Chapter 3
Consideration of Pipeline Project Proposals
3.1 The Government Members have given careful and anxious consideration
to the recommendation by the non-Government Members that:
all companies holding Letters of Advice at the time of the termination
of the Development Import Finance Facility be processed in the normal
way and that additional funds be made available to AusAID in 1996-97
and subsequent years to finance successful applications. [1]
3.2 Implicit in the recommendation is the assumption that a significant
proportion of those companies holding Letters of Advice would, in the
usual course of events, have been entitled to be funded. As this Minority
Report demonstrates, this premise is unfounded.
3.3 The Government Members accept that the decision to terminate the
scheme as of 1 July 1996 will impact upon those companies that have proceeded
to develop project proposals in the expectation that DIFF funding may
be available. As at 2 March 1996 there were 50 project proposals in receipt
of a valid Letter of Advice (the “pipeline project proposals”).
With the deemed inclusion of a project proposal by RELPAR on 22 August
1996, the Committee considered the impact of the termination on a total
of 51 project proposals in the pipeline. [2]
3.4 That the DIFF scheme should amount to a virtual guarantee of funding
for applicants in receipt of a Letter of Advice, as inferred by the
Majority Report, is refuted by the Government Members on four grounds.
3.5 Firstly, in accordance with advice received by AusAID from the
Attorney-General's Department, dated 26 March 1996, there is no legal
obligation on the part of the Commonwealth arising from the circumstances
in which parties, in receipt of a Letter of Advice, were involved in
the selection process for DIFF funding.
3.6 Secondly, the subsequent progression of a project proposal in receipt
of a Letter of Advice through the DIFF selection process was neither
a formality nor "simply a matter of successfully passing through
various bureaucratic stages", as described by the non-Government
Members, but clearly dependent on: i) the availability of funding in
accordance with the Government's total annual budget appropriation for
DIFF grants; and ii) the proportion of funding provided to any one country
being less than 40 per cent of total DIFF funds provided in any financial
year.
3.7 Thirdly, the intense competition for DIFF funding and the drop-out
rate of project proposals in the pipeline has been significantly understated
by the non-Government Members to perpetuate the claim that applicants
in receipt of a Letter of Advice had a "high likelihood of proceeding"
to ultimate fruition. [3]
3.8 And fourthly, the non-Government Members have misconstrued, intentionally
or otherwise, statistical evidence supplied to the Committee by AusAID,
to further their argument that individual companies in receipt of a Letter
of Advice had a reasonable expectation of winning DIFF funding. Based
on the statistical evidence supplied to the Committee, the argument that
individual applicants in receipt of a Letter of Advice had a “considerable
expectation of success” is clearly ill-founded. [4]
[As an explanatory note, it must be recognised that multiple Letters
of Advice were distributed to competing companies where only one would
be successful. This explains the difference between the drop-out rates
of individual companies in receipt of a Letter of Advice
proceeding to Final Contract and the project proposals
issued with a Letter of Advice proceeding to ultimate fruition.].
3.9 The DIFF project management cycle, with the notable omission of a
preliminary negotiation stage with recipient country governments, is outlined
in Appendix 5 of the AusAID and DFAT Joint Submission. [5]
3.10 As documented in the Majority Report, each project proposal is
required to progress through four distinct stages in the DIFF selection
process, including:
- submitting an application;
- qualifying for a Letter of Advice;
- receiving a Letter of Formal Offer; and
- executing a Final Contract. [6]
3.11 A sample copy of a Letter of Advice provided as an attachment
to the AusAID and DFAT Joint Submission clearly articulates the intent
of the communication.
The purpose of this letter is to advise that, following initial
examination, your company's proposed project could meet the relevant
DIFF eligibility criteria. However, this letter is not an offer of DIFF
grant funds. [7]
3.12 A further source, AusAID's Explanatory Brochure, confirms this
intent to prospective applicants.
