9.14 Foreign aid

Background

The foreign affairs function has been one of the most rapidly growing parts of Commonwealth expenditure. This reflected the policy of the previous Government to lift spending on official development assistance (ODA) to 0.5 per cent of Gross National Income (GNI). Achieving this target was also an assumption in the 2013-14 Mid-Year Economic and Fiscal Outlook (MYEFO, Australian Government, 2013).

Australia’s ODA is delivered by the Department of Foreign Affairs and Trade (DFAT) and the Australian Centre for International Agricultural Research (ACIAR) in the Foreign Affairs and Trade Portfolio and also by other government agencies such as the Australian Federal Police and the Department of Immigration and Border Protection. Until it was merged into DFAT on 1 November 2013, Australian Agency for International Development (AusAID) was a separate agency providing most international aid.

Rationale for government intervention

Australia’s overseas aid programme has been managed with the objective of assisting developing countries to reduce poverty. This has been seen as serving Australia’s national interests by promoting stability and prosperity both in our region and beyond.

Current structure of the programme

Over the last six years, aid spending had been provided in a fixed envelope based on the Organisation for Economic Co-operation and Development definition of ODA, growing each year towards a target of 0.5 per cent of GNI. Most of AusAID and ACIAR spending is classified as ODA. Funding has been adjusted regularly based on parameter changes. If programmed ODA spending exceeded the envelope, offsets would need to be provided (usually from AusAID), while if proposed spending was less, the difference would be held in the Contingency Reserve for later allocation.

Other agencies providing ODA are either funded directly from the Budget or funded by AusAID through a funding agreement.

Trends

The 2013-14 Budget reported that total expenses under the foreign affairs and economic aid sub-function were expected to grow by 12.1 per cent in real terms from 2012-13 to 2013-14 and by 22.1 per cent in real terms across the forward years from 2013‑14. This increase was driven by the previous Government’s commitment to increase the level of ODA to 0.5 per cent of GNI.

While ODA has been projected to grow rapidly, the growth path has been revised on multiple occasions in the recent past. Chart 9.14.1 illustrates projections of ODA/GNI at the time of various budget documents.

The Government decision to reduce aid spending by $4.5 billion over four years and only grow aid by the consumer price index (CPI) changed this picture significantly. The current estimates show a gradual decrease in aid spending as a ratio to GNI across the forward estimates.

However, the Government’s election policy retains a commitment to eventually increase funding to 0.5 per cent of GNI. The estimates in the 2013‑14 MYEFO show that target being reached in 2017-18.

Chart 9.14.1: Evolution of the ODA/GNI targets

This chart shows the profile of the aid spending targets as a percentage of gross national income from the 2008-09 Budget to the 2013-14 Mid-year Economic and Fiscal Outlook.

Source: AusAID and Department of Finance.

Drivers

Poverty is still a significant problem in many countries, but the trends are generally positive. The growth of China has taken millions out of poverty, while the situation is also improving in many other developing countries.

  • Global economic conditions have meant that Australia is not alone in reducing its planned ODA spending, but the significance of aid is declining as poor countries are more dependent on their own resources, trade, foreign investment and remittances.
  • Significantly, some persistently fragile and economically weak countries are in Australia’s immediate neighbourhood (notably, Papua New Guinea and the Solomon Islands).

Issues

The size of aid spending ensures that it will be a major issue for attention. The merger of AusAID into DFAT and the reduction in aid spending by $4.5 billion over four years means that how the aid programme will be managed in future needs to be considered. Even with the reduced funding, ODA spending will be about $5 billion per year in 2013-14. Ensuring that money is spent wisely should be a priority.

  • The 2013-14 MYEFO shows aid spending returning to the trajectory set by the previous Government in 2017-18, with spending amounting to 0.5 per cent of GNI and reaching $9 billion.

Australia is member of numerous international organisations – some highly valuable and others less so. Membership of international organisations places obligations on Australia to contribute membership fees, to participate in the activities of the organisation (capturing the time of officials and ministers), to provide privileges and immunities to officials of the organisation and, sometimes, to introduce particular laws into Australia. DFAT funds many of these organisations, but others are the responsibility of other agencies.

  • Proposals to join the African Development Bank or the International Fund for Agricultural Development have been under consideration. While these are desirable organisations, it is not clear why joining them should be a priority. This issue is further addressed in Section 10.4 of the Appendix.
  • AusAID conducted an assessment of many of organisations involved in international aid (AusAID, 2012a). It is noteworthy that Australia is still directing significant resources to some organisations that performed weakly in that assessment, such as the Global Fund to Fight AIDS, TB and Malaria.

