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Tuesday, 15 October 1996
Page: 4165


Senator FORSHAW(4.00 p.m.) —I present the report of the Foreign Affairs, Defence and Trade References Committee on the proposed abolition of the development import finance facility scheme, together with the transcript of proceedings and submissions received by the committee.

Ordered that the report be printed.


Senator FORSHAW —I seek leave to move a motion in relation to the report.

Leave granted.


Senator FORSHAW —I move:

That the Senate take note of the report.

I am pleased to table this report of the Senate Foreign Affairs, Defence and Trade References Committee on the abolition of the development import finance facility, or DIFF scheme. DIFF was introduced into the Australian aid program by the Fraser coalition government in 1982. It combined grant funds and export credits to provide concessional loans for developing countries to finance high priority public sector development projects. The present government decided on 8 May this year to terminate the scheme from 1 July.

As a result of continuing refinements to the scheme within Australia and stricter OECD guidelines for mixed credits, DIFF in 1996 bore little resemblance to the original scheme. DIFF was a development scheme with broad humanitarian objectives. By any definition, the overwhelming majority of DIFF projects approved since the inception of the OECD's 1992 Helsinki rules could be classed as humanitarian aid. Many projects had a significant impact at local community level: for example, in education, renewable energy and environmental areas. It was, in fact, a very successful scheme.

An important secondary benefit of DIFF was that it enabled Australian companies to compete on an equal footing with foreign companies when vying for development projects. DIFF was not a subsidy to Australian business but extended to recipient countries terms which enabled them to consider Australian bids for development projects. Recently about 85 per cent of projects funded under the scheme were nominated by recipient countries and not by commercial interests. Projects reflected primarily the development priorities of those countries.

When the Australian government terminated DIFF, it decided not to proceed any further with 50 projects which had received a letter of advice but had not received a letter of formal offer. These projects had received formal notification from AusAID that they were of sufficient priority and met the general eligibility requirements but had still to pass certain formal appraisal processes. The overwhelming evidence presented to the committee suggested that companies and recipient governments regarded the letter of advice as indicating that, subject to a satisfactory completion of those appraisal processes, DIFF funding would be forthcoming. AusAID has assured the committee that, as DIFF operated, 70 per cent of projects with a letter of advice proceeded to completion.

The committee believes that the decision not to proceed with these projects represents the narrowest possible legalistic approach to the termination of DIFF. It took no account of Asian business culture based upon development of relationships, trust and commitments. It ignored the pleas of senior ministers of recipient countries not to scrap particular projects. It took no account of considerable investments made by recipient countries, sometimes at the direct request of the Australian government. And it dealt a serious blow to relations, particularly commercial relations, between Australia and regional countries.

The termination of DIFF has had an adverse impact not only on the communities affected but also on Australia's standing as a provider of humanitarian relief to developing countries. The committee noted that the government has acknowledged the continuing need for concessional finance to support the massive infrastructure needs of developing countries in the region, citing a figure of $US1.5 trillion for infrastructure needs in South-East and East Asia in the next decade.

In the next five years alone developing countries in the region will require $US8.5 billion for pollution and emission controls and $US7 billion for water and sanitation each year. These are the very areas on which DIFF projects were concentrating. The committee finds the government's decision to terminate not only the DIFF scheme itself but also specific projects in the pipeline to be inexplicable and inconsistent with its own rhetoric.

The decision has had a severe impact on many Australian companies, which have lost projects worth $1.3 billion. The short-sighted nature of the decision to terminate DIFF can be seen in the fact that one New South Wales company alone will lose $110 million of export earnings in order to help the government save $70 million this year by terminating DIFF. The government has created an export `black hole'.

Although a few big name players appear on the list of Australian companies involved in DIFF, most companies involved were small to medium sized enterprises—many of these subcontracted to 50 or more other companies. They will now no longer be able to employ additional staff as anticipated. Some will have to lay off staff. Many companies had invested large sums in particular projects, and considerable time and resources. These investments have now been lost.

Vying for a DIFF contract entailed commercial risk. There was often strong competition from other Australian and overseas companies. Companies also had to meet all AusAID's DIFF requirements and to subject their proposals to OECD scrutiny. These risks were accepted as normal commercial risks. What cannot be construed in any possible way as commercial risk was the government's arbitrary decision to terminate DIFF. DIFF was the basis on which all of the projects were negotiated and implemented. Without DIFF, Australian companies could not even get to the negotiating table.

