Inquiry into the Abolition of the Development Import Finance Facility

EXECUTIVE SUMMARY AND RECOMMENDATIONS

The Development Import Finance Facility was introduced into the Australian aid program by the Fraser Coalition Government in 1982. It combined grant funds and export credits to provide concessional loans for developing countries to finance high priority public sector development projects. Such mixed credits had been offered by other aid donors since the 1960s. In 1995-96, DIFF comprised eight per cent of the total aid budget. The Government decided on 8 May 1996 to terminate the scheme from 1 July 1996.

DIFF and other mixed credit schemes are subject to the OECD's Arrangement on Guidelines for Officially Supported Export Credits. In 1992, the OECD strengthened the Arrangement by introducing the Helsinki Guidelines, which place strict controls on certain aspects of mixed credits, targeting them at non-commercial, developmental projects. Australia has been among the most stringent adherents of the Helsinki Guidelines. As a result, DIFF in 1996 bore little resemblance to the scheme in its early years.

DIFF was a development program with broad humanitarian objectives. By any definition the overwhelming majority of DIFF projects approved since the inception of the 1992 Helsinki rules could be classed as humanitarian aid. Many projects had a significant impact at local community level: for example, in education, renewable energy and environmental areas.

DIFF provided substantial development benefits to recipient countries but also delivered commercial benefits to Australian companies. About 85 per cent of projects funded under the scheme were nominated by recipient countries and not by commercial interests. Companies had to win contracts for nominated development projects against competition from other Australian and foreign companies. Soft loans were then given to the recipient governments to fund the projects. DIFF enabled Australian companies to compete on an equal footing with foreign companies when vying for development projects. In other words, DIFF was not a subsidy to Australian business.

The Committee noted that the Government has acknowledged the continuing need for concessional finance to support the massive infrastructure needs of developing countries in the region.

Recipient countries publish lists of priority projects subject to mixed credit arrangements for which Australian and foreign companies negotiated with authorities of those countries. Once Australian companies met certain preliminary requirements, AusAID would issue them with a Letter of Advice detailing the steps required before a Formal Offer of funds could be made.

When the Australian Government terminated DIFF, it decided not to proceed with applications for DIFF funding which had received a Letter of Advice but had not received a Letter of Formal Offer. The Committee believes that the decision not to fund projects, simply because they had not received a Formal Offer, represents the narrowest possible approach to implementation of the decision to terminate DIFF. The decision relied on Australian legal advice, without taking into account Asian business culture based upon development of relationships, trust and commitments. It ignored the pleas of senior Ministers of recipient countries not to scrap particular projects; took no account of considerable investments made by recipient countries, sometimes at the direct request of the Australian Government; and it dealt a serious blow to relations, particularly commercial relations, between Australia and regional countries.

The termination of DIFF has had an adverse impact not only on the communities affected but also on Australia's standing as a provider of humanitarian relief to developing countries. Although many of the projects will be renegotiated with companies from other countries, this will inevitably involve additional time and expense on the part of the recipient countries. In some cases Australian expertise, particularly in the area of renewable energy and other environmental and technology sectors, which is leading the world and is well suited to the needs of developing countries, will no longer be available to those remote communities.

The decision has had a severe impact on many Australian companies. Projects worth $1.3 billion were lost, in many cases by small to medium enterprises which will no longer be able to employ additional staff as anticipated and which, in some cases, will have to lay off existing staff. Individual companies had invested large sums in particular projects, often up to $500,000 and in some cases more, as well as considerable time and resources.

DIFF projects tended to involve a number of companies as subcontractors to the principal supplier. Many companies cited a figure of fifty or more small to medium-sized manufacturers who would be adversely affected by the loss of particular DIFF projects. The decision to terminate the scheme immediately, without any phasing out while current projects were implemented, has caused serious disruption to companies' operations. Not only have they lost contracts but, by breaking commitments, caused by the termination of DIFF, those companies will also find it more difficult to break into the Asian market in future.

The DIFF scheme offered significant opportunities for Australian companies to win follow-on business in important developing markets. Even discounting the automatic multiplier provided by the EFIC component of DIFF projects, the accepted figure was a multiplier effect of 2.3. In many cases DIFF was instrumental in establishing a market presence and earning credibility for a company which was then able to win further, fully commercial, contracts. The incidence of such commercial flow-on counters any suggestion that DIFF created a dependency culture in Australian companies.

DIFF provided the opportunity for Australian companies to compete for approved development projects by matching similar mixed credits packages of other countries. Australian companies were still subject to normal commercial risk in that they were competing against other Australian and foreign companies for the projects. They also had to meet stringent AusAID criteria and OECD scrutiny. When DIFF was terminated, the companies holding the 85 Letters of Advice found that all of their work on the projects over the last two or more years was suddenly of no avail. Without the availability of DIFF funding to recipient countries, Australian companies could not proceed any further with those projects. No other funding was available to take the place of DIFF. The Committee concluded that under no circumstances could this be regarded as normal commercial risk.

