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Australia's relationship with the countries of Africa

CHAIR —Welcome. We appreciate your attendance and the submission that you have provided to us, which is the report entitled Into Africa. Gentlemen, as I am sure you are well aware, these proceedings are akin to proceedings of the parliament and all evidence must be truthful, to the best of your knowledge. If there is anything that you believe should be discussed in camera or you wish to do so, please make a request at that time and we will consider it. We will proceed to opening statements and then questions from members of the committee. Mr Armour, would you like to lead off?

Mr Armour —Thank you. I will make my introductory remarks quite brief. Roger will spend a bit more time talking about the macroeconomic perspective on Africa. The person we would most like to have been here in fact is in Africa. He is our African specialist and he is there helping a client right now, so we will do our best in his absence. There are two messages that I want to leave with the committee at the end of this session. Firstly, we have a role to play in promoting Australian trade with and investment in Africa. It has to be seen in the context of the larger resources and scope of DFAT and AusAID, but we have a role, which we will elaborate on. Secondly, we exercise that role responsibly. I would be very happy, as would Jan Parsons, in the question and answer period to elaborate on how we achieve that mandate. We see it very much as our responsibility to help Australian trade and investment in a responsible fashion.

To give you a one-minute snapshot, EFIC is a statutory authority. The independent board of directors reports to the Minister for Trade, the Hon. Dr Craig Emerson. We have three elements to our mandate under the EFIC legislation: to promote trade and investment, to do so in a way that is complementary rather than competing with the private market—that is, working within what we call the market gap—and to do so profitably, so not to lose money but to be profitable. The products that we offer to our exporters are quite comprehensive and I do not intend to go into them in any detail. To paraphrase, we have products that help them to win business when they are tendering for business. We have products that help them to finance what they have won or help their buyers to finance what they seek to acquire from Australia. We have products that help them to protect their investments or to protect themselves against payment risk when they are working in foreign jurisdictions.

Senator TROOD —You do not provide capital directly.

Mr Armour —Correct. We lend money; we do not provide capital in the sense of making equity investments. We are a debt provider, at that end of the spectrum, not an equity provider.

Senator TROOD —And the debt you provide you arrange with banks?

Mr Armour —There are two facets of debt support that we provide. We can lend directly. That is a power under our legislation. We can also guarantee a bank that is making a loan. As I said at the outset—and I am happy to elaborate—we carry out all these responsibilities within a very tightly defined framework of Australian and international law and guidelines, including those relating to ethical, environmental and social standards of business. These rules are ingrained in our internal policies, which are in use in our organisation every day. We do not consider this simply a compliance mechanism; we see this as being very much part of what we do.

Coming to the Africa specific commentary, we have been active in our support for Australian companies working in Africa for a long period, particularly Australian resource companies active in exploration and development, as well as significant work being undertaken by engineering and service companies. Over the past six years EFIC has supported Australian companies in Mozambique, Ghana, Zambia and Mali through a range of financial tools, including political risk insurance, performance bonds, project finance and simple export finance or medium-term finance.

These are all products that have a long-term risk horizon. That is the one common element I would like to draw out—that we are not a short-term player in an African context. The risks that we take and the outlook we have are very much about the medium- and long-term success of Australian trade and investment.

The total of our support over the past six years has been US$353 million, which is not insignificant as a sum. It has, obviously, multipliers in terms of the investment and trade that takes place but it has to be seen in the context of overall Australian investment, which is much greater than what we have supported.

CHAIR —Sorry—US$353 million and what is that exactly?

Mr Armour —That is the value of the policies or the loans, or the bonds we provided over the past six years.

CHAIR —Six years, in total, everywhere?

Mr Armour —Correct, yes, to Africa.

CHAIR —To Africa—that is what I wanted to know. We will come back to that. We will allow you to finish your opening statement.

Mr Armour —The US$353 million is the value of facilities, not necessarily the value of the projects or the investments taking place, which are much larger. In terms of our future pipeline, given the gestation period for most of these projects will be two or three years, over the next two or three years we are looking at facilities of around US$500 million, so there is still significant interest and growth in Africa as an export and investment destination.

Mr RUDDOCK —Comparatively, what is that exposure?

Mr Armour —Comparatively, it is still relatively small to our book.

CHAIR —Can we leave the questions because that is what I was going to come back to, particularly in relation to the submission we have received from Jubilee Australia.

Mr RUDDOCK —So you cannot take the chairman’s questions then!

CHAIR —Let us get the opening statements out of the way first.

Mr Armour —I have the sense that you are champing, so I am going to make one more comment and turn to Roger for the macro perspective. The comment really is about Australian companies. I would like to emphasise and in a way support what BHP said previously. We do not tend to work with the really big companies because they are not in the market gap. So BHP Billiton would very rarely have the need to ask for EFIC’s support—it is a big company and substantial in its own right. We tend to work with smaller companies. Our experience with smaller companies is that they act and perform a very high standard and they do see that as a comparative advantage. They take their Australian experience, which is that they have learnt to work in the communities in Australia, and talking with the chief executives of these company they say, ‘I’m going to behave the same way here because I’m trying to become part of the community. I’m not coming in and out; I’m making an investment that I expect to see roll out over a 10- or 20-year period. This is not a matter of making a quick buck; this is about becoming part of the community.’ The companies we are working with tend to transpose their Australian context and standards to their work in Africa. I could give you some case studies but I will try to keep this short.

