moved back into, the manufacturing capabilities we have are predominately in France, again with some capabilities in Spain. We are in active discussions with those ECAs and they have been very supportive of a number of projects, particularly onshore wind as I said. We are currently in discussions about ECA support for offshore wind, particularly looking at the next round of UK options that are coming up here in this coming year.
Chair
That will be other countries’ export credit agencies supporting you to build offshore wind—
Guto Davies
Supporting the projects. The products that we use within UKEF are slightly different to what Matthew would use, where Matthew is looking for his own working capital capabilities and his funding lines. The role we have is really to find financing solutions for our customers so they have the capability to pay for the goods and services that we provide. The contracts we are involved in would typically not just be isolated to our technology, so there would be other elements of the power project or the development that would also need to be financed. Our mission and our objective here is that as well as providing a comprehensive technological and commercial solution to the customer you need to provide a comprehensive financial solution as well.
Chair
Thank you. Can I come to you, Mr Wiseman? You are obviously looking at the environmental and social issues of these projects. How often do you meet, and do you review the portfolio? Can you talk us through how it works and what you think UKEF could do to open itself up more to the renewable space?
Andrew Wiseman
As an advisory council we meet four to five times a year, which will include a meeting with the Minister as well.
Chair
Which Minister?
Andrew Wiseman
In this case Baroness Fairhead, the Minister responsible for UKEF.
Chair
Would you meet her annually?
Andrew Wiseman
Yes.
Chair
Thank you.
Andrew Wiseman
We do not look at current projects, we do not have an executive role in deciding whether UKEF should support a particular project. What we look at are UKEFs policies and procedures and we look back over projects UKEF has supported to see how it applied those policies and procedures. We also look at ongoing monitoring and the way the projects are working going forward.
Chair
Is there a project that you have raised particular concerns about with the Minister?
Andrew Wiseman
Rather than particular projects with the Minister we generally talk about the general Government support and the way UKEF tries to take a lead in terms of standards in the international arena. We have talked as an advisory council with the Department and also with Ministers in terms of the second part of your question, which was support for renewables. The thing we have seen very much is that UKEF depends on the UK’s manufacturing base, where the UK is exporting to and the products that it is exporting. Certainly from what we have looked at it is clear that UKEF has very much opened itself up to the renewable business. The difficulty from a UKEF perspective, which maybe a different question than for Government wide, would appear to be where the renewables are manufactured, where they are being exported to and whether those are markets UKEF can support.
Chair
We have heard from witnesses that UKEF’s policies are flatly inconsistent with the Paris climate goals. Do you agree?
Andrew Wiseman
I would not say they are inconsistent with the Paris climate goals. My understanding of the Paris Agreement is very much that it is for individual countries to decide how they will meet their particular goals. If a British exporter is exporting to Kenya, it will be up to Kenya to decide whether that project meets its particular goals. Certainly from a Government-wide perspective the Government signed up to Paris with a view to reducing the UK’s emissions and also helping other countries in terms of a transition to lower-carbon economies.
Chair
That may be the case but we have heard evidence about other export credit agencies that have rapidly dialled down their investment in oil and gas products. We are definitely seen as a laggard, is that something you recognise?
Andrew Wiseman
We have looked at some of the other export credit agencies and one of the first thing to look at is what percentage of that country’s exports are in the oil and gas field in any event. I think Sweden would be defined as a leading ECA in relation to that but my understanding is that Swedish oil, gas and coal exports are relatively small in any event. The Canadian ECA, EDC, is also held up as a leader and certainly they have made some very good recent announcements in terms of monitoring and transparency. However, it also was coupled with an announcement of I think an extra £1 billion of credit availability for the oil and gas sector. It is very much looking at the individual country, what that country’s manufacturing base is and then trying to look at whether they are supporting a transition to a more renewable manufacturing base.
Chair
The final question from me, there are these environmental and social impact assessments—the ESIA assessments—that are carried out on projects that are assessed as Category A in terms of potentially big risk. Do you look at those Category A projects?
Andrew Wiseman
We do. We get a complete list of all the Category A projects and then we choose—
Chair
Before they are approved or after their approval?
Andrew Wiseman
After their approval, although prior to their approval the details are published on the UKEF website. However, as an advisory council we would only look at the project after it has been approved.
Chair
Is that something that is set out in statute, is that something you have decided or is that at the Minister’s discretion?
Andrew Wiseman
It is not set out in statute. The statute is fairly open where we are formed so we can advise the Minister on such things that the Minister wishes to be advised on. More a combination of custom and practice is the way the Advisory Council has worked since 1991, also recognising we are not an executive and that there is a separate management board that runs with proper non-executives. We are an advisory committee post the event.
Chair
Thank you.
Caroline Lucas
I want to follow up on that because it does worry me that it sounds like you are outsourcing responsibility to the recipient countries rather than accepting that the UK has its own responsibility. Of course, the Minister, Lord Bourne, when he was signing the Paris Agreement said that this is an agreement like no other and that we and all the other signatories will take action to mobilise all finance flows towards sustainable growth. How is that compatible, the sense that all financial flows ought to be going toward sustainable investments? Instead of that I think it is fairly clear to see that UKEF is going in the opposite direction.
Andrew Wiseman
It is very important, certainly from my perspective, the UK Government as a whole support countries to make that transition.
Caroline Lucas
It is not, is it? Through the work of UKEF they are doing exactly the opposite. We have been hearing lots of evidence from lots of people who are basically saying there is a gross inconsistency between all the statements about our international obligations and what we are going to do in terms of international climate leadership and what UKEF is actually doing.
