Chapter 2
The DIFF Scheme
2.1 The stated objective of Australia's aid program under the previous
Government was:
to promote ecologically sustainable development in developing countries
in response to Australia's humanitarian, foreign policy and commercial
interests. [1]
2.2 The development objective of the present Government's aid program,
articulated during the election campaign and since coming to office, is:
to assist developing countries to help meet the basic needs of
their people, and to assist in achieving a more secure and equitable international
order; [2]
and:
to ensure the reduction of poverty and the promotion of economic
development as a permanent means of overcoming such poverty. [3]
2.3 More recently, AusAID has stated that:
The objective of Australia's development cooperation program is
to promote sustainable economic and social development in developing countries.
[4]
2.4 In 1995-96 the Australian aid budget was $1.563 billion. Bilateral
programs accounted for 56 per cent of the total, and global programs,
including DIFF, 35 per cent. Expenditure on DIFF itself was $126.5 million,
eight per cent of the total aid budget. Non-government organisations received
around $100 million. [5]
2.5 Of the 21 countries that form the Development Assistance Committee
(DAC) of the Organisation for Economic Cooperation and Development (OECD),
Australia ranked ninth in 1995-96 in terms of the ratio of Overseas Development
Assistance (ODA) to Gross National Product (GNP). The ODA/GNP ratio for
Australia for 1995-96 was 0.34. [6] As
a consequence of the abolition of DIFF and other cuts to Australia's aid
program amounting to a ten per cent reduction in outlays, the estimated
ODA/GNP ratio for Australia in 1996-97 is 0.29, an all-time low. [7]
The United Nations target for ODA/GNP ratio is 0.7.
2.6 Australia has for some time had a regional focus in its aid program.
In 1995-96, 77 per cent of expenditure on bilateral aid programs was directed
towards South East Asia and the Pacific: 35 per cent to Papua New Guinea,
29 per cent to South East Asia and 13 per cent to the South Pacific. Less
than five per cent was directed to Africa, which Australia tends to leave
to big donors with traditional interests in those areas, although Africa
remains a major recipient of Australia's emergency assistance. [8]
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2.7 DIFF was an aid scheme whereby Australia provided mixed credits,
normally a 35/65 blend of grant aid and Export Finance and Insurance Corporation
(EFIC) financing, to developing countries for high priority public sector
projects using Australian capital goods and services. DIFF, which was
financed out of the aid budget, was used to fund the grant component,
while EFIC financing was used for the remainder. The two components were
combined and provided as an EFIC loan to the buyer in support of the full
value of the export.
2.8 During the 1970s and 1980s, dramatic growth and increasing urbanisation
in East Asia had created a demand for investment in public infrastructure
that was not being met by governments in the region. Bilateral aid donors
created mixed credit schemes in order to increase the amount of concessional
finance available to satisfy the increasing demand for infrastructure
developments. Use of these funds was generally limited to the purchase
of goods and services from the donor country. By 1982 such programs accounted
for about six per cent of total OECD bilateral Overseas Development Assistance.
[9]
2.9 DIFF was introduced into the Australian aid program by the Fraser
Coalition Government in the 1980-81 budget as an additional means of assisting
developing ASEAN countries, with initial expenditure on DIFF projects
in 1982-83. It was also intended to match the concessional financing being
provided by other countries and thus help Australian firms compete for
aid projects. It enabled Australian companies to tender competitive contracts
for the supply of Australian goods and services for projects in developing
countries, by reducing the cost to governments of importing the goods
and services required for development purposes.
2.10 The DIFF grant, which in the early years of the scheme was usually
equal to 15 to 30 per cent of the value of a contract, was combined with
export credits provided by EFIC to provide a concessional loan tied to
the supply of Australian goods and services. The use of such tied aid
mixed credits is subject to strict rules monitored by the OECD.
2.11 The scheme's initial objectives were:
- to provide a vehicle for channeling increased levels of development
aid to ASEAN countries in a form which was appropriate to their stage
of development;
- to introduce flexibility into the bilateral aid program by permitting
the support of commodity supply projects which were not easily accommodated
within the then bilateral program;
- to soften the export credit terms able to be offered, in certain circumstances,
by Australian firms in tendering for the supply of capital goods and
services of a developmental nature in ASEAN countries; and
- to provide significant spin-offs to Australian exporters.
2.12 The original selection criteria against which specific proposals
were assessed were consistent with these objectives:
- the proposal had to be accorded priority in the development plan of
the recipient country;
- the proposal had to contribute demonstrably to the recipient government's
economic and social development objectives;
- the proposal had to be broadly consistent with Australia's development
assistance objectives in the recipient country;
- the proposal had to be financially and economically viable;
- the borrower and borrowing country had to be creditworthy;
- the provision of concessional payment terms had to be justified on
the grounds that it was necessary to match officially aid-supported
competition;
- the equipment or service had to be wholly or mainly of Australian
origin; and
- the scheme applied to machinery, capital equipment or services related
to development projects. Grants were not available for defence equipment
or defence-related projects, luxury goods, consumer durables or raw
bulk commodities.