DIFF enabled Australian companies to win follow-on business in important developing markets. Even discounting the automatic multiplier provided by the combination of grant and loan funds in DIFF projects, the accepted figure was $2.30 of further business for Australian companies generated by every dollar of DIFF funding. In many cases DIFF was instrumental in establishing a market presence and earning credibility for a company which was then able to win further, fully commercial contracts. These opportunities will now be lost.

For a government which trumpets its concern for small business, which assures us of its interest in engaging with Asia and which makes much of its desire to increase employment, the decision is monumentally ill-judged. The committee therefore recommends that all projects holding letters of advice should be processed in the normal way and that funds be made available to AusAID to finance projects which successfully pass the appraisal processes.

The government has indicated that it will consider introducing a revised mixed credits scheme as early as 1997-98. It is included in the terms of reference of the Simons review of Australia's aid program. The committee believes that a revised scheme as outlined in the department of foreign affairs and AusAID submission largely describes DIFF, either as it was or at least as it was evolving.

If the government were to suspend DIFF for only one year, it is incomprehensible why the government did not simply revise it instead of going through the trauma of terminating it and then replacing it with a similar scheme, incurring substantial damage to the national interest in the process.

The committee believes that DIFF was an effective element in Australia's overall aid program. It also provided significant benefits for Australian companies, particularly in the sector providing high technology capital goods, arguably the most important sector for Australia's future trade performance. The committee therefore recommends that the Australian government not wait for the financial year 1997-98 but introduce, at the earliest possible time, another mixed credits scheme to replace DIFF. The committee also recommends that, given the significant environmental needs in the region—acknowledged by the government—the percentage of projects under the green DIFF component in any new mixed credit scheme be raised to 40 per cent.

Many witnesses who appeared before the committee spoke of the importance of personal relationships and trust established over a long period of time in business dealings in Asian countries, and of the enormous damage done to commercial relationships by the decision to terminate DIFF. The withdrawal of Australian government support for these projects is regarded as a serious breach of faith on the part of Australia.

At first, Mr Downer tried to play down the strength of the criticisms of regional countries. In answer to a question without notice on 18 June in the House of Representatives, he replied that `not one minister' has raised concerns with him. One by one, the written and oral criticisms of ministers of regional countries were made public. The minister was forced to apologise for misleading Parliament.

The strength of the adverse reaction in the region to the original decision to terminate DIFF is evident in the minister's decision on 22 July to provide funding for some high priority projects nominated by recipient governments. The committee believes that this embarrassing partial policy reversal only serves to emphasise the precipitate and ill-considered nature of the original decision. Moreover, this about-turn has also heightened the confusion in the region about Australia's intentions and can only further erode Australia's credibility as a reliable aid provider and neighbour.

During examination of these matters in the public hearings, the committee sought certain documents and information which officers of the department and AusAID referred to the Minister for Foreign Affairs (Mr Downer). The minister has refused to provide those documents or information to the committee on grounds that the committee found to be quite unconvincing. The effect of that refusal has been that the committee is unable to conclude its inquiries under terms of references (d) and (f).

Until that information requested by the committee is provided by the government, the committee can only report in interim terms in relation to those two terms of reference. The committee believes that it is in the public interest for the requested information and documents to be made available to the committee. The committee believes that the minister's reasons for withholding the documents and information from the committee are specious, and therefore recommends to the Senate that the documents be provided to the committee.

The committee also believes that the many issues left unanswered could be resolved if the minister were to agree to the committee's request to appear before the committee. I indicate that tomorrow I will give notice of motion with respect to the production of documents and other matters raised in the committee's recommendations on these issues.

In conclusion, the committee found that DIFF was an important and effective element in Australia's aid program, which delivered significant humanitarian benefits to developing countries. It also assisted Australian companies by enabling them to compete on equal terms with overseas companies for development projects. Its abrupt termination has damaged our relationships with regional countries, undermined Australia's standing as a provider of humanitarian relief and compromised our commercial credibility in the region.

Recipient governments will view with caution future commitments made by Australian governments. Australian companies will find it significantly more difficult to establish themselves and win contracts in the region. The implementation of the decision to terminate the scheme was clumsy and ill-judged and has only confirmed the perception in some quarters that the government's commit ment to Asia is little more than lip service. (Time expired)