AUSAID reversed a decision to slash funding to an East Timorese program after President Jose Ramos-Horta threatened to tell Kevin Rudd the "vast majority" of Australian aid was spent on consultants and study missions.
Diplomatic cables and briefing notes reveal the funding injection occurred after a diplomatic row erupted between the Australian and East Timorese governments over cuts to the "Buy Local, Build East Timor" program, which was run by respected Canadian non-government organisation Peace Dividend Trust.
The AusAID-funded project, begun in 2007, had been developing a business database, matchmaking program and tender distribution operation, and aimed to encourage international donors to use local business.
Funding cuts were proposed last year after an AusAID review found alleged scheduling and monitoring deficiencies and inefficiencies such that transactions worth US10c were costing $US18. The program had already cost $2.6 million.
When Mr Ramos-Horta heard of the proposed cuts, he wrote to Australia's then ambassador in East Timor, Peter Heyward, in June demanding the cuts be reversed and threatening to tell then prime minister Mr Rudd that most Australian aid went on consultants, study missions and recommendations.
The letter was leaked to the press on June 9, prompting a flurry of diplomatic correspondence and ministerial briefings. A day later, $400,000 was committed to the project, according to documents obtained by The Australian under Freedom of Information laws.
"The (Peace Dividend) Trust had misinterpreted AusAID's initial offer and had decided to go public in its opposition rather than discuss matters with AusAID," said one Department of Foreign Affairs briefing document.
"Subsequent clarifications in negotiating with the trust's head office in Canada have been successful and on 10 June, 2010, AusAID agreed to provide a further $400,000 to the trust to fund its operations for another year."
A diplomatic cable from the Australian embassy in Dili to Canberra in September revealed officials' concerns over the project, which had yet to secure other funding. "An independent review commissioned by AusAID in 2009 highlighted a range of flaws in PDT's East Timor program, including insufficient evidence to back its (large) claims of success in developing local business opportunities and failure to address issues of sustainability including, for example, modest cost-recovery mechanisms," said a cable from Australian embassy aid counsellor Jemal Sharah on September 15.
PDT has rejected most of the review findings as "profoundly flawed" in concept and detail.
The project's funding history, design, objectives and implementations had been misunderstood, it said. It also denied claims that the matchmaking procurement service was not yet viable.
"PDT asserts this is fiction and that it has been operating in Dili and up to nine districts since February 2008, having facilitated thousands of documented business transactions."
An AusAID spokesperson said negotiations had been under way to provide funding, in keeping with the recommendations.