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Foreign Affairs, Defence and Trade Legislation Committee
16/02/2012
Estimates
FOREIGN AFFAIRS AND TRADE PORTFOLIO
Australian Trade Commission

Australian Trade Commission

Mr D Richardson : This is a little bit of pedantry, but you mentioned the trade portfolio. We had a few questions earlier today which related to trade. There is an integrated Department of Foreign Affairs and Trade. There is not a separate department of trade. It is the one department.

CHAIR: We appreciate that, but in terms of the program.

Mr D Richardson : This is different to there being agencies within the portfolio, Austrade and the like. But there is a single Department of Foreign Affairs and Trade.

CHAIR: We appreciate that, but we are looking to the trade program now. I welcome back to the table officers of the Department of Foreign Affairs and Trade and officers from the Australian Trade Commission. We go to bilateral, regional and multilateral trade negotiations.

Senator RHIANNON: Is the government planning to seek a binding and compulsory most favoured nation commitment in the PACER Plus negotiations?

Ms Rawson : As I think we have said before in this committee, the primary objective is the promotion of the sustainable economic development of the forum island countries. It is expected that that agreement would be WTO consistent. Perhaps those with greater knowledge of the particular trade issues than I have could comment on the MFN aspect but certainly we would be aiming to negotiate an agreement that is WTO consistent.

Senator RHIANNON: Is there anybody else who can comment on the MFN possible aspects of PACER Plus?

Mr Gosper : As Ms Rawson has said, in this negotiation we are very much guided of course by both how we might negotiate something which is consistent with the rules that apply to such agreements but also something that will aid the Pacific countries. So the question of whether this agreement proceeds, at what pace it proceeds and whether it actually proceeds to conclusion is very much in the hands of the Pacific countries themselves. If it were to come to conclusion, then of course there would have to be an appropriate element of MFN provided by those countries but there are various ways of course to ensure that particular sensitivities of such countries are protected through phasings or even, in a limited sense, exclusions. But again it is very much in the hands of the Pacific countries.

Senator RHIANNON: As I understand it, one of the requirements is to protect Australian business interests and investments from being disadvantaged. To achieve that, would you not have to go for an MFN commitment?

Mr Gosper : There is an element of the reality that the Pacific countries have negotiated certain concessions with the European Union which would involve tariff concessions and it may well be that that could potentially at some point lead Australian businesses to some disadvantage and that is of course something that the government will have to take account of. But of course the government's primary consideration is to promote the economic development of the Pacific countries, and that is very much the guiding approach to these negotiations.

Senator RHIANNON: There does seem to be a contradiction there. When are you looking after Australia's commercial interests—which I understand is not a key imperative here, but you are saying it is up to the Pacific countries? There appears to be a contradiction there. I maybe wrong, but I would just like that clarified.

Mr Gosper : My point is that it may well be that some Australian businesses are disadvantaged in some of these countries for some products, but Australia has a particular national interest in securing the economic development of this region and we are not looking to foist onto such countries agreements that they find unhelpful or destabilising.

Senator EGGLESTON: I have a question which I will put on notice. What is the current status of the following free trade negotiations: Australia-China; Australia-Gulf Cooperation Council; Indonesia-Australia Comprehensive Economic Partnership Agreement; Australia-Malaysia; Pacific Agreement on Closer Economic Relations Plus; Trans-Pacific Partnership Agreement; Australia-India FTA; the Doha Round; EU; and the Australia-Korea FTA? With respect to the Australia-Korea FTA, what has been the impact of the KORUS FTA on Australia's export market to South Korea? When is an agreement likely to be reached? Is it correct that an agreement was expected to be clinched by the end of 2012? If so, why the delay? Is greater political involvement from the Australian government needed to get this agreement finalised? Have the Koreans signed an FTA with the USA? That is a very interesting question. If so, what impact is this expected to have on (1) Australia's trade with Korea and (2) Australia's FTA negotiations? Is the department concerned that the US-South Korea FTA will adversely affect our $630 million beef export trade? What FTAs have been signed since the Prime Minister appointed Minister Emerson to the role of Trade Minister? That is obviously a lot of questions, and I will put them on notice.

