5.1
As noted earlier in this report, changes to Australia’s aid program since 2014 have resulted in an increased focus on the role of the private sector in aid and development.
5.2
This chapter considers evidence received in the inquiry on the following aspects of private sector development:
private sector partnerships; and
Aid for trade
5.3
Aid for trade aims to assist developing countries to access international markets by addressing internal constraints to trade, such as lack of private sector capability, weak public sector institutions, and poor infrastructure.
5.4
The aid for trade initiative was launched by the World Trade Organisation in 2005.
5.5
DFAT submitted that aid for trade is ‘central’ to Australia’s aid program.
5.6
In a submission, DFAT explained that aid for trade can ‘have a direct and immediate impact on the poor and disadvantaged through the creation of jobs, increased business opportunities and incomes, greater food security and education and training’:
To realise these benefits, it is critical to build the capacity of the private sector. Aid for trade can help establish conditions that make it easier and cheaper to do business. This is essential as the private sector generates 90 per cent of jobs and funds more than 60 per cent of investment in developing countries. However, trade alone is not sufficient to achieve sustainable economic growth or to reduce poverty. Complementary factors, such as macro-economic stability, the application of the rule of law and presence of developed financial systems, are also crucial.
5.7
In 2015, the then Minister for Foreign Affairs and the then Minister for Trade launched the Strategy for Australia’s Aid for Trade Investments.
5.8
The strategy established a framework for aid for trade investments to ensure they are ‘effective, meet the needs of developing country partners, and align with Australia’s interests’.
5.9
In 2014, the Australian Government set a strategic target to increase aid for trade investments from 13 per cent of the total aid budget to 20 per cent by 2020. This target was achieved in 2016-17, when aid for trade investments reached $941.0 million, which was 23.3 per cent of the total aid budget for that year.
5.10
In addition to investments in trade facilitation and international competitiveness, DFAT highlighted the aid program’s commitment to infrastructure development in the Indo-Pacific region. In 2016-17, approximately $397.3 million (40 per cent of Australia’s aid for trade investments) was dedicated to infrastructure. Of this amount, approximately $103.2 million was dedicated to the Pacific region.
5.11
World Vision cautioned against overstating the increased proportion of investment in aid for trade, noting that this increase has occurred in the context of a declining aid budget.
5.12
Also noting the declining aid budget, the Development Policy Centre pointed out that an increased focus on aid for trade comes at the expense of other activities:
In the case of Australian aid, it has been at the expense of education and health. ...Whether or not this shift was worth it, it is important to be aware of the trade-offs.
5.13
DFAT noted that the aid for trade target was included in the review of aid program targets currently underway.
5.14
The Committee sought evidence on the appropriateness of the current aid for trade target. The Export Council of Australia recommended that Australia continue and expand its aid for trade program, but did not make a specific recommendation in relation to the target. The Global Trade Professionals Alliance recommended that the target remain at its current level.
Effectiveness of aid for trade
5.15
The Committee received a range of evidence on the effectiveness of Australia’s aid for trade investments and the aid for trade initiative more generally.
5.16
The Export Council of Australia expressed strong support for the aid for trade component of Australia’s aid program, claiming that the program is delivering ‘positive outcomes for recipient countries and Australia’.
5.17
In its peer review of Australia’s aid program, the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) noted Australia’s efforts to have a clear strategy for aid for trade and its ‘rapid scale up’ of aid for trade. The OECD DAC referred to a 2016 evaluation of Australia’s aid for trade investments, conducted by the DFAT’s Office of Development Effectiveness.
5.18
The evaluation report stated:
DFAT investments in trade facilitation have been effective in addressing capacity issues, have the potential to make significant impacts to poverty reduction, and contain many elements of good global practice.
5.19
However, the evaluation report also noted the challenge of ‘demonstrating results and attributing impacts’ to aid for trade investments.
The DFAT investments evaluated exemplified this challenge. They demonstrated a range of results that had the potential to generate positive economic and development gains, however, attributing quantifiable impacts to interventions is currently limited.
5.20
While acknowledging the strong evidence that aid for trade investments have contributed to increasing exports and improving the investment conditions in developing countries, a number of stakeholders raised questions about the relationship between aid for trade and poverty reduction.
5.21
For example, the Australian Council for International Development (ACFID) submitted:
International trade and markets, as key drivers of job creation, can be both powerful enablers of economic growth and transformative tools for large-scale poverty reduction. However, many communities, especially those living in poverty, currently lack the capacity to fully realise the benefits of markets and trade.
... After a decade of continued investment, global aid for trade has certainly been effective at improving the exports and trade performance of developing countries. However, its effect on poverty reduction and inclusive growth is less evident.