If, and only, if, your proposed project meets the DIFF criteria
and is of sufficient priority, AusAID will seek the Minister's approval
to issue a Letter of Advice. The Letter of Advice does not constitute
an offer of DIFF funds. It details the steps required for the project
to be eligible for a formal offer. [8]
3.13 In the case of individual applicants expending funds prior to
the execution of a Final Contract, the AusAID Explanatory Brochure contains
an express warning in the following terms:
any costs incurred by the applicant in seeking funds, including
the costs of preparing feasibility studies, are not refundable.
When applying for DIFF funding, firms should be aware of the
considerable costs that may be involved in this type of financing arrangement
compared with other commercial arrangements, etc. bank charges, legal
fees, EFIC fees, feasibility study costs, costs increases due to time
delays, etc. [9]
3.14 Legal advice obtained by AusAID from the Department of Attorney
General, dated 26 March 1996, concluded that there were no binding legal
obligations on the part of the Commonwealth relating to project proposals
in the pipeline at the time of the decision to terminate the DIFF scheme.
[10] The advice was to the effect that:
...the letters of advice were not legally binding on the Commonwealth
and that, secondly, it was debatable whether the formal offers were
binding or not. [11]
AusAID received advice from the Attorney General's Department
that the Letters of Advice are not binding on the Commonwealth. The
Letters of Advice made clear that no offer of DIFF funds had been made.
[12]
3.15 A decision was taken on 8 May 1996 to proceed with DIFF funding
for all project proposals in receipt of a Letter of Formal Offer, irrespective
of the expressed reservations as to any legal liability to do so. The
Government's decision is summarised below by the Minister for Trade
and Deputy Prime Minister, Tim Fischer.
I would add that because of budget constraints the Government
is not in a position to fund the vast majority of projects with DIFF
Letters of Advice. These letters made clear that while the projects
were worthy of consideration for DIFF funding, the Government is under
no legal obligation to proceed with them. All Letters of Formal Offer,
however, will be met. [13]
3.16 The subsequent progression of a project proposal in receipt of
a Letter of Advice through the DIFF selection process was neither a
formality nor “simply a matter of successfully passing through
various bureaucratic stages”, as described by the non-Government
Members, but clearly dependent on the fulfilment of specific criteria.
3.17 Projects in receipt of a Letter of Advice must undertake a feasibility
study within three months unless otherwise negotiated in writing. Failure
to do so will result in the Letter of Advice becoming invalid. A feasibility
study validates a Letter of Advice for twelve months from receipt. [14]
This requirement may well explain the anomaly between 114 Letters of Advice
distributed in 1995-96 and the 86 Letters of Advice outstanding as at
2 March 1996. [15]
3.18 In addition to the specific conditions set out in the sample copies
of Letters of Advice and Formal Offer, the commitment of grant funds
to project proposals is conditional upon the availability of funding
in accordance with the Government's total annual budget appropriation
for DIFF grants.
3.19 Furthermore, the commitment of DIFF funding is subject to the
proportion of funds provided to any one country being less than 40 per
cent of total DIFF funds provided in any financial year.
3.20 In accordance with the scheme's operating guidelines, all of the
pipeline project proposals in receipt of a Letter of Advice as at 2
March 1996 could not have proceeded in the 1996-97 financial year in
any event because the total DIFF funds allocated to Indonesia alone
in that round exceeded the 40% maximum permissible.
3.21 Anecdotal evidence presented to the Committee indicated that project
proposals at various stages in the pipeline experienced significant
lead times before proceeding to or withdrawing from the next stage in
the selection process. The inference promoted by the non-Government
Members that the 50 projects in receipt of a Letter of Advice as at
2 March 1996 were poised to immediately advance further in the selection
process is unfounded and gives insufficient weight to the intense competition
for the available DIFF allocation in any one financial year.
3.22 In 1994-95 DIFF funds were oversubscribed by a factor of thirteen,
with projects worth over $1.7 billion seeking DIFF grants worth $123 million.