The final anecdote, before I turn to Roger, is that I happened to be in South Africa about three weeks ago for another purpose altogether. As part of that, we were having seminars with various African institutional bodies concerned with risk and development in Africa. The most stark picture—literally, if I could hand it to you, I would—I had in terms of the complexity of Africa was a very simple outline of the continent of Africa within which was placed the United States, China, most of Europe and a couple of other countries. I am sure you have heard from many submissions already that talking about Africa is quite a complex task. If you think of it as the United States, Europe and China all rolled into one geographic body, you realise that it is quite diverse.

Mr Donnelly —I am the chief economist in EFIC. In that role I do so-called country risk assessments of transactions in Africa. I have been involved in all EFIC’s major transactions for more than a decade now in countries like Mozambique, Mali, Kenya, South Africa and Zambia. I have also undertaken broader research into the push by Australian resource and engineering companies into the African resource sector. With your leave, I would like to tell the committee very briefly about the findings of that research. The main piece is a book I have written with my colleague Ben Ford, who cannot be here today because of another commitment. It is this one, called Into Africa—How the Resource Boom is Making Sub-Saharan Africa More Important to Australia. It was written for the Lowy Institute in 2008. I have already sent the e-version of the book to the committee. I stress that the views we express in this book are ours, not necessarily EFIC’s; please bear that in mind as I make a few remarks now.

I guess a key finding of the book is that Australian resource investment in Africa is significant in two ways—significant for Australia in the context of its overall offshore resource investment and significant for Africa in the context of its overall inward flows of foreign direct resource investment. Three quick facts: we estimated back in 2008 that actual and prospective investment by Australian companies in Sub-Saharan Africa in the resource sector had climbed to $20 billion from very little at the turn of the decade, so it was quite a big ramp up. Australian companies had become the third largest exploration spenders in Africa, after South African and Canadian companies. And the big Australian mining and engineering companies—big to small, actually—were making a substantial fraction of their sales from African projects and had lined up work on at least a further $4 billion worth of projects in Africa. I was surprised to hear, for instance, in the course of writing this book, that WorleyParsons had a thousand people on their payroll in Nigeria, servicing the oil platforms in the Niger Delta. Nigeria makes Papua New Guinea, in terms of political risk, look like a Girls Guides’ picnic. They had a thousand people on their payroll—not all Australians, but an Australian company. Very interesting, I thought.

A lot of water has passed under the bridge since 2008 of course, following the bankruptcy of Lehman Brothers in September 2008. World financial markets suffered that big convulsion and commodity prices slumped severely. Since then financial markets have revived somewhat and commodity prices have roared back in a phenomenon that many Australian commentators in particular are calling the commodity boom mark 2.  I guess a question we all need to look at is how Australian companies have weathered those ups and downs.

My co-author Ben and I examined these issues in a later paper we wrote for the Australian Institute of International Affairs and again, with your leave, I would like to table this paper with you. The long story short is that a lot of the investment was mothballed or cancelled in the immediate aftermath of the Lehman collapse. But it was quickly revived as commodity prices began to recover. I am sure that if you did a stocktake the 20 billion number that we came up with in 2008 would now be much larger. There have been subsequent commitments and investment that could boost the number considerably, in my opinion.

To give just one recent instance, back in June BHP reportedly signed a US$3 billion deal with Liberia to develop an iron ore mine. Another example is that in 2010 the number of ASX listed firms with African assets rose by 20. According to DFAT, up to 40 per cent of foreign owned mining projects in Africa are run by Australian companies. I find that quite an interesting statistic. There are now more than 170 Australian companies with African assets in nearly 40 African countries. They are the dry facts, but there are some important qualitative aspects of the Australian resource investment in Africa that we also examined in our research. I will just note three before finishing. Firstly, there is the so-called social licence to operate. We look at how Australian companies have gone about gaining that all-important licence above and beyond all of the legal and regulatory approvals they need to gain in a country to operate.

Secondly, there is China. The subject of the African resource sector and the current African resource boom obviously cannot omit mention of China. State backed Chinese companies are striking very large resource-for-infrastructure deals with African governments. The phrase to Google is, ‘Angola mode’ deals. They are being dubbed ‘Angola mode’ deals by the World Bank now. There are very large commitments by the Chinese to build football stadiums, university campuses, parliament buildings, railways and roads in return for long-term supplies of commodities such as copper, cobalt, oil et cetera. These deals are often not evaluated with commercial yardsticks but have the strategic objective of helping China to achieve what is called resource security, energy security. This large-scale state backed strategic investment represents not only a competitive threat to Australian companies but also an opportunity because, in some cases, it has provided capital and markets to Australian projects.

Thirdly, we have looked at public policy implications. The saying normally goes that ‘trade follows the flag’. In this paper we wrote we note that, in Africa, it has been the other way around: the flag has followed trade. Australian resource companies invested in Africa first and now Canberra, by its own admission, is looking to follow. We present some observations on how far various public policies might be recalibrated in an Africa with direction, owing to this resource investment. I would be delighted to take your questions on anything I have raised.