5.22
Similarly, International Justice Mission Australia submitted:
It is widely accepted that Aid for Trade (AfT) achieves macro-level growth indicators in the long-term. However, there is evidence indicating that under certain conditions, these benefits will not reach the poor, and that AfT can have negative effects in the short to medium term.
5.23
The Australian Disability and Development Consortium noted the ‘increasing recognition that the progress achieved through trade is not distributed equally within countries and communities’:
A recent Asian Development Bank report noted that vulnerable groups are often excluded from the benefits of trade, as they do not have access to the means to exploit entrepreneurial and employment opportunities.
5.24
Fairtrade Australia New Zealand suggested that, while there was ‘considerable value’ in Australia using its power to create markets:
... it would be misguided to over-rely on the private sector and the aid for trade program to address the asymmetries of power that keep hundreds of millions in the region in poverty and at the margins of the global economy.
Trade and the more liberal flow of private investment are frequently seen as the main drivers of growth and poverty alleviation. However, aggregate measures of growth can mask stark inequities within countries, including gender inequality. The foundations of sustainable development, such as gender equality, protection of children, and environmental sustainability, are too often treated in isolated from trade agreements and programs, and hence decoupled from economic activity. This risks promoting unsustainable, unfair growth.
5.25
Speaking to the Committee in Sydney, Ms Alina Bain, Chief Executive Officer of the Export Council of Australia, addressed some of the criticisms of aid for trade:
There has been some criticism that aid for trade delivers economic growth while potentially exacerbating inequality and without bringing development benefits to the poor. We believe there is nothing about aid for trade that means that this outcome is inevitable. Indeed, with the right focus it can achieve outcomes in very targeted areas, such as gender equality and reducing inequality.
‘Aid for inclusive trade’
5.26
It was put to the Committee that aid for trade investments should be more explicitly linked to the objective of reducing poverty.
5.27
For example, World Vision Australia submitted:
The Australian Government should clarify that the primary purpose of aid for trade is to reduce poverty through trade. In the context of aid for trade, trade is a means to an end (poverty reduction), rather than an end in itself. ...the first test for aid for trade investments should be whether they empower families and individuals to lift themselves out of poverty, and considerations such as whether those investments meet the needs of developing country partners or align with Australian interests should be secondary.
5.28
Similarly, ACFID suggested it was crucial that that aid for trade initiatives ‘explicitly link their actions to measurable outcomes for those living in poverty’:
Government donors are rightly accountable for ensuring their activities achieve not just macro-level growth, but development outcomes for those living in poverty.
5.29
In addition, it was suggested that Australia should adopt a more inclusive approach to its aid for trade investments.
In their 2017 review of global aid for trade the World Trade Organisation and OECD called for a greater focus on ‘aid for inclusive trade’ and emphasised connecting SME’s to international markets as a development priority.
... Australia’s range of market-based development programming, including aid for trade, should have a more intentional focus on reaching non-market ready individuals, including people living in poverty, women, youth, ethnic minorities and/or other marginalised groups, who are often excluded from traditional market systems.
5.31
Similarly, Oxfam Australia submitted:
Investments should focus on enhancing the capacity and resources available to poor communities and marginalised groups within them, particularly women, to access markets (through increased physical and digital connectivity as well as removing trade barriers). Programs should also aim to increase the benefits flowing from trade to poor communities, for example through increased employment.
5.32
A number of organisations, including ACFID, World Vision Australia, and Fairtrade Australia and New Zealand, emphasised the importance of building the productive capacity of small-to-medium-sized enterprises, including small-holder farmers.
5.33
For example, World Vision Australia submitted:
Building the productive capacity of local communities living in poverty is the most direct and immediate way to help poor communities in developing countries to engage in trade.
By contrast, the benefits from aid for trade investments in regulatory reform and economic infrastructure often take a long time to materialise, and they often disproportionately favour larger businesses and producer groups operating in the formal sector, rather than supporting informal and semi-formal financial intermediaries or businesses.
5.34
The Australian Disability and Development Consortium highlighted the importance of aid for trade investments to support women in accessing markets, suggesting that a similar approach is required to enable ‘the approximately one in five people in developing countries who live with disabilities’ to access the benefits of trade.
5.35
World Vision Australia suggested that, to assist in future evaluations, indicators should be developed to measure the inclusiveness of Australia’s aid for trade investments.
5.36
Similarly, CARE Australia suggested that DFAT conduct an evaluation of the effectiveness of its aid for trade portfolio, giving consideration to the impact of investments for small producers, including women.
