I beg to move, That the Bill be now read a Second time.
This short Bill is necessary to enable the United Kingdom to participate in a Financial Support Fund which has been set up by the Organisation for Economic Co-operation and Development. An Agreement establishing this Fund was signed in Paris by the members of the OECD on 9th April and 30th May this year. The fact of the signature was announced by my right hon. Friend the Chancellor of the Exchequer to the House on 9th April and the text of the Agreement was published as a White Paper on 5th October. The Bill gives legislative force in this country to that Agreement.
The Agreement will come into force and the Fund starts to operate when member States with quotas representing 90 per cent. of the total of the Fund have deposited instruments of ratification. We have therefore an obligation to our partners in OECD and it is in our own interests as a nation to complete the legislative processes leading to ratification as soon as possible, even though the Fund is intended as a "safety net", which OECD members are not likely to need to use unless other sources of borrowing are not available.
Perhaps I can briefly recount the history behind the setting up of the Fund. As hon. Members will know, one of the major problems caused by the oil price rises of autumn 1973 to summer 1974 was the problem of financing the massive balance of payments deficits which resulted from the oil producers' limited capacity to absorb imports from the industrialised countries. This problem was aggravated, first, by the danger that the oil producers' pattern of investment for their hugh surpluses would not correspond to the pattern of deficits caused by the oil price increases and, second, by the very real threat to the stability of world financial markets caused by the massive potential accumulation of claims in the hands of the oil producers. Both these dangers meant that individual countries, through no fault of their own, could find themselves faced with acute financing difficulties.
These were the reasons lying behind the numerous proposals which were considered in the international financial community in 1974 for coping with the problem of "recycling" what came to be known as petrodollars, and they are the reasons lying behind the agreement to set up the OECD Fund. It is, of course, true that up to now the world economy and the international monetary system have in some respects coped surprisingly well with all these problems and, as the capacity of the oil producers to absorb imports improves, the magnitude of the problem may be decreasing. But the danger is still with us. We are still in the depth of the world recession created by the oil crisis.
A large part of the world, including a number of industrialised countries, faces the prospect of having to finance substantial balance of payments deficits for some time to come and the need still exists for facilities to enable countries to adjust to the new situation without having to adopt measures which might correct their balance of payments but would lead to delay in their recovery and further deepen the present world depression.
As I said, the Fund is based upon an Agreement between the countries concerned, and the Bill gives legislative force to it in this country.
The purposes of this Fund are to assist member States which are facing balance of payments difficulties as a result of the oil crisis by giving them access to multilateral credit facilities. The Fund was conceived as an addition to existing sources of credit; it is a condition of eligibility for borrowing that an applicant member should demonstrate to the Governing Committee of the Fund that it has made the fullest appropriate use of its reserves and credit from other sources.
I should here explain that what is envisaged is not a fund in the sense of another international institution with its own resources, but, rather, a fund providing a facility whereby moneys raised will be immediately lent on to the member State in response to an application from that member State.
The total amount laid down in the Agreement which can be raised by the Fund, to be lent out to other member States, is 20 billion SDRs or 24 billion United States dollars, determined by the quotas set out in the Agreement. The quotas establish the maximum liability in sharing risks and the normal proportions of contributions to assist a borrowing member. The United Kingdom's share in this is 1,600 million SDRs—that is £917 million at current market rates. This is 8 per cent. of the total of the Fund.
A member wishing to borrow must demonstrate two things to the Committee. It must show the Committee that is is encountering serious external financial difficulties, and that it has made the fullest use of its reserves and other forms of credit.
The Support Fund then raises the necessary finance and determines the terms and conditions applying to that loan. The only terms specified by the Agreement are that loans will be subject to economic policy conditions to be agreed between the borrower and the Governing Committee, and that the loans shall last for not more than seven years and be in convertible currencies of the contributing member's choice—they could also be in SDRs.
The amount of the loan will be related to the borrower's quota and will depend on the voting support given to the proposal by the other members. A member can draw up to its full quota on a two-thirds' majority of voting members; over the full quota and up to twice the amount of quota would require a 90 per cent. majority, and a request for borrowing more than twice a member's quota can be agreed only if all other OECD members are content. Voting is weighted according to quota.
Faced with a request for loans from a prospective borrower the Support Fund can raise money in a number of alternative ways. It can call on members to make individual contributions or it can borrow on a collective undertaking provided by all the OECD members. If the Support Fund calls for individual commitments, contributing members have two options. A member may either transfer moneys directly to the Fund, or provide an undertaking or guarantee for a Fund borrowing. In the case of a guarantee, the Fund will seek to raise the money in international or domestic financial markets first, and if it is unable to do so, the sum required may then be raised in the domestic market of the individual member. The purpose of providing an individual guarantee is that the member undertakes to stand behind the Support Fund's obligations to lenders in general.
