Chapter 4
The Economics of DIFF
4.1 The Committee was presented with evidence from company representatives
claiming that DIFF generated exports, lowered the current account deficit,
generated employment and contributed to the net economy.
4.2 As the Majority Report clearly acknowledges that reviews of DIFF
based on projects operating prior to the implementation and effect of
the Helsinki Guidelines are "completely irrelevant" to the scheme
as it operated at the time of its termination, it is contradictory for
the non-Government Members' to further claim that "the commercial
benefits of DIFF have well been established by recent studies". [1]
| Finding: In the absence of a comprehensive and
definitive assessment of the overall economic impact of the
DIFF scheme, no positive concluded view can be expressed by
the Government Members as to the net economic benefits to the
Australian economy. |
| Finding: That evidence given on behalf of companies
overwhelmingly supported the assertion that commercial benefits
flowed to individual companies that had received DIFF funding.
|
| Finding: That any comprehensive assessment of
the net economic effects of DIFF on the Australian economy would
need to take into account the nature, cost and effect of the
claimed commercial benefits to Australian companies. |
4.3 The Committee Members did not have access to a definitive assessment
of the economic impact of the DIFF scheme. The non-Government Members'
reliance on the May 1992 NIEIR study to establish trade creation effects
was undertaken prior to the implementation and effect of the Helsinki
Guidelines and has been criticised as it was used survey material collated
from the scheme's financial beneficiaries.
4.4 The DIFF reviews conducted, as outlined in Chapter 2 of the Majority
Report, were, in many cases, conflicting and unreliable as a basis for
objective analysis. This included the most recent 1996 AusAID Review
which was based on a survey of projects operating between 1988-89 and
1991-92, before the implementation of the Helsinki Guidelines.
4.5 A DFAT report highly critical of DIFF sought in evidence before the
Committee, did not apparently find favour with the then Minister, Gordon
Bilney. Given the former Minister's awareness of the report and the legitimate
concerns it raised, it is a matter of conjecture why no further steps
were taken in relation to the report which he was reported to have described
as "ideologically blinkered and plain wrong". [2]
| Finding : That the draft DFAT report dated May
1995 containing serious criticisms of the operation and effect
of the DIFF scheme and which came to the attention of the former
Minister, Gordon Bilney, required investigation as a matter
of priority, rather than being dismissed out of hand. |
4.6 Amidst the controversy and criticism generated by the release of
each review of the DIFF scheme, the various reviews could not avoid
the conceptual and methodological problems associated with the reliance
on responses from financial beneficiaries of the program under review.
As a general comment we readily accept that the methodology used
in the various studies of flow-on export benefits from DIFF are open
to question, the irrefuted fact is that these studies represent the
only work done on this question. [3]
4.7 In attempting to diffuse at least some of the issues relating to
the economic impact of the DIFF scheme, this chapter addresses: the
extent to which DIFF provided industry assistance to Australian exporters;
individual versus net economic benefits; the multiplier effect; subsidy
dependency; and Australia's current export performance in the Asia-Pacific
region.
4.8 There was some debate in the evidence presented to the Committee
regarding the extent to which DIFF provided industry assistance to Australian
exporters. Mr David Borthwick, Department of the Treasury, gave evidence
that DIFF selectively provided high levels of assistance to companies
successfully negotiating the selection process. That these companies
accessing opportunities via the support of DIFF funding were in the
infrastructural sector was considered "obvious" in evidence
presented by Mr Trenberth, Department of Industry, Science and Tourism.
It is 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. [4]
4.9 Compared to other forms of export assistance, the Industry Commission
described the DIFF scheme as "highly selective" and "expensive".
In 1994-95 DIFF provided around $130 million to 20 projects in
six developing countries. In contrast, the $210 million of assistance
provided by the Export Market Development Grants scheme was spread around
some 3 500 claimants. [5]
4.10 The provision of DIFF funding may represent an element of industry
assistance to exporters, despite the fact that funds are usually paid
directly to the recipient country government. Based on the available reviews,
the Government Members are unable to determine the extent to which DIFF
provided industry assistance to Australian exporters. On the one hand,
the Department of Treasury provided evidence that the total subsidy of
the DIFF-EFIC package averages out at about 40% of the total project.
[6] Comparatively, the Industry Commission
provided evidence indicating the potential of DIFF to provide 100% industry
assistance.
