While the foreign affairs function has been one of the most rapidly growing parts of government expenditure, this largely 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). In contrast, Department of Foreign Affairs and Trade (DFAT) resourcing has broadly remained constant in real terms, while Australian Trade Commission (Austrade) funding has declined.
The Foreign Affairs and Trade Portfolio consists of DFAT, Austrade, the Australian Centre for International Agricultural Research (ACIAR), the Export Finance and Insurance Corporation (EFIC), Tourism Australia and the Australian Secret Intelligence Service. Until 1 November 2013, the Australian Agency for International Development (AusAID) was a separate agency providing international aid but is now a part of DFAT.
The original departments of state at Federation included the Department of External Affairs and the Department of Trade and Customs.
Rationale for government intervention
Diplomacy and consular activities are a traditional function of national governments. The Foreign Affairs and Trade Portfolio also undertakes roles in relation to ODA, trade policy and tourism assistance. These activities are discussed further in Sections 9.14 (Foreign Aid) and 10.1 (Industry Assistance) of the Appendix.
Government intervention in trade is often understood in terms of addressing market failures. Trade policy has usually centred on negotiation with the governments of trading partners to lower tariffs and non-tariff barriers to Australian goods and services. In addition, governments can attempt to directly address market failures, although such activities run the risk of suffering from government failures and not keeping up with change in the international trading environment.
Tourism assistance can also be seen as aiming to address market failures within the tourism industry.
Current structure of the programme
There are a few unique aspects of the Foreign Affairs and Trade Portfolio funding model:
- Passport funding has separate arrangements which see the marginal funding for each passport negotiated with the Department of Finance every three years. DFAT funding for passports is then adjusted regularly over the three years reflecting updated forecasts of passport demand.
- No win/no loss funding arrangements apply in limited circumstances – currently only for security costs in Afghanistan – with DFAT receiving additional funds if actual costs are higher than budgeted and returning any surplus funds. Although not described as no win/no loss, membership fees for international organisations (like the United Nations) are effectively a no win/no loss arrangement.
- DFAT charges agencies rent for the space they occupy in embassies and for other services they provide (IT, utilities, etc).
- Austrade charges businesses for services they provide (currently at a rate of $190 per hour).
- The Commonwealth Government provides a foreign exchange no win/no loss arrangement where agencies are reimbursed for a deterioration in the value of the Australian dollar, or return funding when the dollar appreciates. DFAT and Austrade participate in these arrangements while AusAID and ACIAR do not (in part reflecting difficulties of managing this within the ODA funding model).
- The ODA funding model which is discussed in Section 9.14 of the Appendix.
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. In contrast, DFAT spending prior to gaining AusAID’s functions and resources was $1.4 billion per year and projected to remain at this level across the forward estimates period.
The Foreign Affairs and Trade Portfolio is facing pressure from the increasingly globalised nature of the world and the complexity of the relationships that result. This includes increasing trade volumes and increasing numbers of Australians travelling abroad.
The environment for international trade has been improving, although the process of reducing trade barriers has been uneven. Generally, more progress has been made in negotiating reduced trade barriers through bilateral processes than on a multilateral basis. Negotiations through the World Trade Organization Doha Round have only recently shown some progress with the Bali package from December 2013.
Nevertheless, opportunities for trade have generally been improving, with businesses becoming more aware of opportunities and greater availability of supporting infrastructure and services.
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 - this is addressed in greater detail in Appendix Section 9.14.
The overall level of DFAT resourcing has been a focus of attention, raised by the Joint Standing Committee on Foreign Affairs, Defence and Trade report Australia’s Overseas Representation – Punching Below Our Weight? (2012) and the Lowy Institute for International Policy report Australia’s Diplomatic Deficit (2009).
The Parliamentary Committee recommended increased Budget priority for overseas representation, with a substantial (at least 20) increase in the number of DFAT’s diplomatic posts to bring it to a level commensurate with its position in the G20 and OECD economies. The Committee also recommended that DFAT’s funding be increased in the long-term to a set percentage of gross domestic product.
The Government has an election commitment to review diplomatic resources to ‘ensure Australia’s global diplomatic network is consistent with our interests’ (Liberal Party of Australia and National Party of Australia, 2013).
