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Estimates: Trade

Foreign Affairs, Defence and Trade Legislation Committee

Estimates hearings, 16 February 2012

Department of Foreign Affairs and Trade

  • Mr Bruce Gosper, Deputy Secretary
  • Ms Jennifer Rawson, First Assistant Secretary, Pacific Division
  • Mr Angus Armour, Managing Director and Chief Executive Officer, Export Finance and Insurance Corporation 
  • Mr Jan Parsons, Director, Environmental and Technical Review, Export Finance and Insurance Corporation


Full transcript available here

Senator RHIANNON: Is the government planning to seek a binding and compulsory most favoured nation commitment in the PACER Plus negotiations?

Ms Rawson: As I think we have said before in this committee, the primary objective is the promotion of the sustainable economic development of the forum island countries. It is expected that that agreement would be WTO consistent. Perhaps those with greater knowledge of the particular trade issues than I have could comment on the MFN aspect but certainly we would be aiming to negotiate an agreement that is WTO consistent.

Senator RHIANNON: Is there anybody else who can comment on the MFN possible aspects of PACER Plus?

Mr Gosper: As Ms Rawson has said, in this negotiation we are very much guided of course by both how we might negotiate something which is consistent with the rules that apply to such agreements but also something that will aid the Pacific countries. So the question of whether this agreement proceeds, at what pace it proceeds and whether it actually proceeds to conclusion is very much in the hands of the Pacific countries themselves. If it were to come to conclusion, then of course there would have to be an appropriate element of MFN provided by those countries but there are various ways of course to ensure that particular sensitivities of such countries are protected through phasings or even, in a limited sense, exclusions. But again it is very much in the hands of the Pacific countries.

Senator RHIANNON: As I understand it, one of the requirements is to protect Australian business interests and investments from being disadvantaged. To achieve that, would you not have to go for an MFN commitment?

Mr Gosper: There is an element of the reality that the Pacific countries have negotiated certain concessions with the European Union which would involve tariff concessions and it may well be that that could potentially at some point lead Australian businesses to some disadvantage and that is of course something that the government will have to take account of. But of course the government's primary consideration is to promote the economic development of the Pacific countries, and that is very much the guiding approach to these negotiations.

Senator RHIANNON: There does seem to be a contradiction there. When are you looking after Australia's commercial interests—which I understand is not a key imperative here, but you are saying it is up to the Pacific countries? There appears to be a contradiction there. I maybe wrong, but I would just like that clarified.

Mr Gosper: My point is that it may well be that some Australian businesses are disadvantaged in some of these countries for some products, but Australia has a particular national interest in securing the economic development of this region and we are not looking to foist onto such countries agreements that they find unhelpful or destabilising.

[Other Senators continued the questioning]

Senator RHIANNON: I have some question about the Export Finance and Insurance Corporation. Mr Armour. I could not find any category A projects disclosed in the 2010-11 annual report. I just want to check if it is the case that EFIC has not engaged in any category A projects for that period?

Mr Armour: That would be correct.

Senator RHIANNON: In the annual report on pages 24 and 25, where you have the facility signed, there are six coming through under the facility type 'bonding line'. All bar one are listed in the sector 'construction' and all of them are listed as engineering services. EFIC has not assigned an environmental category for projects at a bonding line. I am really at the stage of trying to understand this. In the annual report, you say this is because: 'Individual projects supported under the bonding line are separately evaluated.' That is one explanation I came across. But in the procedure for environmental and social review of transactions, it says that bonds are treated as non-projects and therefore not screened at all. There seems to be a contradiction about individual projects within bonding lines separately evaluated, or are they not evaluated at all?

Mr Armour: All transactions that we undertake are screened. We consider all transactions. They are divided into different categories. There are projects, non-projects, and some are categorised as A, B or C, depending on their size and the nature of the project itself. It is quite a deliberate process to arrive at an outcome of whether something is a category A or not. You cannot infer from the listing of the industry or the name of the firm whether the activity they are undertaking will qualify as category A. It is quite a disciplined process to arrive at the categorisation.

