Bending AusAID or breaking it?

The combined impact of budget cuts and administrative changes to the aid program will be large and unpredictable, Robin Davies warns.

lSeptember was a harrowing month for Australia's overseas aid program and the agency that manages most of Australia's aid, AusAID. Just before the election, the Coalition announced it would cut $4.5 billion from planned aid spending between now and 2016-17. Then, shortly after taking office, Prime Minister Tony Abbott announced AusAID would be ''integrated'' into the Department of Foreign Affairs and Trade.

Neither of these moves was signalled. The Coalition had consistently said it would increase aid towards a target of 0.5 per cent of gross national income, though it refused to give a time frame. It had also pledged on several occasions to appoint a dedicated minister for international development.

There are precedents in Coalition history for both moves. The Howard government cut aid by about 10 per cent in its first budget in 1996, though this was less severe than cuts by the Hawke government a decade earlier. The Fraser government repealed the Whitlam government's 1974 legislation establishing the Australian Development Assistance Agency as a statutory authority, and folded that agency back into the foreign ministry.

Australia's aid program and aid agency were not obliterated by the Fraser and Howard governments' changes. On the contrary, Australia was a comparatively generous donor under Fraser and an increasingly generous one towards the end of the Howard era. AusAID and its predecessors continued to have considerable autonomy.

However, Abbott's aid cuts will bite harder than Howard's (and Hawke's) and his administrative changes could be more thoroughgoing than Fraser's. The Abbott government has also moved on the aid budget and the administration of the aid program simultaneously and precipitately. The combined impact of budget cuts and administrative changes will be large, unpredictable and difficult to manage.

The effects of the budget cuts, considered in isolation, were already bound to be considerable. Labor had harvested $5.7 billion from the forward estimates in the current and previous financial years alone. The further cuts mean a reduction of over $10 billion in aid that was, just a year ago, to be provided up to mid-2017.


The cuts are to be achieved by reducing this year's aid program to about 5 per cent below last year's level, or about $5 billion a year, and tethering any further growth to inflation. Thus, there will be no real growth in aid this side of 2017.

Given there will be real growth in the Australian economy and no real growth in aid, Australia's aid as a share of GNI will decline. The May 2013 budget forecast it would reach 37¢ per $100 of GNI this year. That would have been a 28-year high. It will now drop to about 33¢ this year and probably hover around 32¢ thereafter.

The government, according to its pre-election foreign policy document, maintains its commitment to reaching an aid to GNI ratio of 0.5 per cent - at some point. It might as well commit to the more widely recognised United Nations target of 0.7 per cent. That would be no less realistic.

Abbott and his Foreign Affairs Minister, Julie Bishop, have been at pains to say the government is merely ''reducing the growth in foreign aid'', as was advocated last year by former finance minister Nick Minchin. In fact, the government has cut the aid program. The within-year reduction to aid in 2013-14 is nearly 12 per cent of the $5.7 billion Labor budgeted. That amounts to over $650 million.

This cut will be applied several months into the financial year, to programs for which there would already be commitments or firm plans. This is unprecedented. When the new Howard government cut aid in 1996, it did so in the budget process and relative to the previous year's budget.

It is hard to imagine the government could implement cuts of this magnitude without all sorts of diplomatic and legal pain. Then there is the burden of process: the renegotiations, redesigns, postponements and engagements with interest groups that must be managed. Predictability and strategic clarity, the bedrocks of effective aid, have been compromised.

It is hard to imagine the government could implement cuts of this magnitude without all sorts of diplomatic and legal pain.

These difficulties will be compounded by the fact that they follow major reallocations within the aid budget by Labor, in late 2012 and 2013, to fund onshore asylum-seeker costs and aspects of the new regional resettlement arrangements. Those reallocations soaked up about $1 billion that, only 10 months ago, would have been slated for other uses.

The planned cuts, if implemented as announced, will have a severe impact at many levels. Australia's international standing, bilateral relations and aid effectiveness will suffer. The government's capacity to do anything new with aid will be highly constrained, which could have the effect of creating a negative feedback loop: a program seen as not serving the national interest in creative and flexible ways is a program ripe for further cuts.

The reintegration of AusAID into DFAT could throw an even bigger spanner into the works. AusAID, or something very like it, has been around for almost 40 years; by one measure, its 40th birthday falls on December 1 this year. It was briefly a statutory authority under Whitlam but, for 33 years, it was an administratively autonomous part of DFAT. In 2010, it was separated from DFAT and became an executive agency, though it remained within the foreign affairs and trade portfolio.

