Please don’t bring back DIFF

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.

About Samuel J

Samuel J has an economics background and is a part-time consultant
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15 Responses to Please don’t bring back DIFF

  1. Pyrmonter

    This is depressing stuff. Another sign this government is looking more like Gorton/Whitlam/Fraser and less like Hawke/Keating/Howard/ (and Liberal leader Hewson)

  2. Tom

    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.

    Frig me diagonally. That’s real present-day money.

    No. It’s not alright.

    And don’t send a frigging cent to a wideboy smartass like Bill Frigging Gates, who knows zero about how to manage money.

  3. Pusnip

    Great post.
    Tying aid money to Australian production reduces the effectiveness of the aid to recipient countries, as they are forced to spend it on projects they don’t give high priority to and/or higher priced suppliers. It is a further ‘cut’ to the aid budget, just a hidden one. Aid Monet should have one clear objective, and propping up Australian businesses isn’t it.

  4. Dave Wane

    As someone who explored business opportunities in Indonesia in the early to late 1990s I became a bit familiar with some of the AusAid “machinery”. Whilst I never used their very elaborate “service” – being totally against my philosophy, I somehow got on their mailing list, and to this day still receive their magazine from time to time. I therefore can fully understand how an outfit like this would write a glossy report about how “wonderful” DIFF is. Another example of yet another unnecessary, big, fat bureaucracy justifying their pathetic existence.

  5. Notvelty

    Agree, but does it.make it more palatable to consider it in terms of three-card-monte?

  6. Baldrick

    I didn’t vote for the liberal Party, I voted for the Liberal Party.
    It’s about time to put the L back into Liberal and stop this fart-arsing progressive libertarian chicanery!

  7. We voted out Labor to stop them giving our money to their mates. Rather pointless if the same money ends up going to Liberals’ mates.

  8. Jessie

    This is an interesting topic Samuel J, thank you for providing this info,

    Is it morally or ethically sound to further publicly fund Bill Gates who is using his own $ to fund malaria research and Millennium Development Goals schemata. In collaborating with scientists like Turney on the Ship of Fools* some research is public funded while channelling into their own private companies. These arrangements [of science] should be upfront if this is the case?

    The 1st Libertarian Conference in Sydney had a presentation on this public funded research, someone on Catallaxy may remember the main themes of this.

    I have yet to read/watch the link posted by GrigoryPotemkin yesterday Myth of the Robber Barons Pt 1 Free Market vs Mercantilism

    In tribal areas** I would suggest it unlikely that fertility will drop as economic development is instituted. The basis for extending families is maintaining communal ownership of property including human beings on that property. Individuals may be in measured Mesh block areas (cf ABS) but this negates polygyny; forced early marriages/rapes and lack of partners for young men over vastly wider geographic areas. That this occurs and is not enumerated as ‘marriage’. Feminists and anthropologists have shied away from discussing this aspect and the violence. The greens/reds would understand the concept well.

    Houses may become less crowded, as philanthropists invest in building and the AusAid roads are used by the more powerful (cf ability to use tribal structure over others [select wives, silence free thought/speech], intimidate/murder etc) to extend and control their reach over property. Just as planes and 4WDs are used in PNG and northern/central Australia for the same purpose.

    It is known that water wells and generators incur rent (or curses) if on land stated to belong to an elder. As do roads and bridges often used as a form of rent seeking and control by Land Councils. Including permission of entry, thereby selection bias.

    * this was only known through the activity of individual bloggers following Turney’s expedition/tour which he publicised.
    ** this includes areas where generations of people that have been re-tribalised or are sought to be re-tribalised.

  9. lem

    I know people working in the “aid industry” who live on the coast and write documents for whoever else is on the gravy train to suck $$$ out of the government. There’s a lot of sighing going on about the cut in the aid budget, but they’re too obese to take to the streets with pitchforks, so they cruise the internet to find wherever else they can fit in.

    Like ticks falling off a dying cow. Except not as attractive.

  10. Jessie

    Link to malaria research also links to The Economist on mobile phones and economic growth.
    There is a much earlier example on the th epric eof garlic and ?Tibetan farmers overcoming monopoly.

    John Humphries spoke in one blog [drugs] on efficacy of black markets, another use of [subsidised] mobile/internet.

  11. Des Deskperson

    My understanding is that the Government has given only the vaguest instructions to DFAT about how it actually sees these new aid/trade directions being implemented and operated which means that DFAT – at least for the present – is likely to simply make some cosmetic changes in programme nomenclature and carry on as before albeit, of course, with a reduced and more regionally directed budget, the latter certainly a good thing.

  12. Petros

    Jessie, Gates became a philanthropist rather than get done for uncompetitive practices. Remember DBase, Lotus and Netscape? All victims of the Gates bastardry. He hasn’t given the money away to independent bodies, he and his cronies control it and give it to whom they like. It’s all about control. He could have quietly gone about it like many philanthropists do. Mention must be made of how family members get on the boards of the philanthropic foundations. Bentley anyone? Need one for those meetings.

  13. Jessie

    Petros, thanks for comment.

    Yes, he is loud in comparison to others who quietly go about their business. As suggested in the link, although Gates made his $ as a technocrat he does not see the utility of this for relief of poverty. Or he hadn’t until recently. Hmmm…

    UN Millennium Goals with the [moving] target date of 2015 has made a useful framework for many studying the problems. In the UN link Supporting Global Funds to Fight AIDS, the related stories include 12 billion $, malaria and TB + target India for re=criminalising same-sex relationships, Nigeria & Uganda for enacting anti-homosexual laws. This interest in SSM/homosexuality flies in the light of economic growth=lower fertility= smaller households=decreased disease hypothesis. Polygyny not discussed.
    Read UN Goal Target 6- Combatting HIV/AIDS, malaria and other diseases.

    Perhaps Bill Gates Really Shouldn’t Be Concentrating On A Malaria Vaccine

    “The mosquitoes responsible for malaria pick up the parasite from humans. At the local level, practically all Anopheles species feed at night. The female mosquito gets the infection from a human blood meal. After egg laying it returns to the same approximate location for another blood meal. The parasite multiplies sexually in the mosquito. The process takes ~10–16 days and is completed when the infective form of the parasite reaches the salivary glands of the mosquito, which allows it to be transferred to another human through the bite.. Early experiments with Plasmodium vivax showed that an infective mosquito will bite 30–40 times (James 1926). For a new person to be infected, a mosquito carrying the mature parasite back to its feeding location must find a victim who is not already infected. Therefore the more people who are sleeping together in the same room, the higher the probability of spreading the infection to a new person. Reinfection is thus a stochastic process, and below a certain threshold number of persons sleeping together, Plasmodium infection success rates drop below the replacement rate and it begins to disappear from the human population, even without other control measures. This study indicates that the threshold is likely crossed when average household size drops below somewhere between 4.0 and 4.5 persons.

  14. Jessie

    Tim Wilson ex IPA and now Australian Human Rights Commissioner had much to say

    The impact of these campaigns should not be under-estimated. And the potential use of taxpayer’s funds to hinder the objectives of Australia’s aid program should not be ignored.

    as did the late Helen Hughes CIS.

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