The pressures on DFAT consular services have gained attention from the Joint Standing Committee on Foreign Affairs, Defence and Trade and the Lowy Institute report Consular Conundrum: The Rising Demands and Diminishing Means for Assisting Australians Overseas (Oliver, 2013). The Committee recommended that ‘the cost of meeting increasing demand for consular services should be met through a combination of increased passport fees and a small hypothecated and indexed travel levy’.
Trade and tourism
Austrade, EFIC and Tourism Australia are intended to support Australian businesses in exploiting commercial opportunities by assisting them in addressing market failures. In the time since these organisations were founded, there have been significant changes in the international environment, the availability of information (notably through the internet), the maturity of the financial services sector and the accessibility of professional services firms on a global basis.
Many of these arrangements have their origins 40 years ago or longer. The economy has changed significantly since then, undermining the case for intervention to promote exports. Consideration of the effectiveness and public benefits of this assistance is discussed in Appendix Section 10.1.
Australia is a 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. Many organisations have little to show by way of practical outcomes. There is no single list of all the organisations. DFAT funds many, 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.
- AusAID conducted an assessment of many of organisations involved in international aid (AusAID, 2012). For other organisations, there is no formal assessment process.
Potential areas for reform
DFAT resourcing is an important issue for the Commission as additional funding for diplomacy makes the task of achieving a longer-term surplus more difficult.
The overall resourcing position of DFAT is now obscured by its merger with AusAID. Even with the reduction in aid spending, AusAID resourcing was much greater than that of DFAT. Broadly the argument about resourcing has centred on four issues:
- DFAT funding has been largely constant in real terms since 1995-96, while peer comparison agencies have been growing rapidly (e.g. AusAID and the intelligence agencies).
- DFAT staffing is lower than it was in 1996 and the number of overseas Australia‑Based (A-Based) staff is notably lower.
- DFAT has a smaller diplomatic footprint (i.e. number of overseas posts) than any similar sized G20 or OECD country.
- Growing numbers of Australians travelling overseas are placing increasing pressures on consular services and DFAT workloads.
While the overall level of diplomatic capability involves a choice for government, the Commission does not consider that the case for a significant increase in resources is compelling.
It is not surprising that an organisation delivering essentially the same function as it did 20 years ago should have essentially the same funding in real terms. The underlying details make the story more complex and this is explored in Attachment 10.4.1 of the Appendix.
In any case, any increase in real expenditure should be accompanied by increased outcomes valued by government. At the heart of establishing value for money is the planning and performance measurement system.
Strategic planning necessarily involves sensitive judgements on foreign countries and the publicly provided ‘Asian Century’ strategies probably do not serve as the best basis to assess the quality of DFAT strategy work. Rather, the approach would benefit from assessing the interests of various actors and their sources of power in relationships, the dynamics of relationships and the opportunity costs of the various options available to Australia.
Performance measurement for diplomacy is complicated by the intangible nature of the outcomes being delivered. Nevertheless this means that more effort is required rather than less.
While the DFAT Portfolio Budget Statements and Annual Report list key performance indicators (KPIs), reporting on them is inadequate. The first KPI reads:
High level of satisfaction of ministers and high-level clients with the quality and timeliness of advice, briefing and support in relation to Australia's foreign, trade and economic, and international security interests (Program 1.1).
Although the performance reporting section in the Annual Report is 136 pages, there is no mention of client satisfaction.
Despite the difficulties in measuring intangible outcomes, much work has been done by AusAID in providing more robust self-assessments of aid programmes and this approach can be supplemented by peer and client assessments. Regularly presenting the cost and performance associated with particular relationships would provide a better basis for managing the DFAT budget and those of other agencies with an international presence.
Strategies that should be considered include: client surveys; self-assessment (such as applied in AusAID’s Quality at Implementation (QAI) reports); peer assessment; and assessing public diplomacy through the use the techniques used for measuring the effectiveness of marketing campaigns.