Other views
5.37
The Development Policy Centre gave evidence on the role of aid for trade investments in the Pacific region, suggesting that a focus on labour mobility would be more appropriate given the particular circumstances of the region:
The Pacific is not a trading region. Remittances are much more important for the Pacific (and Timor Leste) than trade. Remittances are the first or second source of foreign currency for Fiji, Timor Leste, Tonga, Samoa and Vanuatu, and possibly for other Pacific island countries as well. These countries are too remote and isolated to be competitive in the trade of goods.
... In the Pacific, therefore, aid for trade should mean aid for migration or aid for labour mobility. As with aid for trade, this means facilitating a private-sector activity but in this case one involving the movement of people rather than goods.
5.38
The DPC made suggestions to assist people in the Pacific to access existing pathways to Australia (including the Seasonal Worker Programme and the Pacific Labour Scheme), and also suggested reducing the cost of remittances and promoting school quality.
5.39
International Justice Mission Australia (IJM) recommended that investments to strengthen domestic public justice systems be included as part of the aid for trade program. Mr Josiah Fajardo, Research and Policy Associate for IJM, told the Committee:
... strengthening public justice systems ... forms part of the infrastructure of trade to have a strong justice system where property rights are enforced and people can enforce contracts. That's part of the mechanisms of trade just as much as a bridge or a road to facilitate the transfer of goods.
5.40
Mr Fajardo suggested that reform of public justice systems was needed ‘to ensure that the benefits of trade are actually transferred to the poor’.
5.41
IJM also recommended that trade agreements secured as part of aid for trade ‘incorporate appropriate regulatory safeguards that secure the labour rights of vulnerable groups in global value chains’.
Private sector partnerships
5.42
In addition to the role of Australia’s aid program in improving access to markets, the Committee received evidence about the aid program’s relationship with the private sector more generally.
5.43
As noted earlier in this report, Australia is committed to the Addis Ababa Action Agenda, which recognises the funding gap required to achieve the Sustainable Development Goals. The agenda calls for the mobilisation of public and private finance, beyond traditional forms of overseas development assistance, to address this gap.
5.44
Consistent with this commitment, changes to Australia’s aid program since 2014 have resulted in an increased focus on engagement with the private sector.
5.45
The performance framework for Australia’s aid program, released in 2014, includes a strategic target that ‘all new investments will explore innovative ways to promote private sector growth or engage the private sector in achieving development outcomes’. This includes:
... engaging the private sector in: the design or delivery of investments; innovative approaches to project financing; public-private partnerships; improving the regulatory environment for private sector participants; or addressing other constraints to economic growth.
5.46
In 2015, the then Minister for Foreign Affairs, the Hon. Julie Bishop MP, released the statement, Creating shared value through partnership, which invited the private sector to collaborate with the aid program on implementing sustainable solutions to address development challenges.
5.47
Also in 2015, the Australian Government release the Strategy for Australia’s aid investments in private sector development, which provided guidance on how the aid program could most effectively improve the growth and inclusiveness of the private sector in recipient countries.
5.48
DFAT submitted that it has a range of programs for incentivising collaboration with the private sector, including:
Business Partnerships Platform (BPP);
Scaling Frontier Innovation;
Pacific Readiness for Investing in Social Enterprises Facility;
Emerging Markets Impact Investment Fund (EMIIF); and
Market Development Facility
5.49
DFAT explained that the BPP, launched in 2015, is the ‘principal initiative through which the department collaborates with business’:
It brings in the expertise and competitive advantage of the private sector in contributing to development through matched co-investment (up to A$500,000 at a minimum 1:1 investment ratio from business). [The BPP] has leveraged A$14.32 million in private sector funding from Australia's A$7.6 million contribution. ...Improving the economic empowerment of women and girls is one of four key criteria for assessing BPP applications.
5.50
Speaking to the Committee in Canberra, Ms Beth Delaney, Assistant Secretary of Development Economics in the Private Sector and Agriculture Branch of DFAT, provided an example of a BPP project that involved AVI and Intrepid Travel working with DFAT to support small and medium enterprises in the tourism sector in Myanmar.
5.51
DFAT also explained that the EMIIF, announced in 2017, is a $40 million ‘fund of funds’ for investing in small and medium enterprise (SME) investment funds, and for providing technical assistance to investment funds and underlying SMEs. The EMIIF is designed to support businesses that ‘benefit poor communities through their products, services, supply chains or employment practices’.
5.52
In its Performance of Australian Aid 2016-17 report, DFAT stated that its strategic target in relation to engaging the private sector had been met:
The number and diversity of partnerships formed at corporate, country and investment levels and the value of private resources mobilised has increased. In 2016, nearly three quarters of monitored investments engaged with one or more private sector partners.
5.53
However, the report also noted that, at the investment level, engagement had been ‘more straight-forward in some sectors than others’. The report also identified a need for a more strategic approach to working with the private sector and for capacity building for DFAT staff.