2.13 Expenditure on DIFF activities in the first year of operation, 1982-83,
was $1.8 million. At that time the scheme was restricted to the then ASEAN
countries: Indonesia, Malaysia, the Philippines, Singapore and Thailand.
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2.14 Over the years of its operation the DIFF scheme changed considerably,
in response to debate within the relevant agencies and the general public
in Australia, changes in the international environment, changes in the
attitudes and requirements of recipient governments and developments within
Australia. The over-riding objective behind these changes was the developmental
effectiveness of the scheme.
International Developments
2.15 International developments resulted in important changes to all
mixed credit schemes, including DIFF. In an attempt to avoid distortion
of trade by the selective application of government supported export credits,
the members of the OECD agreed, in April 1978, to an Arrangement on Guidelines
for Officially Supported Export Credits. This agreement set limits on
the terms and conditions that could be offered by sellers to buyers of
all forms of export credits supported by the official export credit agencies
of members, and which had a duration of two years or more.
2.16 The OECD establishes guidelines for and monitors the use of mixed
credits and aims primarily to discourage the use of aid to subsidise trade.
In 1987, the OECD raised the Minimum Permissible Grant Element (MPGE)
for mixed credits to 30 per cent and further increased it to 35 per cent
from July 1988. The MPGE for Least Developed Countries was raised to 50
per cent from July 1987, in recognition that Least Developed Countries,
being poorer, warrant a higher aid component in mixed credits.
2.17 Australia strongly supported these changes, which were introduced
to improve the developmental focus of mixed credit schemes, and, by making
them more expensive, to temper their use as a trade instrument.
2.18 In a further attempt to improve the effectiveness of the Arrangement,
the OECD introduced a new set of rules in February 1992. Commonly known
as the Helsinki Guidelines, the introduction of these rules was again
strongly supported by Australia. The Helsinki rules further strengthened
the development focus of aid-supported mixed credits and reduced their
attractiveness as a trade instrument. In particular, the types of projects
supported and the donor country's assessment processes were changed.
2.19 The Helsinki rules apply only to tied aid credits. Concessional
finance which is not tied to procurement in the donor country is not subject
to the Helsinki rules.
2.20 The Helsinki rules have had a major impact on all countries' mixed
credit schemes, including DIFF. The use of DIFF was restricted to activities
that were deemed not to be commercially viable. As a consequence there
was a significant trend away from projects in sectors such as telecommunications,
power and manufacturing and a parallel trend towards social development
projects such as water supply, remote area telecommunications and those
with an environmental focus, such as waste disposal and renewable energy
projects.
2.21 The Helsinki rules also introduced more rigorous appraisal processes
for determining the commercial viability, developmental merit and environmental
impact of proposed projects. The DIFF scheme, as it was when it was terminated
in May 1996, reflected the 1992 Helsinki Guidelines and not earlier forms
of the scheme.
Changes in recipient countries
2.22 While it was always necessary to be able to demonstrate that a proposed
project was consistent with the stated development policy of both the
recipient country and Australia, projects could be initiated either by
an Australian supplier or an agency of the recipient government. By 1995-96
supplier initiated projects could still be funded but stronger, more tangible
support from the relevant agency of the recipient government was also
required. The project had to be dealt with through the recipient government's
planning processes and thus be more explicitly subject to its development
priorities.
2.23 In 1992, AusAID conducted a series of discussions with recipient
governments to determine how the scheme could be improved. In response,
AusAID introduced a range of operational changes, including:
- the DIFF annual program cycle was changed to place greater emphasis
on the joint identification, selection and preparation of DIFF projects
with recipient countries. By 1995-96, 85 per cent of projects were initiated
by the recipient government;
- proposals were screened against explicit eligibility criteria before
being short-listed;
- recipient agencies were requested to put forward high-priority projects
well in advance of the DIFF application deadline, and competing proposals
from Australian companies were encouraged; and
- each proposal was required to be supported by a feasibility study
prepared by the supplier, and was subject to an independent appraisal
by AusAID before funds were committed.
2.24 These changes lifted the developmental effectiveness, increased
the extent of competition between Australian suppliers for individual
project contracts and improved project scheduling and expenditure management
of the DIFF scheme.
Changes to DIFF from within Australia
2.25 In 1982, the range of recipient countries eligible for DIFF was
broadened from the ASEAN bloc to all countries receiving Australian bilateral
aid. From 1983 onwards, the supplier merely had to demonstrate donor competition
in the relevant sector of the recipient country rather than direct aid-supported
competition for a specific project.
