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7.14 Reforming foreign aid

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.

Over the last six years, Australia’s aid spending was provided in a fixed envelope based on the OECD definition of official development assistance. It had grown each year towards the previous Government’s target of 0.5 per cent of Gross National Income.

As outlined in Chart 7.20 Australia’s official development assistance currently stands at around $5.0 billion and, should the previous Government’s target be met by 2017-18, assistance would reach $9 billion with foreign aid continuing to grow very strongly after that.

Chart 7.20: Growth in 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.

The Government’s decisions to reduce funding to the aid programme across the forward estimates and merge AusAID into the Department of Foreign Affairs and Trade should assist in re-setting an agenda for Australia’s aid programme.

The Independent Review of Aid Effectiveness 2011 made a number of recommendations that the Commission considers warrant full implementation. Its key issues included:

  • The aid programme lacks a clear and comprehensive overall strategy. This risks a scattered effort and makes an assessment of effectiveness difficult.
  • The aid programme is fragmented. Australia has aid programmes of more than $200,000 per year in 88 countries, compared to 69 countries five years ago. The number of projects has doubled. These trends are unsustainable. Consolidation of individual programmes and projects is needed.
  • AusAID had strengthened its performance management systems in the recent past, but an important gap is the absence of a single, easily comprehensible scorecard on the effectiveness of the Australian aid programme as a whole. The system of independent evaluations is not working well and requires reform.
  • A feature over the past five years has been a dramatic rise in the proportion of the aid programme going through multilateral, non-government organisations 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 and more emphasis needs to be given to whole-of-government coordination and performance management.

Aid funding had been managed to a set of targets which reflected the previous Government’s agreed growth path, with unallocated funding held in the Contingency Reserve. The approach allowed for growth to be reflected in the Budget bottom line, but generated an undue focus on what was defined as official development assistance in government agencies.

The Commission considers that an artificial target for aid spending, such as 0.5 per cent of Gross National Income, has the potential to distort the focus of decision-making away from the quality of outcomes with a focus instead on the quantity of resources applied. This approach is unlikely to deliver effective programme outcomes.

The Commission therefore suggests that future aid spending should increase at a rate no greater than the rate of inflation. Even with this funding, aid spending would be at historically high levels (Chart 7.20 refers).

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 future increases in aid spending, which will not now eventuate.

The Commission further notes that 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. The current Government, however, has indicated that it would prefer the aid programme to directly support Australia’s national interest. A programme narrowly focussed on the most strategically important countries would be more sustainable.

The Government should articulate the relationship between aid spending and its strategic and diplomatic priorities. As noted above, the aid programme has had a significant level of fragmentation, with programmes operating in many countries at small scale. This risks having programmes that lack the scale to make any meaningful progress on poverty.

Better use of aid would be to focus on the nearby countries where Australia’s expertise and interests are higher, with contributions to the better performing multilateral funds (including the World Bank and the Asian Development Bank) to address humanitarian concerns beyond this region.

While AusAID has been merged into the Department of Foreign Affairs and Trade, a higher level of transparency around aid spending is still highly desirable. 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 and the Independent Evaluation Committee.

In order to reinforce the independence and credibility of this process, the Office of Development Effectiveness should be separated from Department of Foreign Affairs and Trade and become a unit within another agency.

Recommendation 31: Reforming foreign aid

Australia's overseas aid programme serves Australia's national interests, including by contributing to global efforts to reduce poverty and promoting stability and prosperity in our region. The Commission recommends Australia's Official Development Assistance programme be better managed including by:

  1. not tying aid spending to the level of Gross National Income, rather managing it in the same way as other agency funding, with any increase in resources justified in terms of the overall fiscal context rather than to a set of funding targets;
  2. increasing future aid spending at a rate no greater than the rate of inflation, noting that even with this funding, aid spending would be at historically high levels;
  3. reducing the significant fragmentation, with bilateral aid delivery tightly focussed on countries of strategic interest to Australia and with assistance to other countries addressed through the better performing multilateral funds; and
  4. focusing aid programme reporting on outcomes achieved rather than the quantity of resources applied.