Potential areas for reform

The Government’s decisions to reduce funding to the aid programme and merge AusAID into DFAT do much to set an agenda for the aid programme. Nevertheless, the Government’s election policy retains a commitment to increase funding to 0.5 per cent of Gross National Income. The estimates in the 2013-14 MYEFO show that target being reached in 2017-18. Should this profile be followed, aid spending would increase by 73 per cent in one year; an increase which would be difficult to manage while still ensuring spending is well planned and effective.

The 0.5 per cent target is essentially an arbitrary one.

Significantly, it risks shifting the objective of the aid programme from achieving useful outcomes to simply spending the money. Australia’s GNI may be a measure of Australia’s capacity to fund aid programmes, but it is a simplistic one that does not take account of other Budget pressures.

Australia would also not be alone in prioritising domestic concerns ahead of increased aid spending. Across the OECD, aid spending has fallen by 4 per cent in real terms in 2012, following a 2 per cent fall the previous year. The same data showed Australia’s spending increasing by 8.4 per cent, following an increase of 11.2 per cent in constant US dollar terms (OECD, 2014).

There is a common misunderstanding that Australia is working to a United Nations target, somehow associated with the Millennium Development Goals (for example, PolitiFact Australia, 2013). The UN General Assembly passed a resolution in 1970 calling on developed countries to increase their aid spending to 0.7 per cent of GNI by the mid‑1970s (OECD, 2010). Some countries have adopted this as a national goal, but only five small European countries meet this target. Two other European countries spend more than 0.5 per cent of GNI (OECD, 2014).

Aid spending at about $5 billion is still greater, in real terms, than Australia’s spending in any year prior to 2011-12 (see Chart 9.14.2) and, with some reprioritisation, would allow us to continue the same rate of effort with the most important of our aid recipients.

Chart 9.14.2: Aid spending projections

This chart shows aid spending: historical data from 1982-83 to 2012-13, Budget projections which increase rapidly in 2017-18 and a projection based on growth in line with the consumer price index.

Source: AusAID, Department of Finance and National Commission of Audit.

Over the last six years, AusAID public service staffing has grown by 126 per cent (an increase of 907 ongoing staff from 30 June 2007). Many of these staff were employed in anticipation of increases in aid spending, which will not now eventuate. There are also concerns about the ‘tooth to tail’ ratio for managing our aid spending – prior to amalgamation into DFAT, AusAID’s departmental was 7.6 per cent of its total resourcing (AusAID, 2012b).

Historically, aid spending was managed to a set of targets expressed as a percentage of GNI — for which budget forecasts are subject to change. When projected aid spending fell below the target, additional funding was held in the Contingency Reserve (a provision in the Budget estimates which is not allocated to individual programmes) and spending was cut when it exceeded the target.

The approach allowed for growth to be reflected in the Budget bottom line, but generated inordinate attention on what was defined as ODA in government agencies. In addition, the planning benefits of funding predictability were easily eroded by parameter movements and the need to accommodate new Government priorities. This is not a desirable model for agency resourcing, as it encourages poor decisions on additional funding and reductions.

As aid spending is directed overseas and is of the nature of discretionary spending by government, former AusAID administered programmes should not be indexed. The former AusAID departmental expenditure should be indexed at the same wage cost index (WCI) as DFAT. All AusAID staff (Australian Public Service and locally engaged) should be funded from departmental programmes.

With aid spending at around $5 billion per year, it would still be important to demonstrate that this expenditure represents value for money.

The Independent Review of Aid Effectiveness (Hollway et al, 2011) made a number of recommendations that should still be implemented. The Independent Review’s key issues included:

  • The aid program lacks a clear and comprehensive overall strategy. This risks a scattered effort and makes an assessment of effectiveness difficult.
  • The aid program is fragmented. In 88 countries Australia has aid programmes of more than $200,000 a year, compared to 69 countries five years ago. The number of projects has doubled. These trends are unsustainable. Consolidation is a recurring theme of the Report. It will require a sustained effort to tighten political and bureaucratic discipline.
  • AusAID has greatly strengthened its performance management system in the recent past, but an important gap is the absence of a single, easily comprehensible scorecard on the effectiveness of the Australian aid program as a whole. The system of independent evaluations is not working well and requires reform.
  • One of the most striking changes over the past five years has been the dramatic rise in the proportion of the program going through multilateral, NGO and government partners. In 2005, over 40 per cent of aid from AusAID was spent through contractors; now it is just over 20 per cent. In several respects this shift has been highly successful, but there is scope to make better use of existing partnerships and include new partners, particularly the private sector and community groups.
  • A wide range of government agencies are involved in delivering aid. Other government departments bring a variety of strengths and skills. More emphasis needs to be given to whole-of-government coordination and performance management.