The Commission is aware of previous unpublished studies done
for AIDAB (now AusAID) which have estimated that DIFF funding can provide
effectiveness assistance to exporters in the order of 100%. [7]
4.11 In one viewpoint expressed to the Committee, the support of a
concessional finance package enabled Australian companies to match the
tied loan packages of foreign competitors. In the scenario where an
Australian company undercuts the price of a foreign competitor at the
very margin, the recipient country effectively does not gain from the
presence of DIFF. This type of scenario was summarised in evidence by
the Industry Commission.
In this instance, the DIFF subsidy enables the Australian company
to compete in the "corrupt" world market for this project.
But the developing country gains no benefit from DIFF because it could
have the bridge built fore the same amount by one of the Australian
company's foreign competitors. The full benefit of the DIFF subsidy
flows to the Australian firm. [8]
4.12 Further, the Committee was presented with evidence which inferred
that Australian companies were able to increase the price of project
proposals whilst still offering a competitive price to the recipient
country government. Filmer suggested that this practice of undercutting
competitors prices at the margin was widespread.
Based on some information from interviews with Australian firms
who have been DIFF recipients, my guess is that, on average, Australian
firms raise prices for DIFF-supported projects by about five to ten
per cent over the price they would charge if there was no DIFF subsidy.
[9]
4.13 Whilst the evidence presented to the Committee did not enable
a definitive assessment regarding the extent to which DIFF provided
industry assistance to exporters, the evidence provided by some company
representatives indicated that a concessional finance package was necessary
in order to engage in project negotiations with certain countries.
4.14 Taking into account Australia's size and status as a global economic
player, there appears to be little advantage in engaging in a subsidy
war with other larger economic powers. The Department of Treasury concluded
that emulating the subsidies of other economies is "likely to produce
only a spiral of costly distortion". [10]
4.15 Whilst individual companies detailed the commercial benefits following
to them as a result of winning DIFF support, the net effect on the Australian
economy is unclear.
4.16 For example, Treasury submitted that follow-on trade gained by
individual companies involved with DIFF projects is not considered to
be of net economic benefit because the trade gained is marginalised
in one highly subsidised sector.
Net benefits arise to the extent that the activity is additional
- not just to the subsidised sector but to the whole economy - and that
it earns higher returns than any displaced activity. [11]
4.17 Also, as DIFF (worth approximately $120 million per year) was
highly concentrated on a core group of companies in one major industry
sector during the majority of its operation, the claim by the Majority
Report that the scheme wields significant impacts on the economy's overall
performance is overstated.
If DIFF is a truly trade creating program, as claimed, it should
be creating opportunities for companies which have not yet broken into
a particular field in a particular country. It should not flow to companies
already successfully doing business in that field in the recipient country.
[12]
4.18 Evidence presented to the Committee by the Department of Treasury
described the gains in employment and trade creation as likely to be
transitory, temporary and/or available to individual companies without
ongoing DIFF support.
...if export credit and insurance were temporarily to increase
exports and employment, the exchange rate would appreciate, imports
would increase and employment in import-competing activities would fall
to offset the temporary improvements. [13]
4.19 Further evidence indicated that where commercial returns to an
exporter are anticipated to be sufficiently high - both directly and
in terms of spin-off benefits, the exporter may have undertaken the
project without the additional sweetener of a DIFF subsidy.
4.20 On the other hand, evidence was given of individual examples of
the boost given to Australian companies to enter the export market and
the internationalisation of their business. Bulk Materials (Coal Handling)
stated:
BMCH traces its export success and the internationalisation
of its business to the provision of DIFF support for an initial project
in Indonesia.
From this initial DIFF supported success, BMCH went on to win
further non aid supported projects under international competitive bidding.
[14]
4.21 Further, Mr Robin Winkworth from Wilson Transformers expressed
understandable concerns about the impact of the termination of the scheme
on the ability of Australian companies to establish export markets.
In the experience of Wilson Transformers, the company had:
...commenced exports in 1990 under the DIFF scheme, and for the
past three years, our DIFF supported exports have represented approximately
two thirds of our exports. In 1996-97, our current year DIFF supported
exports will only represent 25 per cent of our exports and our export
growth will be about 35 per cent for the current year. We expect that
in the following year there will be no DIFF supported exports and the
growth will continue". [15]
4.22 The Department of Treasury outlined criticisms of the economic
benefits outlined in AusAID's 1996 Review of the Effectiveness of the
DIFF.
