Chapter 5
The Impact of the Termination of DIFF in the Asia-Pacific
Region
5.1 There was some difference of opinion between departmental and business
witnesses who appeared before the Committee as to the impact of the
decision to terminate DIFF on Australia's relations with recipient countries.
The Department of Foreign Affairs and Trade argued that the decision
to terminate DIFF, while generating some disappointment in the region,
had to be seen in the context of the broad range of bilateral relations,
of which development assistance was only one component, and that no
substantial damage had been done to relations in general.
5.2 On the other hand, representatives of companies dealing with firms
and government agencies in recipient countries reported very considerable
concern, and a loss of trust, which had the potential to lead to a significant
loss of opportunities for further commercial activity by Australian firms
in the region. They considered that the sudden termination of DIFF, and
the abandoning of projects in which both sides had already invested a
large amount of time and money, was a severe blow to the credibility of
Australian industry and the Australian Government, from which it would
take many years to recover: 'It will do considerable harm to our relationship
with our neighbours.' [1]
5.3 Mr Trevor Kanaley, Director General of AusAID, speaking of the
decision to terminate DIFF, told the Committee that:
because DIFF was just one component of the total aid program
and the aid program in turn just one component of a complex and diverse
bilateral relationship, the Government's assessment was that any impact
could be absorbed. That would be particularly the case given the breadth
and depth of our relationships with the major DIFF recipients, Indonesia,
China, the Philippines and Vietnam. [2]
5.4 Ms Joanna Hewitt, Deputy Secretary of the Department of Foreign
Affairs and Trade, said that:
As we expected ... there was certainly disappointment with this
decision. This disappointment was conveyed to the Australian Government
through diplomatic channels and through some direct correspondence [but]
disappointment and concern is not damage. We in the Department see no
evidence in Australia's broader relations with the affected countries
of substantial damage to our overall bilateral relations. [3]
5.5 Ms Hewitt argued that the relationships with the countries concerned
are broadly based and:
do not evaporate when we decide, for budgetary reasons, that
an adjustment needs to be made to our aid program ... While disappointed
at our decision the governments of China, Indonesia, the Philippines
and Vietnam have all indicated that they understand the reasons for
the decision. [4]
5.6 Ms Hewitt explained that there had been a number of steps taken
to inform recipient governments of the termination of DIFF and to explain
the decision:
we have sent one of the deputy directors-general of AusAID around
the region to explain the decision. We sent our heads of mission into
governments concerned to explain the decision on the abolition of DIFF
shortly after it was taken. We have organised a briefing session here
in Canberra for the representatives of the diplomatic community. [5]
5.7 However, according to the MTIA, the termination of DIFF is already
having a significantly detrimental effect on Australia's involvement in
development projects in Asia. Mr Leigh Purnell, Director of the MTIA,
told the Committee that members are reporting a 'Don't look south' policy
in countries such as Indonesia, and that many recipient countries 'now
look on us as unreliable aid providers'. [6]
5.8 Mr Purnell also spoke of 'enormous confusion' in DIFF recipient
countries:
This comes from DIFF being cancelled, then the Minister, Alexander
Downer, saying that there will be some countries now where there will
be some projects that will be looked at again, so there is quite legitimately
confusion in these countries. Do we have a DIFF scheme? Is it being
reinstated? Is it going to be reinstated for some projects and not others?
How does that fit? Who is directing whom as to what projects are important?
... They don't know whether they can rely on us. [7]
5.9 Mr Alexander Gosman, Executive Director of the Australian Electrical
and Electronic Manufacturers' Association, said that:
A lot of it is about the perceptions and the desire of Australia
to engage with the region. Getting away from the individual company
cases, I think it creates a general perception of some uneasiness and
not being sure where Australia's position is exactly. [8]
5.10 Mr Gosman also said that in a number of cases there had been:
an expectation that DIFF would be provided and that these projects
that had been planned to alleviate poverty would go ahead. The negotiations
have been quite advanced and now the companies have just had to pull
out and say that they are no longer in a position to continue with those
projects. That has caused quite considerable inconvenience to recipient
countries. [9]
5.11 Mr Julian Dinsdale of Austenergy described the reaction to the termination
of DIFF among recipient governments and organisations as 'bewilderment,
amazement and great disappointment'. He said that business associates
of his in Asia were 'absolutely astounded,' and went on to say that people
associated with DIFF in recipient countries viewed the Australian Government's
decision as 'naive, lacking in understanding of exactly what the DIFF
funding is doing'. [10]
5.12 Dr Katherine Woodthorpe, Chief Executive Officer of the Technology
Industries Exporters Group spoke in a similar vein, saying that Australia:
has always struggled to show that it is a credible part of our
near region ... I think it has certainly made us look foolish or naive
in our handling of international relations with our near neighbours.