Senator KROGER: I would like to go to responses that were given to the last supplementary estimates. The headcount of Austrade at that time was 1,087 as at 30 June. The projected headcount for the next year to 30 June 2012 was 1,066, implying a shedding of 21 positions. I am wondering how this was tracking and, more importantly, what level of positions you have shed or are anticipating will go?

Mr Grey : The changes in headcount numbers have been jumping around during this six months in particular because, as you may recall, we have been going through a major review and restructuring. That included moving positions from onshore to offshore. So the numbers onshore have gone down and those offshore have gone up. We have also been closing a number of our smaller locations and using some of those resources to strengthen other parts of the world. So it has been in quite a bit of flux. As of the end of December we were down to about 1,018, which is below what we had projected. However, that includes a lot of unfilled vacancies at this point of time, which reflects to a large extent the changes which are going on.

Senator KROGER: You mentioned smaller offices closing and so on. In what countries were they?

Mr Grey : This was part of the process last year which involved moving resources—not closing down altogether—out of the established markets of North America and Europe and into the growth in emerging countries, which is where businesses tell us they need us the most. We reduced by about 23 staff in North America. As for the locations, we have these things called virtual district managers, which are really a guy, a laptop and a mobile phone linked in with some key performance indicators and overseen by a trade commissioner in a major office. We have them in Denver, Miami, San Diego, Honolulu, Kansas and Montreal. We closed those positions off. In Europe we closed down our operation in Copenhagen, where we had four staff. That was a very high-cost location. We also had one in Rotterdam, one in Amsterdam and one in Dublin. We withdrew an A based commissioner from Suva at the end of 2011. We kept the office there but it is run by our local business development managers, and we have a Trade Commissioner Pacific located in Brisbane, which is a convenient place to do it from. So there is a lot of change going on. Part of the proceeds from the exercise are going into opening in Mongolia. I hope in the next couple of months we will have a fully functional Austrade managed consulate there. We have had someone there temporarily for 12 months now. Hopefully in the next six months we will have someone in Bogota, Colombia which again is an interesting commercial proposition. We will put extra resources into Sao Paulo, particularly in the lead up to the major sporting events they will be having, and hopefully at least one additional resource into Africa, probably in Accra.

Senator KROGER: With the office in Mongolia, what sort of capacity are you planning for somewhere like that? How many staff would you have in Mongolia?

Mr Grey : By Austrade standards it is about an average number, which is one A based staff and three local staff. But we can do quite a bit with that by just being fairly focused. Frankly, it is not difficult in Mongolia. Firstly, people who turn up at your doorstep are generally fairly serious about doing business. So you do not get as much drop-in traffic there. Also, we know what our targets are there. It is mining equipment and technology and service suppliers who are servicing other major mining companies operating in Mongolia. There are some Australian law firms interested in establishing in Mongolia, and financial people. Education is another area we will spend our time on. So one person with three staff can actually make quite a substantial contribution there.

Senator KROGER: Earlier in the day we touched on the number of students coming from Brazil, which is an emerging strength as well. You have mentioned Colombia and Sao Paulo. Are you looking at further expanding in South America?

Mr Grey : Colombia is a new one, and one of the drivers there is education. There are now about 10,000 students coming from Colombia generally. I think there are 15,000 coming from Brazil, if memory serves me right. The 10,000 from Columbia are good quality in an educational sense in that they are often degree students. I visited there myself recently, and my counterpart was a recent graduate from the University of Queensland's MBA program. So there is lot of interest in Colombia and it is a very good source of students—10,000 is obviously a substantial number. And I think we have got about 150 to 170 companies exporting to Colombia at the moment, so it is a very interesting market.

Senator KROGER: While we are on education, I understand that the Chinese Ministry of Education recently rejected 25 applications from Australian universities. I think there were 10 Australian universities to provide courses in Australia. Are you aware of that matter?

Mr Grey : I saw the report. One of my colleagues might be able to answer that.

Mr P Rowe : We are well aware of these reports and we are looking into them. We understand there has been a change of emphasis in what sorts of courses the Chinese are steering their students into. So it might have been something related to that. We have not been able to get to the bottom of it yet.

Mr Yuile : I am certainly aware of the report. It is a policy issue in terms of the way the Chinese government is deciding on preferences. As Mr Rowe has observed, it seems that they have been directing their interests into particular areas of study rather than perhaps some of the business and other courses put forward by some of the universities—Southern Cross University and the University of Ballarat were two that I saw mentioned.

