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Budget estimates - Lee questions EFIC about PNG LNG and the Productivity Commission Recommendations

Estimates & Committees
Lee Rhiannon 14 Feb 2013

Senator Lee Rhiannon questions the Export Finance  & Insurance Corporation (EFIC) about the govenrment's reponse to the recent Productivity Commission report on EFIC and the controversial LNG project in PNG.

Senate Estimates - Thursday 14 February 2013


Senator RHIANNON: I wanted to take up some of the recent developments with EFIC. I notice that the Productivity Commission has recommended significant changes to EFIC's mandate and operations. One paragraph reads that 'EFIC's operations will need to focus solely on those firms most likely to be affected by information-related market failures—newly exporting SMEs'. I noted that the response document says that it expects a reduced level of EFIC support to MNEs, 'except for those investing in emerging and frontier markets'. How do we interpret this response? Are you proposing that investment projects by multinationals in areas of the developing world with great operating risk will continue to be financially supported by EFIC?
Mr McCormick: I might begin on this, Senator, because the government announced its response to the Productivity Commission's inquiry, and it was released, I believe, on 29 January. The government has decided to put more of a focus on particular market failure and also on assisting SMEs with solid export potential.
Senator RHIANNON: I am trying to understand the interaction between all this and the process, but I have some specific questions as well. What is the justification for disregarding this recommendation from the Productivity Commission?
Ms Piggott: Until the beginning of January, EFIC was in my area of responsibility, so I chaired the interagency process that put together the government response.
Senator RHIANNON: It looks like we have the right person. So, my question is this. We have had this clear recommendation from the Productivity Commission, but the government is disregarding this recommendation. What is the justification for that?
Ms Piggott: Which particular recommendation was that?
Senator RHIANNON: That 'EFIC's operations will need to focus solely on those firms most likely to be affected by information-related market failures—newly exporting SMEs. Then, the response document says that it expects a reduced level of EFIC support to MNEs, 'except for those investing in emerging and frontier markets'. So, that recommendation is being disregarded, and I am trying to understand how that was arrived at.
Ms Piggott: In arriving at the whole-of-government response, there was an acknowledgement that the core function of EFIC was to assist Australian exporters accessing trade finance in markets that essentially are risky markets. And it is about export opportunities. The reasoning was also not to cut out any particular sector or type of business and, on the understanding that the priority was export related, that EFIC should be able to assist all Australian companies offshore. And there would be a number of criteria that would go along with that, which meant that you are really looking at frontier or emerging markets, not just any overseas market. Part of the discussion was that EFIC had been involved in some large onshore domestic projects, which perhaps were not where its priorities should lie, and so the government response was to give a particular emphasis to assisting SMEs to operate offshore, but all Australian companies if they met the criteria for market failure.
Senator RHIANNON: At the start of the answer you spoke about assisting Australian exporters in risky markets. When you say 'risky markets', I am assuming you are including everything there—economic, environmental and social risk.
Ms Piggott: Essentially it is about access for these companies to trade finance, to be able to put into effect the transaction that they wish to engage in. As we have discussed before in this committee many times, part of EFIC's considerations in looking at projects and agreeing to them or not includes social and environmental considerations along with the financial criteria.
Senator RHIANNON: I also notice that the commission recommended that the EFIC Act should articulate which international obligations aimed at analysing and mitigating the social and environmental risks of funded projects EFIC should comply with and that EFIC's compliance with those obligations should be publicly reported. We are aware that EFIC has been involved in funding a number of extractive industries, and some of the controversy around those. But it appears that nowhere has it been articulated which international obligations EFIC is required to comply with. That is what I am trying to understand. What I took away from this is that EFIC is not required to report on its compliance with international environmental and social due diligence obligations. Is that accurate?
Ms Piggott: No, Senator. EFIC, as we have discussed many times in this committee, does comply with a number of international guidelines and benchmarks.