[11]
5.13 Her view was echoed by Mr Tom Spurling, General Manager of LADS
Corporation, who said that:
the decision to scrap DIFF may have confirmed to certain countries
that Australia does not understand what it takes to be a true member
of the Asian community. [12]
5.14 In a letter dated 14 June to the Parliamentary Secretary to the
Minister for Foreign Affairs, Mr Andrew Thomson, MP, Mr Richard Woolcott,
former Secretary of the Department of Foreign Affairs and Trade, former
Ambassador to Indonesia and the Philippines, Chairman of the Australia-Indonesia
Institute and a member of the Government's advisory panel on the foreign
affairs and trade policy white paper, referred to the decision to terminate
DIFF. He said that:
As things stand, Mr Howard's and Mr Downer's rhetoric about closer
engagement with Asia has been eroded by this action and our credibility
and reputation for reliability in the region will suffer, especially
in the Philippines, following the understandings reached during President
Ramos's visit last August. I am sorry to have to write in these terms
... but I believe this decision really will damage Australia's wider
national interests in Asia. [13]
5.15 Ms Janet Hunt, Executive Director of the Australian Council for
Overseas Aid, said that:
Australia ... tends to promote civil and political rights. For
developing countries, the social and economic rights are much more important
in many respects. I think if we want to be taken seriously on civil
and political rights, we have got to show some good faith in working
towards the social and economic rights. I think we look rather hypocritical
otherwise. [14]
5.16 In response to a question from the Committee regarding the reaction
in recipient countries to the decision to terminate DIFF, Dr Woodthorpe
said that:
The reaction ranges from despair, because a project they had
set such high hopes on is not going ahead, to anger and also a sense
of Australia's being a joke in the community - you cannot rely on them
to fulfil commitments that they have undertaken. Australia's credibility
... will be very difficult to gain again. It is going to set us back
a long way. [15]
5.17 Mr Tripp of Relpar described the reaction among Indonesian officials
as 'surprise and shock.' He said:
I was there in April and I met with Hasan Walinono, the Secretary
General of Education. He was disappointed, shocked and said, 'Where
do we go from here? What happens now?' - so I think certainly amazement
and disappointment. [16]
5.18 Many witnesses who gave evidence to the Committee spoke of the
importance of trust and personal relationships built up over a long
period of time when doing business in Asia, and the sense that the termination
of DIFF had been a breach of trust. That breach of trust would have
a significant impact for a considerable time on the ability of Australian
firms to win contracts in the region.
5.19 Dr Woodthorpe, speaking on the basis of well over twenty years'
experience of living and conducting business in Asia, said that:
it is common knowledge ... to say that doing business with
Asia involves long term relationships and long term building up of
trust. A lot of that is not contractual or legal obligations. But,
if you then do something to that relationship as dramatic as the cancellation
of DIFF has been, I think you damage that relationship.
... When two organisations such as an Australian company and
an Indonesian Government department work closely together over a period
of two years to put together a project that they both believe quite
passionately in, I do not think the word 'commitment' is over used ...
It may not have a contract attached to it, but there is no way you can
reduce the level of the word 'commitment'. It is very much a commitment
and that relationship will suffer. [17]
5.20 Mr Xiaowu Wu, Managing Director of Smartgas Ltd, said that:
If [the Chinese] trust and believe in you that you have the credibility,
they will trust you and you can do business virtually without contracts.
If they distrust you, even if you have a contract in hand, the contract
will not perform. [18]
5.21 Mr Andrew Johnson, Chief Executive of Transfield Defence Systems,
referred to the 'great disappointment' of the Philippines Government
at the termination of DIFF, and went on to say that:
I do not think it is an exaggeration to say that they put great
store in long term relationships. They had an agreed position, which
was publicly stated by their President at an international conference
in Manila earlier this year. The President praised the support he was
getting from the Australian Government. He personally feels very let
down by this decision. That flows down through his government. [19]
5.22 Somewhat ironically, the Department of Foreign Affairs and Trade's
own June 1996 pamphlet, The Philippines Economy at a Glance, states that
'Personal relationships are important in doing business in the Philippines'.
[20]
5.23 Mr Rodney Johansen, Transfield's Commercial Manager, referred to
a meeting of senior AusAID officials, the National Economic and Development
Authority (NEDA) and Department of Transport authorities in the Philippines
in August 1995, agreeing to the number of projects that would be passed
for financial support in 1996-97, and to the subsequent issuing of a Letter
of Advice for his company's project. He said that 'As far as the Philippines
is concerned, the issue of that Letter of Advice is an agreement'. [21]
5.24 Mr Johansen said that:
The last thing that happens in Asia is a signed contract. After
the agreements, the understanding and the trust that leads up to that,
it is just a celebratory event. When government departments meet and
agree a list of projects and they are made aware of that Letter of Advice,
they see it from there onwards as only detail to be wrapped up. Their
understanding is that agreements are made at that level of Letter of
Advice. [22]
5.25 Mr Johnson said that:
Our relationships [with Philippines authorities] are very good,
but this certainly is not helping. We have spoken regularly about the
fact that we have an honest, trusting relationship between us, but a
situation like this really does not help. [23]
5.26 Mr Ian Berckelman of LABAX said that:
When you first begin to distrust your neighbour and when you
first find that your neighbour is confidently unilaterally breaking
a bilateral agreement, I do not know whether you would give much credence
to any further projects that they may wish to agree to in the future.
If they break these commitments ... why wont they break them again?