2.26 By 1987, following a series of internal AusAID reviews, the scope
of the scheme was expanded to include all developing countries. At the
same time, Burma, China, India, Indonesia, Malaysia, the Philippines,
Sri Lanka and Thailand were declared spoiled markets. This meant that
the presence of competing donor aid could be assumed and evidence of aid-supported
competition was not required except in the case of services and non-capital
goods. By 1995, Vietnam and Pakistan had been added to the list of spoiled
markets and Burma and Malaysia had been removed.
2.27 In 1994-95, $20 million was set aside within DIFF's $120 million
budget for a Green DIFF component. This was designed to respond to a range
of environmental problems and inadequate environmental infrastructure
in developing countries. Rapid growth and urbanisation in certain countries
have brought significant environmental problems that impede social and
economic development.
2.28 Green DIFF projects were identified by the relevant authorities
in developing countries. The primary criterion for eligibility for Green
DIFF funds was that the project would make a major contribution to improving
environmental conditions. The Green DIFF program expanded rapidly, with
23 Green DIFF programs under consideration when DIFF was terminated in
May 1996.
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2.29 The DIFF scheme has been the subject of considerable debate during
the course of its evolution and has consequently been the subject of a
number of reviews and commentaries:
- 1984 Jackson Review of Australia's Overseas Aid Program
- 1989 Joint Committee on Foreign Affairs Defence and Trade's Review
of AIDAB and Australia's Aid Program
- 1989 Committee for Review of Export Market Development Assistance
- 1989 DIFF Review Working Paper
- 1990 Bureau of Industry Economics study
- 1990-92 Evaluations of specific projects
- 1992 Centre for International Economics study
- 1992 National Institute of Economic and Industry Research study
- 1992 ACFOA's assessment
- 1993 Study of the commercial benefits from DIFF in China
- 1993 Environmental audit of the aid program
- 1994 Environmental audit of specific aid projects
- 1995 Study of the commercial benefits from DIFF in Indonesia
- 1995 DFAT International Economics and Finance Section paper, Making
DIFF Better [10]
- 1996 David Burch, The Commercialisation of Australia's Aid Program
- 1996 Review of the Effectiveness of DIFF
- 1996 Treasury comments on AusAID's Review of the Effectiveness of
DIFF
- 1996 OECD Review of Australia's Aid Program
- 1996 Productivity Commission's comments
- 1996 Senate Foreign Affairs, Defence and Trade References Committee's
report, Australia China Relations
- 1996 Richard Filmer, Has DIFF Passed its Use By Date? [11]
2.30 Many of the refinements and changes to the DIFF scheme over the
years were made in response to the findings of these reviews. Early studies
noted the need to strengthen development criteria and to introduce rigorous
appraisal of projects. The need to ensure competition for projects was
also a subject of comment. The 1989 Working Paper was a major review and
led to a number of changes approved by Cabinet. These included:
- 90 per cent of DIFF allocations in any year were to go to the Asia-Pacific
region, in line with Australia's regional priorities;
- a maximum of 40 per cent of DIFF funds were to go to any one country
in a single year;
- feasibility studies for each project, according to strict criteria,
were to be provided by firms, and those studies would then be appraised
by AusAID;
- the minimum and maximum size of the DIFF grant for individual projects
was set at $0.5 million and $75 million respectively;
- AusAID would undertake evaluations of individual projects; and
- DIFF funding would not be available in cases where it had previously
been provided to a particular firm in the same sector or the same region
of a recipient country.
2.31 These changes significantly improved the developmental effectiveness
of DIFF projects but, as a result of a significant backlog of approved
projects, it was not until 1992 that the effect of the 1989 changes began
to appear in project appraisals.
2.32 The 1992 National Institute of Economic and Industry Research study,
DIFF: Its trade creation, industry development and current account impacts,
came to the following conclusions:
- there had been a substantial trade creation effect from the use of
DIFF funds;
- in many instances Australian firms had transformed their focus from
a primarily domestic orientation to a strong international emphasis;
- so long as development co-operation objectives continued to be met
there was substantial commercial justification for a continuation of
DIFF based on its trade creation effects alone; and
- there were numerous positive effects at industry level, including
employment creation and increased investment in R & D, plant and
equipment.
2.33 In January 1996 AusAID published A Review of the Effectiveness of
the Development Import Finance Facility, based on a detailed survey of
51 projects, undertaken in 13 developing countries in the period 1988-89
to 1992-93. The review assessed the effectiveness of DIFF against two
criteria: the extent to which projects achieved their intended developmental
impact, and the extent of commercial and other trade benefits to Australia.