Andrew Wiseman
I would say—this is very much from my perspective—from the Advisory Council’s perspective it would be managing the transition for those countries.
Caroline Lucas
How do you manage a transition if you are investing in a whole set of fossil fuels that then lock you into that in the future?
Andrew Wiseman
The issue is the degree to which you say to these countries, “We will not support this particular project”. That would not mean that project would not go ahead because the—
Caroline Lucas
That is always the argument, “If we do not do it someone else will use slave labour, someone else will exploit children”. That is not a moral argument for a country that is trying to show global leadership, is it?
Andrew Wiseman
A country could decide, “We will not support those businesses, we will not support the new project”. That would be a political decision for a country to take.
Caroline Lucas
It would be a perfectly appropriate political decision for them to take, just like you have taken decisions not to support child labour or, indeed, not to support some of the most inefficient coal-powered stations through the OECD guidelines.
Andrew Wiseman
That is a question for the UK Government rather than from an advisory council perspective.
Chair
We will leave it there, thank you. We are going to move on with a question from John.
John McNally
Thank you, Chair. My question is for yourself, Mr Davies, in the first place. I am looking for some clarity over the Iraqi power plant projects in general. I wonder if you can describe the support GE and yourself have received from UKEF for a variety of projects since 2017 and the terms under which the support was granted.
Guto Davies
We, as GE, have had a strong relationship in Iraq for a number of years, have been present there for about 50 years and currently generate about 55% of the generation capacity in Iraq. Obviously post the war there is a significant need for investment in infrastructure in many sectors, including power generation. We have had a Government relationship there for a number of years, looking at a number of facets of rebuilding the power infrastructure in Iraq, this goes from rehabilitating and repurposing existing facilities—which may be either inefficient or not currently in operation due to lack of maintenance—through to the current projects that we are working on. Those are building new capacity and new power generation, two combined-cycle power plants that are currently under construction. When we look at these projects from an evaluation perspective part of the role we perform is trying to understand where the supply-chain capability that we have is, either within GE or if it is procured in externally, and what support we can provide and give the Iraqi Government to help them finance this. The Iraqi Government are currently running a budget deficit and as such large capital-expenditure projects will require external sources of funding in order to help them proceed. The message was very clear, without financial support these projects would not move forward. Probably about three years ago we embarked on a series of discussions based on the supply chain capabilities and opportunities we saw to see who had capabilities to provide financial support to Iraq. The structures that have been put forward, which have been supported by the UK, are a mixture of guarantees provided to commercial banks to provide funding loans to the Iraqi Government and some direct lending capability from the UK Treasury in support of those projects as well. Where the capability exists we have been able to bring in risk mitigation and to get other ECAs to help support the UK Government in sharing the burden. If there is procurement coming from Switzerland as well as the UK we have been able to pool the two other so not one ECA is aggregating all of the risk in one location, they are able to offload and effectively reinsure a proportion of that capability as well.
Chair
What procurement is coming from Switzerland?
Guto Davies
Some of the components. The transactions that involved the UK and Switzerland together were maintenance and upgrades. Some of them were components coming from Switzerland as well as the UK so we were able to put the two together. The second example is the grid project, where we have transformers coming into the UK. This, again, is a good example of where UKEF is building up the industrial footprint here in the UK. Those transformers would probably have been done in Continental or Eastern Europe, within other factories GE has. The availability of this funding and the financing solution allowed us to bring this into our facility in Stafford and also aggregate it with some technology that we were manufacturing in Switzerland to allow them to combine together to risk share. All of these solutions have ended up providing loan facilities to the Iraqi Government, to allow them to pay for the goods and services that we provide.
John McNally
What was the total support from the UK for that that GE received in 2018? I have figures here saying you received about $117 million—
Guto Davies
Correct.
John McNally
—to work with ENKA to deliver these two projects. That seems an awful lot of money. I do not know if Mr Crewe is able to develop this but I am very curious about the cost of a turbine and how much businesses in this country have benefitted from this in the supply chain. I would like if you could develop that a bit more because it sounds like a vast amount of money.
Guto Davies
In aggregate the two power plants we are discussing here, the two projects, are about 750 megawatts each so 1.5 gigawatts in total. The capital expenditure on those two projects is in excess of $1 billion to fully implement. The initial support that was provided by UKEF was to cover the earliest phase of that, to get construction activity going. You may have recently seen an announcement that UKEF posted on its website at the end of December announcing the signature of the loan agreements in relation to the two power plants as well as a grid project we are doing in Iraq. In aggregate the support UKEF provided was around about $1 billion across all three projects.
Chair
The UK provided $1 billion?
Guto Davies
Across all three projects, yes.
Chair
Can I just stop you there because it says at the beginning UKEF was providing $117 million in finance for ENKA and GE.
Guto Davies
Correct.
Chair
That was the first phase, was it?
Guto Davies
Correct.
Chair
When was phase 2?
Guto Davies
For phase 2 the loan agreements were closed in December and since December we have been what is called discharging the conditions, set a precedent on the facility in the order to make it operate.
Chair
How much is allocated in phase 2?
Guto Davies
For the power projects, $620 million and for the grid project around about $400 million.
Chair
Is that the distribution? You say the “grid”, what do you mean?
Guto Davies
Fourteen substations are either being rehabilitated or constructed from new across the whole country.
Chair
That is the 2018-19 financial year?