Stakeholder views
5.54
In its peer review of Australia’s aid program, the OECD DAC noted that, since 2014, Australia has placed a greater emphasis on leveraging finance from the private sector:
Australia is increasingly using blended finance models including in its work with multilateral banks. For example, Australia is a member of the Private Infrastructure Development Group, which leverages Australian aid for private sector investment. Australia has used ODA to support the development of infrastructure projects designed to attract finance from the private sector, other donors and multilateral organisations. An example is the Tina River hydropower plant in Solomon Islands. Australia spent AUD 9.7 million in ODA to develop the project, which has attracted more than USD 145 million in additional finance...
5.55
Prospr, a for-profit joint venture involving Save the Children Australia, submitted that DFAT did not have a specific strategy to leverage private sector capital directly to target development outcomes.
5.56
Prospr stated that DFAT’s existing private sector partnership models ‘have tended to be small scale and to be at a business transaction and partnership level’. It went on to suggest there is a ‘missing opportunity’ for donors such as DFAT to partner directly with larger private sector organisations:
... to share capital and risk in business projects which directly reach those most in need providing job and income opportunities, and/or life changing goods and services.
One of the potential benefits of this approach, compared with traditional aid for trade investment approaches, would be to increase accountability. Greater direct investments into business projects creating tangible, measurable development impact means that a direct line can be drawn between the [overseas development assistance] investments and impact so donors can report more reliably on the value of capital allocated, and can more readily make evidence based choices about investment decision.
5.57
Dr John Marsh, Director of Prospr, told the Committee that DFAT’s private sector engagement should ‘extend to more strategic partnerships and shared investment with selected firms from selected target sectors’. Dr Marsh nominated agriculture, digital, and energy as target sectors.
5.58
Specifically, Prospr recommended a Digital Economy Aid Investment Strategy focusing on the Pacific, which would ‘support existing service providers - public, private and civil society - to innovate and accelerate digital inclusion and high impact services including financial and insurance services, e‑government, e‑learning, e‑health as well as enabling empowerment, transparency and democracy’.
5.59
Dr Marsh expanded on opportunities in the digital sector:
... investment in the acceleration of the digital economy is critical for the Pacific given its unique development challenges, such as isolated populations spread over large distances. For example, evidence shows that increasing mobile phone penetration in low-income countries by 10 per cent can give a bump to GDP of 0.8 to 1.2 per cent ongoing. That's across the whole economy. Improved internet access transforms the way that people receive health, education and other services and improves participation in democratic processes.
... From our point of view, deeper, more strategic partnerships with the likes of Digicel, which is the largest telco in PNG and the Pacific, needs to elevate to a more mature and sophisticated level to enable DFAT and other donors to leverage Digicel's capital and resources to achieve these broader development outcomes.
5.60
World Vision Australia suggested that the EMIIF be complemented by a $100 million ‘Sustainable Development Impact Fund’, which would provide finance to the private sector ‘for investments that promote sustainable development in Australia and in aid recipient countries’.
5.61
Oxfam Australia submitted that private partners are not subject to the same degree of scrutiny as other partners:
While Australian NGOs go through a rigorous accreditation process before being able to deliver Australian aid, private sector partners do not appear to be held to the same standard.
Contracting out large parts of the aid program to private entities without appropriate safeguards carries risks of aid profiteering and poor ethical practice.
5.62
Oxfam recommended development of a ‘standardised system of safeguards and minimum standards on human rights and environmental performance’ for all private sector partnerships, ‘to ensure these projects deliver on people-centred and sustainable development outcomes’.
5.63
In addition, the Committee received more general evidence on the role of the private sector in aid and development. Note that much of this evidence echoed evidence outlined in the previous section on aid for trade investments.
5.64
International Justice Mission Australia submitted that the ‘growth of the private sector has been responsible for much of the poverty alleviation that has occurred in recent decades’, noting the recent experience of China. However, IJM cautioned it was critical that efforts to enhance private sector activity be accompanied by efforts to ensure that the benefits of growth are transferred to the general population.
5.65
IJM made suggestions including assisting developing countries to design tax and regulatory policies, assisting the provision of social services, and promoting partnerships involving local rather than multinational companies.
5.66
Similarly, Professor Juliet Willetts, Research Director of International Development at the Institute of Sustainable Futures at the University of Technology Sydney, emphasised that private sector engagement alone would not address inequalities and that a systemic approach, including changes to governance and regulatory settings, was required. Professor Willetts went on to illustrate this point:
Our research showed in Vietnam that poor households were being systematically excluded from piped water services and, similarly, supply chains for sanitation. In Indonesia, there were much higher costs in more remote areas.