[24]
5.27 Blackwattle Environmental said that 'The abolition of DIFF has had
a major impact on Australia's reputation in Vietnam. [25]
5.28 In a number of cases, despite the presence in the market of firms
from competing countries ready to step in and undertake particular projects,
witnesses indicated that projects have been frozen pending the outcome
of further deliberations by the Australian Government:
Signs prove that countries like Norway and South Korea are trying
to seize these projects. But the land administration persists [in] awaiting
a positive decision for its project since it has been so deeply involved
with Australia. [26]
and:
The clear indication to us was that unless we can resolve this
issue ... the vessels will go to another nation. They cannot afford
to wait any longer. As I said in my submission, the only reason that
project is still held over now is five years of trust. [27]
5.29 Clearly, considerable trust has been developed over a long period
by Australian business people learning to operate in the commercial and
cultural context of Asian countries. That trust has earned Australian
companies a breathing space but it has now been placed 'on hold'. [28]
It was a common view that:
They do not make any differentiation between the government and
the private sector and it is more a case of, 'Just fix it up, will you?
Do you want to work with us or not? [29]
5.30 The Committee considers that the Government, by relying on a narrow
legal interpretation of commitments, has misunderstood the Asian way
of doing business, which is based on the development of relationships
and trust. As several witnesses pointed out, in Asia a contract is the
final, almost ceremonial, act of a business deal. Binding commitments
occur much earlier in the process. The Australian Government's decision
to terminate DIFF resulted in the breaking of many such commitments,
creating much confusion and distress to the parties involved in those
projects.
5.31 The Committee 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 very considerable
difficulties ahead for Australian firms, particularly in those sectors
in which DIFF operated. The fact that a Foreign Minister does not raise
this matter as a major issue in the bilateral relationship, or glosses
over it, does not mean that little or no damage has been done to the
relationship. Other Ministers, who are more directly affected by the
Australian Government's decision, may treat the matter more seriously.
5.32 While arguing that the decision to terminate DIFF has caused no
substantial damage to overall bilateral relations, Ms Hewitt from the
Department of Foreign Affairs and Trade, did acknowledge a degree of concern
on the part of recipient governments, and stated that, 'We do not want
to minimise that degree of concern.' [30]
The seriousness of the concern, and of the impact of the decision on bilateral
relations generally, is evident in the Government's decision on 17 July
to make funds available for some of the projects affected by the original
termination of DIFF.
5.33 However, the subsequent decision itself has only added to the
'enormous confusion' in recipient countries, referred to above, as to
where the Australian Government stands, and has compounded the problems
caused by the original decision. Governments are now in the position
of having to identify which projects, of those which they believe the
Australian Government had committed itself to, are of highest priority
and are to receive the token funding made available as a result of regional
disquiet.
China
5.34 According to the Department of Foreign Affairs and Trade:
Australia and China agreed each year to a list of projects for
funding under DIFF ... Clearly it is not an internationally binding
agreement but a bilateral understanding of activities to be implemented
each year. There then follows other formal processes, including the
DIFF Letter of Formal Offer and so on. [31]
5.35 While the Department might view such agreements as not binding,
Mr John Dougall of AWA reported to the Committee a meeting in Beijing
between his company's General Manager and the Chinese Minister for Foreign
Trade and Economic Co-operation, Madam Wu Yi. According to Mr Dougall,
Madam Wu had not denied the right of the Australian Government to cancel
programs, but that in the case of particular projects she had said that:
trust has been breached and that we have derogated on our commitment
over the last five years of the Joint Ministerial Economic Council forums
... She expressed the fact that they were very disappointed we had done
that. The trust had been breached and insufficient warning had been
provided to the Chinese government. That is going to hurt us in future
business. [32]
5.36 Mr Wu of Smartgas told the Committee that the Guangzhou Municipal
Government officials:
take the view that in 1988 they signed a bilateral agreement;
also in September last year, they signed agreements. From the Chinese
point of view those are binding agreements. [33]
and:
They kept saying that an agreement is an agreement ... They said,
'We want the agreement to be honoured, we want the projects to go ahead'.
[34]
5.37 Speaking for the Department of Foreign Affairs and Trade, Ms Penny
Wensley said that the relationship with China 'at the moment is strong
and positive', but that as DIFF represented 54.2 per cent of aid to China
there would naturally be some concern on the part of the Chinese Government.
However, she repeated the view that such concern should be put 'in the
perspective of the total relationship'. [35]
5.38 In a letter to the editor of The Australian newspaper, however,
the Minister Counsellor (Economic and Commercial) of the Embassy of China
expressed 'grave concern' over the termination of DIFF and the 'great
economic loss' caused to both China and Australia. The letter also referred
to DIFF's 'very important and active role in China's infrastructure build-up,
environmental protection and poverty alleviation'. [36]
5.39 In response to a question from the Committee, Mr Peter Dawson,
Director of LANDMARC International, agreed that Chinese concerns would
not necessarily be obvious at the diplomatic level:
It will be done far more subtly than that, absolutely. It will
be all sweetness and light. Chinese culture ... is not aggressive and
is always very polite. You need to listen very hard to what you are
being told. Perhaps Australia has not been listening all that well to
the reports to Downer about the protests that do exist. Maybe he will
never hear them. But I will certainly hear them. [37]
5.40 Mr Dawson spoke of the loss of credibility for Australian companies
in China. In evidence to the Committee regarding his company's land
management project, he tabled a letter from the Jilin Province Foreign
Economic Cooperation Bureau, which states that:
The Jilin Land Administration hasn't recovered from the shock
and dismay caused by [the] Australian (new) government's motion of cancellation.
