Chapter 6
The Role of Concessional Finance Schemes in Future Australian
Aid Programs
6.1 In the absence of any comprehensive and definitive assessment of
DIFF conducted after the Helsinki Guidelines were implemented in 1992
and took effect over subsequent years, the Committee members were asked
to accept the evidence supplied by recipients to assess the developmental
impacts of DIFF projects. The Government Members are cautious in accepting
this data as being capable, without more, of supporting conclusive assessments
of the effectiveness of aid delivered via concessional finance schemes.
6.2 The conceptualisation of best practices in aid delivery was inhibited
by the fact that the projects described to the Committee during public
hearings incorporated one of two approaches to delivering aid. The first
approach sought to develop sustainable growth at the grass-root community
level whilst the second approach sought to maximise the disbursement
of the developmental impacts via the "trickle-down-effects"
of larger infrastructural projects.
6.3 Whilst both approaches to aid delivery can produce positive outcomes,
it is nonetheless difficult to rate and compare the developmental benefits
deriving from the construction of steel bridges (with a DIFF component
worth $142.213 million) compared to the provision of special education
training for handicapped children ($4.557 million) or an aircraft hanger
complex ($18.844 million).
6.4 It is evident that concessional finance schemes such as DIFF can
and have produced positive developmental outcomes where the project
has sufficiently targeted humanitarian concerns. Large public sector
infrastructural projects are not incompatible with poverty alleviation
and improvements in living standards where adequate consideration and
planning is undertaken to manage the equitable distribution of benefits.
6.5 The question which therefore arises in relation to the effectiveness
of aid delivered by concessional finance schemes is - how could a tied
concessional finance scheme such as DIFF be sufficiently refined to
ensure the effective delivery of humanitarian-focused aid? This sentiment
was expressed in oral evidence by Dr Woodthorpe, Chief Executive Officer,
Technology Industries Exporters Group, who stated:
I am not saying that all the projects of the DIFF scheme have
always been appropriate. I think we would agree that some of the vert
big ones have maybe been inappropriate. But don't let us throw the baby
out with the bathwater. I would rather look the DIFF scheme, tighten
it up, maybe add a few more guidelines about what sort of aid is appropriate
under the DIFF scheme, than cancel it completely. That seems to me to
be too cavalier and foolish. There is much within it, even if there
is much that is rightly and genuinely criticised. [1]
6.6 The remainder of this chapter summarises three factors which distorted,
to some degree, aid priorities during the operation of the DIFF scheme
between 1982 and 1996 and which may need refinement in any future implementation
of a concessional finance scheme.
6.7 Whilst the trend was starting to diminish, the DIFF scheme has
provided $575 million to just ten companies. The largest beneficiaries
of DIFF funding are also some of Australia's largest companies supplying
infrastructure. One company alone received $153.443 million between
1984 and 1993 to carry out four bridge construction projects in Indonesia
and a transmission grid in Malaysia.
6.8 The concentration of DIFF funding in a select core of companies
in one major industry sector indicates that the DIFF selection process,
as it operated between 1982 and 1996, was highly selective. The provision
of large amounts of financial assistance to one industry sector monopolising
DIFF funding increases the potential of the scheme to distort aid priorities
- geographically and by industry sector.
Claims by the previous government that all DIFF schemes were
about poverty alleviation remain unsubstantiated. If that were true,
sectoral divisions about DIFF would reflect it, but they do not. The
agricultural sector dominates the prospects of the poorest people in
poor countries, yet it received only 2% of the 1983-1995 disbursements.
[2]
6.9 In a written submission to the inquiry, the Department of Treasury
stated:
DIFF also creates a bias toward large capital equipment projects
in sector such as transport, mining and communications that have a high
import content and a corresponding bias against projects with high levels
of local employment and sourcing. [3]
6.10 That the type of DIFF projects that successfully negotiate the
selection process distort aid priorities is supported by ACFOA.
DIFF distorts the type of aid projects supported. Because it
basically provides support for the purchase of capital goods, DIFF produces
a bias towards infrastructure-type projects (for example, cement plants,
coal mines, bridges and aircraft hangers) which rely on economic trickle-down
effects to benefit the poor. This is contrary to the prevailing view
that to most effectively tackle poverty you need projects which benefit
the poor directly (for example, through agricultural development, water
supplies and sanitation, rural and adult education). [4]
6.11 Further, Results Australia claimed:
The donor countries will tend to divert assistance to countries
that can nominate infrastructure or industrial projects that would produce
sufficient economic benefits or commercial returns to qualify for DIFF
funding, rather than the countries with the greatest needs. [5]
6.12 Whilst the Government Senators acknowledge that effective aid
can be delivered via a variety of mechanisms, the planning of any future
concessional finance scheme would need to examine any potential for
bias in the selection process of project proposals to receive support
from a concessional finance
6.13 Whilst the Committee heard much oral evidence from companies about
the cost and time involved in fulfilling the scheme's feasibility requirements,
far less attention was paid to how the feasibility studies were designed
and conducted (for example, the identification of performance indicators,
measurements of social and economic impacts, etc.).