Guto Davies
Correct, so they will come in through this year. To answer your question on the benefit to the UK, the gas turbines you mentioned in this project are investments the Government had already made as part of a procurement strategy some 10 years back to buy a fleet of gas turbines to help rebuild the infrastructure in Iraq.
John McNally
Which Government are we talking about here?
Guto Davies
The Iraqi Government. Those were paid for a number of years back and this is the final project that is deploying this fleet of gas turbines. The $1 billion is the remaining capital expenditure required in order to complete and fully construct the project. I mentioned before how we look at the supply chain in order to understand where we should focus our attention. We were aware of the UK Government’s strong relationship with the Iraqi Government. We initiated with ENKA—who is the EPC, the construction partner we have—a process with the UK Government and the Department for International Trade, along with the electrical and mechanical trade associations within the UK, to allow us to be able to aggregate the supply chain within the UK. We held a fair in about March of 2017 to initiate that process. We had about 100 companies attend a session here in London to discuss the project and to outline the opportunities that existed within the project for the UK supply chain. As of October of last year we had about 192 UK companies that were currently tendering to ENKA in support of the project. Around $115 million worth of contracts has already been awarded to UK companies. The rest of these contracts will be awarded once the project achieves financial close, which it achieved yesterday ironically. They will now be the next wave of procurement to come. The aspiration we agreed with the UK Government is that there should be $230 to $250 million of procurement from UK companies out of that supply chain as our contribution to the UK economy to make that project work. It equates to about 40% of, shall we say, the non-Iraqi scope of the contract, which is well above the traditional threshold the UK has required.
John McNally
I wonder if you could develop and tell us GE’s working relationship with ENKA and how it developed, financially and geographically. Iraq is obviously close to Turkey in this case, but I wonder if you would tell us how you developed this relationship.
Guto Davies
We have a strong relationship with a number of internationally-renowned EPCs—equipment, procurement and construction companies—as part of our power business. ENKA is a critical partner for us in many geographies. It has been incredibly successful in being able to construct and commission power plants in Iraq. It would have been one of a number of companies we would have evaluated as part of this project to be a partner.
John McNally
Among other groups.
Guto Davies
As part of a consortium, indeed, with us. We have had a long-standing relationship with ENKA. As part of that process, as we talked about before, even though we are only a piece of the, shall we say, technological solution on a project we cannot look at our scope in isolation and try to solve the funding problem for that piece. The role is to work with our partners and find an aggregate solution for the whole project, which is why we looked at ENKA as well.
Alex Sobel
How many staff does ENKA employ in the UK to manage this project?
Guto Davies
I know that question has been posed to ENKA. I did speak to them yesterday and know they were unable to attend the session today. I know ENKA will prepare a response and will respond to the Committee.
Alex Sobel
You do not know?
Guto Davies
I do not know off the top of my head.
Chair
It is zero, isn’t it? They have told us they have no staff in the UK.
Guto Davies
In fairness to ENKA, part of the process and the dialogue with UKEF is clearly that the project had to get to financial close so the financing is committed. As I said, the financial close happened yesterday so I would expect ENKA would now start to migrate employees from Turkey or employing, hopefully, people here to support that procurement.
Alex Cunningham
Have they told you that it is going to start to employ people in the UK?
Guto Davies
That was part of the discussion with UKEF at the beginning, yes, and was part of their commitment.
Chair
Can I go back to the phasing? When you were allocated the $117 million back in 2017-18, obviously that was phase 1. Were you given a nod and a wink that if you got the phase 1 through you would be coming back for quite a substantial extra part? There is no point in subsidising phase 1 if it is not going to get to phase 2 and completion, is there?
Guto Davies
The point on subsidy I will come back to, there is no subsidy effectively. The project needs to be looked at, as you rightly say, in its entirety. The intention at the beginning was to start the construction activities and we would then commit to build the supply chain up in the UK in order to attract the secondary wave of financing. The reason the project was split up into phases is really a function of the criticality of the need for power. The intention is that by May of this year some of those gas turbines will be operational and online. GE and ENKA agreed to accelerate a lot of the expenditure before the financial close happened as our commitment to the Iraqi Government to help make sure we achieve that objective of trying to get some of those power-generation units operational by the summer of this year, which is clearly a critical demand issue for the Iraqi Government.
Chair
You said about the phasing and about how much money would go into the UK supply chain, $230 to $250 million.
Guto Davies
Correct.
Chair
You said that is 40% of the procurement spend.
Guto Davies
Of the offshore scope.
Chair
Of the offshore spend.
Guto Davies
Correct.
Chair
Which is offshore from Iraq?
Guto Davies
Offshore from Iraq, yes.
Chair
Where is the other 60% going?
Guto Davies
Some of it is actually in Turkey. Again, this is part of the reinsurance discussion I mentioned before. UKEF advised them the reinsurance capability would exist from Turkey. We know they are in discussions with the ECA of Turkey, Türk Eximbank, to provide reinsurance for the Turkish element so there is some risk sharing in relation to that. When we look at the supply chain below that it actually scatters into many geographical areas, some of that is in Europe and some will be in Asia. I would say the smaller pieces would be more commoditised products that would be, from a cost perspective, more efficiently procured.
Chair
Mr Crewe, are you involved in the project in any way?
Matthew Crewe
No, not on this project. We are not involved in it.
Chair
You are not aware of it. You are now, maybe. Have a chat after the meeting. Thank you.
Kerry McCarthy
Can I bring Andrew in? You have been quiet for a while. In terms of climate change risk assessment, is there much scope at the moment within the ESHR policies that UKEF adopts to look properly at whether there is a climate change risk?