Mr Pei [the Director General] argues that his department has been working
with your company since 1992 and suddenly all work seems to be in vain.
[38]
5.41 Mr Dawson told the Committee that:
In the West, we are used to dealing with things in a fairly
cut and dried fashion. We have a whole body of contract law that sets
out our rights. That does not exist in China. It is a Confucianist
society where basically trust is a very high element. A lot of time
and attention is given to establishing trust. Typically, large projects
would have a lead time of two or three years associated with them.
... When they get to know and trust you, most things are done
on a handshake, and you can really tear up and throw away the document.
It is what they say to you and the context in which it is said that
really counts. [39]
5.42 Mr Wu said of his contacts at different levels of government in
China that they 'all express disappointment and some express anger'. He
suggested that provincial and municipal governments in China would become
'cautious when they are using Australia as a source of funding and as
a source of supplies'. [40]
5.43 He went on to say that:
Australia and the Australian Government have been enjoying a
very good relationship with the Chinese and the Chinese governments
to this present time. Why do something to upset it? Australia has a
very good reputation in China right at the moment, very good indeed.
Wherever you go in China and they know you are from Australia, you have
a good reputation at the moment. [41]
5.44 Clearly, whatever the view offered by the Attorney-General's Department
concerning the legal position of Letters of Advice, there was a very
strong feeling on the part of Chinese authorities and companies that
the stage reached in the development of particular projects was one
involving firm commitment. The withdrawal of funding for those projects
is regarded as a major breach of trust.
5.45 The Committee believes that the termination of DIFF has seriously
threatened the trust that has been earned in China by Australian companies
over a number of years. In its report on Australia China Relations,
tabled in the Senate in June 1996, the Committee stated that DIFF had:
helped Australian companies carve out niches in key sectors of
the Chinese economy ... The cutting of CFF [DIFF] will damage Australia's
reputation with Chinese authorities and customers, especially in relation
to commitments made on the basis of CFF funding. [42]
Indonesia
5.46 In the case of Indonesia, DFAT First Assistant Secretary, Mr John
Dauth, said that:
the bilateral aid program is an element not to be dismissed,
and it was always to be expected that the Indonesians would not welcome
changes to the relationship [but] DIFF has caused no substantial damage
to the overall bilateral relationship. [43]
5.47 However, the Chairman of Advanced Energy Systems Ltd, Professor
Don Watts, said that:
The political damage of this turbulence and uncertainty cannot
be overstated ... Many of Australia's most important friends in the
bureaucracy in Indonesia will lose enormous face as a result of this
turnaround in policy. The long term damage is incalculable. [44]
5.48 Professor Watts said that 'The thing that allows us to survive
... is the goodwill that we have established and that of course is under
severe attack of corrosion at the moment'. He went on to describe the
response within the Indonesian bureaucracy to the decision to terminate
DIFF as 'one of bewilderment'. He said that senior bureaucrats had convinced
the government of the trustworthiness of Australian policy but that:
When it changes overnight for no apparent reason, then trust
is lost - which, in Asia, takes a long time to build - and long term
commercial and diplomatic relationships are endangered. [45]
5.49 Dr Woodthorpe of TIEG said that:
If an Australian company and an Indonesian Government department
... had been given reason to understand, from their experience of the
DIFF scheme and the ongoing nature of the DIFF scheme, that a project
such as this would pass all the guidelines, I call that quite a strong
commitment. It might not be down on paper with signed signatures as
a contract, but experience from our companies with DIFF is that that
is absolutely the last thing that happens. [46]
5.50 Mr Patrick Kilroe, Director of the ASEAN Focus Group, told the Committee
that 'In terms of the fallout, we ... have lost a great deal of credibility.'
[47] He went on to say that:
If the project were phased out and if the people who had letters
of advice were allowed to execute those projects over time, there would
be far less impact ... I think we have lost a tremendous amount of face.
There is a lot of shock on their part. They do not know why it has happened
to them ... they feel completely let down ... Not being able to deliver
now is a tremendous slap in the face. [48]
5.51 Mr Spurling of LADS said that Indonesian officials who have supported
LADS had done so at some risk to their own credibility:
Their confusion and disappointment was reflected when I was asked
to explain the reason for the abolition of DIFF during our recent high
level public workshop on LADS in Jakarta on 30 May. I obviously could
not give a satisfactory response ... the people who are exposed must
lose a degree of hard won trust in the process. LADS Corporation suggests
that it will be difficult to recover that trust, once it is lost. [49]
5.52 Mr Berloud Surjadi, Managing Director of Australian Technical
Supply Ltd, said that:
Indonesia believes that we still need to keep to that bilateral
agreement. We cannot just dishonour that agreement ... It is such an
embarrassment for the consortium to go to Indonesia and say, 'I am sorry
that we cannot fulfil our commitment,' ... this is the first time the
bilateral agreement has been dishonoured. [50]
5.53 Mr Ian Berckelman of LABAX said that the Indonesian Government had
already spent well over $500,000 developing the 21 laboratories which
would receive his company's equipment, [51]
and presented letters to the Committee confirming that Indonesia had committed
those funds at the request of the Australian Government through AusAID.
[52] It now appeared that the project,
designed and developed by Australians, would go ahead but with Japanese
funding and project teams.