The 1995-96 figure was over $2 billion. In conjunction with the reduction
in DIFF expenditure from $130 million in 1994-95 to $120 million in 1995-96,
the claim by the non-Government Members that individual applicants in
receipt of Letter of Advice had a “high likelihood of proceeding”
was overstated. [16]
3.23 This point is illustrated by an exchange in oral evidence between
Mr Michael Roberts, Acting Director, Export Credit Policy Group of the
Department of Industry, Science and Tourism and Senator Peter Cook.
ROBERTS: ...I think the reality is that each year we have had
about $1 1/2 billion worth of applicants chasing $120 million worth
of grants. So I think the inevitable conclusion is that there would
be a lot of disappointed companies along the line.
COOK: But if you got to the letter of advice stage through
to the first hurdle, a lot of those applicants have been filtered
out by this point, have they not?
ROBERTS: That is true. But the letter of advice is no formal
indication of the availability of funds. [17]
3.24 The statistics supplied in the AusAID and DFAT Joint Submission
indicate a disproportionate increase in both the number of project applications
submitted and the number of Letters of Advice issued to individual applicants
in the years 1991-95 compared to the total number of formal offers made.
[18]
3.25 Data on projects in receipt of DIFF funding submitted to the Committee
indicates significant drop-out rates at various stages in the DIFF selection
process within the financial years 1991 to 1995 inclusive. [19]
3.26 Large numbers of project applications fall by the wayside each
year. In the financial years following the introduction of the Helsinki
Guidelines, not more than 10% of total DIFF applications have been subsequently
signed. [On the figures supplied in the AusAID and DFAT Joint Submission
to the Inquiry, a total of 58 contracts for DIFF funding were signed
from a total of 824 applications submitted between 1991 and 1995].
Stages 1-2: Project applications progressing from the initial
application stage to receiving a Letter of Advice
3.27 For each financial year between 1991 and 1995, the proportion
of project applications receiving a Letter of Advice within the financial
year in question was 40.96%, 33.83%, 31.29%, 46.97% and 46.15% respectively.
The average number of project applications receiving a Letter of Advice
as a percentage of the total number of applications received for each
financial year between 1991 and 1995 was 39.84% - representing an average
annual drop-out rate in the first stage of the DIFF selection process
of 60.16%.
Drop-out Rates of Project Applications in the First Stage of the DIFF
Selection Process. (%)
| YEAR |
Percentage of Project Applications Receiving
a Letter of Advice in the Year the Application was Submitted. (%) |
| |
Success Rate |
Drop-out Rate |
| 1991 |
40.96 |
59.04 |
| 1992 |
33.83 |
66.17 |
| 1993 |
31.29 |
68.71 |
| 1994 |
46.97 |
53.03 |
| 1995 |
46.15 |
53.85 |
Stages 2-3: Project Applications in receipt of a Letter of Advice
subsequently receiving a Letter of Formal Offer
3.28 For each financial year between 1991 and 1994, the proportion
of project applications in receipt of a Letter of Advice subsequently
proceeding to the formal offer stage during the financial year was 52.94%,
31.11%, 19.61% and 24.73% respectively. The average number of project
applications in receipt of a Letter of Advice proceeding to the formal
offer stage within each financial year between 1991 and 1994 was 32.10%
- representing an average annual drop-out rate of 67.90%.
Drop-out Rate of Project Applications in Receipt of a Letter of Advice
Offer Proceeding to Formal Offer within the Financial Years 1991-94.
(%).
| YEAR |
Percentage of Project Applications in
Receipt of a Letter of Advice Receiving a Formal Offer within the
Financial Year. (%) |
| |
Success Rate |
Drop-out Rate |
| 1991 |
52.94 |
47.06 |
| 1992 |
31.11 |
68.89 |
| 1993 |
19.61 |
80.39 |
| 1994 |
24.73 |
75.27 |
| 1995 |
(6.14) |
(93.86) |
A total of 114 Letters of Advice were issued in 1995, with 7 projects
receiving a Letter of Formal Offer.