Andrew Wiseman
Within the policies, in terms of the risk assessments UKEF will carry out, there are various aspects that relate to climate change. There is, at a base level, an assessment of a project as to whether or not it could be subject to flooding or something of that nature because of climate change. Then there is a higher-level look, if I can describe it as that, and they collect data in relation to CO2 emissions and things of that nature.
Kerry McCarthy
The first thing you said is the impact of climate change on the project.
Andrew Wiseman
On the project, yes.
Kerry McCarthy
Potential danger to the project.
Andrew Wiseman
Yes.
Kerry McCarthy
In terms of the other way round, whether the project itself contributes to climate change—
Andrew Wiseman
The impact on the climate, the project on the climate as against the climate on the project.
Kerry McCarthy
Yes.
Andrew Wiseman
UKEF certainly collects and look at data in relation to the emissions of a project. Those are published as part of the UKEF annual report and also as part of the process of publishing the environmental data of a project.
Kerry McCarthy
The ESHR and then the ESIA are there to try to establish an ethical approach to the funding we put in, would that be right? The issues they are looking at are trying to ensure there is not environmental or social harm and so on. It sounds from what you are saying that it is not a factor that is really considered, it is more something that is noted.
Andrew Wiseman
The standards UKEF follows are the international standards of the OECD. There is something called the Common Approaches, which I know your Committee has discussed.
Kerry McCarthy
There are the Equator Principles as well.
Andrew Wiseman
The Equator Principles as well that are an adjunct, the main one is the OECD Common Approaches. That is meant to create a level playing field across all OECD ECAs as to what they look at, what they take into account and what they ask project sponsors to provide.
Kerry McCarthy
Do you think there could be a change of approach that would mean we will better be able to integrate climate change risk into the way we do things now?
Andrew Wiseman
I am sure there is certainly more that could be done. Stating the obvious, there is always more that could be done. Certainly it is one of the things that I think would be good for the Advisory Council to look at going forward, as to what UKEF does with the information it gets and the degree to which that is part of its risk assessment procedure.
Kerry McCarthy
Can I ask the other two specifically about the Iraq application that we have already been talking about. At any point during the discussions you have had did UKEF raise or promote emissions concerns with you?
Guto Davies
The project is classified as a Category A project, potentially a high-impact project. As part of that process it was clear an environmental and social impact assessment was required to be performed to make sure it complied with international standards. GE and ENKA, at the request of the Iraqi Government, supported them in getting the report commissioned. We retained a company called 2U1K, based out of Turkey, to perform the ESIA. Throughout this whole process we had the environmental teams from UKEF and the lenders in the project working with us to develop the scope of work, to understand exactly what needed to be assessed and to make sure the report was prepared in the appropriate way.
Kerry McCarthy
We have some details here of the factors that were considered in the ESIA report, it is things like air quality, hydrology and soil. Climate is mentioned but it is not clear from what I have in front of me whether that is the impact on climate change. There is aquatic flora and fauna and key biodiversity areas, lots of different things it will look at. However, what we are trying to get to the bottom of, because it is the purpose of this inquiry, is whether the emissions themselves were something that was a key part of the discussions.
Guto Davies
Emissions would have been part of the assessment.
Kerry McCarthy
Quite often when an assessment has a long list of things to look at it can become bit of a tick-box exercise, “We’ve looked at this, we’ve looked at that”.
Guto Davies
No, it is an assessment. Obviously each plant is unique based on its configuration, the environmental conditions it operates in as well as the fuel that it uses to operate. The good story that comes out of this is that the original plan the Iraqi Government had here was to run one of these plants on heavy oil and the other on crude, which clearly would not have been an optimal solution. With the involvement of the international lenders and UK Export Finance, and getting the study up to the required needs, the Government committed to switching the primary fuel to natural gas and are currently building the gas infrastructure that brings gas into the project.
Kerry McCarthy
Are you saying that is because of UKEF exercising some influence, if they had gone down the heavy-fuel approach it would not have been approved?
Guto Davies
Yes, because they would not have met the emissions standards required should they be running on either the heavy fuel oil or the crude and UKEF would not have been able to support otherwise.
Caroline Lucas
I am coming back to Mr Wiseman again. How would you respond to those who have called UKEF the elephant in the room when it comes to undermining UK climate and development leadership?
Andrew Wiseman
I would not see it as the elephant in the room. Once again, I think this is a wider-Government issue in terms of what project it supports and the degree to which Government are enabling businesses to transition. I see UKEF and the work we have carried out on the Advisory Council as being open for business in relation to renewables but the renewable industry in the UK not needing its support. I am sure there is more UKEF could do in terms of publicising and making sure all renewable businesses know about it. This will be a sweeping generalisation so I apologise for that, but generally renewable businesses in the UK do not export to markets that UKEF would be allowed to support.
Caroline Lucas
It is interesting that if you compare our percentage of the energy portfolio that goes towards fossil fuels it is significantly higher than other G20 export credit agencies. To the contrary, if you look at the G20 export credit agencies they have about 7% going to renewables and we have 0.5% going to renewables. I do not suppose British renewables are that different from those in other G20 countries.
Andrew Wiseman
Unfortunately I think British renewables are most likely lower in terms of export markets than some countries. The UK is about number 7 in terms of support for oil and gas exporters in terms of the G20 and is a lot lower in terms of renewables.