5.54 The LADS Corporation was initially presented to the Indonesian Government
under the auspices of the Collaboration on Science and Technology - Australia-Indonesia
(COSTAI). LADS' marine survey project was the subject of three years of
assessment by the Agency for Assessment and Application of Technology
(BPPT), which then announced the success of the assessment program. [53]
5.55 Mr Spurling of LADS told the Committee that:
DIFF's demise obviously has also had an impact on the government
of Indonesia ... the tangible losses ... can be summarised into four
points: they obviously will have less than optimal marine resource planning
and management; there will be a delay in the development of important
north-south sea lanes through the archipelago; there is a loss of an
opportunity for Indonesia to receive and understand technology from
Australia; and there a is loss of opportunity for it to have [the Indonesian
built aircraft] CN235 in a benign surveillance application. [54]
5.56 Mr Spurling said that it was his impression that BPPT had for many
years taken a sceptical posture in relation to Australian technology.
Referring to Dr Habibie's visit to Australia in 1995 he said that Dr Habibie
'was impressed with that technology.' [55]
5.57 Professor Watts of Advanced Energy Systems said that:
The relevance here is Australia's partnership with Indonesia,
its sharing of technology, its political goodwill long term and meeting
the needs of Indonesia through the Australian provision [of aid] and
the development of an Australian company in partnership with the Indonesians.
[56]
5.58 The Committee believes that the withdrawal of funding from projects
that were regarded by Indonesian authorities as firm undertakings has
had a serious effect on Australia-Indonesia relations. When a project
has been placed on an Agreed List by government authorities of the two
countries, when an Australian Government agency formally requests a
recipient government to expend funds on the development of a project,
when ministers of the two countries have made a joint announcement regarding
a project and when prior experience of the DIFF process has led to an
understanding of what these steps mean, the sudden cancellation of the
scheme and of all projects pending, must deal a severe blow to Australia's
standing in that country.
5.59 It seems particularly unfortunate that an increasingly positive
view of Australian technology, resulting from government programs such
as COSTAI, and the Australian Government's invitation to the relevant
Indonesian minister to visit Australia, should now be undermined by
the Government's decision to terminate DIFF.
What remaining scar must we expect as Australians as we attempt
next time to take a product from a company, whether it be small or large,
into the system in Indonesia? To pretend that they do not care is stupid
... You would be very naive if you thought that even this small project
that we are talking about will not leave a lasting scar in Jakarta.
[57]
Philippines
5.60 Mr Dauth of the Department of Foreign Affairs and Trade said that
although concerns about DIFF had been raised by the Philippines Government,
they had been:
raised in an entirely understanding and appropriate manner ...
but it is, I think, quite impossible to argue that the broader bilateral
relationship has been substantially damaged. [58]
5.61 However, the Ambassador of the Philippines said that not only was
the credibility of Australian products and services, and the improvement
of trade and investment opportunities, an important benefit flowing from
DIFF, but that, 'More than just projects, DIFF involves perceptions of
Australia's commitment to the region.' [59]
This echoes the concern raised by companies working throughout the region,
that the termination of DIFF only serves to confirm perceptions that 'Australia
does not understand what it takes to be a true member of the Asian community.'
[60]
5.62 The Age newspaper reported on 14 September 1996 that the Philippines
President, Mr Fidel Ramos, had told an Age correspondent in an interview
that his country had been 'let down' by the termination of DIFF and the
cancellation of Transfield's search and rescue vessel project. The newspaper
reported 'deep resentment' in Philippines Government departments at the
abrupt manner of the termination of DIFF, and said that officials had
been 'stunned' by the loss of the project. [61]
5.63 Although the President later released a statement affirming the
'warmest and most cordial relations' between the Philippines and Australia
the specific issue of the termination of DIFF is clearly a significant
issue within the Philippines Government. This is evident from the high-level
representations made by the Philippines Government, listed in Chapter
3, about the termination of DIFF and its effect on particular projects
not having a Letter of Formal Offer.
5.64 Mr Johnson of Transfield said that the Australian Government was
'certainly seen by the [Philippines] government as being formally committed,
so this was an absolute stepping back,' and that 'they thought the relationship
was stronger ... that was not how friends dealt with each other'. [62]
He went on to say that:
There were three parties to those discussions - the Philippines
Government, the commercial contractor and Australia. They had worked
very closely together but the Australian Government had not managed
to do what they believed it was committed to in writing. After all,
they have a letter signed by an Australian minister the best part of
a year old. They had every reason to believe it was a committed position.
They would have every right to publicly state that they were concerned
that they had been let down. [63]
5.65 His company's submission to the inquiry included a copy of a letter
dated 7 December 1995, from the then Australian Minister for Development
Co-operation, which stated that following a meeting between AusAID and
NEDA, the company's search and rescue vessel project:
has now been placed on the agreed list of projects to be funded
in the 1996-97 financial year. This will, of course, be subject to the
normal AusAID and EFIC requirements being met. [64]
5.66 It is the Committee's view that such a letter commits the Australian
Government to supporting the project if the requirements referred to
are met, and that despite reassurances to the contrary from the Department
of Foreign Affairs and Trade, the cancellation of projects which had
reached this stage ignores undertakings given and presents the Australian
Government and Australian business in a very poor light in the region.