6.14 The Government members sought specific advice from AusAID relating
to the nature and methodology associated with the feasibility studies
and were, prima facie, assured that the cost benefit analysis withstood
scrutiny. Specific documentation sighted included: Supplier's Briefing
Papers (November/ December 1995); Draft Appraisal Report Format (January
1995); and the Feasibility Study Guidelines and Format (September 1995).
6.15 However, in any future concessional finance scheme, the feasibility
study framework must be refined to generate consistent outcomes from
the selection process. It is inconceivable that the same feasibility
study framework approved $4.557 million for the provision of special
education training for handicapped children and $20 million for the
refurbishment of run down lighthouses.
6.16 It is also conceivable that the feasibility study framework adopted
by the DIFF scheme might not adequately address the broader social and
economic impacts of project proposals. The Sydney Morning Herald makes
the following claim about a DIFF funded open-cut coal mine in north-east
India.
Some of the DIFF-supported development programs have been embarrassing
for the Government. For example a $410 million open cut coal mine in
north-east India was labelled "a scandal" by Australian and
Indian development organisations where it was revealed that local people
were being evicted from their village without compensation, to make
way for the massive scheme. [6]
6.17 Any future concessional finance scheme must refine the feasibility
study requirements to enable the consistent selection of projects focused
on humanitarian aid.
6.18 It became evident during the inquiry that the source of project
initiatives was an important factor influencing the effectiveness in
which aid was delivered.
The way the scheme operates now is that 85 per cent of the projects
that are coming through for consideration have been initiated by the
recipient government. In our view that is just an improvement. One hundred
per cent would be better, but 85% is the current level. That is certainly
different to the first years of the scheme when the vast majority of
theme - were company initiated. [7]
6.19 The Department of Treasury articulated the pitfalls in delivering
effective humanitarian-focused aid in situations where commercial objectives
outweighed developmental concerns.
The supply-driven nature of DIFF means that it is focussed on
projects and sector that are important for Australian exporters, rather
than necessarily for recipient countries. A 1992 AIDAB review that examined
the impact of DIFF in Indonesia reported that the Indonesian National
Development Planning Board: "...felt that the 'supply-driven' nature
of DIFF was distorting development priorities. Rather than line ministries
planning for future needs, defining a project in consultation with BAPPENAS,
and then seeking a supplier, a situation developed in which suppliers
were convincing ministries to take what was on offer. [8]
6.20 The omission of a preliminary negotiation stage between recipient
country governments and suppliers in the DIFF project management cycle,
appended to the AusAID and DFAT Joint Submission, may reflect the fact
that the initiation of projects by recipient country governments had
not been fully entrenched into the DIFF scheme at the time of its termination.
6.21 Whilst supplier-driven project initiatives may have the effect
of distorting aid priorities, it may also have implications for the
level of public support for the delivery of Australian aid.
6.22 Recent opinion surveys indicate high levels of public support for
foreign aid to developing countries, where aid is used to target health,
poverty and basic needs. [9]
Over two million Australians regularly support aid agencies.
In 1994, the Australian public gave a total of $162 million to these
organisations from their own pockets. Most Australians believe that
Australia has a moral obligation to contribute to the eradication of
poverty through an overseas development assistance program. [10]
6.23 Mr Russell Rollason, the former Executive Director of ACFOA, summarises
the negative impact on public support caused by an excessive commercial
orientation of Australia's aid program.
The motivation is solely within Australian and the problem with
the commercial emphasis is the aid program is the initiatives come from
Australia. We look at what we want to sell or what we are best at and
then look for development projects that meet than end. We don't start
at the need end, and I think the downside of all this is, is that we
are losing public support. The Australian public does not believe aid
is about trade promotion. In fact, the Australian public generally believes
that the Government was out for a level playing field and removed trade
subsidies some years ago, but in fact what they did is they changed
trade subsidies into the aid program, they swapped it over. I don't
think the public supports an aid program that is focussed on trade promotion
and what is more, Government backbenchers don't either. [11]
6.24 Further, ACFOA stated:
The Australian public supports aid in order to eradicate poverty.
The Government has a Trade Department to promote Australia's trade objectives
overseas. The public is clear that aid should not be tainted by the
trade push. It must be a humanitarian program. It will then maintain
full public support. [12]
6.25 Amidst the views of DIFF critics, who describe it as "being
at worst little more than a subsidy to Australian companies trying to
win contrasts in developing countries" and supporters, who claim
that it is a "win-win" situation for developing countries
and small to medium Australian exporters, the Government Members conclude
that DIFF can and has provided positive outcomes where projects have
targeted humanitarian objectives.
6.26 The Government Members support the use of concessional finance
schemes where humanitarian-focussed projects are delivered in a manner
which complements Australia's commitment to reducing greenhouse gas
emissions. The Government Members reiterate the following comment made
by Mr Kilby, Community Aid Abroad, in oral evidence.