Senator KROGER: What is the normal process? I read this in the Australian Financial Review. If you identify in a report that there might be an issue like this, where do you take it from there? How do you verify whether that is the case or not and whether some intervention is required to support the universities themselves, or whatever the case may be? How do you verify the veracity of it and then advance it?

Mr Grey : I think we would have to pass that one on to our colleagues in Australian Education International. We accept the regulatory environment and the assessment processes that the policy departments have put in place and we operate within that. Frankly, that is something you could take up with that department.

Senator KROGER: There is not much you can do about it in other words?

Mr Grey : In our case it is probably inappropriate for us to do anything about it. It is not our job to be interfering in the regulatory and policy processes in Australia. We do not have that function.

Senator KROGER: But I was meaning more at the other end.

Mr Grey : At the other end we can always make representations; we can carry out the normal duties and roles along with our colleagues from DFAT and other agencies.

Mr D Richardson : The first thing to do would be to ascertain whether it was a decision specifically directed against Australian universities or whether Australian universities were merely caught up in a wider decision by the Chinese government which reflected their own education policy approach. If it is the latter then I think there is little that can be done about it. If it was the former, and it was a decision in which the suggestion was it was being directed against our universities, then that is something we would certainly take up with the Chinese government.

Senator KROGER: I am also aware that there is a China International Education Exhibition Tour that is normally held around March each year. I was wondering whether Austrade was putting any resources into that?

Mr Yuile : Yes, we certainly work with the institutions in that. It is a major fair and it moves around several Chinese cities.

Senator KROGER: Where is it based?

Mr Yuile : It starts in Beijing, but last year, from memory, it moved to Shanghai and couple of other cities. I have not got the current program with me but it is held every year and it is a major exhibition. From memory we had about 20-odd institutions there last year. We branded that part of the display then so it was an Australia Future Unlimited branding.

Senator KROGER: Do you have a budget for what Austrade puts into that?

Mr Yuile : We work at the post level with that.

Senator EDWARDS: I want to talk about the live cattle trade. What requirements are being placed on exporters of live cattle, in terms of traceability? This is in reference to both the Indonesia and the Middle East trade.

Mr D Richardson : That question would be better directed to the Department of Agriculture, Fisheries and Forestry.

Senator EDWARDS: Are you involved with Minister Ludwig on his trade delegation to the Middle East?

Mr D Richardson : On the broader policy aspects, yes, but in terms of details relating to traceability and the like, the department of agriculture has the lead.

Senator EDWARDS: They sent me here.

Mr D Richardson : That is a bit odd. If it relates specifically to traceability then that is a bit odd.

Senator EDWARDS: That is fine. I will put it on notice to them.

Senator EDWARDS: I will go to the abattoirs in Indonesia which receive Australian cattle. Are they expected to meet or exceed the standards that apply in Australia?

Mr D Richardson : My understanding is they are expected to meet an agreed international standard. I forget the technical term.

Mr Gosper : We expect that animals are treated in accordance with agreed international standards as set forward in OIE guidelines, the OIE being the relevant international organisation for animal health and the like.

Senator EDWARDS: Can you give me any idea of what changes in paperwork have been required of exporters of live cattle since we have had a review?

Mr D Richardson : We were asked a similar question earlier on in the day. We need to take that on notice because, again, the paperwork required of Australian exporters is something which the Department of Agriculture is more expert on than we.

Senator EDWARDS: Sorry, I was not here earlier today. If you could put on notice also whether there are any plans to extend that to exporters of sheep.

Mr D Richardson : Yes.

Senator EDWARDS: There was an article quoting John Edwards, no relation, who is chairman of the Western Australian Live Exporters Association. He said on 4 February this year—are you aware of that article?

Mr D Richardson : I am not aware of that article off the top of my head.

Senator EDWARDS: According to the article, he said that if the government enforced the February deadline for new regulations it would be 'holding guns to people's heads over food security'. Would you care to comment on that?

Mr D Richardson : No. Again, we do not set the regulatory environment in Australia for Australian exporters.

Senator EDWARDS: On the current status of the new regulations, will they be enforced by 29 February?

