Recent announcements by Australia’s Prime Minister, Scott Morrison, about infrastructure development in the Pacific are troubling, says Stephen Howes, Director of the Development Policy Centre at the Australian National University.

ANU’s Stephen Howes Source: Business Advantage International

In November 2018, Scott Morrison made two announcements about infrastructure for the Pacific. One received a lot of attention: the A$2 billion Australian Infrastructure Financing Facility for the Pacific, or AIFFP.

The other, a surprise, received little attention: an extra A$1 billion for Efic, Australia’s export credit agency, to support infrastructure in the region.

It is a dramatic change. That A$1 billion will come in the form of callable capital, which the government promises to provide Efic only if it is needed in an emergency.

Efic’s callable capital today is only A$200 million, so that is a six-fold increase!

‘There are four fundamental problems with the government’s Efic plans.’

Efic is not short of capital. Its capital adequacy ratios are well above the minimum levels the organisation sets for itself. So why the massive increase?

Efic’s mandate is to be expanded to cover overseas infrastructure projects. Any overseas infrastructure project that can be shown to be of direct or indirect benefit to Australia will be eligible for funding.

The indirect benefits can include ‘stronger relationships,’ so Efic will effectively be allowed to fund any overseas infrastructure project.

It all sounds good. The Pacific needs infrastructure. Australia wants to do more in the Pacific. Asking Efic to do more costs virtually nothing.

So what’s the problem?

Risks

There are four fundamental problems with the government’s Efic plans.

The first is the risk that it will give a green light to Australian businesses in neighbouring countries to push projects, including by recruiting local political champions.

‘Australia should not be imitating China and further undermining governance in the Pacific.’

The risks are obvious. They are: that the better connected, rather than the better infrastructure projects, will be approved; that good governance will be undermined; and that competitive tendering will be sidelined.

This is not just a theoretical concern. This is exactly how much of China’s development financing works.

Australia should not be imitating China and further undermining governance in the Pacific by encouraging a supply-side, project-proponent-led, non-competitive approach to infrastructure.

Cable

A second problem is that what really matters for infrastructure success is not financing availability, but the domestic policy framework.

If that policy framework is sound, financing will follow. If not, no amount of official financing will lead to sustained development.

Efic has no capacity to assess the infrastructure policy framework in PNG or any other country. And it has no mandate to push for policy reform.

This is not just a theoretical concern. Take the undersea cable connecting Australia, PNG and the Solomon Islands.

‘Efic will only be required to show that infrastructure it plans to support is of benefit to Australia, rather than the recipient country. This is in equal parts bizarre and appallingly nationalistic.’

Its utility depends on access arrangements once it has come onshore.

Australia’s Department of Foreign Affairs and Trade (DFAT) is in charge of the funding and has a mandate to support development and engage in policy dialogue—yet it is not clear the policy framework is in place in PNG to enable the cable to be optimally utilised.

If Efic was in charge of lending for the cable—as it would be under the reforms—there would be even less engagement on policy. The only boxes Efic has to tick are a commercial return for itself and benefits for Australia.

Again, Australia would become like China: pushing loans to build business and goodwill, regardless of development outcomes.

And let’s not just pick on China. Many European projects try to get a look-in on the basis of tied finance.

Principled approach

The third reason Efic should not be charged with regional infrastructure development is its mandate is to promote Australian exports and business.

Efic will only be required to show that infrastructure it plans to support is of benefit to Australia, rather than the recipient country. This is in equal parts bizarre and appallingly nationalistic.

‘A more considered, less rushed, more principled approach is required that puts the needs of the region first.’

Efic’s commercial viability test doesn’t cut it either: it is all too easy for an infrastructure project, backed by government guarantees or loans or monopolies, to be commercially viable but bad for the country concerned.

Fourthly, how will AIFFP and Efic relate in the infrastructure space? Australia runs the risk of moving from too little support for Pacific infrastructure to an overly complex architecture.

A more considered, less rushed, more principled approach is required that puts the needs of the region first.

There are various ways forward. Establish and resource AIFFP properly (and equally costlessly) so there is no need to expand Efic’s mandate.

Or, as some have suggested, an Australian development finance institution could be established, like the very successful UK Commonwealth Investment Corporation.

Efic is the last entity we should be asking to develop the region’s infrastructure.

Stephen Howes is Director of the Development Policy Centre at the Crawford School of Public Policy, Australian National University. This is an edited extract of an article published originally for the Devpolicy blog.