Canberra, 27 June 1955
CONFIDENTIAL
The Colombo Plan
In his submission on Australian Participation in the Colombo Plan,1 the Minister for External Affairs has brought to Cabinet two matters which have been under debate between his Department and my own. They are—
(a) the Budgetary procedure for Colombo Plan procurement;
(b) the eligibility of certain types of equipment and supplies as Colombo Plan gifts.
2. Since the Minister and I see these matters differently and since they are complex I propose to set out here my views upon them. I am the more concerned to do this because the questions involve important principles and are by no means confined to a matter of trucks. At this point, I think I hardly need to say that, although the Colombo Plan falls under the general administration of the Minister for External Affairs, the procurement and financing of Colombo Plan supplies inevitably raises questions bearing upon our internal Budget, the balance of payments and the general state of the economy upon which, as Treasurer, I must necessarily maintain my own point of view. I do not think, however, that the Minister for External Affairs questions this.
Budgetary procedure
3. Hitherto, Cabinet has approved and Parliament has voted each year a sum of money to be spent under the Colombo Plan. To the extent that such annual appropriations have not been spent they have lapsed at the end of the financial year. This is of course standard budgetary practice and there are the soundest reasons for it. Not only does it conform to the basic Parliamentary requirement of annual votes; it gives the Government each year a chance to decide, in the light of all its other commitments, how much to provide that year for the Colombo Plan. It does not conflict in the least with the general undertaking given by the Government in 1950 to provide £34.75 millions2 over six years for the Colombo Plan. In fact the sums provided each year have proved much greater than it was possible to spend. Under the procedure, moreover, forward planning and placement of orders are completely possible since, once approved, orders can be placed and commitments arising under them are automatically provided for in subsequent annual votes.
4. The Minister for External Affairs, however, commends the Canadian and New Zealand practice of paying annual contributions into trust accounts in which case annual appropriations do not lapse. I do not know the reason for the Canadian system but the New Zealand practice is simply explained. Because New Zealand has little to give by way of equipment or other acceptable supplies her Colombo Plan contributions take the form mainly of financial gifts which are paid over to recipient countries. Having received these payments, those countries can of course draw on the money as and when they wish.
5. Various departments and authorities do of course press from time to time for the setting up of trust accounts upon which they Could draw. But it is a pernicious practice, tending inevitably to break down budgetary control of expenditure and, except under very special circumstances, it ought not to be approved. Since the system of annual appropriations does not in any way impede the procurement of Colombo Plan supplies, there is no case whatever for setting up a trust account in this instance. I might mention in passing that, had there been from the beginning a trust account for Economic Development under the Colombo Plan, the unspent balance in it would by now have reached a total of approximately £7.6 millions. Since the total amount of appropriations over the period has been £18.8 millions this shows that well over a third of the ftinds provided have not been spent. It certainly confirms my earlier point that Colombo Plan procurement has not been held up by any lack of money. (Incidentally, the trust account sometimes mentioned in this connection is no more than a working account which is replenished from annual votes as expenditure proceeds).
Criteria for procurement
6. On the question of supplies eligible for procurement the Minister for External Affairs cites a proposal to supply trucks to a number of countries and recommends generally that he should be authorised to make Colombo Plan gifts of any class of goods currently being exported from Australia. This opens up a wide issue.
7. At all times since the Colombo Plan started it has been necessary in the interests of the Australian economy to make certain reservations about the types of equipment or other supplies which should be contributed from our resources. Broadly, these reservations have fallen under three headings, which I shall explain.
Imported products
8. Since, over most of the period, Australia has had to maintain import restrictions of greater or lesser severity to conserve foreign exchange with which to buy necessary imports, it has seemed wrong in principle to be giving away concurrently articles either wholly imported or containing imported elements.
9. Because, however, so many Australian manufactures contain imported elements this principle, if applied rigorously, would narrow down considerably the potential field of procurement. It has, therefore, been considered that products containing imported elements up to a certain proportion of their value ought to be regarded as eligible. For working purposes the proportions have been taken as 30–33 per cent for non-dollar components and 10 per cent for dollar components. I have always regarded this as a reasonable compromise and I may point out that it still applies despite the worsening of our balance of payments and the tightening of import restrictions.