The government has now decided to return AusAID to DFAT, citing a need for greater alignment between ''the aid and diplomatic arms of Australia's international policy agenda''. This may amount to little more than a reversal of the 2010 change, which would be relatively trivial. However, it seems likely to be more than that. DFAT has referred to the change as a ''merger''. It has set up a taskforce to determine what the new arrangements might look like and its secretary, Peter Varghese, has said the transition will be a ''major undertaking'' and a ''lengthy and complex'' process.

Housing aid policy and administration in a foreign ministry is unexceptional. Most other donor countries do it. In fact, Britain is now the only major donor country that has a fully independent development agency with a dominant role in aid policy and management. The question is not whether the loss of AusAID's executive agency status and its integration into DFAT is a bad thing; it need not be. It's whether integration really means disintegration - whether something still recognisable as AusAID will get to celebrate its 40th birthday.

If one looks at arrangements elsewhere, there are broadly three ways in which aid policy and administration can be integrated into a foreign ministry.

One approach is to have a clearly identified entity within the ministry that does both aid policy and program implementation. This model has prevailed in Australia and other countries. Another approach is to have the foreign ministry responsible for aid policy but to create a separate implementation agency. This model is found in Germany and many other countries. A third approach is to mainstream aid policy and management across the foreign ministry. This is, as of March 2013, the Canadian model and is also found in Denmark.

The question now is which of the three models Australia will adopt. Mainstreaming would dissolve AusAID's identity and create a host of problems with aid effectiveness, including problems with fiduciary risk management. Converting AusAID to an implementation agency would maintain its identity but lobotomise it - which, in an extreme scenario, could leave the government open to challenge from private contractors alleging unfair competition from a public sector agency.

In short, there are considerable and unnecessary difficulties with substantial departures from the Australian status quo. These are now being played out in Canada and New Zealand, whose conservative governments previously merged their aid agencies with their foreign ministries. A return to pre-2010 arrangements, or similar, would be by far the best outcome in the Australian context.

Would that achieve the government's objectives for the change? It's hard to answer without the benefit of a fuller articulation of what those objectives are. However, we know the government wants policy alignment and we can also safely assume it wants to see administrative efficiencies.

Policy alignment operates at two levels: macroscopic and microscopic. On matters of major policy, which one would hope are the only matters that would be considered at the political level, AusAID and DFAT have always reported to the same portfolio minister. At no point since 1976 has AusAID been a statutory authority free to chart its own path. It is as much subject to political direction as DFAT - and it is the same direction. For better or worse, this guarantees alignment on macro-level policy matters. Thus, macro-level alignment requires no change at all.

It is, however, possible that the government's strong emphasis on policy alignment signals a desire to give DFAT more microscopic policy control than it had even before AusAID's 2010 change of status, whether at secretary level or at lower levels, too. Such control might be exercised, for example, to ensure our aid is more identifiably Australian, which Bishop has flagged as a priority.

If that's the case, the government's ends could easily be achieved by modifying pre-2010 aid oversight structures in minor ways. There is simply no reason to think perceived instances of aid misallocation have anything to do with the present administrative arrangements or any lack of responsiveness on AusAID's part to foreign policy priorities.

In fact, just the reverse. The Coalition said before the election that the aid program's strategic priorities ''were skewed by Labor's campaign for the UN Security Council seat''. If this is accepted, it is difficult to escape the conclusion that there is little need for the aid and diplomatic arms of Australia's international agenda to be more closely aligned. It appears the aid program was in fact highly responsive to the foreign policy priorities of the Labor government, even if the Coalition opposition didn't share those priorities.

The same can be said in relation to other notorious uses of aid, great and small. The decision to reallocate $750 million within the aid budget for domestic asylum-seeker costs, which the Coalition criticised in strong terms, was not taken on AusAID's advice.

A small but talismanic decision to make a disproportionately large grant for a memorial at UN headquarters in New York to the victims of the international slave trade, which Bishop criticised last year, was taken within DFAT.

In general, if AusAID is found to have funded something that patently has little to do with its core business, it's a safe bet it was leaned on to do so by another agency, most often DFAT, or by a minister, most often its own.

If policy alignment requires only minor administrative change, the only real reason for more wrenching change would be to reap savings from AusAID's administrative budget. Abbott has noted that AusAID, like ''other areas of the public sector'', could have fewer staff within several years. We cannot yet know whether AusAID will be expected to bear more than its share of public service staffing reductions, perhaps on the assumption that existing DFAT staff (whose ranks will presumably also be thinned) will take on some of the aid workload. It might never be possible to make a before-and-after comparison if the distinction between AusAID and DFAT agency personnel is entirely erased.