Opportunities for savings
The Commission was asked to report on efficiencies and savings to improve the effectiveness of, and value-for-money from, all Commonwealth expenditure. Some options exist to improve the efficiency of DFAT operations. These include:
- ending future involvement in international expositions. While Australia’s representation at World Expos has some public diplomacy value, costs are very high and it is difficult to secure buy-in and contributions from State Governments or Australian industry. Australia should withdraw from World Expos — a number of ‘like-minded’ countries have decided not to participate in the forthcoming Milan Expo due to budgetary pressures;
- re-examining the need for embassies in high cost locations, where the additional security costs can make representation in some countries several times as expensive as a similar sized presence in a more secure country. Options might include providing representation from a neighbouring country and providing a minimal footprint in‑country;
- reviewing overseas conditions and allowances. Overseas postings are a significant part of DFAT’s costs and that of other agencies. An Executive Level 2 officer might have a salary of around $140,000. Once overheads are added, the cost of a posting to New York can total around $600,000. An option would be benchmarking allowances against what corporations pay. The range of allowances and other support provided to personnel being posted overseas appears generous in comparison to that offered by major corporations and there would be merit in benchmarking the allowances paid by all agencies;
- exploring options to further reduce Canberra staffing. While the Lowy Institute, in Australia’s Diplomatic Deficit (2009), argued for an increase in overall resourcing for DFAT, they also noted that the proportion of overseas staff was low compared to comparison countries; and
- making greater use of arrangements to share resources with like-mind countries. Australia already has a longstanding agreement with Canada to provide consular assistance in locations where one country has a mission and the other does not. While in 2012 the United Kingdom announced its intention to have shared embassies with Canada and Australia, nothing further has been heard of this idea.
The Government has invited public comment on an Issues Paper: Development of a new Consular Strategy 2014-16. That paper notes that ‘At present, Australia is among the most generous providers of consular services, especially in comparison to our closest consular partner countries (Canada, United Kingdom, New Zealand and the United States)’. Demand for consular services would be better controlled by applying cost recovery. Australian travellers would then be conscious of the need for better preparation, insurance and use of alternative sources of advice and assistance. As a comparison, the United Kingdom charges an ‘attendance fee’ of £130 for each hour (including travel time if performed away from the consular office).
While Traveller Emergency Loans are a relatively small expense, the recovery rate is only about 70 per cent. DFAT advice is that ‘There is an expectation the money will be repaid, but interest is not charged. Passports are not issued if the loan is outstanding, and the loan is not written off unless there is very clear evidence that recovery is unlikely’. Slow repayments of interest free loans should not be surprising. An interest rate equivalent to that charged for credit card advances would be appropriate.
DFAT provides 1.7 million passports per year, which it expects to grow to 2.1 million by 2015-16. It provides around $374 million annually to consolidated revenue at a cost of around $223 million. Significant parts of the passport production have been outsourced and DFAT is in the midst of a major upgrade of its IT systems. Despite the outsourcing of functions, the current funding model is not effective in ensuring that there is a continuing improvement in efficiency, with costs increasing in real terms. The introduction of the last passport funding agreement in 2012-13 saw costs jump by nearly 20 per cent.
The argument that security requirements prevent further outsourcing is not compelling. The government already outsources a number of national security related activities to be performed by appropriately cleared contractors. Furthermore, the need for retaining separate state passport offices is unclear and these could be closed.
The average cost of issuing overseas passports is significantly greater than the fee charged to clients. These overseas costs reflect relatively high overheads and poor economies of scale. A surcharge could be considered for overseas issued passports.
Opportunities also exist to cease or scale back funding for public diplomacy activities such as the Australia Network and the International Relations Grants Program. Ostensibly, these activities are intended to support Australia’s international goals, but the relationship between the funded activities and these goals is not clear.
The Australia Network is broadcast to more than 46 countries in the Asia-Pacific region. It seeks to promote a positive and accurate image of Australia and build regional, cross-cultural understanding. The ABC has been awarded successive contracts to deliver this service including the most recent contract in September 2012, valued at $223 million for 10 years.
A number of submissions raised concerns surrounding the tender process for the Australia Network, which the previous government decided should be provided to the ABC in perpetuity – irrespective of the cost-effectiveness of offers by other media companies. However, the Australia Network is an expensive option for meeting diplomatic objectives given its limited outreach to a small audience. Funding directed toward the Australia Network would be better directed to other areas or returned to the Budget.
