Younger readers may not recall the Development Import Finance Facility (DIFF) that was abolished by the incoming Howard Government in April 1996. It had operated for about 16 years and comprised a mixed grant/loan scheme where a grant (about 30%) from AusAID was supported by a concessional loan from EFIC (about 70%).
Newly minted Treasurer Peter Costello rightly called the scheme
a subsidy paid to domestic business
The abolition of DIFF – which had been in the sights of Finance and Treasury for many years – was hugely controversial. It is to the credit of the Howard Government that it stared down critics and shut down this costly, inefficient, distortionary and corrupting scheme.
In fact, 97% of the amount owed by Indonesia to Australia was loaned during the 1980s and 1990s under DIFF. China was the largest beneficiary of DIFF largesse. As at 30 June 2013 (as reported in the EFIC Annual Report) $424.5 million was still owed by Indonesia, $23 million from China and $4 million from the Philippines.
The Australian construction company, Leighton, has been a major, if not the major, recipient of DIFF funding. It still receives substantial funds from EFIC (see the EFIC Annual Report).
In January 1996, AusAID published a review of DIFF. Naturally it found the facility was wonderful and should be expanded.
Surely the fact that AusAID published such a glowing review of DIFF just two months before the 1996 election – when the Coalition had promised the abolition of DIFF – is evidence of a level of politicisation? The review stated
… the overwhelming majority of the 51 DIFF projects had been effective in delivering their intended development benefits. Only two projects, which were not completed for reasons beyond AusAID’s control, could be described as failures. Another four projects did not achieve their intended development benefits to a large extent, but could not be classified as failures. All these projects were approved before feasibility studies and formal AusAID appraisals were a requirement.
It is likely that the greatest contribution which DIFF projects make to development is in their economic impact. In addition to their contribution to investment and employment generation, the capital goods supplied through DIFF projects are helping to address the key infrastructure constraints to economic development.
This review was deliberately blind to the reality of DIFF. Not only did it redirect scarce resources to arbitrary projects that were principally beneficial to Australian construction companies, but it skewed projects to major construction (such as building bridges no one wanted) rather than addressing fundamental problems like clean water.
DIFF has been responsible for building more useless and unwanted bridges than all of the ear marks from the US Congress put together.
Further background on DIFF may be found in a report from the Parliamentary Library. It is useful to note that (in 2011 dollars) the total aid budget was $2578.1 million. In 2012-13 (again in 2011 dollars) it had risen to $5143.5 million.
I applaud the Government for cutting the aid budget, although it should have been slashed by significantly more. As I have argued previously, aid crowds out economic development.
Yet I have concerns that DIFF may be returning, albeit under a different name. In reporting on the Government’s new foreign aid priorities, it stated
The government will also promote the theme of aid for trade. Bishop wants to leverage Australian private sector involvement where possible. She will end AusAid’s previous bias against infrastructure projects. Infrastructure – roads and bridges for example that connect farmers to markets – are a critical tool of economic development.
I hope this is not code for DIFF Mark 2. It is right to reduce Australia’s aid budget. But it shouldn’t be redirected to Australian business welfare. History shows that such schemes become rorted, do not achieve their aims and cost taxpayers directly and indirectly.
Instead, use the money saved to cut Australian Government debt, help improve its fiscal position and ultimately return to surplus and cut Australian taxes. It should be up to individuals, not Government, as to whether, how and where their money is spent on foreign aid.
If the Australian Government really wants to spend taxpayers’ money on foreign aid, just send the money to Bill Gates. He would have a better idea on using the money effectively and efficiently than any Australian Government agency. The Department of Finance could handle the transfer to the Gates Foundation through a simple electronic transaction.