Imports under I.B.R.D. loans
10. Special considerations, however, apply to equipment or components for equipment financed through the International Bank loans. Under the Loan Agreements with the Bank we have undertaken that such equipment shall be used exclusively within Australia and its Territories. In effect, there is a legal ban on exporting such equipment or giving it away abroad and this is reasonable enough, seeing that Bank loans are made to finance development within the country of the borrower and nowhere else.
11. But, quite apart from our obligations to the Bank, there is the solid reason against giving this equipment away that we borrowed and are still borrowing expensive dollars to pay for it. Because road transport equipment was short in Australia and was regarded as vital to development and the efficient running of the economy, the Government raised loans on fairly stiff terms to remedy our shortage of such equipment. The charges on these loans are paid by the general taxpayer.
Equipment comparable to I.B.R.D. imports
12. The same considerations apply with practically equal force to equipment not obtained with I.B.R.D. dollars, but comparable in type and used for the same purpose. The reasons for this may not be so obvious but they are real and cogent just the same. They are as follows:—
(a) we represented to the International Bank that there was a critical shortage of transport equipment here and that we needed dollars to ease the shortage. If now we give away not the actual equipment obtained but equipment in the class which we told the Bank was short, the Bank would have every right to say that our representations were humbug;
(b)we borrowed dollars to remedy a reputed shortage of transport equipment. We would be open to serious and well-founded criticism if we now proceeded to give away equipment of types which we have borrowed dollars and are still borrowing dollars to obtain.
13. I might say here that in the course of our successive negotiations with the International Bank we pressed hard on this item of transport equipment and succeeded in getting, all told, allocations of $36 million to obtain trucks and truck components for local manufacture. We also got the Bank to widen the categories of trucks eligible under the loans until eventually they comprehend all types of trucks from 15cwt utilities upwards.
14. The Minister for External Affairs mentions that the Treasury has been unwilling to consult with the International Bank on this matter. That is quite true. There is a long and, at points, embarrassing story of our relationships with the Bank on this subject. It began when the Bank learnt that we had undertaken to supply diesel locomotives to Pakistan under the Colombo Plan while we were borrowing from the Bank to obtain similar locomotives for ourselves. We cleared ourselves in that case by showing that we had insisted on Pakistan providing the dollars involved in the diesels contract. But remembering that incident and remembering also how strong and definite have been our representations to the Bank on the score of transport equipment I am, frankly, most reluctant to open .up the question with the Bank—the more so as I am firmly convinced that we ought not to be giving this type of equipment away in any case. In other words, I am unwilling to approach the Bank and tell them that although, only a matter of months back, we were short of trucks and wanted dollars to obtain them, we now propose to give as many as 300 trucks away under the Colombo Plan.
15. It may perhaps be asked, as the Minister for External Affairs in effect asks, why, if we take this stand on trucks for the Colombo Plan, trucks of a similar type are being exported elsewhere.
16. The facts are that certain exports of one make of truck have been made to New Zealand, and I understand that further orders in that country are in prospect, the idea being to build up a steady, if rather small, market there. But there are radical differences between these exports and gifts under the Colombo Plan. Thus—
(a) trucks exported to New Zealand are sold and earn us sterling exchange with which we can buy essential imports. Colombo Plan exports are straight gifts;
(b) we have long given New Zealand preferred treatment under our export policy. We sold them coal when coal was short here and we are selling them steel though steel is short.
17. Logically, perhaps, the International Bank could query our action in permitting exports of trucks to New Zealand. But we would at least have the defence that these exports will earn us sterling exchange at a time when our international reserves are running down rapidly. We would have no such defence in the case of Colombo Plan gifts.
18. This brings me to the central proposition made by the Minister for External Affairs, namely, that he should be able to give to Colombo Plan countries any type of equipment and supplies currently being exported. I do not think this proposition can possibly be entertained. For example—
(a) it may be justifiable to export goods even though they contain a large imported component because we will get more back in exchange earnings than the goods cost us in exchange. The same cannot be said for Colombo Plan gifts;
(b) it may even be justifiable at times to export goods which are scarce here or which contain elements which are scarce if this will help us to earn a big margin of exchange which we can spend on essential imports. Again, this could not be said of Colombo Plan gifts.