Its findings included:
- the DIFF program was effective in delivering its intended development
benefits;
- DIFF projects addressed key infrastructure constraints to economic
growth and development and possibly the most significant contribution
which they had made to development was through their economic impact;
and
- DIFF projects had been effective in generating considerable commercial
benefits for Australia. [12]
2.34 The review concluded that:
It is clear that the DIFF has met the Government's objective of
effectively delivering development benefits to recipient countries. It
has also brought substantial commercial benefits to Australia. While in
the past there may have been some shortcomings ... these problems are
unlikely to recur. Additional modifications ... would further improve
the effectiveness of DIFF. [13]
2.35 Criticisms of DIFF expressed in some of the reviews included the
following:
- the basic motivation for DIFF was commercial not developmental;
- DIFF distorted the geographical distribution of aid by singling out
a few 'commercially interesting' countries in the region;
- DIFF distorted the type of aid projects supported because it supported
capital intensive infrastructure projects rather than projects targeted
directly at the poor;
- DIFF contributed to indebtedness because developing countries were
obliged to borrow from EFIC to finance DIFF projects;
- there was no conclusive evidence that DIFF contributed to trade creation;
and
- DIFF created a dependency culture in companies rather than an export
culture.
2.36 These criticisms are addressed in the body of this report. The Committee
notes, however, that changes to the OECD rules in 1992, and changes to
DIFF, make most reviews of DIFF prior to 1992 irrelevant as a means of
assessing the program at the time of its termination in May 1996. The
1996 report on Australia's aid program by the OECD Development Assistance
Committee itself makes the point that DIFF had 'changed dramatically over
time and become almost unrecognisable compared to its original form'.
[14]
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2.37 Recipient government agencies were requested to put forward
high-priority projects well in advance of the DIFF application deadline.
Prior to any formal application for DIFF funding, companies would develop
possible projects in consultation with the relevant agencies. This might
take several years and involve a considerable degree of investment in
the development phase of the project.
Source: AusAID/DFAT, submission, p. 63.
2.38 Companies would then lodge a proposal with AusAID, which would seek
advice from the Australian mission in the recipient country, its own country
specialists, other Commonwealth departments and the recipient government,
in order to determine whether the project met the minimum requirements
for eligibility.
2.39 If the proposed project met the DIFF criteria and was of sufficient
priority, AusAID would seek the Minister's approval to issue a Letter
of Advice. This did not constitute an offer of DIFF funds but detailed
the steps required for the project to be eligible for a Formal Offer.
2.40 If a proposed project met all further eligibility requirements and
was approved by the Minister, a Formal Offer would be made, conveying
to the recipient government, as the nominal applicant, an offer of DIFF
grant funds. Notification was forwarded to the firm as the payee of the
grant, which it received on behalf of the recipient government.
2.41 Proposals lodged by firms were assessed by AusAID against a range
of development criteria. The Australian firm had to provide an acceptable
project feasibility study, assessing the development benefits of the project
and its financial and economic viability, before AusAID could recommend
to the Minister a subsequent Formal Offer of DIFF funding.
2.42 In order to be eligible for DIFF funding a project had to meet the
selection criteria listed at 2.12, above. In addition, it had to be consistent
with the OECD's Arrangement on Export Credits, including the Helsinki
Guidelines. Projects are notified to the OECD and any member can call
for consultations and challenge another member to prove that their project
is consistent with the revised rules.
2.43 From the scheme's inception until its termination, 123 projects,
with DIFF funding of $887 million, were undertaken in 15 countries by
70 companies. Indonesia and China were the main recipients of DIFF grants,
accounting for 45 and 28 per cent of the expenditure respectively. [15]
Most of the funding was for projects in the transport, energy and communication
sectors, with 46, 15 and 11 per cent respectively. [16]
If DIFF had continued, these figures would have changed as the effects
of the 1992 Helsinki rules became more apparent.
2.44 By mixing DIFF funds and export credits, EFIC structured its DIFF
associated loans to suit the particular borrower. Loans to Indonesia have
the longest maturity, typically an 18 year repayment term, commencing
seven years from the time of the loan - a total repayment period of 25
years - at an interest rate of 3.5 per cent. Loans to China have the lowest
interest rates, typically a zero interest rate for a loan repayable over
five to seven years. [17]
2.45 Although some attention has been drawn to the fact that over the
life of the scheme two-thirds of DIFF funding was awarded to just ten
companies, the introduction of the Helsinki rules had a significant impact
on the distribution of funds. Such a concentration of DIFF funds could
no longer occur. Moreover, when the large number of subcontractors who
have always been involved in DIFF projects is considered, such a figure
gives a misleading impression of the spread of benefits to Australian
firms.
2.46 At the time of the change of Government in March 1996, there were
seven projects which had received Letters of Formal Offer, with DIFF value
of $65.2 million and total contract value of $186.2 million. There were
50 projects, for which 85 Letters of Advice had been issued, with a DIFF
value of $384.4 million and total contract value of $1,098.3 million.