...that Australian trade off greenhouse targets with developing
countries and use the aid program to do that, the theory being that
Australia could meet its greenhouse targets by providing aid to developing
countries to reduce their emissions. I would just like to way unequivocally
that we would oppose that. The purpose is for Australia to reduce its
greenhouse gas emissions. That is what it is obligated to do, and to
palm it off and use development aid for developing countries to meet
that, should bot be how that is done. Also it would inevitably lead
to a redirection of the aid program away from that poverty focus. [13]
6.27 The Government members also acknowledge the estimation by the World
Bank to the effect that $1.5 trillion in infrastructure investment in
developing countries in South East and East Asia will be required during
the next decade, and accept the assessment by AusAID and DFAT that several
sectors, including environmental improvement and water sanitation, could
fail to attract sufficient public or private investment. [14]
6.28 Further refinement of the selection process, the feasibility study
requirements and the framework for conducting needs analysis may have
improved the effectiveness of aid delivered via the DIFF scheme. However,
as the scheme operated to July 1, 1996, it did not consistently provide
for effective aid delivery despite the anti-poverty benefits of some
individual projects.
DIFF projects are not designed to promoted policy dialogue or
to assist in the development of institutional capacity in recipient
countries. Whatever the merits of individual projects that DIFF may
finance, their development impact is inevitably much narrower than is
available through other forms of aid. [15]
6.29 Some of the companies presenting evidence to the Committee suggested
alternatives to replace the former DIFF scheme. For example, Pacific Asia
Industries suggested that the strength of the Australian trading banks
be used as a basis for the creation of a tax free, self liquidating, environment
development bond to replace the DIFF scheme. Pacific Asia Industries claim
that this type of bond would allow the provision of concessional finance
in a much more commercial and large scale mechanism than that provided
by the DIFF scheme. [16]
6.30 Another alternative proposal facilitated greater private sector
involvement through zero-coupon bonds. In this proposal, Australian financial
institutions would borrow from a funds manager more money than is required
to fund a specific aid project. Excess funds would be put into zero-coupon
bonds, which pay no interest but deliver a lump sum return on capital
on maturity. The value of these bonds would compound and eventually be
used, at maturity, to repay the original borrowings. The aid recipient
would be responsible for meeting the interest payments on the money which
was on-lent, but would not be required to repay the principal - thereby
reducing borrowing costs substantially. [17]
| Finding: That some DIFF projects provided positive
development outcomes where the project sufficiently targeted humanitarian
objectives and large public sector infrastructure projects are
not incompatible with poverty alleviation and improvements in
living standards were adequate consideration and planning is undertaken
to manage the equitable distribution of benefits. |
| Finding: That the Government Members support humanitarian-focused
DIFF projects which also meet environmental objectives, including
the reduction of greenhouse gas emissions. |
| Finding: That subject to budget constraints, there
is a role for soft loan or tied concessional finance as a mechanism
for delivering humanitarian-focused aid. |
| Finding: That in the absence of a definitive and
comprehensive assessment of the overall impact of DIFF, the Government
Members recommend that the terms of reference to the Simons Review
be enlarged to the extent necessary to examine:
the overall impact of the multiplier effect, flow-on trade,
export opportunities and other commercial benefits to individual
companies and the net economy;
the extent to which concessional finance advantages export
companies and facilitates entry into new export markets and
enables the internationalisation of Australian businesses;
the extent to which concessional finance can delivery positive
development outcomes effectively; and
whether Australian companies would suffer any competitive
disadvantage in the Asia Pacific region from being excluded
from access to a concessional finance package.
|
Senator Ron Boswell
Senator Helen Coonan
Senator Sandy Macdonald
Footnotes
[1] Committee Hansard, p. 267.
[2] Gray. Submission to the Inquiry.
Number 52, page 1.
[3] Department of the Treasury. Submission
to the Inquiry. Number 46, at point 16.
[4] ACFOA. Aid For a Change. May 1992,
p. 91.
[5] Results Australia. Submission to the
Inquiry. Number 48, at point 6.
[6] Ibid.
[7] Committee Hansard. 6 August 1996,
p. 30.
[8] Department of Treasury. Submission
to the Inquiry. Number 46, at point 15.
[9] See: ACFOA. "Less than 2%. What Foreign
Aid Means to Australia". Press Release. June 1996; Results
of Opinion Poll on Overseas Aid. April 1996; and the Roy Morgan
Research Centre. Public Attitudes Toward Foreign Aid. June 1994.
[10] Community Aid Abroad. Polliewatch.
Briefing Number 24. April 1996, p. 5.
[11] "Flood in Aid Agencies Critical
of the Government's Aid Policies". Lateline. Tuesday 31
May 1994, p. 7.
[12] ACFOA. Submission to the Inquiry,
at point 3.14.
[13] Committee Hansard. 6 August 1996,
p. 62.
[14] AusAID and DFAT Joint Submission. Submission
to the Inquiry. July 1995, p. 27.
[15] Department of Treasury. Submission
to the Inquiry. Number 46, at point 11.
[16] Pacific Asia Industries. Submission
to the Inquiry. Number 1, pp. 2-11.
[17] The Financial Review. 3 July 1996, p.
1, 4.