19. It could indeed be argued that, at a time when our resources are running down, it is wrong to be giving away anything which can be sold abroad. On this score I have had my doubts at earlier periods about giving wheat and flour at times when we were in balance of payments trouble but could sell wheat and flour readily and at good prices. I have recognised, however, that such a rule would put too severe a limitation on Colombo Plan procurement and I have agreed to very large contributions of wheat and flour being made. Up to the end of this financial year they will amount to over £6.5m which is more than half our total Economic Development contributions. In point of principle, I think it is much better to make contributions of wheat and flour—commodities of which we have a genuine exportable surplus—than to give away items of basic production equipment such as trucks and so on.
20. The real core of the problem lies in this supply of articles which are relatively scarce here. This is brought out very strikingly by a proposal to provide for India some 2,000 rail wagons to be made in Australia. I am informed that construction of those wagons would take no less than 15,000 tons of steel including 6,500 tons of spring and structural steels which are in extremely short supply in Australia. Steel generally is short. We are trying to obtain about a third of our total requirements from abroad and imports have gone up steeply. There is, however, a world-wide shortage of some types of steel. Is it therefore wise to be undertaking Colombo plan commitments which will involve us using up quite large quantities of this fundamental material?
21. This makes me wonder whether we have not misconceived to some extent the nature of the contribution we can and should make under the Colombo Plan. We may have reasons for preferring gifts of basic equipment but we have to recognise that we are in an altogether different position from the U.S.A., Canada and the United Kingdom which manufacture large surpluses of such equipment. Except here and there, we do not have any such surpluses. On the contrary, developing rapidly as we are, we tend rather to be short of basic equipment than otherwise. I fully recognise the importance of assisting the development of Asian countries as an antidote to the spread of Communism. At the same time I think we must always give a still higher priority to the up-building of our own industrial capacity and potential upon which, in the last resort, our national strength and security depend.
22. It is not to be thought, incidentally, that the quantities involved are so small as to make the questions of principle unimportant. As the Minister points out, there remains £20 million still to be spent under the Economic Development programme and he has asked Cabinet for authority to pledge a further £15 millions under that programme.
23. This is not to say that we cannot provide some equipment for the Colombo Plan countries for experience has shown that we can. Even within the categories for which we have imported equipment under International Bank Loans there is quite considerable scope for procurement. It is only when articles can be held to be similar in type and purpose that the difficulty arises. For example, we have had tractors under International Bank Loans. But we have also contributed considerable numbers of tractors of different styles and horse-power ratings to Colombo Plan countries.
24. The whole problem is very difficult and that raises in my mind the question of machinery for dealing with it. Originally an interdepartmental committee, comprising External Affairs, Treasury, Trade, and Customs, Commerce and Agriculture and National Development, was set up for this purpose but I understand it has not operated in a regular way. It might be a good idea to revive the committee, perhaps with the addition of other Departments, to examine the problem continuously under changing circumstances and make recommendations to Ministers.
25. Apart from this my conclusions can be summarised as follows:—
(a) there is no need to depart from the system of annual appropriations for Colombo Plan expenditure and there are very strong reasons against setting up a continuing trust fund for the purpose;
(b) it would be quite wrong to put Colombo Plan procurement on the same basis as policy on commercial exports;
(c) Colombo Plan gifts should not be made from equipment either obtained under International Bank loans or similar in type and purpose to such equipment;
(d) Cabinet ought to consider seriously whether Colombo Plan gifts should be made at all from equipment containing basic materials, such as steel, now short in Australia;
(e) There should be an interdepartmental committee to consider questions of eligibility of local supplies for contributions under the Colombo Plan.
[NAA: A4940, C353]
1 Document 293.
2 This sum incorporated £31.25 million for economic development, as decided by Cabinet on 13 December 1950 (see Document 125), and £3.5 million for technical assistance that had already been pledged by that date. See statement by Spender of 20 December 1950, in Current Notes , vol. 21, 1950, p. 886.