Senator RHIANNON: Perhaps you could give us, or take on notice, which ones.
Ms Piggott: We have replied to that very question in the past, but we can do that again if you wish. There are OECD guidelines, and there are World Bank related guidelines. They are the principal ones, and they are the existing international guidelines; there are no others. EFIC complies with the existing international guidelines and benchmarks.
Senator RHIANNON: I understand that one of the things the Productivity Commission had set out was that EFIC should articulate which international obligations were aimed at analysing and mitigating the social and environmental risks. Has that happened? I know you might have told this committee, but in terms of what the Productivity Commission required, did you comply with that recommendation?
Ms Piggott: Yes, in the sense that we maintained and agreed across government that EFIC already meets and complies with the existing international benchmarks—for example, the World Bank and International Finance Corporation Performance Standards; the OECD's Guidelines on Multinational Enterprises; the United Nations Guiding Principles for Business and Human Rights; the Equator Principles; and what are called the OECD Common Approaches. So, there are several of them, all of which are taken into account by EFIC in its consideration of transactions.
Senator RHIANNON: A number of times you have said in your response that you have supplied this information earlier. But why would the commission have recommended that EFIC should articulate regarding the aims of the international obligations? It sounds like they want to get it into the actual EFIC Act. That is not what is occurring. So, is there a reason it is not going into the act?
Ms Piggott: I think the reason for not specifying it in the act is that it then becomes an exclusive list, and if there were evolutions in these standards then that would actually narrow it down rather than expand it.
Senator RHIANNON: But wouldn't it be possible to list those ones that you referred to with regard to the World Bank et cetera and—the delights of the English language—put a catch-all phrase in there: 'and any other standards that will assist this work'? Again, I go back to the fact that you had a clear recommendation from the Productivity Commission that it should be articulated in the EFIC Act. What I am taking from your answers is that that is not going to happen.
Ms Piggott: No, that was not one of the recommendations that the government accepted, and the reasoning was, as I said, that is was agreed that EFIC already does comply with international standards and guidelines. The other part of the consideration informing that government response was that EFIC identifies those standards on its website and in its publicly available material. So, we understood that the Productivity Commission was essentially seeking full transparency, and in our consideration we thought that already existed.
Senator RHIANNON: Should EFIC ensure that funding applicants implement due diligence processes to prevent or, where prevention is not possible, to minimise and remediate the violation of human rights of individuals and communities and environmental impacts as a result of their operations?
Ms Piggott: As I have said, in applying the existing international standards our consideration is that EFIC does do that.
Senator RHIANNON: So you are just saying that they do do it, but it is not actually set out how they do that. Isn't this why there isn't confidence? You have just said that they do it, but how do they do it?
Mr Armour: As we have testified previously and as Rhonda has just repeated, the international rules that we abide by flow from OECD arrangements. The OECD and the UN have particular guidelines that we follow. We publish our policy, which is to follow those guidelines, and any transaction that we review has to comply with those guidelines. So, the effect of what you are trying to achieve, I believe, we do achieve. The Productivity Commission made these observations but at the same time could not substantiate that there would be any material improvement or in fact any change in our practice in adopting that recommendation.
Senator RHIANNON: So we have that clear recommendation from the Productivity Commission about getting it into the act, but your argument is that it is not required?
Mr Armour: The act already compels EFIC to comply with and respect Australia's international obligations, which of course would embrace the OECD and the UN. So it is already there in form. The PC recommendation that I recollect was to list them, and I think the point Rhonda has made is that the list evolves—and, therefore, to change a legislative instrument to adapt, even in the way that you describe, is a bit of an unwieldy process, given that the current legislation achieves what you are trying to achieve.
Senator RHIANNON: So do you think the Productivity Commission misunderstood the legal process or were just wrong? They have made a clear recommendation, and you are not following it.
Mr Armour: It is not really our position to comment on that.