CHAIR —Thank you very much. In the Risky business report by Jubilee Australia, who appeared early this morning, they make a statement: ‘In 2006-07, 85 per cent of EFIC financing and insurance went to support extractive projects in Africa.’ Is that accurate? They do not give dollar figures. You gave some dollar figures earlier.

Mr Armour —By value, that is correct. By number, it was 16 per cent; by value, it was 81 per cent in 2007. That was driven by a particularly large project in Zambia that tended to distort the results in that year. If you look at either side of that, in 2008 you will see that we had zero per cent. If you look at 2006, you can see that it was 32 per cent. It is very much a peak and trough effect.

CHAIR —This report is dated December 2009, so there were other figures on either side of 2006-07 that give a different perspective altogether?

Mr Armour —It does vary significantly from year to year.

Senator MARK BISHOP —Mr Armour, at the end of your introduction you were talking about the involvement of Chinese SOEs and some of the assets they agree to provide to countries where they get access to mining rights. In terms of the prices they negotiate with the governments of those countries in Africa, are they generally market or commercial prices, or are they set on another factor?

Mr Armour —I do not think we have great insight into the specific commercial details of the transactions that Roger alluded to. We know what we read in the press, but I do not think we have any particular insight in terms of whether it is a fair exchange between two sovereigns.

Senator MARK BISHOP —We are all aware that there is a significant amount of infrastructure investment by, and a lot of development aid going from, China into a range of countries, and I was wondering whether there was a subsidised price, perhaps, obtained as more in terms of long-term supply contracts, that perhaps they are not getting from otherwise competitor companies.

Mr Armour —I do not know whether I can comment on the commercial terms. I can offer some observations about their EFIC equivalents, if that is any help. There are in fact two in China: Sinosure, which is an insurance company, and China Eximbank, which is a finance company.

Senator MARK BISHOP —And they are SOEs?

Mr Armour —Yes, very much so. They are state directed. There is a very strong relationship between the direction of the institution and the central party.

My impression, frankly, is perhaps more positive than the impression you would have gained from reading the press. My impression, at least of Sinosure, is that their pricing is largely consistent with what you would expect from agencies such as EFIC globally. I have the impression that China Eximbank may be more aggressive on pricing but, on the other hand, they also have a large pool of domestic savings. That means that their cost of funds can be down as well. So it is harder for me to offer criticism there without knowing more detail. On balance, I do not see subsidies flowing through the EFIC equivalents into these transactions.

Senator MARK BISHOP —Do those two Chinese EFIC equivalents you mention limit themselves to the sale of the types of products EFIC Australia sells or do they also engage in large-scale provision of capital as part of development applications?

Mr Armour —China Development Bank, a third institution, would be typically associated with the activities you are talking about rather than Eximbank, although China Development Bank is truly a bank rather than an export credit agency. They have a much broader range of products. I am not conscious of them providing equity in any of this. Equity is typically driven out of the professional enterprise in oil, gas or mining—or whatever is owned by the Chinese government—rather than out of the finance institutions.

Senator MARK BISHOP —Understood. Thank you, Mr Armour.

Mr Armour —I should supplement my answer: they do not, in my view, compete on price. However, their risk-taking appetite is quite significant.

Senator MARK BISHOP —And of course they have a much longer time frame to price the risk?

Mr Armour —Exactly. They take risks that a purely commercial institution may reconsider.

Ms PARKE —This morning we heard from Jubilee Australia, which have submitted a report, as the chair mentioned, called Risky business, in which they comment: ‘Various EFIC documents are exempt from the Freedom of Information Act’ and that EFIC is ‘one of the most underscrutinised and least accessible statutory corporations in Australia’. They concluded: ‘There are serious questions about EFIC’s accountability to Australians and citizens in developing countries, in particular, with regard to the protection of human rights, environmental and social safeguards,’ although they seem to suggest that this has improved in recent times. They have recommended that EFIC publish summaries of minutes of meetings of its board of directors and summaries of its risk assessment for category A projects, like the US and Japanese export credit agencies do. I would just like to hear your comments on that.

Mr Armour —I would like to start with a sort of high-level response and maybe touch on some of the issues and supplement some of my remarks where I am not conscious of the detail. You would expect me to say this, but I do not agree with the characterisation. I think if you look at the material that we place in the public arena you will see it is actually quite extensive. If you look at the significant annual report we table you will see that it is beyond what is required under CAC. We actually follow the ASX guidelines in terms of what we are trying to tell the public. We follow every conceivable rule and regulation when it comes to disclosure of significant environmental projects. Our engagement with the community is quite significant. There is a certain irony that the information they seem to be basing their judgment on comes from us. We have more that we try to tell them, but it is a process. That process is in fact continuing this Thursday when Jan will sit down with Jubilee and Oxfam—those are the only two confirmed at this point—to walk through the review of our environmental policy. We reposted the environmental policy to see whether we could get comments back from civil society on how it can improve. We had three submissions altogether, one of which was one page. The other two were more substantial. We went out for an eight-week period and, from the whole community, we had only two substantive comments on our environment policy.