Caroline Lucas
There is a sense that UKEF is entirely passive in all of this and can only be responsive to what comes to it. However, we know that, for example, Philip Hammond had a roundtable in Buenos Aires and did invite oil and gas companies to see what support UKEF could give to them but chose not, at that point, to invite renewable companies.
Andrew Wiseman
I cannot comment on that. I would certainly hope and expect that UKEF engages actively with the renewable industries that want to export and also—I looked at it when it was UKTI—in terms of DIT’s links with BEIS and supporting UK businesses.
Caroline Lucas
Parking renewables for a second because it does not have to be the case that you can only disinvest from fossil fuels if the renewables options are there. The policy option obviously remains for the Government to decide simply not to be investing in fossil fuels at this point. I will be really interested to know what advice you might have given about how UKEF should change its way of operation post Paris. After the Paris Climate Agreement what changes did you observe or did you advise in the way UKEF works?
Andrew Wiseman
We have certainly seen a considerable increase in UKEF activity in terms of marketing to renewable companies.
Caroline Lucas
No, I want to look at where it is disinvesting from fossils. What change did you see as a result of that?
Andrew Wiseman
I would say we have not seen a particular change from UKEF.
Caroline Lucas
Is that a problem?
Andrew Wiseman
I would say the problem is a Government-wide issue in terms of supporting the transition. There is a clear policy decision to be taken as to whether or not—I am sitting within kicking distance of GE so I need to be careful—you say, “We will not support any fossil fuel projects” with the impact that would have on a number of constituencies and jobs around the country as against managing the transfer from fossil fuel supports.
Caroline Lucas
You are talking about our country, British jobs?
Andrew Wiseman
Yes.
Caroline Lucas
In a sense you are saying that because of the impact on British jobs this much-vaunted global climate leadership that we keep hearing about is not actually going to happen because it is going to have an impact on British jobs?
Andrew Wiseman
I would not say that is a question for me. I would say it is a question for the UK Government as to—
Caroline Lucas
You raised the subject.
Andrew Wiseman
I see it as a genuine policy decision to be taken.
Caroline Lucas
I am finding it really hard to pin down. I appreciate you are not the Government, you are not making the political decisions, but nonetheless you have a role in overseeing advice in this area.
Andrew Wiseman
Advising, yes.
Caroline Lucas
What advice would you have given UKEF after the Paris Climate Agreement in terms of its investment decisions?
Andrew Wiseman
The advice after Paris I would have given to—
Caroline Lucas
What did you do, not would have done. What did you do?
Andrew Wiseman
It is in terms of discussions with DIT and BEIS to ensure there is a proper and good transfer for UK-based companies so they can use UKEF for supporting non-fossil fuel renewable business.
Caroline Lucas
It does not look as if that is happening, does it?
Andrew Wiseman
It is happening but it is happening slowly.
Caroline Lucas
What more could, and should, be done in your view?
Andrew Wiseman
I am not an expert on, UKTI, DIT and BEIS and how they interact with companies in the UK to provide them with support on that transition.
Caroline Lucas
Who is giving that advice if you are not in a position to do so?
Andrew Wiseman
BEIS and DIT will be the people.
Caroline Lucas
Sorry, I know we need to move on and I will but there seems to be a big gap if your council is not in a position to be able to advise on what is the greatest threat facing humanity and indeed many of the businesses we are talking about today.
Andrew Wiseman
We can advise UKEF on making sure it is open for business for all renewables, and that renewable business that is exported can go through UKEF and there are no barriers from UKEF.
Caroline Lucas
That sounds a very passive thing to be doing, just making sure there are no barriers. We need a massive investment in renewables if we are to have any chance of avoiding climate catastrophe. Simply for you to say, “We just make sure there are not any barriers” does not feel commensurate to the scale of the challenge.
Andrew Wiseman
I am looking at UKEF’s role, not the Government-wide role.
Caroline Lucas
I think UKEF has a very big role in this potentially. Let me go on and ask GE and Green’s Power, what will be the consequences for your businesses if UKEF did start considering and reporting on emissions in its project assessments? We will begin with Mr Crewe first.
Matthew Crewe
There will be some impact on our business but the fact is our business is so much smaller, has moved into the renewable area and will not be that heavily affected.
Caroline Lucas
GE, Mr Davies?
Guto Davies
From our perspective, it is perfectly clear the Iraqi project would not have been one anchored out of the UK from a supply-chain perspective. To some of the points Andrew was making before, if I look at projects from an investors’ perspective when I am trying to finance the project, you start off with the largest capital-expenditure item in the project. Let us use windfarms as an example, it is the machine, the nacelles that sit on top of the towers and the blades on the towers. Those are the three key elements and then there are the physical construction costs. You would look at the supply chain effectively anchored into each of those and where the primary manufacturing locations of the nacelles would be located. In the UK we do not have that capability today.
Chair
Except in Hull where we make the turbines.
Guto Davies
It is coming.
Chair
We do have it with Siemens. It is a Germany company located here working for a Danish company.
Guto Davies
Correct, hopefully the investment is coming with the next round of auctions. The Government’s recent announcement into the renewable sector and their planned investments to help build that supply chain infrastructure will initially, yes, be focused on building up the capabilities for deploying the offshore developments in the UK but it will become the export platform of tomorrow. UKEF is a very demand-led institution by nature. I think the other context to bring in here is that a lot of the renewable projects do attract a lot of private sector capital from green funds and the like. It is not UKEF’s job to compete with the private sector if that project can be viably financed with private sector capital. If there is no need for UKEF to provide support it is quite right they do not play a part. The dynamic here with the UK sector is you probably have a lot of small SMEs and suppliers that provide subcomponents to Siemens, to Vestas, to Mitsubishi, whomever.