5.67
The University of Queensland submitted that current use of the term ‘private sector’ is ‘specific and limiting’:
It does not acknowledge the multitude of actors engaged in Australian aid beyond a binary public-private divide, nor the complex interrelationships between actors across sectors.
5.68
Professor Mark Moran, Group Leader of Development Effectiveness at the Institute for Social Science Research at the University, expanded on this point at a public hearing:
... it’s really important to understand that the private sector is quite a complex sector. ...There are a lot of people who are in the business of implementing. Then there’s the private sector in a broader sense in terms of industrials and bankers and mining companies, who are not necessarily in the business of delivering development but are nonetheless increasingly making investment in development.
5.69
The University’s submission went on:
... To ensure the innovation inherent within the private sector is maximised for the benefit of Australia’s regional aid programs, the multiplicity of actors engaged in international development needs to be acknowledged and understood in policy terms.
Food and agriculture
5.70
As noted earlier in this Chapter, the Committee heard evidence on opportunities to build the productive capacity of small-holder farmers through private-sector partnerships.
5.71
More broadly, DFAT submitted that the aid program leverages Australia’s expertise in agriculture to support growth in the region’s agriculture sector:
Through the aid program, as well as agricultural research (driven by the [Australian Centre for International Agricultural Research]), Australia is helping link thousands of poor smallholder farmers to more profitable agricultural value chains. As well as raising incomes and creating jobs, our investments are increasingly seeking to build the resilience of smallholder farmers to climate-related shocks and promote more nutritious food systems.
5.72
In a submission to the inquiry, the Australian Centre for International Agricultural Research (ACIAR) provided a range of case studies demonstrating its contribution to promoting more productive and sustainable agricultural systems, for the benefit of developing countries and Australia, through agricultural research partnerships.
5.73
In particular, ACIAR outlined its involvement in private-sector partnerships with ‘partners from large multinational companies to local large, medium, small and microenterprises’.
5.74
The Committee observed widespread support among stakeholders for the work of ACIAR and its role in the development sector.
5.75
The University of New England recommended increased private sector involvement in ACIAR projects to improve the changes of long-term adoption of project outputs.
5.76
While noting ACIAR’s increased focus on small-scale producers and women, Oxfam recommended that food security and sustainable agriculture and fisheries be given greater priority in the aid program.
Local procurement
5.77
The Committee sought evidence on the role of local procurement in Australia’s aid program. The Committee was interested in the impact that procurement of goods and services from local entities could have on economic sustainability in the countries in which Australia provides development assistance.
5.78
As an example, in the book Dead Aid, Dambisa Moyo discusses the case of an African manufacturer of mosquito nets that is put out of business when similar products are brought in and distributed from another overseas supplier, instead of sourcing nets from that local supplier.
Stakeholder views
5.79
The Committee observed general support among stakeholders for the principle of local procurement and, more generally, encouraging local entrepreneurship.
5.80
Mr Gilling, First Assistant Secretary, Contracting and Aid Management Division at DFAT, stated that ‘having good-quality local providers creates added value’.
5.81
In response to a question from the Committee which referred to the book Dead Aid, noted above, Mr Gilling suggested that ‘damaging by-products of aid’ identified in the book ‘reflect a lack of attention to [the] issue of do no harm’:
Do no harm can apply at the personal level and at the social level as well as at the economic level, and that's one of the things that's brought to bear when we do peer reviews of these designs. It's a core part of what we do, and the principle is do no harm.
5.82
Ms Joanne Choe, Board Director of the International Development Contractors Community (IDCC), outlined to the Committee the benefits of working with local providers:
I think we definitely look at it in terms of not only the hard asset that you’re getting at the end of the project—what’s built in an infrastructure program, for example—but also the soft assets
... We operate on the ground. We have offices and staff on the ground. We engage and contract local companies. We use local materials. Through that process of working for years with local providers, there are absolutely huge benefits in employment in terms of skills upgrades and the transfer and sharing of capacity. I think there would be big benefit in looking at the impact of not only the hard infrastructure but also those soft skills and the skills and capacities that are being developed as a result of that infrastructure when you operate in that way.
5.83
Dr Cameron Hill, also representing the IDCC, explained:
There is a myth that, when a contract gets signed, the money goes to the contractor and that is it. But there’s a whole downstream of flow-on benefits—subgranting, employment and skills building—that happens at the local level.
5.84
Mr Sheldon Yett, Representative for Pacific Island Countries for the United Nations Children’s Fund (UNICEF), also supported the principle of local procurement:
Whenever possible we try to get local services, for obvious reasons: by doing that, you’re building capacity; you’re partnering them with others; and it’s much cheaper for us to do that. It’s killing two birds with one stone.