The International Relations Grants Program – costing $5 million per year – provides a key tool to strengthen people-to-people and institutional links in our region and enhance Australia’s profile internationally. Some grants appear to fund useful engagement between Australia and other countries; however, others are difficult to relate to any diplomatic goals.
Australia should consider withdrawing from organisations that are of only peripheral strategic interest, such as European Bank for Reconstruction and Development and the International Criminal Tribunal for the Former Yugoslavia. It should not pursue joining the African Development Bank or the International Fund for Agricultural Development, whose functions overlap with other organisations of which Australia is already a member.
Better use of international organisations provides the opportunity to both reduce costs and improve outcomes related to Australia’s interests. This should include making organisational reform and better value-for-money a key part of Australia’s involvement with organisations, particularly where Australia has a leadership role (such as the G20 or the United Nations at present); looking for the opportunity to simplify and rationalise international bodies; and ensuring that proposals for expansion should be treated with caution and based on a robust business case.
A number of issues to be considered in implementing the Commission’s recommendations on resourcing diplomacy and consular activities are summarised in Box 10.4.1.
Box 10.4.1: Implementation notes
In implementing the Commission's recommendations for resourcing diplomacy and consular activities a number of issues should be considered:
- improvements to DFAT's performance reporting and evaluation through strategies such as: client surveys; self-assessment (such as applied in AusAID's Quality at Implementation (QAI) reports); peer assessment; and assessing public diplomacy through the use the techniques used for measuring the effectiveness of marketing campaigns;
- DFAT undertaking ongoing assessments of the performance and cost of maintaining Australia's international relationships with each country, including assessing: the cost of the embassy, any aid provided and staff based in the country and Australia; the quality of the relationship and any specific aid activities, using self-assessment and peer/client assessment tools; and indicators of the importance of the relationship;
- in introducing fees for consular services, DFAT should apply fees to cost recover most forms of consular assistance, including an attendance fee for consular visits on par with that applied by the United Kingdom and apply interest to Traveller Emergency Loans;
- revising the guidelines and approval process for the International Relations Grants Program to ensure that funding addresses critical areas of relationship building, rather than cultural activities of limited appeal;
- further outsourcing of passport production, once the Passport Redevelopment Project has delivered new systems — DFAT could submit an in-house bid for this, as well as assess the need to retain separate state passport offices; considering a surcharge for overseas issued passports.
- benchmarking overseas allowances for DFAT and other agency staff against major corporations;
- giving priority to improving organisational performance and value for money of international organisations that Australia is a member of – including through DFAT compiling a single list of international organisations of which Australia is a member and the Government reviewing these organisations every three years to determine whether Australia should continue membership and to allow funding to be directed at the better performing organisations; and
- withdrawal from: the European Bank for Reconstruction and Development and the International Criminal Tribunal for the Former Yugoslavia; not joining the African Development Bank and the International Fund for Agricultural Development.
AusAID 2012, Australian Multilateral Assessment, viewed December 2014, <http://aid.dfat.gov.au/partner/Documents/ama-full-report.pdf>.
Australian Government 2013, Mid-Year Economic and Fiscal Outlook 2013-14.
Australian Public Service Commission 2013, Capability Review: Department of Foreign Affairs and Trade, Canberra.
Department of Foreign Affairs and Trade various years, Annual Reports 1996 to 2013, Canberra.
Department of Foreign Affairs and Trade 2013, Issues Paper: Development of a New Consular Strategy 2014-16, 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.
Joint Standing Committee on Foreign Affairs, Defence and Trade 2012, Australia’s Overseas Representation – Punching Below Our Weight? Parliament of the Commonwealth of Australia, Canberra.
Liberal Party of Australia and National Party of Australia 2013, The Coalition’s Policy for Foreign Affairs, Canberra.
Lowy Institute for International Policy 2009, Australia’s Diplomatic Deficit: Reinvesting in our Instruments of International Policy, Sydney.
Oliver, A and Shearer, A 2011, Diplomatic Disrepair: Rebuilding Australia’s International Policy Infrastructure, Lowy Institute for International Policy, Sydney.
Oliver, A 2013, Consular Conundrum: The Rising Demands and Diminishing Means for Assisting Australians Overseas, Lowy Institute for International Policy, Sydney.