Caroline Lucas
We have less of an argument about why UKEF is not doing more when it comes to renewables, where the argument really is why it is not withdrawing some of its support from so many fossil fuel initiatives and projects. As I said earlier, we are disproportionately invested in locking developing countries into fossil fuel dependence and that seems to be a perverse thing to be doing.
Guto Davies
I also think the likes of gas will be part of the energy mix moving forward. I do not think it is in any forecast today that gas will not play some kind of baseload capability within the generation mix moving forward. I think even the UK in 2030 is still planning to have about 20% to 25% of its capacity within gas, even though coal will be dismantled all together and there will be a significant growth of renewables. It is a transition that cannot happen overnight and there are some economies that do not have the capability to run other fuels in order to generate power.
Caroline Lucas
I do not get a sense of where this transition is.
Chair
I am going to leave it there, we have two more questions.
Mr Philip Dunne
Thank you very much for explaining the Iraq contract as clearly as you have. Do you happen to know whether it was one of the largest UK contributions to the rebuilding of Iraq following the war?
Guto Davies
Yes, those three contracts are the largest contributions the UK Government have made. The signature on the last three agreements, which closed at the end of December, basically completed UKEF’s capacity within Iraq. We would like to see more, there is plenty more that needs to be done.
Mr Philip Dunne
Mr Wiseman has explained that UKEF is very demand led. The Iraqi state has the benefit of significant fossil fuel reserves, self-evidently. Was there any contract available for supply of renewable energy in rebuilding power capacity in Iraq?
Guto Davies
No, there is nothing there that is happening as of right now.
Mr Philip Dunne
Had this opportunity not been financed there was not an alternative renewable. You did not propose a renewable alternative to Iraq?
Guto Davies
Correct.
Mr Philip Dunne
Thank you. I want to ask in relation to the way in which you look at projects—perhaps this is a question for both GE and Green’s—whether you do any calculation of the Scope 3 indirect lifecycle emissions or is it purely financially driven?
Matthew Crewe
In the main financially driven. What we do look at is the heat-recovery aspect, where some of the heat is saved by using our products. It is the flipside of it. Our products save some of the base fossil fuel, the engineering around that helps.
Mr Philip Dunne
You do an energy efficiency calculation for the client.
Matthew Crewe
Exactly, yes.
Mr Philip Dunne
You must therefore do a calculation of what the emissions are likely to be, or not?
Matthew Crewe
It tends to be on the efficiency rather than on the emissions.
Mr Philip Dunne
What do you do it on?
Guto Davies
Keeping on the topic of Iraq, as you mentioned before the emissions would have been part of the assessment process from an environmental perspective in order to get the necessary approvals. Part of the commitment the Iraqi Government have to make is to retain a consultant who will be retained during the process of construction and during the repayment term of the loan facility to continually monitor all of the environmental, social and humanitarian aspects of that project throughout the life that UKEF will be exposed to.
Mr Philip Dunne
Is that a requirement of the Iraqi Government of UKEF’s financing?
Guto Davies
It is imposed by the lenders collectively, UKEF and the other two banks that are involved in the project.
Mr Philip Dunne
As far as you are aware you think UKEF is keeping an analysis of the emissions of the projects it supports?
Guto Davies
For this Category A project, yes, it would have access to emissions data.
Matthew Crewe
I think it does take some information from us too. There are two big aspects of the UK application that we see. The first bit is around the environmental policy part and the other part is around bribery and corruption and that kind of thing, which sort of goes hand in hand. They are two areas of real focus. For me, having gone through the application, those are big areas.
Guto Davies
The only thing I would probably add is that the standards UKEF and the international community would hold—this is not just Iraq but I think in general—in emerging markets typically are significantly higher than local domestic standards would otherwise be.
Mr Philip Dunne
I think you were saying in response to an earlier question the source of fuel was also a determining criteria.
Guto Davies
Correct.
Mr Philip Dunne
Moving to gas from heavy fuels was required by the Iraqi Government or by UKEF as part of its criteria?
Guto Davies
By the lenders, by UKEF and the two banks involved in the project as part of the approval. If it was not for the change of fuel it would have failed the environmental test, which would mean the funding would not have been available.
Mr Philip Dunne
The banks’ test or UKEF’s test?
Guto Davies
Collectively, they run to the same standard.
Andrew Wiseman
We run to those same standards so UKEF would not have supported it had those standards not been met.
Mr Philip Dunne
That is an environmental policy that UKEF has introduced?
Andrew Wiseman
Yes, they are international standards that UKEF follows.
Mr Philip Dunne
As far as you are aware, Mr Wiseman, does UKEF assess the emissions of projects that it lends to?
Andrew Wiseman
It does. It collects that data and that data is published. The data is available for the project as a whole. Obviously UKEF sometimes will only support one aspect or a smaller part of it so it does not go into that granular detail, but for the project as a whole it does collect that data.
Mr Philip Dunne
Does that cover Scope 3 emissions, the indirect emissions over the lifecycle of projects?
Andrew Wiseman
I believe it does.
Mr Philip Dunne
We can ask them shortly.
Andrew Wiseman
Yes, certainly, but I am quite happy to find that out and write to the Committee.
Mr Philip Dunne
That will be helpful. Do you think that also covers its portfolios, is it assessing the environmental emissions impact of its portfolio?