A proper economic assessment would analyse the impact of the
whole economy rather than survey the impact of the DIFF supported firms.
Importantly, it would focus not on the level of subsidised activity
but on the benefits from that activity. [16]
4.23 Despite the many reviews conducted, the absence of any comprehensive
economic review prevents the Government Members from formulating substantive
conclusions regarding the scheme's net economic benefits to the Australian
economy. It is a question which requires resolution in the interests
of the continuation of any concessional finance scheme.
4.24 Whilst it is undebatable that a 35% grant element in an export
finance package will result in a multiplier effect, the size of this
multiplier was a matter of considerable variation in the evidence presented
to the Committee. Various suggestions of the size of the multiplier
ranged from $1.50 to $5 for every dollar of DIFF.
4.25 The potential of the DIFF scheme to contribute to trade creation
is difficult to determine as many of the DIFF funded projects would
have proceeded without DIFF support.
4.26 Further, it is difficult to isolate the benefit of DIFF funded
projects from Australia's overall economic performance in exporting
capital goods not used in concessional loans.
4.27 The Majority Report is seriously at odds when it concluded that
DIFF did not create a dependency culture in Australian companies but maintained
that the decision to terminate DIFF represents a "serious threat
to the viability of some of the companies in question". [17]
4.28 The degree to which companies appearing before the Committee could
be considered to be 'dependent' on DIFF varied. MTIA representatives
gave evidence that as internationally competitive organisations, they
were not dependent on DIFF funding for continued financial viability.
Let me assure you that our product is world class. We are not
an inefficient manufacturer relying on DIFF funding to do business in
Asia. The opposite is the case. [18]
4.29 On the other hand, the same industry group recognised that companies
dependent on DIFF to engage in project negotiations with overseas countries
would be hard felt by the decision to terminate the scheme.
While DIFF does not create dependency amongst Australian industry,
the scheme plays a critical role in assisting companies to establish
a presence in key developing country markets and in the internationalisation
of industry. [19]
4.30 In light of evidence relating to the high incidence of repeat
allocations of DIFF funding to a core group of companies during the
majority of the scheme's operations, further research is needed into
the longevity in which exporters require access to a concessional finance
package.
4.31 As stated by Dr Neil Blewett, the then Minister for Trade and
Overseas Development,
Australian companies are not going to meet their export challenges
by relying on the aid program. Indeed commercial benefits are likely
to be almost insignificant beside the growth in potential markets for
Australian exports that will come as the countries of our region develop
further. [20]
4.32 The Government Members consider that any subsidy dependency argument
must be put into a macro picture of Australia's trade performance in
the Asia-Pacific region. When looking at Australia's total export performance,
DIFF funded projects represents a minute slice of the export market.
Australia's export relationship with China was summarised by Ms Wensley,
Acting Deputy Secretary, Department of Foreign Affairs and Trade.
Overall China trade is a $7 billion two way trade - only 3% of
our exports and penetration of that market is being supported through
the DIFF scheme. [21]
Footnotes
[1] Majority Report. Chapter 4, at
point 4.42.
[2] Reported in The Age. Monday 5 August
1996, p. A5.
[3] Department of Industry, Science and Tourism.
Comments on the Department of Foreign Affairs Paper - Making DIFF Better
[4] Committee Hansard, p. 496.
[5] Industry Commission. Submission to
the Inquiry, p. 3.
[6] Committee Hansard. August 8, 1996.
[7] Ibid.
[8] Ibid, p. 2.
[9] Filmer. Has DIFF Passed its Use by
Date? June 1996.
[10] Department of Treasury. Submission
to the Inquiry. Number 46, p. 8.
[11] Ibid, p. 7.
[12] DFAT. Making DIFF Better. March
1995, p. 14.
[13] Ibid, pp. 7-8.
[14] Committee Hansard, p. 119.
[15] Ibid, p. 77.
[16] The Department of Treasury. Comments
on AusAID's Review.
[17] Majority Report. Chapter 4, at
point 4.109.
[18] Committee Hansard, p. 71.
[19] MTIA. Submission to the Inquiry.
Number 27, p. 14.
[20] Quoted in: ACFOA. Aid for a Change.
May 1992, p. 92.
[21] Committee Hansard, p. 371.