5.85
However, Mr Yett cautioned:
Obviously UNICEF ... and other agencies are always interested in working hard to ensure the best bang for the buck, so to speak. Of course, we also keep a very close eye on ensuring that we don’t undercut local markets and that we provide opportunities for local business whenever possible, but I think we also have to ensure we’re getting the highest quality supplies and the best return.
5.86
Mr Yett went on to explain that there were circumstances where it was not possible to use local suppliers—for example, when purchasing immunisation supplies.
5.87
The Committee heard from other organisations about their approaches to procurement. For example, Ms Molly Olson, Chief Executive Officer of Fairtrade Australia and New Zealand, told the Committee:
We don’t go in and say, ‘We think you need rice. We think you need water. We think you need a school. Here, let us help you. Have some money for a road—whatever it is.’ We work with them and they identify their path for development. ... What that does is it puts the communities into the driver seat, and if they see that there’s a need for a market in onions or something they then can create that.
So local procurement from our perspective is about local empowerment...
5.88
Dr Greta Nabbs-Keller from the University of Queensland explained that the University seeks to partner with local entities in its international development work:
In terms of local procurement, we often work with local consultancies in the provision of logistics. For example, in Islamabad recently, we’ve been using a local consulting company. We also, obviously, use local venue hire and local translation services. The other point I’d make is particularly in our courses, particularly if there’s a private sector component ...we will bring local corporate entities into those programs where possible as presenters and experts.
5.89
Professor Mark Moran, also from the University of Queensland, suggested that there is often the capacity in low- and middle-income countries to participate in the procurement process:
Many of the students coming to the University of Queensland aspire to careers in aid and they go back to their low- and middle-income countries and they’re looking for opportunities to be working in that procurement process, actually in aid programming in addition to the procurement of the construction contracts and a whole broad range of things.
Procurement process
5.90
Mr Gilling explained that the DFAT did not have any obligation to procure from local entities. Mr Gilling emphasised that the Department has a commitment to deliver value for money.
5.91
DFAT’s website states that contractual arrangements entered into by the Department are conducted in accordance with the Public Governance, Performance and Accountability Act (2013), Commonwealth Procurement Rules, and other departmental policies.
5.92
DFAT has developed eight value-for-money principles relating to economy, efficiency, effectiveness, and ethics, which are used to guide decision making and maximise the impact of investments.
... The value-for-money concept ... is actually quite sophisticated and takes us beyond that short-term financial obligation. Value for money doesn't actually mean the cheapest. It does mean the outcome that can deliver best for us.
5.94
In its peer review of Australia’s aid program, the OECD DAC noted the strong focus on value for money in the aid program:
A new set of value for money principles is being applied across the aid programme life cycle with the aim of maximising the impact of aid investments. This focus is reinforced through one of the strategic targets ... which is expressed in the directive that at least 85% of aid investments must meet high standards of value for money through investment quality reporting. Where standards are not met and improvements are not achieved within one year, investments will be cancelled.
5.95
Mr Gilling also explained that there is an obligation within DFAT’s procurement process to demonstrate where Australia benefits:
Often you’ll find within the aid contracting that companies are asked to focus on how the money that we are giving them to spend in Indonesia has an impact in Australia. So there is in fact a legislative requirement for people to look in a different direction.
5.96
Coffey, which described itself as one of the aid program’s largest managing contractors, stated that it ‘purposefully works ... to provide commercial and investment opportunities for small to medium local enterprises, especially those owned by women, to improve livelihoods, sustainability and economic growth in the region’:
Coffey supports local businesses and non-government organisations through transparent, inclusive local procurement processes and by disbursing aid and investment grants. Where appropriate, Coffey encourages smaller local entities to tender for the supply of goods and services, so that they have a critical mass to deliver community based development outcomes and grow their businesses.
Measuring procurement from local entities
5.97
The Committee heard evidence from DFAT about the difficulty in determining the proportion of goods and services that are procured from local entities.
5.98
DFAT submitted that, in order to maximise efficiency and value for money, it tended to enter into fewer (but larger) funding arrangements, with procurement at the local level taking place at the secondary and tertiary level through sub-grants and sub-contracts.
5.99
Mr Gilling explained that DFAT lacked a mechanism to capture information about secondary and tertiary contracts.
5.100
However, the Committee was told that DFAT was undertaking analysis on the supply chains in the aid program to better understand local procurement and was finalising a new ‘contract reporting framework’ to be launched in January 2019 that would facilitate this work. At the time of writing, the Committee had no further information about these initiatives.
Suggested approaches
5.101
The Committee sought suggestions for how to encourage local procurement within Australia’s aid program. However, while the Committee observed general support for the principle of local procurement (see above), suggestions were limited.