General Comments
5.67 In DFAT's assessment, the arbitrary termination of DIFF has not
caused substantial damage to the overall bilateral relationships with
DIFF recipient countries. That may be the case. But it would be naive
to suggest that no damage had been done to those relationships by the
Government's decision. The difficulty is establishing the degree of
that damage. The Committee notes that often, in Asia, the true nature
of the response to such a decision may be masked or softened through
the subtleties and niceties of diplomacy. Whatever the degree of damage
done to overall bilateral relationships, the Committee believes that
serious damage has been done to Australia's commercial relations within
the region and that it will take a long time to recover fully from the
effects of the decision to terminate DIFF in the way it was done.
5.68 The fact that the Government was forced into a partial policy
reversal by the strength of the representations of those countries indicates
that the initial decision was received in those countries with more
than just 'disappointment' and 'concern'. Apart from the loss of aid
funds, at least one head of state and a number of influential ministers
had committed themselves to particular projects, with the encouragement
of Australian authorities. They therefore had every reason to believe
that those projects would be funded under DIFF, subject only to the
normal AusAID and OECD criteria being met. By identifying themselves
with particular projects, their prestige, and that of their officials,
was at stake when expected Australian Government funding was suddenly
no longer available. Many of those officials had also invested considerable
time, effort and funds into the projects.
5.69 It was the suddenness and the arbitrariness of the decision to
terminate DIFF which accentuated the impact on regional countries. Any
cut in the aid program would have resulted in expressions of concern.
However, if the Government had phased in the abolition of the scheme,
so that projects, which had been in the pipeline for up to two years
or more and which had strong support in the recipient countries, could
have been allowed to go through the final DIFF processes, there would
not have been the same intensity in the reaction of those countries
to the decision.
5.70 As it is, there must now be some question mark within the region
over Australia's commitment to Asia, as the Australian Government did
not consult DIFF recipient countries before making the formal decision
to terminate the scheme, ignored the pleas of some countries not to
scrap particular projects, relied on Australian legal advice but did
not consider Asian views of trust and commitment, and took no account
of investments made in potential projects by recipient countries based
on their understandings of Australian Government commitments to those
projects.
5.71 The situation has not been ameliorated by Mr Downer's inept handling
of the whole matter, from his handling of early representations, his
ill-considered decision to terminate the scheme, the unfolding of events
in the Parliament and his partial policy reversal in July 1996. Furthermore,
the Minister's refusal to provide the Committee with relevant information
and documents makes it difficult for the Committee to reach firm conclusions
on the extent to which bilateral relations have been damaged by the
termination of DIFF.Witness after witness from companies involved in
the DIFF scheme said that doing business in Asia requires the building
of relationships over a period of time, during which trust and commitment
can be developed and credibility established. It is only when relationships
are firmly established that contracts are finalised. By breaking those
commitments and trust the Government has set back commercial relations
with Asian countries and, inevitably, but to a lesser degree, overall
bilateral relationships.
[Contents]
5.73 DIFF projects were, by the very nature of the program and the
various steps in the selection process, significant social infrastructure
and environmental programs, and played a critical role in the economic
and social development of the countries concerned. Since the introduction
of the Helsinki rules in 1992 proposals were subject to a rigorous three
stage examination of their suitability: they had to be accorded priority
in the recipient government's development program, they were subject
to the feasibility and appraisal processes under AusAID's procedures,
and they had to pass OECD scrutiny.
5.74 Any of the 50 projects holding Letters of Advice could be cited
to demonstrate the value to the recipient country of the project and
of the DIFF program as the means of providing it. A number of the projects
affected by the termination of DIFF were in the energy sector. Mr Dinsdale
of Austenergy spoke of the importance of those projects:
As you expand a country at the rural level, the first thing you
want is an electric light. You want to educate the population; you want
to give them some pumps to pump water; you want to do something with
sewerage - the basic commodities that eventuate in a rural community.
We are talking per capita incomes which are unbelievably low by Australian
standards. [65]
and:
In South East Asia and all the countries around that area you
see incredible poverty. The countries I have been associated with do
not have sufficient funds to be able to fund that rural improvement.
It runs into billions of dollars ... You cannot do everything, yet you
cannot say that one should do nothing. That is why in all countries
energy has been selected as one sector that requires aid funding ...
It is a major infrastructure cost that is associated with the country.
[66]
5.75 Two of the companies which made submissions to the inquiry were
involved in education projects in Indonesia. Australian Technical Supply
had been developing a vocational educational program in 178 vocational
schools across twelve Indonesian provinces, developing functional, practical
workshops and training teaching and support staff. Relpar was working
on Phase 2 of a special education project for disabled children. Education
projects are particularly significant, having a powerful broadcast effect
as students take their increased knowledge and skills into their communities.
5.76 Smartgas was working with municipal authorities in Guangzhou in
China to reduce vehicle pollution in a city of 6.4 million, with extremely
high levels of carbon monoxide and other pollutants. City employees,
such as bus drivers and traffic policemen, have a high morbidity rate
from lead poisoning and other pollution associated illnesses.
5.77 The LADS Corporation was developing a marine mapping program to
enable better management of Indonesia's marine estate by authorities
and by the 40 per cent of the population who live in coastal areas and
rely heavily on marine and coastal resources.