Andrew Wiseman
In terms of what are defined as Category A projects, yes.
Mr Philip Dunne
Thank you.
Chair
Can I come back on Scope 3? Mr Davies, you talked about a consultant being retained, is that the Turkish-based company you talked about in one of your previous answers?
Guto Davies
It will be tendered out to a range of environmental consultants.
Chair
In this country?
Guto Davies
Yes, they will be open to bid. There have been invitations extended to some as well, so that procurement process is underway right now.
Chair
Did you have to submit your Scope 3 emissions calculations for this project?
Guto Davies
We would have provided operational data in relation to how our technology would operate, which would have fed into the environmental and social impact assessment as part of the calculation process for the emissions. Yes, we would have fed into the process.
Chair
You included your value-chain emissions in that?
Guto Davies
Correct.
Chair
Was that done to the Greenhouse Gas Protocols Corporate Value Chain Standard, the international standard, do you know?
Guto Davies
I am not an environmental expert.
Chair
If you could go back to your environmental experts and get us the answer to that it would be very helpful to us in our deliberations. I want to get clear on the money. We have had figures in pounds of £87 million and £88 million to you and to ENKA and yet you have told us it is $117 million. Are we doing current exchange rates?
Guto Davies
It would have been the exchange rates at the time. The contracts are dollarized so apologies for this.
Chair
That is fine.
Guto Davies
The initial phase would have been about £70 to £80 million. The second phase, as I said, just closed now, which was $620 million.
Chair
We will be able to do the maths on that. Thank you, it is very helpful.
Alex Cunningham
Before we move on I have a supplementary question. Before I ask a supplementary question I think I have to place on record that I chair the All-Party Parliamentary Group on Carbon Capture and Storage. Is there any time that, when these projects are being put together, there is consideration of carbon capture, storage and use?
Matthew Crewe
From my perspective it will have been considered by the EPC contractors that we work for, not directly by us.
Guto Davies
Not in relation to this project, no.
Alex Cunningham
Thanks very much. This is for Mr Crewe and Mr Davies. We have heard that countries that do well in export markets usually have a good home market to start from. What I am interested to know is what you are doing to promote and develop a low-carbon business model. Mr Crewe?
Matthew Crewe
A low-carbon business model—
Alex Cunningham
Not really your bag, is it?
Matthew Crewe
Not really but we are pushing our business more heavily towards the renewables and recyclable projects, so in the last five years we have moved our business very heavily away from the coal-fired power stations in its heartland of Wakefield all the way into the waste-to-energy and other aspects, which are nicer on the environment. That is our input into that. In transporting goods, we try to limit the level of transportation that we have to do, the painting of the goods, the materials that we use we try to look at the best possible materials to use in that. Rather than painting something five times at a certain level and a certain standard we push our customers to do it at a lesser level because any equipment that we use is going to burn it off it in the first five minutes anyway, so it is only protective.
Guto Davies
I am not an expert on these matters but GE is a global company that holds itself up to good corporate citizenship. We have a large renewables business as well, so from that perspective I think we power around 60 gigawatts of wind across the globe so we do have a very strong environmental ownership and responsibility.
Alex Cunningham
We have heard lots this morning that betrays the fact that very little of the investment money or the loan money that is going in from UKEF is going into green projects, so that means we have the others. To what extent do you consider your projects, the gas projects and the oil projects and whatever could be at risk of the assets being stranded or maybe because of all the climate risk issues associated with it, do you think your assets could be stranded in the shorter or mid-term?
Guto Davies
These are decisions for owners and customers to make and I think we are living in an environment where the energy mix is changing. When we look at gas, I think I mentioned earlier on today, we do still expect that in years to come and even when these power plants will be coming to the end of their life cycle that gas power generation will still be part of the energy mix within certain Governments. Some of them have more options than others as regard to what fuels they can use to generate, and I know that other witnesses have provided different testimonies here, but it is our view that those projects are not going to create an inherent risk to the taxpayer.
Alex Cunningham
So no risk at all?
Guto Davies
Never say never.
Matthew Crewe
I think limited risk from our perspective. Most of our work is retrofit, so it is after, it is not new build fossil fuel kind of stuff. It is retrofit stuff and most of it is focusing on e-Recovery and efficiency, so the drive of the customer is coming towards us for that kind of project still, so I do not think projects will be stranded. Our projects last probably six to nine months as well, so we do not see them as term projects. Probably what will happen is when these plants do go out of commission we lose the repeat work that we would have ordinarily done 20 years after we were doing it the first time around.
Alex Cunningham
So no real risk for you either?
Matthew Crewe
No major risk, no.
Alex Cunningham
Mr Wiseman, I wonder if you could tell us what actions you would expect to see UKEF taking in order to align itself with the global requirement to be at net zero emissions by 2050 and meet the Paris Agreement targets?
Andrew Wiseman
I see that as an overall Government objective, so looking at DfID, DIT and UKEF and anyone involved.
Alex Cunningham
Okay, but UKEF have a specific responsibility of their own.
Andrew Wiseman
They do. The UKEF main responsibility under its Act of Parliament is to support exporters, so I would say that the UKEF’s role in terms of the Paris side of things is to ensure that they are supporting exporters and helping the transition to support Paris in countries worldwide.
Alex Cunningham
Yes, but we are facing a situation where the vast majority of investment is in anything but projects that will contribute to that objective.
Andrew Wiseman
That is correct in terms of their current mix, so I hope and expect that as years develop and exports develop that you would see that mix change. That is the important thing from my perspective that needs to be worked towards, to increase the amount of renewables, as we describe it.