5.102
Mr Gilling suggested to the Committee it would ‘very hard and possibly counterproductive ... to identify specific amounts of money that we need to spend within partner countries’. He suggested that, given the importance of the ‘core value-for-money requirement’, dedicated projects to strengthen local businesses would the preferred approach.
5.103
In a submission, the School of Archaeology and Anthropology at the Australian National University raised the impact of Australia ‘untying’ its aid program. In 2006, the Australian Government lifted previous eligibility criteria restrictions thereby allowing organisations to bid for Australian aid program contracts regardless of the basis of their origin.
5.104
The School suggested that there was a question as to whether or not this change disadvantaged Australia and its development partners:
Other donor countries tend to tie their aid to their own suppliers to varying degrees. China, for example, ties its aid to the provision of Chinese goods and services to a very high degree, but similar tying of aid can be found in ... most other donors. The question here is whether the Australian government approach disadvantages us, and our development partners vis a vis those that use tied aid more directly.
5.105
The School recommended that the practice of tying aid be revisited ‘so that local contractors and Australia based contractors are not disadvantaged’:
There is a case to be made that preference be given to local country providers first and then Australian providers.
5.106
The Committee was made aware of two policy changes that may lead to an increase in local procurement in Australia’s aid program.
5.107
Firstly, DFAT is attempting to reduce barriers to entry to its supply chain by launching a ‘sub procurement portal’ in early 2019 to increase local firms’ awareness of opportunities in their area.
5.108
Secondly, DFAT is also introducing a requirement that ‘all tenders for major aid contracts will have to demonstrate commitment to a range of diversity matters, which will increasingly make it easier for local suppliers and personnel to participate’:
There is good anecdotal evidence of the increasing rate of local staff members being placed in senior roles in Australian aid program-funded activities. This is instrumental in ensuring capacity built through these activities remains in-country.
5.109
The Committee is also aware of an initiative within the Department of Defence to ensure that local businesses (in the vicinity of Defence bases, facilities, and training areas) are considered and provided the opportunity to compete in Defence procurement. In select pilot projects launched in 2017, tenderers bidding for major projects were required to state clearly how they had engaged with local industry, and how local industry would be involved in the project.
Committee comment
5.110
In relation to Australia’s aid for trade program, the Committee acknowledges the importance of assisting developing countries to access international markets. The Committee notes the evidence that aid for trade investments improve economic conditions in recipient countries, and considers that this outcome aligns with the wider objective of Australia’s aid program.
5.111
The Committee notes that the strategic target to increase Australia’s aid for trade investments to 20 per cent of the total aid budget by 2020 has been achieved ahead of schedule. The Committee also notes that the target is subject to review, along with other strategic targets.
5.112
The Committee is concerned that a further increase in the percentage of aid for trade investments could compromise other outcomes of the aid program. For this reason, the Committee does not at this stage support an increase in the target and instead recommends that the target remain at its current level. However, in the context of an increasing aid budget, as is envisaged in the recommendations made earlier in this report, the Committee would support an increase in the percentage of aid for trade investments.
5.113
In either case, the Committee is keen to ensure that future aid for trade investments are, in so much as possible, effective in contributing to improved development outcomes in recipient countries.
5.114
The Committee therefore suggests that the criteria for aid for trade investments be narrowed to investments that explicitly seek to improve market access for poor and marginalised groups, including but not limited to small- and medium-sized enterprises, small-holder farmers, women, minorities, and people with disabilities. Alternatively, the Committee suggests that appropriate sub-targets, within the overall target, be established for these groups (see Recommendation 16).
5.115
In this way, the Committee hopes that the Australia’s aid for trade investments can more effectively contribute to sustainable economic growth and poverty reduction.
5.116
The Committee recommends that the strategic target for aid for trade investments remain at its current level of 20 per cent of Australia’s aid budget for now, while the aid budget remains at current funding levels (so as not to take away from other non-aid for trade programs). However, the Committee recommends that with a timeframe set to increase Development Partnerships funding to 0.5 per cent of gross national income (as per Recommendation 3), the aid for trade program target should concurrently gradually increase to 25 per cent of the Development Partnerships budget (but such that non-aid for trade program funding is not impacted). Concurrently, aid for trade investments should be more explicitly linked to the objective of reducing poverty.
5.117
Beyond the aid for trade program, the Committee notes the increased focus of Australia’s aid program on partnering with the private sector.
5.118
The Committee considers that this increased focus is appropriate and reflects the important role of the private sector in supporting economic growth and achieving the Sustainable Development Goals.