The approach we have taken to Thursday is that we have drafted everything, and we will say, ‘Here are things we’ll agree to right away. We can agree with what you say. Here are things that we may be able to agree to, but we need to clarify because we think there is a misunderstanding in terms of what you said and what in fact takes place’—some of the comments that you have repeated there in fact fall into that category—‘and some things we can’t do, simply because it’s government policy and we’re not a policy-making body; we’re an agency that executes under a mandate.’

So we are very actively engaged with the community, always seeking to improve this environment policy, which has been in place since 2000 and was, I have to say, a precursor to any international understanding through the OECD, which I think was 2003. Yes, 2003 is when the OECD started a focus on the environment; 2000 is when we introduced our environment policy. We have revised it four times in 10 years, each time engaging with the community, sometimes extensively—using consultants et cetera to develop the dialogue further. There were some that were very happy to agree to some of those specific points that they raised. As a matter of fact, I took some comfort from the tone of the submissions to your committee relative to what we thought was a more bombastic tone in the Risky business report, which really did not strike a chord in terms of our experience. There is a lot in what they have submitted to the committee that sounds sensible, absolutely; we would like to work on that. Probably the only area in which we disagree is they say that our due diligence around risk is not matched by our due diligence around the environment, which is just flat-out untrue from our perspective.

CHAIR —Mr Parsons, were you going to add something? I thought Mr Armour was inviting you to, but you do not need to if not.

Mr Parsons —I do not think so, unless you want some more detail about specific policies.

Ms PARKE —Okay. But do you believe there is a necessity for EFIC to be exempted from the FOI Act?

Mr Armour —The commercial-in-confidence question is a good one. Our concern around commercial-in-confidence is very much around the commercial end. We have firms who give us their financial statements, and if they are small firms that means I can tell how much their chief executive is paid. These firms are small, privately held companies through to big companies. They give us a whole raft of documents, and our commercial-in-confidence exemption is based on the fact that they do not want that material in the public arena. What we are very willing to put in the public arena, which I think relates to this concern, are matters concerning the environment, but not issues of their cash flows, their internal reports et cetera. We think that, on balance, the interest is in protecting their commercial-in-confidence information rather than disclosing it. Why? It is not simply because they are private companies; our experience is that you will get a better quality of information from these companies when you tell them that it is a discreet dialogue. If you say, ‘Everything you give to EFIC will be revealed to the public,’ you will get a sanitised report or a sanitised comment. If you say, ‘We want extensive information to understand what you are doing, some of which we are going to disclose,’ I think you get a better quality of assessment.

Ms PARKE —But, if those companies are seeking public money, which they are, and other export credit agencies are happy to reveal their minutes and the summaries of their risk assessments, why wouldn’t EFIC be happy to do that too?

Mr Armour —Again, frankly, I think the comment they provided to you is misleading. The US Ex-Im Bank minutes are: ‘We met; this is what we talked about.’ That is it. It is not pages and pages of discussion and analysis; this is really two-sentence type material. The Japanese one, which I think you know better than me, Jan—

Mr Parsons —The Japanese agency publishes a summary of its assessment which is really a non-descript summary. It does not actually state the name of the project. You have to infer which project it is referring to. As far as environmental and social analysis goes, it says, ‘Environmental issues, there were none; social issues, there were none.’ It is that level of information—

Ms PARKE —I see.

Mr Parsons —and we provide probably more than that in our annual reports. I do not want to get too technical, but we have degrees of environmental risk, if you like. We have category A, which is where there is a significant risk or a significant potential for impacts. For those ones, before making a decision to support a project, we disclose whatever environmental and social information we have at the time, which is usually an impact assessment of some kind or sometimes management plans if they are available. But we disclose those prior to making a decision. Then, in our annual reports, for that type of project we typically say: ‘We looked at this project. The major issues that we were concerned about were these and, typically, this is how we would manage those.’ So we actually do what they are asking for. We do not do it in the same format perhaps, but we disclose and publish a lot more than we are obliged to under our international obligations.

Ms PARKE —I have a question that I also put to BHP Billiton; I am not sure whether you were in the room. BHP Billiton signed up to a number of standards like the EITI and the ICMM—principles of sustainable development, the UN Global Compact. I am looking for your comment on how you think it would be for the government and industry to encourage all Australian companies to sign up to these standards in order to promote an Australian brand of high corporate standards for governance in Africa.

Mr Armour —That is a policy question that is probably best answered by DFAT or AusAID. I can answer a very specific EFIC element of that, though, which is quite beyond what we are obliged to do under the OECD approaches. We have also signed up to the Equator Principles, which is an environmental monitoring mechanism for commercial banks, and the UNEP Finance Initiative, which is another framework for examining the environment. So, as an institution, we are very aggressive in terms of picking up other frameworks by which to examine our own activities and to give confidence to the public that we are doing the right thing. In terms of the EITI, obviously we are conscious of it, we watch it and it is an element in our thinking, but it is a policy question that I would prefer to refer to DFAT.

Ms PARKE —It does get mentioned quite extensively in the paper, though, that was done for the Lowy Institute, so presumably your institution does have a view on it.

Mr Armour —No, we do not as an institution. As Roger said—

Ms PARKE —Was it Roger’s view, then?