[18] When the DIFF program was terminated
Australian companies were reported to have spent about $70 million on
the development of these projects. [19]
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2.47 DIFF has generated considerable debate over the life of the scheme.
Much of this has focused on the issue of whether it is fundamentally a
development program or a trade promotion program. [20]
The AusAID review came to the conclusion that 'the development benefits
from DIFF are very substantial and that the trade argument has been overstated'.
[21]
2.48 The review pointed out that if DIFF were a trade subsidy then most
elements of Australia's aid program could be considered the same. Emergency
food aid could be regarded as a 100 per cent subsidy to food suppliers!
The important consideration in assessing DIFF is to measure its achievements
in terms of its primary objective - sustainable development. Domestic
economic benefits are a welcome bonus. [22]
2.49 Clearly, while DIFF has generated major development benefits for
the recipient countries, it has also delivered substantial commercial
benefits for individual companies and for Australia. However, to imply
that it is simply a subsidy to Australian business or that its primary
purpose is to provide industry assistance is to misunderstand the operation
of the scheme and its place in Australia's aid program.
2.50 Such a view ignores the very clear statements from successive ministers
and from AusAID that DIFF was a development program first and foremost.
[23] Projects were assessed against
a range of development criteria by the recipient government, by AusAID
and by the OECD. Any suggestion that there is no clear guidance as to
what the priorities are is confusing, to say the least.
2.51 Dr Katherine Woodthorpe, Chief Executive Officer of the Technology
Industries Exporters Group, said that 'we are unbelievably naive if we
take this high moral ground about aid never being tied to trade'. [24]
She said that she did not see DIFF as a way of subsidising Australian
industry:
I see it as good aid that they are utilising to sell more product
than they might have done otherwise. But those same companies are selling
into other more sophisticated countries, where aid is not an issue, and
they are selling their products very commercially. They are good products
that can be used elsewhere. [25]
2.52 In evidence to the Committee, the Deputy Secretary of the Treasury,
Mr David Borthwick, said that because the levels of assistance that DIFF
provided to some Australian industries was higher than is afforded through
other assistance measures, it did not serve Australia's industry policy
objectives. [26] He said that:
In essence, by lowering the price of tenders, DIFF enables a few
Australian exporters to win development contracts that they otherwise
might miss out on but, in so doing, it provides them with very high levels
of assistance. The fact that this assistance is linked to the provision
of foreign aid does not change the situation. The benefit flows to the
Australian industry. [27]
2.53 The Committee finds this a difficult argument to accept. DIFF was
not industry policy but a development program, one of a number designed
to meet various development objectives. The Committee notes that:
The primary objective of DIFF is to provide aid grants to assist
developing countries undertake high priority public sector development
programs ... An important and secondary objective of the DIFF scheme is
to promote the export of internationally competitive Australian goods
and services. In this regard the objectives for DIFF closely mirror those
for the total aid program more generally. [28]
2.54 Furthermore, the Committee believes that it is important to clarify
Mr Borthwick's comment in relation to the price of tenders for development
projects. DIFF did not provide grants to industry which allowed companies
to tender lower contract prices; rather, it made grants to recipient governments
which lowered the cost to that government of the project. Australian companies
could compete for development contracts because the Australian Government
made it as easy for recipient governments to pay the Australian contract
price as other OECD governments made it for them to pay the contract price
of companies from other countries. In other words, Australian companies
could compete with overseas companies on equal terms.
2.55 The Committee also notes the comments of Mr Robert Trenberth, Deputy
Secretary of the Department of Industry, Science and Tourism, who said
that:
DIFF is principally an aid program that relates to broad, strategic,
international objectives and humanitarian objectives that the Government
has. There are some important industry spin-offs and we note those ...
But to cast it as an increment to our existing industry development funds
is not quite the right way to think about it. [29]
2.56 If, in meeting its primary development objectives, DIFF also provided
assistance to certain sectors of industry, some of which, such as high
technology companies with the potential for export growth, arguably need
support in the early phases of their development, it seems unnecessarily
narrow to argue that because it assisted some companies and not others
it was poor policy. The Committee would also draw attention to Mr Trenberth's
comment that:
it is also stating the obvious to note that the companies that
respond to these opportunities are driven by the nature of the project
in the recipient country. If those projects fall into certain categories,
then the companies that respond will fall into certain categories. [30]
2.57 The Committee believes that the commercial benefits flowing from
Australian companies' involvement with DIFF have not distorted the development
objectives and achievements of the scheme. The undeniable value of the
vast majority of projects, particularly those approved since the inception
of the Helsinki rules in 1992, cannot be questioned simply because there
have been significant benefits to individual Australian companies and
to the export performance of particular industry sectors. Given the nature
of DIFF and the Helsinki rules it is not surprising that particular sectors
will be the commercial beneficiaries of the scheme, but the fact that
the scheme draws on those sectors does not mean that it supports those
sectors at the expense of development objectives.