While reforms have occurred following the Independent Review, including providing a better integrated whole-of-government perspective and an assessment of multilateral partners, the Commission considers more needs to be done to reduce fragmentation and improve effectiveness.

The Independent Review argued that the objective of the aid programme should clearly focus on reducing poverty, with national interest as a subsidiary guiding consideration. Yet this approach made aid spending seem purely discretionary and vulnerable to cuts to address immediate fiscal concerns. The Government has indicated that it wants an aid programme directly supporting national interest. A programme narrowly focussed on the most strategically significant countries would be more sustainable. This could include limiting the Australia Awards development scholarships to countries of strategic interest; currently these are offered across the developing world, including in countries where Australia has no other aid activities.

While AusAID has been merged into DFAT, it is still desirable to have a higher level transparency around aid spending. This can be achieved by continuing to provide an annual ministerial statement on aid spending which articulates what aid funding is used for. AusAID made some useful progress with providing for independent review of aid programmes through the Office of Development Effectiveness (ODE) and the Independent Evaluation Committee. In order to reinforce the independence and credibility of this process, ODE should be separated from DFAT and become a unit within another agency.

ACIAR is a small agency in the Foreign Affairs and Trade Portfolio established under its own act of Parliament. The Independent Review of ACIAR (2013) found that ‘ACIAR is a lean organisation, with a low proportion of overheads’, in part due to the ‘expansion of administered and external funding that has occurred with little additional departmental funding and staff’. The Independent Review agreed that the ‘ratio of administration to total expenditure appears quite low given the geographic spread and the roles and responsibilities’.

Details on implementing the Commission’s recommendations on foreign aid are provided in Box 9.14.1.

Box 9.14.1: Implementation notes

In implementing the Commission's recommendations for not tying aid funding to the level of gross national income and providing greater transparency and effectiveness, the Government should consider:

  1. indexing the former AusAID departmental expenditure at the same wage cost index (WCI) as DFAT and ensuring that all AusAID staff (Australian Public Service and locally engaged) are funded from departmental, rather than administered, programmes;
  2. continuing to provide an annual ministerial statement on aid spending which articulates what aid funding is used for;
  3. separating the Office of Development Effectiveness from DFAT to become a unit within another agency; and
  4. limiting the Australia Awards development scholarships to countries of strategic interest.

References

AusAID 2007-2013, Australia’s International Development Assistance Program, Budget Papers, various 2007-2013, Canberra.

AusAID 2012a, Australian Multilateral Assessment, viewed December 2014, <http://aid.dfat.gov.au/partner/Documents/ama-full-report.pdf>.

AusAID 2012b, Helping the World’s Poor through Effective Aid: Australia’s Comprehensive Aid Policy Framework to 2015–16, Canberra.

Australian Government 1996, National Commission of Audit Report,Australian Government, Canberra.

Australian Government 2013, Mid-Year Economic and Fiscal Outlook 2013-14, Australian Government, Canberra.

Australian Public Service Commission (APSC) 2007, Australian Public Service Statistical Bulletin 2006-07, APSC, Canberra.

Australian Public Service Commission 2013, Australian Public Service Statistical Bulletin 2012-13, APSC, Canberra.

Australian Public Service Commission 2013, Capability Review: Department of Foreign Affairs and Trade, Canberra.

Farmer, B, Duncan, R, Enright, T and Jarvie, W 2013, Independent Review of the Australian Centre for International Agricultural Research (ACIAR), ACIAR, Canberra.

Hollway, S, Howes, S, Reid, M, Farmer, B and Denton, J 2011, Independent Review of Aid Effectiveness, AusAID, Canberra.

Liberal Party of Australia and National Party of Australia 2013, The Coalition’s Policy for Foreign Affairs, Canberra.

OECD 2010, History of the 0.7% ODA Target, viewed February 2014, viewed November 2013, <http://www.oecd.org/dac/stats/the07odagnitarget-ahistory.htm>.

OECD 2014, International Development Statistics (IDS) Online Databases, viewed February 2014, <http://www.oecd.org/dac/stats/idsonline.htm>.

PolitiFact Australia 2013, The Government’s $4.5 billion Aid Cut is Greater than what was Budgeted by Our Labor Government in 2013-14 for the Entire AusAID Country and Global Program, viewed February 2014, <http://www.politifact.com.au>.