Mr Gosper : All indications to date are that good progress is being made in respect to the markets to which that February deadline would apply. Of course, as the secretary has indicated, this is primarily a responsibility of the department of agriculture.

Senator EDWARDS: Would it be of concern to your department if those 29 February deadlines would cause the industry so much of an operational problem that we ran into the same issues that occurred in Indonesia that led to the suspension of the cattle trade? Would that be in your department's bailiwick?

Mr Gosper : We work with the department of agriculture to promote the sustainable maintenance of this trade. That is something that is being done under the leadership of the department of agriculture in close consultation with exporters as well as the relevant export markets.

Senator EDWARDS: I am receiving anecdotal evidence out there that the industry is struggling to meet that deadline of having this in place by the 1 March. Is that your view?

Mr Gosper : None of this is easy for anybody involved but all our advice at this point is that good progress is being made.

Senator EDWARDS: What discussions has the department had with peak bodies—for example, National Farmers' Federation, Cattle Council of Australia, Sheepmeat Council of Australia and Meat & Livestock Australia, to confirm your view?

Mr Gosper : We have been working with the department of agriculture which has been in close contact with all these bodies and, of course, the live animal exporters as well.

Senator EDWARDS: Thankyou, Chair. I just have one question on EFIC when you are ready.

CHAIR: Senator Fawcett, is your question on EFIC?

Senator FAWCETT: Mine is on importation of New Zealand apples. Am I in the right place or are you going to send me to Agriculture?

Mr D Richardson : Give us a try.

Senator FAWCETT: It is getting close to dinner time.

Senator Conroy : Have you tried Immigration?

Senator FAWCETT: There are living creatures on some of the apples coming across, so perhaps Immigration is the best place. Obviously, apple growers and pear growers are very concerned about fire blight. In South Australia we have been watching with interest Tasmania's move, and the Chairman of Apple and Pear Australia said he is not sure whether the Tasmanian ban is actually legal grounds for a challenge by New Zealand. I am just wondering if you can comment on whether there is actually action underway to challenge the Tasmanian decision?

Mr Gosper : The decision that has been made of course applies to all parts of Australia—Commonwealth and states. There is no action, if I understand your question, underway in respect of exports to Tasmania at this point. I am not aware of any particular intention or proposed shipment to Tasmania at this point.

Senator FAWCETT: So where the media have been talking about New Zealand threatening action under the WTO that is a hypothetical, if imports were actually banned?

Mr Gosper : I am not aware of the threat of action by New Zealand, but of course I would note that New Zealand would expect us to fully implement the decisions that were made, and those decisions would apply to all parts of Australia.

Senator FAWCETT: Has there been any discussion between the federal government and the Tasmanian government over their ban?

Mr Gosper : I would have to take that on notice.

Senator FAWCETT: Thank you. Do you know what the actual technical basis is for the ban?

Mr Gosper : No, I do not.

Senator FAWCETT: Thank you.

Senator EDWARDS: I am looking for a comment. Do you see—

Senator Conroy : Officers as a rule do not provide commentary. If you would like to ask a question of fact, preferably relating to the Senate additional estimates but we are very broad here

Senator EDWARDS: I apologise. You of course will let me know if I am out of order, Minister, and Chair.

CHAIR: Yes, I will.

Senator EDWARDS: The trade division of AQIS: does that have an increasing or decreasing conflict with the activities of your department.

Mr Gosper : AQIS is part of the department of agriculture.

Senator EDWARDS: It has a trade development branch, though.

Mr Gosper : They have a technical market access area which looks, amongst other things, at conditions that apply to Australian exports into other markets overseas and in that context they work closely with the Department of Foreign Affairs and Trade

Senator EDWARDS: If I was looking to start a big business in camel meat exporting, who would I go to?

Mr Gosper : There are a number of places you could go to, including Austrade and the Department of Foreign Affairs and Trade, but a major issue would of course be whether there are any particular animal health or welfare related conditions that apply to such exports in the intended market.

Senator EDWARDS: Okay. I will leave it there.

CHAIR: Senator Rhiannon.

Senator RHIANNON: I have some question about the Export Finance and Insurance Corporation. Mr Armour. I could not find any category A projects disclosed in the 2010-11 annual report. I just want to check if it is the case that EFIC has not engaged in any category A projects for that period?

Mr Armour : That would be correct.