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2.58 Mr Leigh Purnell, Director of the MTIA, said that 'in the past some
criticisms made of the DIFF scheme might have been legitimate', but went
on to say that 'Certainly the tightening of the guidelines has made an
enormous difference ... making it a very creditable, worthwhile program'.
[31]
2.59 Ms Lee Rhiannon, Director of AID/WATCH, told the Committee that
'The determining factor in any aid program has to be poverty alleviation
with targeted communities involved in the design and implementation of
projects', and that aid determined by the commercial benefits to companies
cannot meet those requirements. [32]
She went on to say that:
Obviously, we are not objecting to Australian companies being involved
in the aid program; we are objecting to them determining what form the
project should take. [33]
2.60 The Treasury took a similar line, arguing that:
The supply driven nature of DIFF means that it is focused on projects
and sectors that are important for Australian exporters, rather than necessarily
for recipient countries. [34]
However, according to AusAID, 'The way the scheme operates now
is that 85 per cent of projects ... have been initiated by the recipient
government'. [35]
When pressed by the Committee on this point Mr Borthwick from the Treasury
allowed that 'there had been substantial modifications and improvements
since 1992'. [36]
2.61 In his criticisms of DIFF, based largely on what he conceded was
a conceptual model for 'an ideal world', Mr Borthwick agreed that he was
'not contending that these are bad development projects', [37]
but that Australian aid could be better directed. He argued that DIFF
distorts the decision-making framework of recipient governments in according
priority to particular projects, by encouraging them to undertake commercially
non-viable projects which will meet OECD guidelines.
2.62 The Committee believes that a theoretical model of countries' economies
or of the aid program is not of great value in assessing the effectiveness
of aid delivered to real world situations. To argue that if DIFF, or similar
schemes from other donor countries, were not available recipient governments
might give lower priority to projects that could only be financed through
such schemes is a truism. However, it is the responsibility of recipient
countries to determine their own priorities, including provision of basic
amenities to disadvantaged/isolated communities which are unattractive
to commercial interests. It should not be forgotten that Australian governments
of all political persuasions have subsidised services to some elements
of the Australian population for reasons of social equity and fairness
at the expense of economic orthodoxy.
2.63 The Committee raised the issue of funding from international financial
institutions, such as the World Bank and the Asian Development Bank, with
a number of witnesses. The Treasury had argued in its submission that
such aid was more effective than DIFF funding. [38]
The Department of Foreign Affairs and Trade noted that concessional loan
schemes from those two institutions amounted to '20 or 30 times the value
of the DIFF program'. [39] However,
one witness stated that:
small companies find those markets very difficult to enter ...
We are told that the level at which we could enter at this stage is really
too small for the World Bank to consider.
... At the entry level, for a small company, the World Bank is
a difficult proposition. We think it is a step away from our company ...
We looked upon [DIFF] as a marvelous stepping stone for the company. [40]
2.64 In its submission, LABAX International Pty Ltd said that the Committee
should:
note the relative lack of success of Australian commercial organisations
in obtaining contracts through multilateral agencies such as the World
Bank and the Asian Development Bank. [41]
2.65 Mr Michael Lamb, Managing Director of ERG Telecommunications Pty
Ltd, said that:
Frankly, in running a business you would go a long way to find
another win-win situation such as DIFF ... If you go out there and see
the situation in which people live ... you have no doubt at all that the
supply of telecommunications is real aid to these people. You just have
no doubt about it. [42]
2.66 One of the major issues in the DIFF debate has been the element
of technology transfer and sustainability. The introduction of new technology
was a major focus of DIFF projects. Many of the examples of projects given
to the Committee included significant elements of technology transfer,
including bringing personnel to Australia for training or undertaking
training on location. Education programs, in particular, have a significant
broadcast effect as skills and knowledge are distributed through communities.
2.67 Mr Robin Winckworth, Finance Director of Wilson Transformer Company
Pty Ltd, said that contacts and relationships developed in Malaysia as
a result of DIFF had enabled his company to develop a joint venture there,
as a consequence of which 'we have been able to transfer a lot of technology
to Malaysia which has enabled the Malaysians to increase their employment'.
[43]
2.68 Problems with sustainability often related to the recipient agency's
capacity to utilise, operate and maintain the technology and equipment
supplied. The AusAID review noted that while these are perennial concerns
in aid delivery they were specifically addressed in the appraisal processes
in operation at the time of the termination of the scheme. [44]
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2.69 A significant part of the DIFF debate has focused on whether or
not the scheme could be classified as humanitarian aid. The Government
has said that it wishes the aid program to have 'a clear and unfettered
focus on humanitarian aid and poverty alleviation.' [45]
The Committee believes that DIFF as it existed, particularly since the
inception of the Helsinki rules in 1992, demonstrably contributed to those
objectives, and complemented other aspects of Australia's overall aid
program.