Senator RHIANNON: In response to the commission's recommendation 9.6 dealing with funding proposals that have significant adverse environmental or social impacts, which includes three separate recommendations, the government's response document says, 'Agree in part' across all three. Could you clarify which parts are agreed to and which parts are not agreed to?
Ms Piggott: Senator, I would have to take that one on notice, because I do not have that document in front of me. There were 90-something recommendations. But I am happy to take that on notice.
Senator RHIANNON: Thank you very much. There might be some more of those. All documents relating to anything done by EFIC under part 4 or part 5—part 4 is 'Insurance and financial service products' and part 5 is 'National interest transactions'—of the EFIC Act are exempt from disclosure under the FOI Act. I understand that, contrary to the Productivity Commission recommendation, this recommendation will not be accepted. Is that the case?
Ms Piggott: Yes.
Senator RHIANNON: Why is that?
Ms Piggott: Senator, is that the recommendation relevant to the FOI Act?
Senator RHIANNON: Yes.
Ms Piggott: Again, the consideration was that that was not really a priority. Can I just make a general point. There were a number of recommendations that the government did not accept. The Productivity Commission, when it undertakes reviews, obviously makes recommendations; it is up to the government to accept, reject or agree in part. In this particular case, there were a number of recommendations that were not accepted, quite a number of which were partially agreed and some which were agreed in full—so there is the full range of views. The Productivity Commission's review provided the government with a very good opportunity to have a serious think about what it wanted from EFIC and what was the role of EFIC. That is what you saw in the government's response.
Senator RHIANNON: Yes, but not much seems to have changed. And the FOI Act one is very curious, considering you already have that exemption from disclosure—so, again, you have given a general answer, but it is not clear why that one was not taken on board. Surely, EFIC has a responsibility to inform the public adequately on all this range of challenges and risks—economic, environmental, social and human rights—that come up in so many of your projects; and you have an exemption there, that covers you in many ways. So I am interested in why that recommendation from the Productivity Commission was not taken on board.
Ms Piggott: In looking at that one we looked at why the exemption was there in the first place, and principally it is about the transactions that EFIC agrees to or becomes involved in—and the government as well, on that national interest account. So there are a number of issues of confidentiality around the commercial transactions that are involved. For that reason the exemption exists and ultimately the government agreed that it was appropriate for it to remain. But, as I have said before with respect to your concerns about environmental and social aspects of specific transactions: those are available on EFIC's website. EFIC's policy on environmental and social review of transactions is on the EFIC website, but the specifics of particular commercial transactions are not normally available publicly.
Senator RHIANNON: Thanks. I want to move on to the national interest account. I noticed again the recommendations here, and the official response to the recommendations is that they are 'Agreed in part'. Again, can you advise what is meant by that?
Ms Piggott: I think I need to look at the specific recommendation. As I said, there were quite a few.
Senator RHIANNON: Maybe how we deal with this is, where you have agreed in part, can you explain what part you agreed with and why you did not agree with the other parts.
Ms Piggott: I can do that. But, by way of explanation, if you just look at the raw document, as you are doing, it is not exactly obvious; and for that reason DFAT has put basically an explanatory note on its website, which goes to the decisions that the government took, and a little bit more explanation about why. But we can provide you with—

Senator RHIANNON: Okay, thank you. Moving onto the specifics: picking up on one we have spoken about before, the PNG LNG developments. Which lenders requested that D'Appolonia investigate the PNG LNG mudslide?
Mr Armour: I think you can identify each of the specific institutions through publicly available information but the lenders as a group would seek to have an incident like that investigated.
Senator RHIANNON: So, do we have something more specific?
Mr Armour: Is you question to identify each of the financial institutions who requested the review?
Senator RHIANNON: Yes, that is what the question was.