Mr Armour —Yes, exactly. We had to negotiate with DFAT that we would lend our economists to Lowy without representing the Australian government. It was a very sensitive negotiation, as your question picks up. We are happy to talk about the EITI in terms of informing the committee about how it works and that sort of thing, but we are not the institution to say we should or should not do it.

Ms PARKE —In that case, Mr Donnelly, would you like to talk about the EITI? We have had a comment from other people who have made submissions to this inquiry that, although the Australian government supports the EITI, it does not implement it. I am not quite sure what that means, but if you know that could you can explain it to us.

Mr Donnelly —I believe it has provided funding to promote the adoption of EITI by both sets of parties. It is an initiative where the host governments are urged to publish what they receive and mining companies are urged to publish what they pay, to shine a bright light of transparency upon what is going on to minimise the risk of corruption and so forth. It was an initiative promoted, I think, by Bono and Tony Blair a few years back and it has acquired quite a bit of momentum. It is an initiative that I think, by and large, within the industry is seen as necessary but not sufficient for achieving good governance and transparency. As I understand it, a lot of companies see value in signing up to the initiative to the extent that they can engage in dialogue with the host country governments to also adopt the EITI. There is dialogue at the moment with PNG, urging them to adopt the EITI. My co-author and I suggested in the Lowy book that this is an area that the government might want to examine. Going back to the beginning, the investment has gone into Africa first. We made the observation, which Canberra agrees with, that public policy has lagged somewhat behind investment by Australian resource companies in Africa. We then posed the question: how might public policy catch up? We identified five areas where that could take place, one of which is perhaps more effort on the part of Canberra to urge governments to adopt the EITI and other frameworks that promote good governance.

Ms PARKE —Is there a question about Australia providing financing for the EITI mechanism but not itself having adopted it?

Mr Donnelly —Speaking in my personal capacity, I do not see it as EFIC’s role. We have a comparative advantage in providing financial support to—

Ms PARKE —I am not asking about EFIC. Some other people who have made submissions to this inquiry have suggested that, although the Australian government is providing finance, it has not itself adopted or implemented the EITI. I am not sure what is meant by that statement. I just wondered if someone could clarify that.

Mr Parsons —The EITI is more than just adopting. It is not just a country coming out and saying, ‘We’ve adopted that; it’s done.’ There is actually a formal checked process of passing certain hurdles, which is done by a committee set up somewhere in Europe. I did check earlier on this year, but I think there are only two countries that actually pass the highest hurdle in terms of implementing the EITI. Off the top of my head, I think they are Ivory Coast and Nigeria. So only two countries at the moment fully pass or fully implement the EITI. But there is an audited process that countries have to go through to be assessed as being implementing the EITI.

Ms PARKE —And Australia has not done that yet?

Mr Parsons —Australia has not done that.

Ms PARKE —And that is why that is being raised?

Mr Parsons —Yes. A common criticism by developing countries is, ‘You’re imposing this on us; why don’t you guys sign up to it too?’

Ms PARKE —I think PNG is saying that to us.

Mr Parsons —I think there is only one First World country—Norway, I think—that has started going through the process of becoming an implementing country.

CHAIR —It is a policy decision anyway, isn’t it? We are well over time, but we will keep going. Mr Murphy?

Mr MURPHY —Mr Armour or Mr Donnelly, in terms of companies doing business and managing risk at the same time in Africa, a number of initiatives have been taken by companies to deal with corporate social responsibility. I would be interested—very briefly, in view of the time constraints—in how you see Australian initiatives compared with those of other countries.

Mr Armour —This is the initiatives that individual Australian companies are taking?

Mr MURPHY —Yes, compared with what companies from other countries are doing in Africa.

Mr Armour —We see a sliver, a snapshot of part of the market rather than the whole market. This is a chance for me to tell an anecdote. The project in Zambia we supported that was the large blip in our signings in one year was a development by a Western Australian company called Equinox of a copper mine in Zambia. They used a Queensland based company called Ausenco to do the engineering and procurement to complete the project. So it was very much an Australian project. People working the project had extensive knowledge of and engagement within Africa, but there was a real Australian flavour to it, which in the Zambian context was very good. They took there a sense of community. They went there and they said: ‘It’s a mine, sure, but we’re actually talking about the future of the people who are going to live there for the next 10 or 20 years.’ They worked with the Zambian government on a number of fronts.

In the interests of saving time, I will just emphasise one that really stood out. They contracted a European designer of low-cost housing to come to the mine site and said, ‘Give us four models of housing that people can afford at different levels, on a mining pay scale.’ They went to the Zambian government and they said, ‘We would like title to lands around the site that we can then put into a package so that people who work on the mine site can be the first mortgage holders in Zambia.’ So they contracted to build the houses. We went through them, and what they were getting was really good, because they bought them in bulk. They had four great designs. They got title and set up a system so that people could just pay their mortgage out of their pay, like we do here. They created a title-owning group in Zambia. They have all the advantages that we have in terms of borrowing against the house in order to fund their kids’ education and in terms of having an asset that, over the 10 and 20 years of that mine, will grow and they will accumulate wealth in a real way. Why did they do this? Because they have done it in Australia. They took that exact philosophy and said, ‘The people around here actually have to benefit as a community from what we are doing.’