5.78 The loss of any of these programs would have a significant impact
on the particular communities affected and on the economic and social
development of the recipient countries generally. Evidence to the Committee
suggested that in most cases the recipient countries would turn to other
donors able to undertake the projects. Many witnesses spoke of competing
companies from other donor countries ready to do so.
5.79 However, although most projects would eventually go ahead with
support from other donor countries, the delays involved and the possible
expenditure of funds in order to make necessary adjustments to different
technical requirements, would cause considerable inconvenience to the
governments and communities concerned.
5.80 In some sectors the Australian product is particularly well suited,
and the loss of the project concerned would mean a reduced outcome for
the targeted community:
Australian industry developed considerable expertise because
of the nature of the geography of Australia. Telstra has had a lot of
expertise in providing solutions into rural areas and has made use of
Australian suppliers. It is the same for the electricity industry and
the distribution lines that run right across Australia. There has been
the ability to translate that expertise in Australia and take it to
some of these regions which have very similar geographical features.
[67]
[Contents]
5.81 A significant impact on recipient countries of the termination of
DIFF has been the cancellation of Green DIFF projects. The Green DIFF
program started slowly but expanded rapidly, both in terms of the number
of activities supported and the value of the support provided. In 1995-96
$31.8 million, or 25.5 per cent, of DIFF funds was disbursed for six projects
in China, one in the Philippines and one in Indonesia. The projects included
city water supplies, waste water treatment, battery recycling and occupational
health and safety laboratories. [68]
5.82 At the time of the decision to terminate DIFF, 23 Green DIFF projects,
with a DIFF value of $183 million, held Letters of Advice. The projects
were to be implemented in China, Indonesia, the Philippines and Vietnam
and included water supply, waste treatment, natural gas treatment, clean
air emissions, solar power and environmental laboratories. [69]
5.83 The principal criterion for a Green DIFF project was that it make
a major contribution to improving environmental conditions. Thus, almost
by definition, the cancellation of the 23 Green DIFF projects holding
Letters of Advice will have a serious effect on attempts in the recipient
countries to improve environmental conditions.
5.84 In his submission to the inquiry Mr Kevin Gray referred to two
coal gasification projects in China in 1994-95, where steaming coal
was converted to town gas, replacing domestic coal burning, the main
cause of regional air pollution and of widespread health problems. He
said that the projects had resulted in substantial reductions in toxic
emissions and went on to say:
To lose such beneficial projects ... at a time when environmental
degradation is getting worse, is in nobody's interests ... Environmental
degradation of neighbours will impact on our own environmental concerns.
Global warming knows no boundaries. [70]
5.85 Mr Ian Berckelman, Executive Director of LABAX International Pty
Ltd, 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. [71]
5.86 Dr Woodthorpe of TIEG spoke of the value of environmental projects
and said that:
We castigate [developing countries] where we think appropriate,
if they do not fulfil the right requirements. Yet here we are denying
them the opportunity to monitor their environment and to find out the
best ways they can to improve it. [72]
5.87 Aid groups which made submissions and appeared before the Committee
emphasised the value of Green DIFF programs. The Australian Council for
Overseas Aid cited its 1992 argument for a Green Technology Transfer Fund,
suggesting CFC replacement technology, solar and wind energy, waste management
and recycling as examples of the kinds of projects that need to be funded
to protect the environment of developing countries. [73]
5.88 Professor Anthony Owen, a former OECD consultant in the area of
mixed credits, told the Committee that 'the majority of projects that
are notified to the OECD as coming under the Helsinki agreement have significant,
if not major, environmental benefits'. [74]
Given the Minister's own listing of the environment as a desirable priority
for any future mixed credit scheme, [75]
the abandoning of a program which had significant environmental impact
is difficult to understand.
5.89 In its submission to the inquiry Blackwattle Environmental argued
that:
If DIFF is to be refined then environmental projects should be
of major consideration. Asian countries in our region require basic
infrastructure projects to improve their environment, reduce pollution,
enhance drinking water quality and improve the health and social well-being
of people. Something Australians take for granted. [76]
| The Committee recommends that the percentage
of projects under the Green DIFF component in any new mixed
credits scheme be raised to 40 per cent. |
5.90 The Committee believes that the decision to terminate DIFF will
have a detrimental effect on the social, economic and environmental
conditions in recipient countries. While in some cases the loss to the
country concerned may be short term, as companies from other donor countries
take up projects lost by Australian companies, there will be cases where
the projects will not be taken up or where the quality of the project
will not be as high as it would have been from the Australian provider.
In some cases the recipient country will incur additional expense through
the delay in finding an alternative provider or through the need to
readjust specifications and preparations already undertaken.
Footnotes
[1] Mr Ron Tripp, Managing Director, Relpar
Pty Ltd, Committee Hansard, p. 233.
[2] Committee Hansard, p. 4.
[3] Committee Hansard, p. 4.
[4] Committee Hansard, p. 5.
[5] Committee Hansard, p. 25.
[6] Committee Hansard, pp 69-70.
[7] Committee Hansard, p. 88.
[8] Committee Hansard, p. 113.
[9] Committee Hansard, p. 111.
[10] Mr Julian Dinsdale, Chairman, Austenergy,
Committee Hansard, pp 221-23.