Stages 3-4: Project Applications in receipt of a Letter of Formal
Offer executing a Final Contract
3.29 A Letter of Formal Offer did not guarantee the execution of a
Final Contract between the individual company and the Commonwealth.
For each financial year between 1991 and 1994, the proportion of project
applications in receipt of a Letter of Formal Offer proceeding to Final
Contract within the financial year in question was 83.33%, 100%, 70%
and 65.22% respectively - representing an average annual drop-out rat
of 20.36%.
Drop-out Rate of Project Applications in Receipt of a Formal Offer
Executing a Final Contract within the Financial Years 1991-94. (%).
| YEAR |
Percentage of Projects in Receipt of a
Formal Offer Proceeding to Final Contract within the Financial Year.
(%) |
| |
Success Rate |
Drop-out Rate |
| 1991 |
83.33 |
16.67 |
| 1992 |
100 |
0 |
| 1993 |
70 |
30 |
| 1994 |
65.22 |
34.78 |
| 1995 |
- |
- |
3.30 As the 1995 figures are incomplete (as no formal offers were made
from the 1995 round following on the decision to terminate DIFF), the
average drop-out rate of project proposals between 1991 and 1994 (from
the submission of 577 project applications to the execution of 51 Final
Contracts) is calculated to be 91.16%. Hence, less than 10% of project
applications were successful in negotiating the selection process and
ultimately becoming eligible for DIFF funding within the financial years
between 1991 and 1994.
3.31 Given the incidence of project applications falling by the way side,
it would seem that the 70% and 50% success rates of project applications
with a Letter of Advice proceeding to a formal offer, suggested by AusAID
and AUSTENERGY respectively, are overstated or, alternatively were based
on a success rate calculated over an extended time period of up to five
years, with many project proposals being rolled-over and/or submitting
repeat applications. [20] In a supplementary
letter to the Secretariat on 13 September 1996, Mr Anderson, Assistant
Director General, AusAID clarified his oral evidence to the Committee
by stating:
Applications and Letters of Advice were rolled over into subsequent
years in those cases where there was a reasonably good chance of eventual
success. [21]
3.32 In this regard, the eventual success rate of 70% of projects in
receipt of a Letter of Advice successfully negotiating the DIFF selection
process can be considered accurate. However, due to the high incidence
of multiple bidders, rolled-over and repeat applications, the number
of individual companies successfully negotiating the DIFF selection
process is much lower.
3.33 The claim by the non-Government Members that individual applicants
in receipt of a Letter of Advice had a "high likelihood of proceeding"
gives rise to the question - just how realistic or reasonably based
is the claimed expectation that individual companies in receipt of Letter
of Advice would have each progressed to a Letter of Formal Offer, signed
Contract and eligibility for DIFF funding?
3.34 Based on statistics contained in Mr Anderson's (AusAID) supplementary
letter to the Committee's Secretariat, the proportion of individual
companies successfully negotiating the DIFF selection process between
1992 and 1994 inclusive was, on average, 25.40%.
Proportion of Companies Awarded DIFF Funding Between 1992 and 1995
| YEAR |
Companies with Letters of Advice |
Formal Offers Issued |
Companies Receiving DIFF grants (%) |
| 1992 |
45 |
15 |
33.33 |
| 1993 |
51 |
10 |
19.61 |
| 1994 |
93 |
23 |
24.73 |
| 1995 |
189 |
48 |
25.40 |
| TOTAL |
378 |
96 |
25.40 |
3.35 Hence, approximately three quarters of the individual companies
in receipt of a Letter of Advice would not have succeeded in obtaining
funding had DIFF not been terminated and statistically the number of
successful projects would have been small. The high failure rate of
about 75% results from two factors. Firstly, the natural attrition in
the number of projects which flow through to completion and secondly,
the often overlooked fact that for individual projects, multiple Letters
of Advice are often issued to competing companies - only one of which
can in any event be successful.