Mr MURPHY —Thank you.

Mr Armour —I went through a mine site examination with colleagues from the other agencies that fund it, including the African Development Bank. The African development person was really hard. She spent two days beating up on this company, to the point where we thought, ‘Gee, we’re in trouble here.’ At the very end of our two-day visit, one of the Zambian ministers came in to do a survey and asked how it went. We thought, ‘Oh, gosh, we’re going to get toasted here.’ The first thing that she said was, ‘This is a model for how the African Development Bank is going to start doing mining in Africa.’

Senator TROOD —What has been the trend of your business in Africa over the last five to 10 years?

Mr Armour —It is very episodic. For example, the 2007 figure was huge. In 2008, it was zero.

Senator TROOD —The GFC, I assume.

Mr Armour —It was partly the GFC. But if you go back far enough it is still episodic. In 2004, it was five per cent by value. In 2005, it was six per cent by value. In 2006, it was 32 per cent. In 2007, it was 81 per cent. You would like to think that it is climbing, but it is episodic. It is very much a function of what is happening in the commercial markets. Our pipeline suggests that we will continue to grow our exposure there. It possibly will not be as large as Asia, for example, but it will be significant, I expect.

Senator TROOD —You obviously get a lot of proposals that you do not decide to fund. Have the number of proposals that come to you increased over the last two or five years or so?

Mr Armour —Even that is episodic. In fact, I have that information in precise detail, but not in my head.

Senator TROOD —Perhaps you can take that on notice. I would be interested to know whether or not there has been an increase in activity and the number of people who are seeking funds which for one reason or another you decide not to grant.

Senator IAN MACDONALD —Is it all mining or is it other things as well?

Mr Armour —It is mostly mining. There are other industries, but it is mostly mining.

Senator TROOD —Mr Donnelly, I want to ask you a couple of questions about your Lowy paper. The point that you make here is that there is a need for a marginal recalibration only. This was published in 2008. I am wondering whether in the couple of years since the paper appeared you have had reason to change your assessment about the need for change, or recalibration as you put it.

Mr Donnelly —We stated in a more recent paper that on balance we feel that if Australian investment in difficult countries continues apace the foreign policy priority that Australia places on Africa may need to rise still further, but this should be a natural evolution rather than a strategic goal. We were questioning in this paper the idea that has gained a little bit of fashion that we ought to be aping the Chinese and becoming a really big strategic player. In both these papers, we have questioned the wisdom of the Chinese approach, suggesting that there are better ways, perhaps, to achieve energy and resource security than through some of these non-commercial and big, resources-for-infrastructure deals. We have also made the point that we are a completely different country from China with different needs. We are not a resource hungry commodity importer that needs to fear rising commodity prices. We benefit from rising commodity prices, for instance. We also do not have the war chests that they can mobilise. The point that was made before by Angus and the BHP gentleman about it being possible to compete with the Chinese and the other big strategic players in Africa for concessions and contracts without going down their road is a very true one. The Chinese are not having it all their own way in Africa. They have encountered setbacks in Zambia and Angola, for instance. At the very highest levels in the politburo, they are having debates about to what extent they ought to be paying more attention to corporate social responsibility on the part of their big flag-bearing companies.

Mr Armour —To add to that, I was in South Africa a few weeks ago for a meeting on global ethics in the private and public sector. This particular meeting was on the public sector and Sinosure was represented. They made this point in a very public forum. They said that they were revisiting some of their thinking. They said that they had made mistakes following a very Chinese model. They said that they intend to local mobilise more and spend more time on these issues. I am not a Pollyanna when it comes to these things, but there is a pragmatic understanding that they might need to shift their approach.

Mr Donnelly —That presents threats as well as opportunities. The Chinese are not stupid; they learn. They will remain formidable competitors.

Senator TROOD —Is this what you mean? Are you primarily referring to the Chinese push into Africa when you talk about the new great game? Is it their activity?

Mr Donnelly —Yes. We were searching around for a clever label and that is the one we settled upon—harking back to the great game that was played in the 19th century. There are other strategic players on the continent. China is by far the largest but you are seeing India, the Gulf countries, Russia, Brazil to some extent—

Senator TROOD —Is it your conclusion though—notwithstanding the fact that this new great game is taking place and, as you have just said, the rules are perhaps in the process of changing—that Australian companies for the most part are not at a competitive disadvantage?

Mr Armour —I think the point that BHP Billiton made earlier was right, and that is: they differentiate themselves. It is a bit like cars. High-value engineering is a great benefit if you are trying to sell a Mercedes or a BMW but not if you are at the low end of the scale. In the same way, they go to their constituents and say, ‘This is what we do. We are going to deliver a whole range of benefits in a prudent way,’ and that is how they sell themselves. They really cannot afford, literally, to pick up the other path. This is a good path for us and they understand it.

Senator TROOD —You do not advocate a Chinese approach but you do argue for a greater Australian engagement and you make the point about opening more diplomatic missions, potentially, in Africa. I wondered whether or not you had reached a conclusion as to where they should be. Secondly, I wanted to ask you about your suggestion with regard to bilateral investment treaties and, in particular, whether or not you think any of the companies with which you have had dealings in Africa would have necessarily benefited from there being a treaty in place.