Undoubtedly, there is scope to achieve some savings on the administrative budgets of both agencies; for example, by sharing some corporate services. However, excessive cost-cutting could seriously threaten the effectiveness of aid and the soundness of its administration.

The government's pre-election foreign policy document says it will focus on ''the quality and rigorous administration'' of aid. It had earlier stressed it would put in place robust aid management ''benchmarks'' to guide the growth of aid towards 0.5 per cent of GNI. Though there will now be no such growth this side of 2016, management benchmarks of some kind will presumably still be put in place. Benchmarking, along with scrutiny and transparency, is important for aid effectiveness. However, two other things - in addition to a reasonable degree of predictability in the quantity of aid - are even more important: adequately resourced management oversight, and appropriate rules and processes for managing the investment of funds.

Aid quality is achieved through structured approaches that incorporate contestability and the lessons of experience. Rigorous administration is achieved by developing and continuously improving the rules and processes for conducting large-scale procurement, meeting obligations under complex contracts and agreements, undertaking independent review and evaluation, and detecting and dealing with fraud and mismanagement. These approaches and capabilities do not exist to any significant degree within DFAT, and must therefore be carefully preserved as AusAID is integrated into DFAT.

Appropriate senior oversight is fundamental for aid quality and administrative efficiency. Towards the end of the Howard era, the Palmer and Comrie reviews found that serious problems in the management of immigration detention stemmed in part from unrealistic spans of management control. Even after its 12 per cent reduction this year, Australia's aid program will remain a substantial item of public spending. It must be asked whether a single deputy secretary and some fraction of DFAT's secretary can provide adequate senior oversight of this large and complex program without undue risk.

If it turns out that integration really means disintegration, there will be consequences for diplomacy as well as aid effectiveness.

The AusAID brand has become part of Australia's diplomatic toolkit. Over a long period of time, our aid agency has transitioned from a situation in which it had a low domestic profile, little international recognition and a series of ungainly names (''AIDAB'' was the standout) to one in which it is readily recognised and identified internationally with the Australian government and the generosity of the Australian people.

Subordinating AusAID's leadership to DFAT's is one thing; entirely deleting its identity as an agency would be quite another - and unnecessary if the government's aims are in fact to achieve stronger policy alignment and greater administrative efficiency.

Making large, within-year aid cuts and restructuring Australia's aid administration are both complex and difficult undertakings. Doing these two things simultaneously is nothing short of heroic.

Even if the AusAID-DFAT merger will be less revolutionary than some fear and others hope, AusAID and DFAT face a considerable period of uncertainty; at least six months, probably longer. The difficulty involved depends on which of the three integration options is chosen. However, former foreign affairs minister Alexander Downer could attest that terminating programs requires close and senior attention. While Downer became a long-serving and respected minister who was closely engaged in overseeing the aid program, his management of the termination of the Development Import Finance Facility in 1996 almost saw him lose his position in his first six months. Senior officials responsible for implementing aid cuts even greater than those imposed by Howard in 1996 would preferably be outward-looking rather than inward-looking over the next six months.

In sum, the government would be well advised to do two things.

First, if it intends to proceed with unprecedented within-year cuts of $656 million in 2013-14, it should accord highest priority to figuring out where the cuts will fall before the financial year advances much further, and to devising strategies for managing them in ways that minimise negative development and diplomatic impacts. It would be odd if a high-powered taskforce was busily drawing up alternative organisational charts but no similar body was looking, with greater urgency, at options for implementing large and immediate aid cuts.

Second, the integration of AusAID into DFAT should occur in a way that, while meeting whatever specific aims the government has, creates minimum disruption to the operation and effectiveness of both the aid program and DFAT's diplomatic and consular activities. That would preferably involve an outcome closely resembling the arrangements that applied from 1977 to 2010.

Perhaps this would involve less administrative autonomy than previously. Perhaps DFAT's secretary and other senior staff would play a greater role in advising the government on aid policy than previously. But the essential point is that it would be in everyone's interests - the government's, partner countries' and DFAT's - for Australia's aid agency to remain a discrete body with substantial policy capacity, strong management systems and a stable brand.

It is entirely proper that the new government should bend AusAID, like other agents of the executive arm of government, to its will. But the agency - which is capable of being both an international public good and a useful tool of Australian international policy - will only bend so far before it breaks. The day it breaks might not be such a good day for diplomacy.

Robin Davies is associate director of the Development Policy Centre in the Crawford School of Public Policy at the Australian National University. He was a senior executive in AusAID for a decade until 2012.