Alex Cunningham
But we are not even taking small steps yet. We are hardly crawling as far as UKEF’s investment is concerned. Is that not the case?
Andrew Wiseman
The percentage is incredibly small of UKEF’s portfolio. I think it is roughly 1%.
Alex Cunningham
In your very specific role, what advice are you giving them to tell them that they need to up their game?
Andrew Wiseman
We have had a lot of discussions with them about their, for want of a better way of describing it, marketing and making sure that they are open to business, for renewables business. I think that is the essential role for UKEF in terms of the renewables business, making sure that those businesses that want to export know about UKEF and UKEF is open to their support. I think that is essential.
Alex Cunningham
Finally, do you think UKEF are quite invisible at the moment? If there is a very tiny percentage being invested in renewables are renewables companies really aware that it exists?
Andrew Wiseman
I do not think UKEF are invisible. I think that there is always more that can be done and there is always more that can be done across Government to encourage renewables companies to export. Now, whether they want to export to markets that UKEF will support is something that is up to those companies to decide, but with support from Government.
Chair
A final question, Mr Davies, you said that this is a gas plant with diesel backup. Are the gas turbines in this power plant working?
Guto Davies
They are not yet. They have not been commissioned, but they were procured by the Government many years back, so they have been in storage for quite some time, and we are in the process of installing the first units now.
Chair
In the project’s projections, how many times do you expect diesel to be used annually as backup?
Guto Davies
It is not envisaged. It is allowed to a certain degree but there is a ceiling on how many hours per annum it will be allowed to operate on the backup fuel.
Chair
What is that ceiling?
Guto Davies
I will have to find out.
Chair
Who sets that ceiling?
Guto Davies
It is with UKEF as part of the environmental diligence that was performed.
Chair
So the creditors, and they monitor that on the basis of the environmental consultant that is going to be appointed?
Guto Davies
The consultant that will be providing the reporting during the operation phase, yes.
Chair
What is the problem if it goes beyond those hours? What is the sanction?
Guto Davies
I believe, and again I will have to get the legal guys to opine, it would be potentially an event of default.
Chair
They will be in breach of their contract?
Guto Davies
Yes, in breach of their obligations.
Chair
Okay, if you could write to us on the details of that it would be very helpful. We have them coming in, so we will explore some of these issues further with them.
Guto Davies
Understood. I will have to take advice on commercial confidentiality as well, but we will advise the Committee.
Chair
Thank you very much indeed. Examination of witnesses Louis Taylor, Baroness Fairhead and Lord Henley
Chair
I welcome our second panel and I am grateful to you all for attending. This is our final panel on the UK Export Finance scheme. Can I ask you to introduce yourselves, starting from my left?
Louis Taylor
Good morning. My name is Louis Taylor. I am the Chief Executive of UK Export Finance.
Baroness Fairhead
Good morning. I am Baroness Fairhead. I am at the Department for International Trade, responsible for trade and export promotion.
Lord Henley
I am Lord Henley, Parliamentary Under Secretary, Business, Energy and Industrial Strategy.
Chair
Thank you all very much indeed for coming. If I can kick off with a question to Mr Taylor, if your role is to provide support to UK businesses why did you award £88 million in 2017 to ENKA, which is a company that appears to have no staff, premises or operations in the UK?
Louis Taylor
The support that we have given to British business through that transaction is the UK content that ENKA has procured for its projects in Iraq, which may not otherwise have been procured out of the UK without the support that we gave.
Chair
How much business has been procured by ENKA to UK companies?
Louis Taylor
The project is still awarding contracts, as I think the previous panel would have told you, so the initial £88 million was initial stage financing. We have just completed the majority of it. We committed to around $250 million of UK content in a $620 million financing, so around 40% is UK content.
Chair
Is that normal practice, to award funding to external firms who then procure in the UK?
Louis Taylor
Yes, we have done this several times before. Names you might recognise include Siemens from Germany, Boeing from the US, Caterpillar from the US as well. It is the UK content that we follow rather than the nationality of the company that we are supporting, because the support goes to the exporters from whom the goods and services are procured.
Chair
Thank you. That is helpful. ENKA registered as a UK company just months before being awarded UKEF support. What are the requirements that a company must meet to receive UK taxpayers’ money?
Louis Taylor
We need to see the UK content going into a project in order to be able to support it and our stated public policy following a consultation is that we will support projects with a minimum of 20% UK content in there but we often, and mostly, achieve a higher percentage of UK content. The establishment of ENKA in the UK was really a facilitation of the aggregation of the UK supply chain that instead of around, let us say, 100 UK SMEs having to export their goods to ENKA abroad ENKA can aggregate them in a UK entity and then undertake the logistics of exporting those products and services to their projects subsequently.
Chair
We know that the gas-fired energy plant in Iraq will have a diesel backup and we have asked the previous panel how many times a year is the diesel allowed to run for how many hours. Do you know?
Louis Taylor
I do not personally know that answer, but we can find out and it would have been part of our environmental assessment. I can write to you with that information.
Chair
That would be helpful. If they run the diesel for more hours than you permit them what are the sanctions?
Louis Taylor
The recipients of our guarantee are the banks who provide the cash, so we will not be withdrawing those guarantees, however we monitor all of the projects that we have exposure to through the life of that exposure, and we would seek to ensure that the maintenance of the gas-fired power station was such that it obviated the need in future for the further use of diesel and to reduce the overall emissions on that basis.