Senator RHIANNON: In the annual report on pages 24 and 25, where you have the facility signed, there are six coming through under the facility type 'bonding line'. All bar one are listed in the sector 'construction' and all of them are listed as engineering services. EFIC has not assigned an environmental category for projects at a bonding line. I am really at the stage of trying to understand this. In the annual report, you say this is because: 'Individual projects supported under the bonding line are separately evaluated.' That is one explanation I came across. But in the procedure for environmental and social review of transactions, it says that bonds are treated as non-projects and therefore not screened at all. There seems to be a contradiction about individual projects within bonding lines separately evaluated, or are they not evaluated at all?

Mr Armour : All transactions that we undertake are screened. We consider all transactions. They are divided into different categories. There are projects, non-projects, and some are categorised as A, B or C, depending on their size and the nature of the project itself. It is quite a deliberate process to arrive at an outcome of whether something is a category A or not. You cannot infer from the listing of the industry or the name of the firm whether the activity they are undertaking will qualify as category A. It is quite a disciplined process to arrive at the categorisation.

Senator RHIANNON: Does that mean that I have misinterpreted the statement that I read where you say that: 'The bonds are treated as non-projects and therefore not screened at all,' or is it incorrect? It comes through on page 4 of your report of 29 August 2011, where you are talking about non-projects.

Mr Parsons : We screen all projects and we divide them up into several different buckets. One of the bucket lines is projects, where transactions are associated with projects. If they are associated with a new project, then we will categorise them as A, B or C. Another bucket is where non-projects go down and in those we decide where we need to look at whether there is a potential for impact or not. If there is no potential for impact then we do not go any further. But if we decide that the project associated with the bond is associated with a project where there is potential, then we do some further investigation on the environmental-social issues and we benchmark those against the IFC performance standards. A bond that is issued under a bonding line would go through that process: we would still do an environmental and social review of that project.

Senator RHIANNON: Thank you for that explanation, Mr Parsons. If I understand correctly, for the non-projects under bonding lines, you will look at them. But if you judge that an investigation is not required, the full-level investigation is in fact not carried out. Maybe you need to define what is done, because from the previous answer you gave, I did take that to mean that what was applied to the non-projects within bonding lines was very minimalist.

Mr Parsons : No, we still do a full review of the project. As part of that review, we make a decision about whether the project associated with the bond has a potential for impact. If it has a potential for impact then we go through our benchmarking against the IFC performance standards. That is the equivalent of deciding if it is associated with a category A or B project. If we decide it does not have any potential for impact, that is the equivalent of a category C. The reason why we do not go through the categorisation for those is that categorisation is basically a decision of whether or not to disclose a project. For bonds and non-projects, we generally do not have access documentation that we can disclose, so the categorisation is purely a decision—

Senator RHIANNON: Excuse me, can you just say that bit again? You talked about not disclosing information on non-projects. Do you have no access to the information or do you not disclose what you do have? Could you explain that further.

Mr Parsons : There is a whole range of things that can happen for nonprojects and bonds, which we have called a nonproject. Part of that can be access to information and part of that can be access to or permission to disclose information because we have no relationship with the actual owner of the project. The route that distinguishes projects from nonprojects is access to direct relationship with the owner of a project. Because we do not have that direct relationship we may not have the permission to disclose and this is the reason we have taken away from the categorisation and disclosure problem. We still do the full review of whatever information we can get and that would involve benchmarking against performance standards, which is exactly the same is if it was a category A, category B or category C project. We still do exactly the same technical review, if I can call it that, of the project.

Senator RHIANNON: It certainly is very confusing and it does sound like there are projects, where EFIC and therefore Australian money is linked, in which very limited assessment and evaluation is made. Maybe the best way to ask is: it appears that you have a two-tier system for projects and nonprojects. Would that be a way to summarise it?

Mr Armour : I would like to intervene here in the sense that it is complex. It is complex because it involves a number of layers of international standards. There is an OECD standard that we comply with and there is a standard that was developed by the commercial banking community called the Equator Principles, then there are IFC performance standards, which we apply against individual projects to assess whether they are performing or not. All those things were developed differently at different times by different people so they do not integrate, necessarily, into one whole. We have tried to use our best efforts to take the best and highest of those standards and apply them to projects we are undertaking.