Mr Parsons: The mudslide you are talking about occurred at a quarry. D'Appolonia, as part of their normal monitoring of the project, had been looking at quarries prior to the mudslide. The quarries that were operated by or for the project were under the scope of D'Appolonia's work, so they were looking at the quarries already. So, after the slide occurred, D'Appolonia would have already planned the next visit, or would already have gone and looked at that, because it was occurrence within their scope of work. But I think there was a general request from quite a few lenders that they concentrate on that because, for each visit that D'Appolonia makes, there is a general request that goes out for any lenders to raise any particular issues, or lenders can raise in particular issue they may have for D'Appolonia on that visit.
Senator RHIANNON: So can you tell us which lenders?
Mr Parsons: All the lenders go through what is called an 'intercreditor agent', so we do not see what other lenders request particularly.
Senator RHIANNON: So you cannot give that information?
Mr Parsons: No, we do not have that information.
Senator RHIANNON: Okay. I was going to come to this later, but I notice that you said then 'on their next visit'. Because, some of the information I received was that post the tragic mudslide, there was not the visit. Could you provide us with the date for the visit after the mudslide?
Mr Parsons: I could provide that. I do not have on the top of my head.
Senator RHIANNON: You can take that on notice?
Mr Parsons: Yes.
Senator RHIANNON: Thank you. At any time did EFIC receive verbal or written advice that there was a risk of a mudslide, either from the consultant or from any other source?
Mr Parsons: D'Appolonia, in some of their earlier reports, had identified problems with some of the quarries. In a subsequent report, before the slide occurred, they said that the project had responded to those concerns and that those concerns had been adequately managed by the project.
Senator RHIANNON: So you say they identified problems with the quarries.
Mr Parsons: Yes.
Senator RHIANNON: Then you are saying the company responds.
Mr Parsons: The company responded to those concerns and, prior to the slide occurring D'Appolonia said that the company had responded adequately and that concern, or non-conformance of theirs, had been closed down.
Senator RHIANNON: So what is EFIC's interaction from when you are informed that there is a risk of a mudslide? Do you just wait for the company to come back to you, do you sit down or do you visit?
Mr Parsons: D'Appolonia did not specifically raise any issues about mudslides; they were just concerned with some of the environmental/social management around the quarries.
Senator RHIANNON: Social management?
Mr Parsons: As part of their—
Senator RHIANNON: Environmental management?
Mr Parsons: The issues raised in relation to quarries related specifically to environmental management—thing such as erosion control, sediment control and those sorts of things. The process then is that, in each of their reports, which are publicly available through the project's website, D'Appolonia raise a series of comments on the project's performance and they grade their concerns according to a series of grading on non-conformance. For each report in which they raise a non-conformance, on the subsequent visit they go back and review what actions the project had taken in response to those comments. The comments on quarries occurred over a period of two or three visits, I think, and they were closed out over a period of time.
Senator RHIANNON: They were what, sorry?
Mr Parsons: They were closed out over that period of time?
Senator RHIANNON: Closed down?
Mr Parsons: The non-conformance was closed out; the quarries were not closed down. With respect to the incident at the quarry in question: the project had not actually operated that quarry for a period of months after the slide; it was actually closed and rehabilitated by the project, and a period of months elapsed before the slide occurred. So it was not actually an operating quarry when the slide occurred.
Senator RHIANNON: Yes, I appreciate that. I am just trying to understand the process. It has been identified that there are environmental issues. When those reports come to EFIC, do you ask questions? What interaction do you have at that point? Because we know we are going to end up with this very tragic mudslide, so at least we should analysing that interaction and hopefully learning some lessons here.
Mr Parsons: First of all, you don't know there is going to be a mudslide—
Senator RHIANNON: I know you don't—I am saying we now know that there was a mudslide, and we have the ability and the responsibility to look at what happened and whether there was a failure early on to look at this closely.