3.36 Given that 25.40% of companies in receipt of a Letter of Advice
between 1992 and 1995 proceeded to Final Contract, any reasonably based
expectation of winning DIFF funding must have been tempered by the fact
that there was a high drop-out rate of applicants failing to win approval
for DIFF funding.
3.37 It follows that numerically at least, individual companies engaged
in the development of DIFF project applications did so assuming some considerable
commercial risk that the DIFF component may not be forthcoming. The intention
of the non-Government Members claim that the DIFF scheme involved risks
"beyond the usual risk associated with commercial ventures"
in winning new business is unclear. [22]
3.38 On 17 July 1996, the Minister for Foreign Affairs announced that
while the DIFF scheme was abolished, it may be possible to look at ways
of still supporting some individual high priority projects using mixed
credits. The Minister agreed to consider funding certain high priority
DIFF projects for 1996-97, using an additional $32 million allocated to
bilateral Country Programs announced in the 1996-97 Budget. A total of
$64 million over two years has been earmarked for funding pipeline project
applications in receipt of a Letter of Advice, provided the projects have
a clear humanitarian focus, are accorded high priority by the recipient
government and meet normal project appraisal and approval demands. [23]
3.39 That the provision of additional funding in the 1996-97 Budget
will go some considerable way toward accommodating those high priority
project applications that had significantly advanced through the selection
process at the time of the scheme's termination is statistically supported
by the following evidence:
- the average number of project applications in receipt of a Letter
of Advice proceeding to the formal offer stage within each financial
year between 1991 and 1994 was 32.10% - representing an average annual
drop-out rate of 67.90%; and
- that an average of 25.40% of individual companies in receipt of
a Letter of Advice between 1992 and 1995 proceeded to Final Contract.
3.40 Apart from those projects classified as high priority projects
to receive funding via the bilateral Country Programs, what remaining
pipeline project proposals may have survived the selection process is
a matter of conjecture.
3.41 No systematic evidence was received to enable any detailed analysis
of where in the pipeline or at what stage of advancement individual
projects had reached. In light of this evidence and the developments
following the announcement of the termination of the scheme including
the decision to fund high priority projects significantly advanced in
the pipeline, it is unreasonable to now invite the various applicants
to continue to develop the relevant project proposals "in the normal
way" as suggested by the Majority Report against the possibility
that had DIFF not been terminated, some additional eligible pipeline
project proposals might be identified.
3.42 The Committee received no comprehensive information that would
enable findings to be made as to which project applications in receipt
of a Letter of Advice had been the subject of a feasibility study and
the stage each applicant had reached in relation to any other in the
pipeline and whether the project would remain viable for successive
rounds if the project proposal was not successful in the 1996-97 round.
3.43 Much forensic time was devoted at the hearings to the evidence
of company representatives describing the impact of withdrawal of the
possibility of obtaining DIFF funding for pipeline project proposals
or those projects being developed in anticipation of receiving a Letter
of Advice. In oral evidence, Mr Robert Trenberth, Deputy Secretary of
the Department of Industry, Science and Tourism, stated:
I think it is a very regrettable and very difficult thing for
individual companies.
However, I think it is also important to bear in mind that there
has never been any certainty about funding; at least my understanding
is that there has never been any certainty of funding in the DIFF scheme.
The projects are evolved by whatever manner, by whatever means. They
go through the system and, until the ink is dry on the agreement, there
is no certainty about the outcomes. So, while it is regrettable that
companies have missed out and this work will go elsewhere--it will not
come to Australia--it is not something that is totally foreign to this
process, it seems to me. [24]
3.44 Whether any other legal obligations could be said to arise from
a course of conduct based on a set of assumptions believed to be correct,
or on representations upon which parties reasonably relied, is problematic.