Mr Donnelly —On your first question, Senator, as to whether we have pinpointed any particular places where new posts should open, no we have not. What we did do is suggest that Canberra think about opening some further posts in terms of this flag-following trade thing that we developed. We did not put it any more strongly than that. Lo and behold, straight after we wrote the Lowy report, they did precisely that. They announced an initiative. Needless to say, I am not suggesting that they were following our lead—

Senator IAN MACDONALD —I suspect there were other reasons.

Mr Donnelly —Of course. Let me just make this factual observation—the one that the BHP gentleman made before: Mozambique is a country where there is an awful lot of Australian investment, and Guinea is another. Why not do a cost-benefit analysis there? It would be my suggestion and that is what we have talked about in Lowy seminars. I am sorry, what was your second question?

Senator TROOD —It was about bilateral investment treaties and whether or not you advocate those as a basis for improving the climate for Australian investment. I am just wondering whether or not you think there are any companies that might necessarily have been either protected or gained advantage by the possibility of those treaties being in place. Or is it a kind of ideal that might serve Australian interests in the future?

Mr Donnelly —It is something that I believe policymakers should be looking at in the future. Canberra has an open mind about these. I talked to the policymakers in Treasury who have carriage of the bilateral investment treaty issue, and they say, ‘If a company approaches us with a case and we feel we can negotiate a good, clean, high quality bilateral investment treaty with a country, we are prepared to look at that. We have to obviously look at it in terms of competing negotiating priorities, but they are willing to do that. The advantage of a BIT over a fully fledged free trade agreement is that they are much easier to negotiate. They are simpler and there could be advantage, particularly in Africa, where the investment relationship is stronger than the trade relationship in doing that.

My final observation on BITs is that Australian companies, or companies with a large Australian beneficial ownership, do not necessarily have to rely on Australian BITs if they are dual listed. If they are listed in Toronto, if they are listed in London, they can sometimes take advantage, for protection of their investment, of Canadian and UK BITs, and there are far more Canadian and UK BITs negotiated with African countries than Australian ones. I believe Australia has only one African BIT with Egypt.

Senator TROOD —I was going to ask you about that. That is the only one of which you are aware, is it?

Mr Donnelly —Certainly since the last time I did a stocktake, two years ago. I do not believe there has been a lot of activity since, though I would have to check my answer there to give you a fully factual one.

CHAIR —You mentioned a post that was opened just after your report. Was that Addis Ababa? There is a history to that. It has actually been planned for some time, hasn’t it?

Mr Donnelly —Yes, I believe so.

CHAIR —Many years, yes.

Senator IAN MACDONALD —Only since we have wanted a seat on the UN Security Council.

CHAIR —No. This is the point. You interject with this stupid remark. There is a reason why it was not opened which relates to the political and certain other situations in Ethiopia which delayed the opening of that post. Plans to open an embassy in Addis Ababa have been on foot for many years, if you learn something about the history.

Dr JENSEN —Given what you were discussing about the nature of your portfolio, I am assuming that basically the nature of your business is providing a certain amount of seed capital to companies. Is that correct?

Mr Armour —It is not so much seed capital in an equity sense. If you are thinking about smaller companies, which I think is where your question is directed, we do provide support through working capital. We typically do that through their Australian bank. So we have two working capital products. It means that, if a company is trying to win a contract in Zambia or wherever and they have a working capital deficit that they cannot accommodate with the bank, we will work with the bank and see if there is a way to provide that.

Dr JENSEN —You also mentioned that you are able to directly provide capital. What is the longest time period that you would be looking at providing capital for? Looking at it going from zero to 16 to 31 to 81 to zero, it seems to be very short term. Would that be right?

Mr Armour —Sorry, those are new signings each year rather than the portfolio growth.

Dr JENSEN —So what sort of time period are we looking at?

Mr Armour —For most project financing and resources, somewhere between six and eight years. That is the term that you would like. If you are making a loan to a resource company, you would like to get it back in a reasonable time frame. Particularly with current commodity prices, you would try to pull it in sooner.

Dr JENSEN —If you are providing funding directly, what sort of interest component do you charge?

Mr Armour —The framework answer to that question, firstly, is that we have talked about it in terms of the environment within the OECD. There is actually an arrangement on export credits which sets a baseline for interest rates and credit margins. We always abide by that agreement. In terms of credit margins, we are usually well above what they tend to suggest is appropriate. The simplest way to characterise that is that we are commercial. If we see that the commercial market would charge a rate of interest, that is the rate of interest we will charge, if not a little bit more.

Senator IAN MACDONALD —I will just follow up a question my Senate colleague asked, the answer to which was sort of interrupted halfway through. It was: are Australian companies generally speaking at a comparative disadvantage in Africa compared to others—that is a broad description—perhaps because of our finer sensitivities to the environment, social issues and inducements?

Mr Armour —I think the answer that they would give you, the clients that we work with, would be no.

Senator IAN MACDONALD —They are not at a disadvantage?