[11] Committee Hansard, p. 266.
[12] Committee Hansard, p. 382.
[13] Committee Hansard, p. 328.
[14] Committee Hansard, p. 59.
[15] Committee Hansard, p. 265.
[16] Mr Ron Tripp, Managing Director, Relpar
Pty Ltd, Committee Hansard, p. 237.
[17] Committee Hansard, p. 271.
[18] Committee Hansard, p. 436.
[19] Committee Hansard, p. 399.
[20] See also The Chinese Economy at a
Glance (February 1996): 'Establish personal contacts and form a
basis of trust when negotiating a business deal.'
[21] Committee Hansard, p. 402.
[22] Committee Hansard, p. 403.
[23] Committee Hansard, p. 410.
[24] Committee Hansard, p. 311.
[25] Blackwattle Environmental, submission,
p. 2.
[26] Letter from Mr Wang Hao, Section Chief,
Foreign Government Loan and Assistance Division, Jilin Province Foreign
Economic Cooperation Bureau, to Mr Peter Dawson, tabled in evidence
to the Committee, 8 August 1996.
[27] Mr Rodney Johansen, Commercial Manager,
Transfield Defence Systems, Committee Hansard, p. 409.
[28] Mr Julian Dinsdale, Chairman, Austenergy,
Committee Hansard, p. 229.
[29] Mr Tom Spurling, General Manager, LADS
Corporation, Committee Hansard, p. 384.
[30] Committee Hansard, p. 27.
[31] Ms Penny Wensley, Acting Deputy Secretary,
Department of Foreign Affairs and Trade, Committee Hansard, p. 356.
[32] Committee Hansard, p. 94.
[33] Committee Hansard, p. 433.
[34] Committee Hansard, p. 440.
[35] Committee Hansard, pp 8, 157-58.
[36] Letter dated 17 July 1996, from Mr Zhu
Zhen Yuan, Minister Counsellor (Economic and Commercial), Chinese Embassy,
to the Editor of The Australian. Excerpts appeared in the issue
of 18 July 1996, pp 1, 4.
[37] Committee Hansard, p. 426.
[38] Letter dated August 1996, from Mr Wang
Hao, Section Chief, Foreign Government Loan and Assistance Division,
Jilin Province Foreign Economic Cooperation Bureau, to Mr Peter Dawson,
tabled in evidence to the Committee, 8 August 1996.
[39] Committee Hansard, pp 423-24.
[40] Committee Hansard, p. 434-35.
[41] Committee Hansard, p. 435.
[42] Senate Foreign Affairs, Defence and
Trade References Committee, Australia China Relations, p. 104.
[43] Committee Hansard, p. 9.
[44] Committee Hansard, pp 247-48.
[45] Committee Hansard, pp 251-52.
[46] Committee Hansard, p. 270.
[47] Committee Hansard, p. 280.
[48] Committee Hansard, pp 286-87.
[49] Committee Hansard, p. 382.
[50] Committee Hansard, p. 290.
[51] Committee Hansard, p. 313.
[52] 'The condition of particular relevance
to BAPEDAL [Indonesian Environmental Impact Management Agency]is that
we will need to be assured that ... Indonesian funds are being applied
for this purpose.' Letter from AusAID to BAPEDAL, 6 October 1995, LABAX
International, supplementary material, 12 August 1996.
[53] Mr Tom Spurling, Committee Hansard,
p. 380.
[54] Committee Hansard, p. 382.
[55] Committee Hansard, p. 382. See also
the case of Solarex and Dr Habibie's visit to Australia, discussed in
Chapter 4, above.
[56] Committee Hansard, p. 256.
[57] Professor Don Watts, Chairman, Advanced
Energy Systems, Committee Hansard, pp 258-59.
[58] Committee Hansard, p. 10.
[59] Philippine-Australia Relations: Fifty
Years of Partnership and Co-operation, address by Her Excellency
Delia Domingo Albert to the Research Institute for Asia and the Pacific,
25 July 1996, p. 11.
[60] Mr Tom Spurling, General Manager, LADS
Corporation, Committee Hansard, p. 382.
[61] 'Philippines deals at risk after aid
axing: Ramos', The Age, 14 September 1996, p. 1.
[62] Committee Hansard, pp 400, 402.
[63] Committee Hansard, p. 411.
[64] Letter from the Minister for Development
Co-operation and Pacific Island Affairs, Mr Gordon Bilney, MP, to Mr
Chris Evans, General Manager, Transfield Shipbuilding, 7 December 1995.
Transfield Defence Systems, submission, attachment.
[65] Committee Hansard, p. 219.
[66] Committee Hansard, pp 223-24.
[67] Mr Alexander Gosman, Executive Director,
Australian Electrical and Electronic Manufacturers Association, Committee
Hansard, p. 109.
[68] AusAID/DFAT, submission, p. 11.
[69] AusAID/DFAT, submission, p. 11.
[70] Mr Kevin Gray, submission, p. 4.
[71] Committee Hansard, p. 305.
[72] Committee Hansard, p. 267.
[73] Australian Council For Overseas Aid,
Aid For A Change, pp 90-93.
[74] Committee Hansard, p. 39.
[75] AusAID/DFAT, submission, p. 25.
[76] Blackwattle Environmental, submission,
p. 3.