The Committee believes that projects which had reached the Letter of Advice stage should have been allowed to continue through the DIFF process. Those projects which ordinarily would have met all the necessary requirements should have been funded, while the others would have been eliminated before Formal Offer as a result of due process.

The Committee also believes that the decision to terminate DIFF has caused very significant damage to commercial relations between Australia and recipient countries. While that damage might not always be apparent at the level of diplomatic exchange, the commercial realities with which Australian companies have to deal suggest that there will be considerable difficulties ahead for Australian firms, particularly in those sectors in which DIFF operated.

Many witnesses who appeared before the Committee spoke of the importance of personal relationships and trust established over a long period of time in business dealings in Asian countries, and of the enormous damage done to commercial relationships by the decision to terminate DIFF, which was regarded by government agencies and commercial partners as a serious breach of faith on the part of Australia.

The strength of the adverse reaction to the original decision to terminate DIFF is evident in the Minister's decision on 22 July to provide funding for some high priority projects nominated by recipient governments. The Committee believes that this partial policy reversal only serves to emphasise the precipitate and ill-considered nature of the original decision and further heightens the confusion in the region about Australia's credibility and reliability.

The Government has indicated that it will consider introducing a revised mixed credits scheme as early as 1997-98. It is included in the terms of reference of the Simons Review of Australia's aid program. The Committee believes that the possible outline for a new mixed credits scheme as suggested by DFAT/AusAID in their submission very largely describes DIFF, either as it was or as it was evolving under the Helsinki rules. The major difference is the incorporation of concessional financing into bilateral aid programs, a proposal to which the Committee has no objection in principle. The Committee wonders why the Government did not simply revise the former scheme instead of going through the trauma of terminating it and then possibly replacing it with a similar scheme in due course, incurring substantial damage to the national interest in the process.

The Committee believes that DIFF was an effective element in Australia's overall aid program. It also provided significant benefits for Australian companies particularly in the sector providing high technology capital goods, arguably the most important sector for Australia's future trade performance.

The Committee examined in some detail the impact of the termination of DIFF on Australia's international relations in the Asia-Pacific region and the Government's management and implementation of its decision to terminate the scheme, in accordance with terms of reference (d) and (f) respectively. During examination of these matters in the public hearings, the Committee sought certain documents and information, which officers of DFAT and AusAID referred to the Minister for Foreign Affairs. In a letter dated 20 August 1996, Mr Downer refused to provide those documents or information to the Committee on grounds that the Committee found to be quite unconvincing. The effect of the refusal to provide the Committee with information that it requested means that the Committee is not able to conclude its inquiries under terms of reference (d) and (f). Under the former term, the Committee finds that there was damage done to the overall bilateral relationships as a result of the termination of DIFF but it is not able to assess the degree of that damage. The Committee wanted to establish more clearly the damage done to our bilateral relationships with DIFF recipient countries. However, the Committee was obstructed by Mr Downer's lack of co-operation in providing documents and information intended to elicit relevant information to help draw the Committee's inquiry to finality.

In its consideration of term of reference (f), the Committee tried to assess the Government's management and implementation of its decision to terminate DIFF. Despite statements in the Parliament by Mr Downer that all relevant information had been disclosed, new information has continued to appear about the mismanagement of the termination of DIFF. The Committee's difficulty in fully examining term of reference (f) has been Mr Downer's refusal to accept the Committee's invitation to give evidence at a public hearing and to provide documents and other information requested by the Committee.

Until information requested by the Committee is provided by the Government, the Committee can only report in interim terms in relation to terms of reference (d) and (f).

The Committee believes that it is in the public interest for the information and documents, which were requested by the Committee but denied by the Minister for Foreign Affairs, to be made available to the Committee to enable it to finalise its inquiries under terms of reference (d) and (f). As reported in Chapter 3, the Committee believes that the Minister's reasons for withholding the documents and information from the Committee are specious,.

Although the Committee was due to present its report to the Senate on 17 September 1996, the Minister for Foreign Affairs did not reply until 19 September 1996 to the Committee's letter of 22 August 1996 inviting him to appear before the Committee. The Committee believes that the Minister should appear before the Committee to answer questions about the Government's management and implementation of the termination of DIFF. There were many questions that the Committee wanted to ask during the Committee's hearings, to which only the Minister for Foreign Affairs could provide answers. The Minister's refusal to appear at a public hearing to answer those questions obstructed the Committee in finalising terms of reference (d) and (f).

The Committee is due to report on this matter by 15 October 1996. As mentioned above, the Committee can only make interim findings in respect of terms of reference (d) and (f). The Committee therefore makes the aforementioned recommendations to the Senate in order to assist the Committee in finalising its inquiries into those two terms of reference. The Committee will therefore need an extension of time to complete its inquiries into terms of reference (d) and (f).