I think your characterisation that we use a minimalist approach to some projects could be true when we are supplying very few services or services that are of a discreet and technical nature. So someone who is providing a design plan is not necessarily something that relates to a category or project. You would not sensibly apply yourself in the same way to that. Or, if a firm were supplying water pumps to a large industrial company, you would not sensibly apply the same tests to those transactions. In that sense, yes, we apply very minimalist approaches to the environment impact because the nature of what is being supplied by the Australian firm has no relevant environmental impact. We still undertake a thorough technical assessment of what that firm is capable of doing but, if there is no obvious environmental issues associated with the project, we do not.

Senator RHIANNON: It does leave one with the feeling that it is worrying having such a large amount of EFIC's facilities remain unclassified. In going back to pages 24 and 25, these are all of the facilities, the ones that come under the bonding line, in the construction sector, which, from what I could see, accounted for close to half of EFIC's new signings by dollar value. Am I correct in making that assumption?

Mr Armour : I come back to the point of classification. Mr Parsons made this point earlier. The classification relates to how we disclose the information to the public, to the community. It relates to a certain type of project. The fact that it is an engineering firm does not mean the engineering firm is undertaking a category A project. The level of due diligence we apply, both technically and environmental, might even be comparable, but one might be a category project and one is not. For a construction firm, they could be building a large building in downtown Hong Kong and that has not got the same sort of environmental impact as the development of a resource project in an emerging market.

Senator RHIANNON: I would just like to move on to some of the assistance to the live export trade. In the annual report you provide details of a bond of $8 million to Wellard Rural Exports for breeding cattle bound for Russia. It comes through as category B, which I understand means there are some environmental or social impacts. Could you inform us what these impacts are as EFIC sees them?

Mr Armour : The categorisation of B for that transaction related to the development of the infrastructure within Russia to maintain the herd when it was delivered. We actually spent a great deal of time on this. I think Mr Parsons himself travelled to Russia to meet with the proponents of the project and to understand better how they intended to develop the infrastructure for maintaining the herd. It is not a category A in the sense of developing a resource project in an emerging market but it had some environmental issues that we wanted to make sure were properly managed, like the waste treatment from the farm.

Senator RHIANNON: I was interested in—and you have covered it to some extent—what actions you have taken to minimise, monitor and report on those risks, particularly mindful that this is something that is now very much of concern to large sections of the public. Were you mindful of that, did you change your monitoring et cetera and how you are handling it?

Mr Armour : Is it specifically this transaction in Russia that you are pursuing with this line?

Senator RHIANNON: Yes.

Mr Armour : The company in Russia is Miratog. It is a very well established, literally billion dollar company that is very capable of undertaking projects of this scope and nature. Our concern was really with how they were going to develop the infrastructure in the area and we were quite comfortable at the end of our assessment that they would responsibly do that. They obviously need to maintain their licenses in Russia. They have made proposals about how they will construct and maintain this farm and they have to maintain those licences. That is the core within Russia in terms of how the health of the herd will be maintained.

Senator RHIANNON: I was then interested in the comparison between how you handled that in Russia and how it was handled in Turkey, because I understand that the credit guarantee for Wellard Rural Exports's feeder and slaughter cattle to Turkey came in as category C. You are saying that that has minimal social and environmental impacts? What is the difference?

Mr Armour : The cattle that were exported to Turkey—if I am thinking of the transactions you are thinking of—were slaughter and feeder cattle. They were going to be processed soon after arriving in Turkey; therefore, there was no infrastructure that had to be established at the same time as our exports were taking place. In Turkey there were existing facilities and there was no need to develop infrastructure.

Senator RHIANNON: So that is what you judged it on—the difference between category B and category C?

Mr Armour : In that case, that is correct. In Russia, again, the category B derived from the fact that they had to establish a large facility for the breeding cattle to maintain that herd; in the case of Turkey, they were feeder and slaughter cattle that were going to processed immediately in existing facilities.

Senator RHIANNON: From what I can see, there is no independent grievance mechanism for project affected communities of EFIC clients, so I was just wondering how you are handling that. Have you received any complaints from project affected communities, what are the details of those and how do you handle that? It does not seem as though you have a mechanism.