Mr Parsons: D'Appolonia series of non-conformance are in levels. There are three levels of non-conformance and there is another level just called 'an observation'. An observation is basically just a housekeeping issue. Level 1 is the lowest level and level 3 non-conformance is where there is a potentially significant concern. There have never been any level 3 non-conformance raised by D'Appolonia. That is the level at which the lenders would then institute other actions under the legal agreement. So there has never been that level of concern raised by D'Appolonia.
Senator RHIANNON: Did it ever get to level 2?
Mr Parsons: There have been 2s, yes.
Senator RHIANNON: When you see that report about a level 2, what do you do? Do you leave it all up to the consultant and the lenders or do you respond or do something?
Mr Parsons: We review each report as it comes in—
Senator RHIANNON: But does it ring alarm bells for you that there is some problem going on and you may actually need to be more hands-on?
Mr Parsons: We look at what D'Appolonia's recommendations are and we look at the company's response to those non-conformances; then we see how they are managed over time. As I say, there has never been the highest level of non-compliance, which is of immediate concern.
Senator RHIANNON: But a level 2 is an intermediate concern; it is just one below. My question is: is your only interaction reading the reports? Do you call them up? Does anybody visit?
Mr Parsons: We have spoken to D'Appolonia on many occasions, yes.
Senator RHIANNON: But to ask specifically: you see a report, it is at level 2. Does that trigger you to say, 'Oh, it's gone up; it's no longer just an observation or a level 1 anymore; it is level 2—we better get more involved'? Does it get to that point? How serious is this? What is a trigger for you?
Mr Parsons: A level 2 is not a serious one. A level 2 is something that D'Appolonia thinks potentially could graduate into something of concern but it is something which is manageable through the normal processes and management systems of the project. So a level 2 alert, if you like, or a nonconformance, is not something that would require immediate action by the lenders. But we keep track of those and we look at what the concerns are, and if cannot understand what the concern is and what the project is doing, then obviously we go and talk to D'Appolonia about it.
Senator RHIANNON: But that did not happen this time.
Mr Parsons: Not with the quarries, no.
Senator RHIANNON: Thank you. I think you said that D'Appolonia's reports are on the website.
Mr Parsons: They are on the project website.
Senator RHIANNON: All those reports.
Mr Parsons: Yes.
Senator RHIANNON: Is it true that the only mention of the mudslide was that it caused some construction delays? When they do speak about the mudslide is that how they talk about it? I must admit I have not read those reports, so I will catch up on them. But I was just trying to clarify: is that the level of detail that they go into?
Mr Parsons: Issues of concern go into quite considerable detail, but with the mudslide the quarry was not part of the project at the time the slide occurred, and it is the PNG government that has the responsibility for looking at and investigating the causes of the slide. It is not actually a project responsibility. So it is now in the hands of the PNG government to examine what happened, the responsibilities and what actions to take.
Senator RHIANNON: So D'Appolonia definitely has released all its reports on this.
Mr Parsons: Yes.
Thursday, 14 February 2013 Senate Page 71
Senator RHIANNON: Has any EFIC official ever visited the site?
Mr Parsons: I went on two occasions during the due diligence. And my colleague, who holds the same role within EFIC as I do, visited for a week just before Christmas.
Senator RHIANNON: Could I confirm the date of the last report from the company? Was it October?
Mr Parsons: D'Appolonia's last site visit, when they accompanied the team of lenders in December—although there will not be a written report on that one—the last site visit was in October and the report for that is just being finalised now. It is not actually on the website yet but it should be up shortly.
Senator RHIANNON: That will go up on the website?
Mr Parsons: Yes.
Senator RHIANNON: When do you expect that to happen?
Mr Parsons: Normally they are up within this period, but I think the December visit and the Christmas holidays and New Year it has been a wee bit delayed but normally they are up within two or three months of the visit.
Senator RHIANNON: So is October—
Mr Parsons: The actual site visit was towards the end of October.
Senator RHIANNON: So you would expect it to go up soon.
Mr Parsons: Yes.

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