AusAID reform: What’s at stake for implementers

With developed country governments under tremendous fiscal pressure across the globe, leaders and parliaments continue to evaluate their foreign assistance programs. In some countries, this has meant cutting aid levels and at least publicly discussing the idea of pivoting away from the traditional contracting model on which bilateral aid agencies have come to rely. When it comes to aid spending, Australia is in the fortunate position of being the exception: with a strong economy and national balance sheet, the country is substantially increasing, not cutting, its foreign aid budget. As a result, it is now seen as an important future source of funding for American and European development consulting companies and non-governmental organizations that face budget cuts at home. Even as it increases its aid budget, Australia too has joined the global chorus for aid effectiveness and is now taking stock of its development assistance policy. Following a government-commissioned, yet decidedly independent review of Australia’s aid program in late 2010 (the first in 15 years), AusAID has embarked on a mission to alter and improve the way it disburses aid. The review was precipitated by years of allegations, made in both in Canberra and on-the-ground where the money is being spent, that Australian foreign assistance was misguided and mismanaged. At least one specific impetus behind the review was a series of investigative reports over the past two years on excessive AusAID consultant salaries. So the combination of a growing foreign aid budget and public skepticism around how it is being spent have led to ‘value for money’ to become the buzzword at AusAID. The agency says it is determined to be more selective with its funding choices, geographic areas of concentration, and overall programming. While it is still too early to tell just how far AusAID will go with its reform policy, many, including development organizations who receive funding from the agency, are bracing for change. But at the end of the day, what might the results of Australia’s independent aid review mean for implementing partners? Before answering that question, it is helpful to understand the scale and nature of AusAID’s growth. Australia’s total development giving is estimated at around $4 billion today, but is expected to double to $8 billion by 2015-16 and most of the money will be administered by AusAID. The organization focuses largely on the Asia-Pacific — a region of increasing global importance with over 60 percent of the world’s population and 1.8 billion people classified as poor. Near neighbors — Indonesia, Papua New Guinea and East Timor — will continue to be the top recipients of Australia bilateral aid. Historically and philosophically in tune with the West but geo-politically immersed in Asia, some consider Australia to be well-positioned to confront Asia’s development complexities and challenges. Although its focus is the Asia-Pacific region, AusAID also supports international stability and development efforts in South Asia, particularly Afghanistan and Pakistan, as well as across Africa, largely through contributions to multilateral development institutions. This growing activity and influence has not been lost on implementers who seek to work with the agency in the Asia-Pacific and beyond. At the same time, however, they are watching closely to see what AusAID reform might mean in terms of contracting opportunities. Despite consistent budget increases over the course of the last five years, AusAID has kept funding for private sector contracting essentially flat. From 2005 to 2010 (the period before the independent review), AusAID cut the share of spending going to contractors from 41 percent to 23 percent of its total budget. This trend occurred while AusAID simultaneously increased its official development assistance by 35 percent (see chart). A top recommendation from last year’s independent review is to “reduce the number of technical advisers by 25 percent over the next two years,” so this trend seems likely to persist. The drop in the share of the budget going to contracting can be traced to more reliance on partner or recipient country systems, as well as to larger contributions to multilateral organizations like the Asian Development Bank. In the findings of the independent review, difficulty in maintaining development gains (e.g. a lack of sustainability) was cited as the primary reason for reducing private contracting. The review panel says that coursing aid through recipient governments will increase the likelihood of full program execution and, over time, enable developing country governments to take greater ownership of development programs. Consolidation is another buzzword found in the AusAID reform policy. The review panel observed that Australia’s aid program is highly fragmented, covering more than 3,700 individual activities in 88 countries. Fragmentation, the panel asserts, can lead to high transaction costs without commensurate results. To resolve this, AusAID will launch fewer but larger initiatives in targeted sectors. But a more thorough analysis reveals that implementers will still have a major role to play in the Australian aid program. Particularly, with Australia’s pledge to double its aid budget within five years, projects that are so large-scale that they have several components and layers, long-term in nature, and in need of measurable results to be considered successes, are expected to dominate the agency’s financing plans. Projects up for bidding will likely have larger budgets from now well through 2015-16. This means total funding for implementing partners may not go down. In fact, it is probable that they may even see an increase in their net funding or, at the very least, not experience a drop in financing. Larger programs will undoubtedly demand the expertise and resources of private development consulting firms and NGOs. Indeed, AusAID sources we spoke to confirm that private sector partners will continue to play a major role in service delivery, especially in terms of high-level management support, and are frequently the only organizations with the competency and service delivery excellence to meet AusAID’s increasingly rigorous performance criteria and standards. With the ability to quickly mobilize advisers, change personnel on-demand, and provide much-needed technical support for highly complex projects, the private sector remains well-placed within AusAID’s aid delivery infrastructure. Furthermore, even as procurements are eventually shifted to in-country systems where possible, AusAID will still require private sector services in the early stages of policy development and program design as well as results monitoring and evaluation. This is especially true in post-conflict or fragile nations where in-country systems are either lagging or nonexistent. Although program implementation through the private sector has declined as a share of total AusAID spending, contracting with private firms still received a significant share, second only to the budget for multilateral organizations. In 2010, the 23 percent share for private contractors outpaced NGOs, which received less than 20 percent of Australia’s aid budget, and partner government systems, which received less than 10 percent. As AusAID’s overall budget grows rapidly, these implementing partners are likely to see a growing total amount of funding, even if their share of the overall budget continues to fall. In addition, the private sector will likely find that AusAID will need them for larger and more targeted projects, particularly in failed states and countries where government systems are not ready to directly handle aid funds. Indeed, these seem the likely consequences for contractors of the ongoing reforms at AusAID. Given the growing importance of Australia’s aid program in the global development community, AusAID reform is a story international development organizations and Devex will continue to watch closely. Louie-An Pilapil and Kristine Tinio contributed to this report. Join the Devex community and gain access to more in-depth analysis, breaking news and business advice — and a host of other services — on international development, humanitarian aid and global health.