Senator RHIANNON: Does that mean that I have misinterpreted the statement that I read where you say that: 'The bonds are treated as non-projects and therefore not screened at all,' or is it incorrect? It comes through on page 4 of your report of 29 August 2011, where you are talking about non-projects.

Mr Parsons: We screen all projects and we divide them up into several different buckets. One of the bucket lines is projects, where transactions are associated with projects. If they are associated with a new project, then we will categorise them as A, B or C. Another bucket is where non-projects go down and in those we decide where we need to look at whether there is a potential for impact or not. If there is no potential for impact then we do not go any further. But if we decide that the project associated with the bond is associated with a project where there is potential, then we do some further investigation on the environmental-social issues and we benchmark those against the IFC performance standards. A bond that is issued under a bonding line would go through that process: we would still do an environmental and social review of that project.

Senator RHIANNON: Thank you for that explanation, Mr Parsons. If I understand correctly, for the non-projects under bonding lines, you will look at them. But if you judge that an investigation is not required, the full-level investigation is in fact not carried out. Maybe you need to define what is done, because from the previous answer you gave, I did take that to mean that what was applied to the non-projects within bonding lines was very minimalist.

Mr Parsons: No, we still do a full review of the project. As part of that review, we make a decision about whether the project associated with the bond has a potential for impact. If it has a potential for impact then we go through our benchmarking against the IFC performance standards. That is the equivalent of deciding if it is associated with a category A or B project. If we decide it does not have any potential for impact, that is the equivalent of a category C. The reason why we do not go through the categorisation for those is that categorisation is basically a decision of whether or not to disclose a project. For bonds and non-projects, we generally do not have access documentation that we can disclose, so the categorisation is purely a decision—

Senator RHIANNON: Excuse me, can you just say that bit again? You talked about not disclosing information on non-projects. Do you have no access to the information or do you not disclose what you do have? Could you explain that further.

Mr Parsons: There is a whole range of things that can happen for nonprojects and bonds, which we have called a nonproject. Part of that can be access to information and part of that can be access to or permission to disclose information because we have no relationship with the actual owner of the project. The route that distinguishes projects from nonprojects is access to direct relationship with the owner of a project. Because we do not have that direct relationship we may not have the permission to disclose and this is the reason we have taken away from the categorisation and disclosure problem. We still do the full review of whatever information we can get and that would involve benchmarking against performance standards, which is exactly the same is if it was a category A, category B or category C project. We still do exactly the same technical review, if I can call it that, of the project.

Senator RHIANNON: It certainly is very confusing and it does sound like there are projects, where EFIC and therefore Australian money is linked, in which very limited assessment and evaluation is made. Maybe the best way to ask is: it appears that you have a two-tier system for projects and nonprojects. Would that be a way to summarise it?

Mr Armour: I would like to intervene here in the sense that it is complex. It is complex because it involves a number of layers of international standards. There is an OECD standard that we comply with and there is a standard that was developed by the commercial banking community called the Equator Principles, then there are IFC performance standards, which we apply against individual projects to assess whether they are performing or not. All those things were developed differently at different times by different people so they do not integrate, necessarily, into one whole. We have tried to use our best efforts to take the best and highest of those standards and apply them to projects we are undertaking.

I think your characterisation that we use a minimalist approach to some projects could be true when we are supplying very few services or services that are of a discreet and technical nature. So someone who is providing a design plan is not necessarily something that relates to a category or project. You would not sensibly apply yourself in the same way to that. Or, if a firm were supplying water pumps to a large industrial company, you would not sensibly apply the same tests to those transactions. In that sense, yes, we apply very minimalist approaches to the environment impact because the nature of what is being supplied by the Australian firm has no relevant environmental impact. We still undertake a thorough technical assessment of what that firm is capable of doing but, if there is no obvious environmental issues associated with the project, we do not.

Senator RHIANNON: It does leave one with the feeling that it is worrying having such a large amount of EFIC's facilities remain unclassified. In going back to pages 24 and 25, these are all of the facilities, the ones that come under the bonding line, in the construction sector, which, from what I could see, accounted for close to half of EFIC's new signings by dollar value. Am I correct in making that assumption?