Mr Parsons : We are establishing a mechanism at the moment. We have a multistakeholder forum which involves several CSOs and we have been considering several drafts with those CSOs. We have used those for our grievance mechanism. We have currently got another draft out with them which they will be commenting on by the end of this month. Shortly after that I hope to present the grievance mechanism to our executive for approval. We have been going through this process now for about four months with the CSOs, developing a specific complaints mechanism. We already have a mechanism there, called a service charter, which is aimed more at our clients. We are developing a specific complaints mechanism for anyone—stakeholders or affected communities—to complain to EFIC. We hope to have that up and running in the second quarter of this year.

Senator EDWARDS: Have you got a changed approach in your procedures in dealing with the eurozone, particularly those countries that are suffering from sovereign liquidity risk?

Mr Armour : There are a number of aspects where EFIC has exposure to the eurozone. We have assets in the eurozone—that is, we have made loans to companies in Europe to allow them to buy Australian exports—and obviously we have our own Treasury operation. The Treasury operation will be at least indirectly affected by how the financial markets perceive the future of the eurozone. In relation to the first, we are watching those assets that we currently have very intensively. There is less than a handful that we need to watch quite intensively, but they are currently performing and paying us. In terms of the Treasury markets, we have deliberately over the past two years stepped down our exposure to European financial institutions to the point where it is relatively small. That, of course, has its own implications for us, but in terms of any immediate impact from the eurozone on EFIC it would be relatively minimal.

Senator EDWARDS: What is the value of the assets over which you have a watching brief?

Mr Armour : Almost all of those assets are fast ferries. So they are movable assets. We would seek to move them from Europe to other jurisdictions and sell them.

Senator EDWARDS: If you can find them.

Mr Armour : They are secured. We do know where they are. They are with substantial companies who are, in fact, still paying their loans. I do not want to presume anything.

Senator EDWARDS: I was being flippant; I should not have been. For Treasury, what is the exposure in dollar terms? Does that vary as things come off?

Mr Armour : It has come down considerably. I would have to take it on notice if you want detail.

Senator EDWARDS: You could give me some idea of that if you would not mind. In general terms you have wound back your exposure dramatically?

Mr Armour : Considerably, as much as we can. There are implications depending on how the markets react, regardless of whether you wind back you exposure. As you have seen, the funding costs for Australian banks have increased significantly.

Senator EDWARDS: So we are not likely to see any write-offs in that zone?

Mr Armour : For EFIC.

Senator EDWARDS: I am sure there will be write-offs; it is not that I am particularly concerned for EFIC.

Mr Armour : At this stage, having spoken with the board this morning, no. But we are watching it quite carefully.

Senator LUDLAM: I have got some follow-up questions on PNG LNG, about which I have asked extensively before, although I think I missed you last time. I want to ask three briefly about Leighton Holdings, which is currently being investigated by the AFP after allegations of corrupt payments allegedly made in Iraq by Leighton Offshore. This is a deal that EFIC is into by way of performance bonds worth about US$37 million for Leighton Offshore. Can you tell me what assessment EFIC carried out on the adequacy of Leighton Offshore's code of conduct and what the result of that assessment was?

Mr Armour : I can provide some information about Leighton but I am curtailed in some of my remarks given the ongoing investigation. In some cases I will generalise but the generalisation will be relevant to Leighton. For every transaction that we undertake we undertake a transaction risk assessment. Through that transaction risk assessment we identify specifically who we are dealing with, often down to the name of individuals. We look at their record. We do not do just that ourselves; we use a Dow Jones service that reviews every firm and provides an assessment to us of their background. We then look at their record in terms of whether they have had problems in the past. In situations in which we are dealing with companies that we have had a long record with, we usually have quite a deal of experience and insight into their culture. In the case of Leighton's code of conduct, we have dealt with them for over 20 years. Our assessment at the point of entering into that transaction with Iraq is that it was a fairly sound framework that they had in place.

Senator LUDLAM: Prior to the announcement of the AFP investigation, did you detect any cause for concern in the conduct of Leighton Holdings, Leighton Offshore or the South Oil Company—which is their customer there—with regard to their operation in Iraq, or did the AFP investigation come as a complete surprise?

Mr Armour : No, we did not identify any reasonable grounds to suspect it was an issue with Leighton. In fact, I believe it is Leighton who identified the issue for the AFP. I think that is an important point.