Mr Armour —They are not because they believe that it is part of their package and, in fact, as an Australian company it is how they intend to operate. If you think of it more from the perspective of where they get their equity, never mind where they are doing business, the Australian community has an expectation in terms of their conduct and they believe that upholding that conduct, even when they are working in far-flung places, is giving them an advantage at home in terms of raising their equity.

Senator IAN MACDONALD —I appreciate it is giving them an advantage at home, but it does not actually get them the licence to operate or the concession to build a railway or whatever if they have a different standard. That is the question: do they work by the same rules, by the same standards as other countries? You have mentioned the Chinese investment in public buildings, but I am a level lower in talking about the environment, social issues and inducements.

Mr Armour —There is a spectrum, obviously, in the behaviour of companies who are trying to win business there. Again, the companies that we are dealing with—and I think this is a reasonable characterisation of a significant portion of the industry—believe their higher level of conduct in fact helps them in their behaviour and integrating with the community. The car analogy is perhaps too obtuse; it is basically that they do not want to compete down at that end of the spectrum. If it becomes a question of inducements, for example, most of these small guys do not have deep pockets, and I have spoken with a large contractor in another area that said, ‘You never go there.’ If you never make the mistake, you have a certain reputation—

Senator IAN MACDONALD —I know they would say that in Australia because it is illegal in Australia—

Mr Armour —This is overseas.

Senator IAN MACDONALD —if they are Australian companies. You hear anecdotal, but I am sure true, stories about what European, American and Chinese companies do to get the nod. Are you seriously suggesting that Australian companies do just as well by remaining pure?

Mr Armour —In the places where they are trying to compete. We have a snapshot, but just to clarify: it is illegal for an Australian company overseas to bribe a public official, and they are conscious of that. Certainly if they walk into our lobby it is one of the first pamphlets they see.

Senator IAN MACDONALD —I appreciate that, hence the question.

Mr Armour —The very direct comment I had from a senior executive in one of our largest engineering companies was: ‘Don’t bother.’ I am trying to distinguish for you playing fields, if you like. There is a playing field that says: if you operate on a certain level and compete on capability and consistency in delivery, and don’t go down that path, sure, you are going to lose some deals over here, but—

Mr RUDDOCK —You don’t get in the football match.

Mr Armour —No comment!

Senator IAN MACDONALD —You are not seriously telling me that all of the countries that are in mining, for example, in Africa have played by Australian rules rather than African rules in getting their licences or their concessions?

Mr Armour —I am describing the behaviour of Australian companies that we are dealing with. That is how I would characterise their behaviour: they are generally upright.

Senator IAN MACDONALD —Of course you could not do otherwise because you would be in trouble.

Mr Armour —No, I think practically. Practically, it is an honest opinion.

Mr RUDDOCK —It might be an accessory.

Senator IAN MACDONALD —I would have to say it puts a lot of pressure on the imagination to think that Australian companies can be this pure and yet compete with other investors who we know are not that pure. It belies common sense almost. That is not a question, it is a statement. I understand your inability perhaps to engage me in that conversation, although you have and you have told me the right thing. I only raise that in the context of well-meaning groups within Australia who are urging even higher environmental, social and corporate governance standards than we currently have. That is all very good in the Australian context, but if we want to act in a country we must play by their rules, I would have thought. I guess you have already answered that by saying that we sell something else.

Mr RUDDOCK —My question is really related to the evidence we received earlier today. I will ask you to do a detailed examination of the information from Jubilee Australia and prepare a response. Secondly, you have told us that you were party to export credit agency conferences in Africa recently. I just wondered whether comparable agencies were being subjected to the same sort of critique that Jubilee Australia has submitted you to and whether it is part of a broader international approach to predate upon export credit agencies.

Mr Armour —In response -

Mr RUDDOCK —In other words are they just singling you out or are all the others being subjected to the same sort of developed critique?

Mr Armour —I cannot say with a great deal of confidence exactly what they have said to other ECAs. We are aware that there is a global engagement with ECAs often through the Jubilee banner. I have not studied it.

Mr Parsons —Several other ECAs are subject to the same process—not necessarily by Jubilee but by other NGOs. EDC undergoes quite a degree of scrutiny as does US Ex Im. Several of the European ECAs are similar. There is actually an overarching—

Mr RUDDOCK —I did not know any of this. I just suspected it listening to them. It would be helpful if you could develop it.

Mr Parsons —There is an overarching NGO called ECA Watch. It is like a consortium of NGOs who have put themselves under an umbrella organisation called ECA Watch which looks at all the ECAs—all the OECD ECAs anyway.

CHAIR —Sort of like Amnesty.

Mr RUDDOCK —Maybe it is creditable. I still wear their badge.

CHAIR —I just make the comment. It sounds to me like a similar model to Amnesty.

Mr Parsons —It is similar but different. It is like a front office behind which sit a number of NGOs that actually do the work. They have a front office where they all combine and put a common view through.

CHAIR —Yes, I understand. You have taken on notice a request from Mr Ruddock to provide us with a written rebuttal—I suppose is the word—or comment on the Jubilee Australia submission where you think it is appropriate to do so. Thank you. We have gone well over time but I think that indicates the significance of the issues that have been raised and your contribution today. Thank you again.

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