This article is more than 1 year old

This article is more than 1 year old

A proposal to set up an Australian Pacific infrastructure investment bank might repeat the mistakes of a disastrous past program from the 1980s that the Howard government axed in 1996, a new report warns.

The prime minister, Scott Morrison, announced the $2bn Australian infrastructure financing facility last year as part of Australia’s “Pacific step up”, which is aimed at combatting rising Chinese influence in the region.

But a new report suggests the scheme is a solution to a crisis that is “largely exaggerated”. The joint report by Jubilee Australia – an NGO that promotes economic justice in Asia Pacific – aid group Caritas and the University of New South Wales, set to be released this week, says of the investment bank: “It pushes a model of development that is likely only to benefit Australian and other western companies and contractors and the small middle classes in some of the larger Pacific nations like Papua New Guinea and Fiji.”

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The federal government in next Tuesday’s budget is expected to confirm $500m will be diverted from the foreign aid budget into the scheme as well as shed light on which areas will be cut. Aid groups warn there is no fat left to trim after more than $11bn cuts since the Coalition came to power in 2013.

The report says a model of concessional government-to-government loans looks similar to the defunct Development Import Finance Facility (Diff), which operated from about 1983 to 1996. The then treasurer, Peter Costello, characterised the scheme as a “subsidy paid to domestic business” before he dumped it.

Senators conducting an inquiry into the program said: “There appears to be little economic advantage in engaging in a subsidy war with other larger economic powers.”

The report notes the “supplier driven nature” of the Diff program where projects were driven by the needs of exporters rather than those of developing countries.

“In the early years of the program, it seems that many or perhaps most of the projects were initiated not by the recipient country but by the exporter,” the report says.

The report says the Diff saw aid priorities depart from the guiding principles of poverty alleviation and sustainable development.

From a country perspective between 1983-1996, 85% of funding had gone to only three countries – 46% Indonesia, 30% China and 9% India.

Funding was skewed towards countries with a large and growing middle class and rapid economic growth and away from countries more in need of actual aid, the report says.

The report warns of the dangers of the “overly aggressive pursuit of economic growth” citing PNG’s resources-backed development path as a case study.

An LNG gas project – which the Australia’s Export Finance and Insurance Corporation (Efic) backed - has not delivered the promised economic boom. Real per capital gross domestic product has gone backwards, the report says.

It notes the loan fund will be “debt creating” at a time when debt levels among Pacific Island nations are rapidly increasing and moving from low to moderate risk to moderate to high risk.

There is widespread alarm over China’s so-called “debt trap diplomacy”.

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Concetta Fierravanti-Wells, the former minister for the Pacific, was critical of the infrastructure bank in an interview with the Guardian last year, saying she did not want to see “one debtor swapped for another”.

The report calls for greater consultation with Pacific countries on their infrastructure needs, a focus on ecological impact and for a list of priority projects to be drawn up.

A parliamentary committee inquiry into a bill that gives Efic a role in the new infrastructure bank is due to release its report on Tuesday.

In a submission to the inquiry, Jubilee Australia was concerned about Efic’s lack of accountability and its exclusion from freedom of information laws.