2.70 The Australian Council for Overseas Aid, which was critical of some
aspects of DIFF, suggested that priority human development needs were
things such as education, health, water supply, and income generation.
[46] DIFF addressed these areas very
significantly through infrastructure development.
2.71 Professor Don Watts, Chairman of Advanced Energy Systems Ltd, told
the Committee that he was:
always amazed at the dogma that leads to the view that humanitarian
and commercial development are incompatible ... There is no greater humanitarian
value than in the provision of high quality energy to remote villages
in places like East Indonesia ... The humanitarian value of village power
supply is unquestioned. It underpins sensible communications systems ...
it assists greatly in the provision of health services ... it assists
the sanitation of the villages ... it is vital to educational networks;
it creates employment. [47]
2.72 Professor Anthony Owen of the University of New South Wales, who
has worked as a consultant for the OECD specifically on mixed credit finance,
told the Committee that:
I would call investment in water purification and sewage treatment
humanitarian aid. I would call investment in coal gasification humanitarian
aid if you are stopping acid rain from falling on the local population.
Where that definition stops and the manufacturing greed definition takes
over, I do not know. It would seem to me that the current system under
the Helsinki disciplines is pushing mixed credits into the area which
can be broad brushed as humanitarian aid. [48]
2.73 Mr Xiaowu Wu, Managing Director of Smartgas Ltd, said that his company's
vehicle emission control project:
does contain humanitarian aid and it is a green project. It does
not matter how well Australia deals with the global effects of greenhouse
gases because if other countries are not going to do anything, it will
still exist and it will not improve. [49]
His company's submission referred to the growing incidence of respiratory
damage, bronchitis, emphysema, pneumonia, cancer and other health problems
attributable to lead particles and increasing levels of sulphur and nitrogen
oxides. [50]
2.74 Mr Kevin Pontifex of Energy Equipment Pty Ltd said that his company's
two coal gasification projects in China were:
simply giving to the households in China gas to cook with - just
basic essential cooking gas. In one area we are actually supplying five
million people with this cooking gas where in the past they were basically
using coal briquettes. There were hundreds of people every year dying
in the province from carbon monoxide poisoning from cooking with coal.
[51]
2.75 Mr Ian Berckelman of LABAX spoke of the 'profound humanitarian impact'
of his company's environmental monitoring project in Indonesia, which
would supply instrumental and laboratory equipment and training and technical
support to 21 regional environmental laboratories in Indonesia, facilitating
the measurement of air and water pollution and assisting the Indonesian
Government's strategy to reduce greenhouse gas emissions. [52]
2.76 Speaking of his company's project to supply search and rescue vessels
to the Philippines coastguard, Mr Andrew Johnson, Chief Executive of Transfield
Defence Systems, referred to the thousand or so lives lost each year in
the Philippines in maritime accidents, and said, 'I do not think there
is anything more fundamental to a humanitarian purpose than saving people's
lives in a real world situation'. [53]
2.77 The Committee believes that by any definition the majority of DIFF
projects approved since the inception of the Helsinki rules in 1992 could
be classed as humanitarian aid. Large public sector infrastructure projects
are not incompatible with poverty alleviation and the improvement of living
standards for particular communities. The Committee further believes that
the termination of DIFF has had an adverse impact not only on communities
affected but also on Australia's standing as a provider of humanitarian
relief to developing countries.
[Contents]
2.78 During the 1996 election campaign the then Shadow Treasurer, Mr
Peter Costello, MP, stated in a press release of 15 February, Meeting
Our Commitments, that the Coalition in Government would terminate DIFF
from the start of 1996-97. The document stated that:
The Development Import Finance Facility (DIFF) is a form of tied
aid. In effect, it is a subsidy paid to domestic business. The Coalition
will discontinue the program. Export credits will remain available for
concessional loans to recipient countries to finance projects. An emphasis
on loans versus grants will encourage recipient countries to maximise
the effectiveness of assistance. [54]
2.79 Following the election, AusAID, in consultation with the Department
of Foreign Affairs and Trade (DFAT), the Department of Industry Science
and Tourism (DIST), EFIC and the Australian Trade Commission (Austrade),
provided advice to the Government on how to implement its decision to
terminate DIFF.
2.80 On 8 May the Minister for Foreign Affairs, Mr Alexander Downer,
MP, decided that the DIFF scheme would be terminated from the beginning
of 1996-97. The Government would fund projects holding Letters of Formal
Offer but not those with Letters of Advice. The Government would not introduce
any alternative mixed credit arrangement in place of DIFF but might consider
a smaller, reformed mixed credit arrangement in future.