The Support Fund may choose to borrow on the basis of a collective guarantee. For this it can choose either domestic or international markets, so long as these markets are within the territories of OECD members. All members participate in such a collective guarantee and the contingent liability on them is determined by the proportion of their quotas in the Fund applied as a percentage to the total amount raised in this way. For example, if the Support Fund raises $100 million, the United Kingdom would underwrite 8 per cent. of this so that, if there were a default by the borrower, we should be paying from the Consolidated Fund interest payments and capital repayments on $8 million. To offset against this, of course, would be the claim we should have against the defaulting borrower, but it is extremely unlikely that any OECD member would default from an international borrowing obligation.
Provision exists in the Agreement for members in balance of payments difficulties to be relieved of or be assisted to meet their obligations under the Fund. In practice we believe that the Governing Committee would take account of the external position of member countries when making calls to lend on to other members, and seek to raise money in those countries and those markets which are best able to support the financing involved.
Having tried to recount briefly the actual Agreement, perhaps I may turn to the Bill and deal with three of the main clauses. The first clause and the last clause are really only descriptive, and I need not go into them in detail. It is only Clauses 2, 3 and 4 which make changes in existing United Kingdom law.
Clause 2 provides that if the Support Fund seeks to raise money under Article 8 of the Agreement by making a call for individual commitments from OECD members, the United Kingdom may respond to this call by making a direct contribution. The clause specifies that the source of that direct contribution shall be the National Loans Fund. Subsection (2) provides that payments of interest, repayments of capital and any other receipts arising from a direct contribution to the Support Fund shall be paid back into the National Loans Fund. The NLF will also receive any moneys due to the United Kingdom when the Support Fund is liquidated.
The Support Fund will be liquidated under Article XIX when the last repayment or outstanding loan has fallen due. This could be after nine years, because the Fund has power to grant new loans for two years after the Agreement comes into force and loans cannot have a maturity of more than seven years. Liquidation, of course, may take longer than this in the event of possible deferments and default. Alternatively, there is provision for the members of the Fund to extend the facility if all members agree to do so.
Clause 3 provides that if the United Kingdom responds to a call for individual commitments under Article VIII by opting to give an undertaking by way of guarantee of the borrowing, or if it participates in a collective undertaking by all OECD members, as provided for in Article IX, any moneys required to implement such guarantees shall be paid out of the Consolidated Fund, and the Consolidated Fund will take in any consequential receipts.
If the United Kingdom is required to give an undertaking under either Article VIII or Article IX of the Agreement, the Treasury must lay a statement of the undertaking before each House of Parliament.
Finally, I turn briefly to Clause 4. This clause extends to the Support Fund those immunities and privileges which cannot be provided by Order in Council under the International Organisations Act 1968. For those, a draft Statutory Instrument will be laid before the House for affirmative resolution. The Statutory Instrument will provide that the Support Fund shall have the legal capacities of a body corporate, that is, it shall have the usual legal immunity, that its archives will be treated like that of a diplomatic mission and that the Fund shall have the tax exemptions as are accorded to a foreign sovereign Power. Hon. Members will, of course, have an opportunity to debate the draft instrument after it is laid before the House.
Clause 4 also covers tax exemptions which are not within the scope of the International Organisations Act, and relates to the securities issued by the Support Fund. In effect, it provides an exemption for non-residents from income tax in respect of these securities. Also, securities issued by the Support Fund are to be treated as property outside the United Kingdom for the purposes of capital gains tax and capital transfer tax. Again, that affects people domiciled outside the United Kingdom and not those who are in the United Kingdom. There will be an exemption from "Bearer Instrument" stamp duty in relation to Fund securities.
As we believe that the United Kingdom is most likely to meet its obligations to the Fund by providing direct financing, it is unlikely that the Support Fund will wish to issue securities in the United Kingdom. We have, however, to take the powers in Clause 4 so that, if such a remote eventuality arises, the Support Fund is not disadvantaged because we have not taken these powers.
In conclusion, as I have said, this is a short Bill, and I hope that it is uncontroversial. It is another attempt by the industrial countries to alleviate a little the consequences of the steep rise in oil prices which has taken place over the last four years and to mitigate somewhat the effects of the present world recession. Both of these aims, I believe, must be in the interests of this country, and I hope, therefore, that the House will agree to give the Bill a Second Reading.