Mr Armour: I come back to the point of classification. Mr Parsons made this point earlier. The classification relates to how we disclose the information to the public, to the community. It relates to a certain type of project. The fact that it is an engineering firm does not mean the engineering firm is undertaking a category A project. The level of due diligence we apply, both technically and environmental, might even be comparable, but one might be a category project and one is not. For a construction firm, they could be building a large building in downtown Hong Kong and that has not got the same sort of environmental impact as the development of a resource project in an emerging market.

Senator RHIANNON: I would just like to move on to some of the assistance to the live export trade. In the annual report you provide details of a bond of $8 million to Wellard Rural Exports for breeding cattle bound for Russia. It comes through as category B, which I understand means there are some environmental or social impacts. Could you inform us what these impacts are as EFIC sees them?

Mr Armour: The categorisation of B for that transaction related to the development of the infrastructure within Russia to maintain the herd when it was delivered. We actually spent a great deal of time on this. I think Mr Parsons himself travelled to Russia to meet with the proponents of the project and to understand better how they intended to develop the infrastructure for maintaining the herd. It is not a category A in the sense of developing a resource project in an emerging market but it had some environmental issues that we wanted to make sure were properly managed, like the waste treatment from the farm.

Senator RHIANNON: I was interested in—and you have covered it to some extent—what actions you have taken to minimise, monitor and report on those risks, particularly mindful that this is something that is now very much of concern to large sections of the public. Were you mindful of that, did you change your monitoring et cetera and how you are handling it?

Mr Armour: Is it specifically this transaction in Russia that you are pursuing with this line?

Senator RHIANNON: Yes.

Mr Armour: The company in Russia is Miratog. It is a very well established, literally billion dollar company that is very capable of undertaking projects of this scope and nature. Our concern was really with how they were going to develop the infrastructure in the area and we were quite comfortable at the end of our assessment that they would responsibly do that. They obviously need to maintain their licenses in Russia. They have made proposals about how they will construct and maintain this farm and they have to maintain those licences. That is the core within Russia in terms of how the health of the herd will be maintained.

Senator RHIANNON: I was then interested in the comparison between how you handled that in Russia and how it was handled in Turkey, because I understand that the credit guarantee for Wellard Rural Exports's feeder and slaughter cattle to Turkey came in as category C. You are saying that that has minimal social and environmental impacts? What is the difference?

Mr Armour: The cattle that were exported to Turkey—if I am thinking of the transactions you are thinking of—were slaughter and feeder cattle. They were going to be processed soon after arriving in Turkey; therefore, there was no infrastructure that had to be established at the same time as our exports were taking place. In Turkey there were existing facilities and there was no need to develop infrastructure.

Senator RHIANNON: So that is what you judged it on—the difference between category B and category C?

Mr Armour: In that case, that is correct. In Russia, again, the category B derived from the fact that they had to establish a large facility for the breeding cattle to maintain that herd; in the case of Turkey, they were feeder and slaughter cattle that were going to processed immediately in existing facilities.

Senator RHIANNON: From what I can see, there is no independent grievance mechanism for project affected communities of EFIC clients, so I was just wondering how you are handling that. Have you received any complaints from project affected communities, what are the details of those and how do you handle that? It does not seem as though you have a mechanism.

Mr Parsons: We are establishing a mechanism at the moment. We have a multistakeholder forum which involves several CSOs and we have been considering several drafts with those CSOs. We have used those for our grievance mechanism. We have currently got another draft out with them which they will be commenting on by the end of this month. Shortly after that I hope to present the grievance mechanism to our executive for approval. We have been going through this process now for about four months with the CSOs, developing a specific complaints mechanism. We already have a mechanism there, called a service charter, which is aimed more at our clients. We are developing a specific complaints mechanism for anyone—stakeholders or affected communities—to complain to EFIC. We hope to have that up and running in the second quarter of this year.

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