5.119
However, the Committee acknowledges concerns—outlined in this chapter and also earlier in the report—that private-sector partners are not subject to the same standards as NGOs. The Committee also acknowledges concerns about the difficulty of assessing the effectiveness of aid delivered with private‑sector partners.
5.120
The Committee encourages DFAT to ensure that all organisations involved in the delivery of Australian aid are subject to consistent safeguards and standards.
5.121
In particular, the Committee reiterates its previous recommendations in relation to orphanage trafficking and modern slavery, noting the intersection between these issues and the aid program more generally.
5.122
The Committee recommends that the Australian Government urgently implement the recommendations of Chapter 8 of the Committee’s Final Report for the Inquiry into Modern Slavery, issued December 2017, noting the potential for misuse of aid, Australian donations, and Australian volunteerism, plus the potential negative impact on the effectiveness of Australian’s aid program, if action is not taken to limit Australian donations and volunteerism to only legitimate orphanages and residential institutions for children.
5.123
The Committee recommends that the Australian Government should implement Recommendation 28 of the Committee’s Final Report for the Inquiry into Modern Slavery, issued December 2017, to fund through its Development Partnerships (aid) program further measures to better address the drivers of modern slavery.
5.124
In relation to local procurement, the Committee notes evidence of the considerable benefits to communities in recipient countries of incorporating local suppliers into the aid supply chain.
5.125
The Committee considers that, when determining how aid is delivered, greater consideration should be given to using local suppliers where appropriate and, equally, ensuring that local suppliers are not adversely impacted in the procurement process.
5.126
The Committee notes that DFAT is working to improve its understanding of the role of local procurement in the aid supply chain and also to raise awareness about opportunities for local suppliers. While the Committee supports these initiatives, the Committee recommends broader changes to the procurement process to ensure that local suppliers are prioritised in guidelines, grants, tenders and contracts.
5.127
The Committee recommends that the Australian Government enhance and develop clearer local procurement guidelines and reporting mechanisms—that prioritise purchase of goods and/or services within, in or within the region of, Development Partnerships (aid) recipient countries where possible—for use by entities including the Department of Foreign Affairs and Trade, other Departments working in the Development Partnerships space, recipients of Development Partnerships funding (including contractors), and businesses, contractors, or individuals employed or engaged by Development Partnerships recipients to assist them in the provision of goods and/or services.
5.128
The Committee recommends that the Department of Foreign Affairs and Trade introduce to their procurement processes, tenders, and contracts, a requirement for recipients/contractors in receipt of Development Partnerships funding to first prioritise procuring locally in the recipient country, where possible (where the goods or services can be provided locally, can be provided at a sufficient quality standard locally, are not excessively more expensive than via procurement elsewhere and/or can be provided within the required project timeframes locally).
5.129
The Committee recommends that the Australian Government eliminate any remaining forms of tied aid, and informal aid tying, where there are conditions that some or all purchases are made from, or from entities from, the donor country (Australia). Goods or services supplied to and/or in recipient countries should only be supplied from Australia or non-regional entities where the goods or services cannot be provided locally, cannot be provided at a sufficient quality standard locally, are being offered at an excessive cost locally to what can be procured elsewhere and/or cannot be provided within the required project timeframes locally.
5.130
The Committee recommends that the Australian Government use recipient country procurement systems as the default option, where possible, and invest Development Partnerships funding to support recipient countries to improve their procurement systems and accountability safeguards.
5.131
The Committee endorses the recommendation received by Prospr and Save the Children in relation to a Digital Economy Aid Investment Strategy focused on the Indo-Pacific, namely honing in on the ‘missed opportunity in the private sector partnership component of DFAT’s aid for trade policy, and the opportunity that exists for DFAT to share risk and investment with selected large firms from strategically significant sectors’ and using their ‘own capital to create specific incentives in the market to leverage private sector capital directly to target development challenges and SDG outcomes’.
5.132
The Committee recommends that the Australian Government introduce a Digital Economy Aid Investment Strategy, as recommended by Prospr and Save the Children (noting that local procurement should remain the first priority under this recommendation, as per Recommendations 10-12).
5.133
Lastly, drawing on evidence received in the inquiry, the Committee is of the view that food and agriculture should have a greater focus in the aid program, with a particular emphasis on enabling partnerships with the private sector.
5.134
The Committee recommends that the Australian Government increase funding both in real terms and as a proportion of an increased Development Partnerships (aid) budget to agricultural, food, agribusiness and food security initiatives, including through the Australian Centre for International Agricultural Research (ACIAR), particularly targeted at better enabling private sector partnership opportunities through the Development Partnerships program. In doing so, the Australian Government should look to the United States Agency for International Development (USAID) Model for private partnerships to assist in creating better and more private sector partnership opportunities, as well as other successful models internationally.