It is beyond the scope of the Terms of Reference to examine whether in
individual cases conduct and reliance upon a reasonably based expectation
may be actionable. Without being unduly legalistic, it would appear that
as a class, the pipeline project proposals proceeded on the basis that
if the project was accepted as eligible and otherwise expressly complied
with the guidelines there was at best an opportunity that DIFF funding
in any one financial year may be available. [25]
| Finding: That the additional funding of $64
million over the next two years for high priority humanitarian-focused
projects will largely accommodate those project proposals that
had significantly advanced through the selection process at
the time of the scheme's termination. |
| Finding: That the claim by the non-Government
Members that individual companies in receipt of a Letter of
Advice had a "high likelihood of proceeding" to Final
Contract is not supported by the statistical evidence which
contends that between 1992 and 1995 only around 25% of companies
with Letters of Advice successfully negotiated the selection
process and ultimately received DIFF funding. |
| Finding: That projects in receipt of a Letter
of Advice proceeded through the selection process on the basis
that if supplementary criteria were satisfied, there was, at
best, an opportunity (as opposed to the
non-Government Members' claim of a 'reasonably based expectation')
that DIFF funding in any one financial year may be available.
|
| Finding: That in the context of the urgent need
to address Australia's budget deficit, together with the difficulties
in conducting retrospective evaluation of pipeline project proposals
and the probability that approximately one quarter of individual
companies in receipt of a Letter of Advice would succeed in
any event, the Government Members cannot support the recommendation
that all companies holding Letters of Advice at the time of
the termination of the DIFF be processed "in the normal
way", as recommended by the non-Government Members.
|
Footnotes
[1] Refer to the Majority Report, Executive
Summary and Recommendations, p. 3.
[2] In a private meeting of the Senate Foreign
Affairs, Defence and Trade References Committee on 22 August 1996, Senator
Coonan moved that the Committee write to the Minister for Foreign Affairs
to bring to the Minister's notice a particular project proposal. The
Committee indicated its preference for the RELPAR project proposal to
be considered as a high priority in regards to the additional funding
provided through the bilateral country programs in the 1996-97 Budget.
[3] Refer to the Majority Report, Chapter
4, page 3 at point 4.10.
[4] Ibid, Chapter 4, page 6, at point 4.24.
[5] AusAID and DFAT Joint Submission.
July 1996. Appendix 5, page 63. See also: Committee Hansard,
page 30, in which Mr Anderson (AusAID) acknowledged that a preliminary
negotiation stage with recipient country governments had been omitted
from the diagrammatical representation of the DIFF project management
cycle.
[6] Refer to the Majority Report, page
8-9, at points 2.37-2.42.
[7] Sample Letter of Advice, AusAID &
DFAT Joint Submission, July 1996, Appendix 3 - Attachment C.
[8] AusAID. Explanatory Brochure. April
1995, p. 6.
[9] Ibid, p. 7.
[10] AusAID and DFAT Joint Submission,
July 1996, p. 23.
[11] Committee Hansard, p. 150.
[12] AusAID and DFAT Joint Submission,
July 1996, p. 23.
[13] Tim Fischer, Press Release, 23 July
1996.
[14] Ibid, Appendix 3 - Attachment C.
[15] Ibid, p. 23.
[16] "A DIFFerence of Opinion".
Parliamentary Research Paper. 1996.
[17] Committee Hansard, p. 510.
[18] AusAID and DFAT Joint Submission,
July 1996, p. 10.
[19] Ibid.
[20] Refer to Committee Hansard, 6
August 1996, p. 161 and 7 August 1996, p. 218.
[21] Letter to the Committee's Secretariat
from Mr Anderson, AusAID, 13 September 1996, p. 1.
[22] Refer to the Majority Report,
Chapter 4, page 5 at point 4.18.
[23] Australia's Overseas Aid Program
1996-97, 20 August 1996, p. v.
[24] Committee Hansard, p. 510.
[25] Ibid.