2.81 On 17 July the Minister decided that while DIFF was abolished, the
Government might consider supporting some high priority individual projects,
using mixed credits, with funding from within AusAID's 1996-97 bilateral
program allocation.
2.82 These matters are explored in greater detail elsewhere in this report.
Footnotes
[1] Australia's Overseas Aid Program 1995-96,
Budget Related Paper No. 2, p. 13.
[2] Coalition policy document, A Confident
Australia.
[3] The Challenges for Sustainable Human
Development, A Response from Australia, address by Alexander Downer,
MP, Minister for Foreign Affairs, to the Crawford Fund, 28 May 1996.
[4] AusAID/DFAT, submission, p. 1.
[5] AusAID pamphlet, Basic Facts and Figures
about Australia's Aid Program.
[6] Dr Ravi Tomar, A DIFFerence of Opinion:
Cancellation of the Development Import Finance Facility, Parliamentary
Research Service, Current Issues Brief No. 20 1995-96, pp. 1-2.
[7] Australia's Overseas Aid Program 1996-97,
pp. 10-12, 66.
[8] Dr Ravi Tomar, A DIFFerence of Opinion:
Cancellation of the Development Import Finance Facility, Parliamentary
Research Service, Current Issues Brief No. 20 1995-96, pp. 2-3.
[9] AusAID/DFAT, submission, p. 4. Other descriptive
sections in this chapter are largely drawn from this source.
[10] DFAT told the Committee that this was
a draft working paper with no official departmental status, Committee
Hansard, p. 135.
[11] A brief summary of the findings of each
of these reviews can be found in the AusAID/DFAT submission, pp. 12-21.
[12] AusAID, A Review of the Effectiveness
of the Development Import Finance Facility, p. 48.
[13] AusAID, A Review of the Effectiveness
of the Development Import Finance Facility, p. 10.
[14] OECD, Australia: Development Co-operation
Review Series, No. 18, p. 28. Also, Professor Anthony Owen: 'As far
as I am concerned, the changes that occurred in 1992 were so dramatic
that many comparisons pre- and post-1992 are really not of great value.'
Committee Hansard, p. 39.
[15] AusAID/DFAT, submission, Appendix 3, Attachment
I.
[16] Dr Ravi Tomar, A DIFFerence of Opinion:
Cancellation of the Development Import Finance Facility, Parliamentary
Research Service, Current Issues Brief No. 20 1995-96, p. 9.
[17] EFIC, submission, p. 3.
[18] AusAID/DFAT, submission, p. 24.
[19] Dr Ravi Tomar, A DIFFerence of Opinion:
Cancellation of the Development Import Finance Facility, Parliamentary
Research Service, Current Issues Brief No. 20 1995-96, p. 12.
[20] See, for example, Australian Council For
Overseas Aid, Aid For A Change, pp. 90-93.
[21] AusAID, A Review of the Effectiveness
of the Development Import Finance Facility, p. 40.
[22] AusAID, A Review of the Effectiveness
of the Development Import Finance Facility, p. 43.
[23] See, for example, the opening address
to a seminar on DIFF in 1992 by the then Minister for Trade and Overseas
Development, John Kerin, MP, in AIDAB, Development with a DIFFerence,
pp. 2-3.
[24] Committee Hansard, p. 266.
[25] Committee Hansard, p. 268.
[26] Committee Hansard, p. 444.
[27] Committee Hansard, pp. 444-45.
[28] AusAID, A Review of the Effectiveness
of the Development Import Finance Facility, p. 31.
[29] Committee Hansard, p. 515.
[30] Committee Hansard, p. 496.
[31] Committee Hansard, pp. 81, 86.
[32] Committee Hansard, p. 96.
[33] Committee Hansard, p. 99.
[34] Department of the Treasury, submission,
p. 3.
[35] Mr Ian Anderson, Assistant Director General,
AusAID, Committee Hansard, p. 30.
[36] Committee Hansard, p. 452.
[37] Committee Hansard, p. 449.
[38] Department of the Treasury, submission,
p. 2.
[39] Committee Hansard, p. 35.
[40] Professor Don Watts, Chairman, Advanced
Energy Systems Ltd, Committee Hansard, p. 253.
[41] LABAX International, submission, p. 2.
[42] Committee Hansard, p. 106.
[43] Committee Hansard, p. 77.
[44] AusAID, A Review of the Effectiveness
of the Development Import Finance Facility, pp. 27-30.
[45] AusAID/DFAT, submission, p. iv.
[46] Committee Hansard, p. 54.
[47] Committee Hansard, pp. 246-47.
[48] Committee Hansard, p. 48.
[49] Committee Hansard, p. 440.
[50] Smartgas, submission, p. 17.
[51] Committee Hansard, p. 74.
[52] Committee Hansard, p. 305.
[53] Committee Hansard, p. 405.
[54] AusAID/DFAT, submission, Appendix 3, Attachment
A.