Senator LUDLAM: Regarding your answer to my previous question about your assessment of their offshore code of conduct, when did that assessment occur?

Mr Armour : That was prior to Iraq. We have been dealing with Leighton for 20 years, and obviously their code of conduct has evolved over that period of time. I could not give you a precise date for when we last reviewed the exact document, but we have a pretty good operational understanding of how the corporate culture approaches these issues.

Senator LUDLAM: Could you give us a precise date on notice, if you do not have it right here

Mr Armour : Sure.

Senator LUDLAM: I think you can see where I am going. To what degree do you carry out ongoing assessment of their activities?

Mr Armour : I would say that every time we do a transaction there is a transaction risk assessment. So at any point that we look at Leighton we would look at that company. We would look at major subcontractors who were working with Leighton—that is, with people who have had more than 10 per cent of the value of the contract. If they are subcontractors, we would look at them. We would look at the team that is involved in actually executing the contract. So we do quite a thorough review every time we do a transaction. We may not cite and read through their code of conduct every time, but we look through the details of each transaction the best we can.

Senator LUDLAM: So you are not just doing preliminary assessments; you actually are the watchdog day to day, to the degree to which transactions are occurring.

Mr Armour : I think 'watchdog' would not be the right term. I think the resources we have do not allow us to assume a role like that. That is something that is relevant to the AFP; it is relevant to people who have resources on the ground and have the capacity to a more thorough day-to-day investigation.

Senator LUDLAM: Who are those people with the resources on the ground in this instance?

Mr Armour : I am talking about the AFP—basically the law.

Mr D Richardson : The AFP would only become involved if an investigation were to be conducted. The AFP does not play a watchdog role in any sense.

Senator LUDLAM: I understand the distinction. I was a bit surprised to hear that you went straight to the AFP. Ideally the regulator prevents these situations from getting so out of hand that you do need the police involved.

Mr Armour : I am not sure which regulator you are referring to.

Senator LUDLAM: You folk.

Mr Armour : We are not a regulator.

Senator LUDLAM: You are not a regulator.

Mr Armour : No.

Senator LUDLAM: So you write the cheques and you are doing the assessment. You are quite correct: it is incorrect to refer to you as the regulator. Then who is? Who stands between the writing of the cheques and the uncovering of corruption allegations?

Mr Armour : They are two very different fora.

Senator LUDLAM: They are.

Mr Armour : There is an obligation under division 70 of the Criminal Code for Australian firms doing business overseas not to engage in corrupt practices, so that falls into a legal framework and that is the framework where Leighton has approached the AFP. There is over here a framework that involves EFIC as a government financial institution which is responsible for prudently lending money to firms that are capable of repaying us—let us put it that way. Our assessments are: are they borrowing that money for a good purpose, are they using that money for the right reason and are they the right people that you should lend money to? That is where our assessment is, but it is very much a commercial, credit and in some cases environmental assessment.

Senator LUDLAM: And in the meantime it is just about trust, really, isn't it? You do an upfront assessment, it looks as though these people are credible and reliable, they have a track record in the area, and we write out a cheque for US$36.7 million and let them go for it—until somebody calls the police because there are allegations of bribery.

Mr D Richardson : I might just repeat what has been previously said, but I think it is very important to have clearly on the record that Leighton went to the AFP. It was their own internal checks and internal concerns that led them to take the initiative and to take it up with the AFP. I just think that is important in terms of fairness to the company.

Senator LUDLAM: That is fair enough. The chief counsel for Transfield is reported in the Financial Review as saying—she was speaking in the context of Transfield at the time—that a code of conduct:

on its own is not enough … You need a vigorous compliance program—

which is what Transfield say that they have in place. She went on to say that there has not been a lot of enforcement in Australia. Would you agree that there needs to be a more vigorous compliance program?

Mr Armour : I cannot comment on that.

Senator LUDLAM: Why is that?

Mr Armour : It is not an EFIC matter.

Senator LUDLAM: That is interesting.

CHAIR: Senator, I am sorry, but the time has expired for this hearing. I will require you to put your remaining questions on notice.

Senator LUDLAM: I will do that. Thanks, Chair.

CHAIR: Thank you very much.

Proceedings suspended from 18:31 to 19:31