The level of Australia’s foreign aid being channelled to private contractors has been halved in recent years, but the lack of competition among aid contractors is a significant problem, a review of the effectiveness of our foreign aid program has found.

This morning Kevin Rudd launched the review, and the government’s response to it, after the Foreign Minister commissioned the review in November last year. The review was headed by Sandy Hollway and conducted by a panel including former diplomat and Immigration secretary Bill Farmer and former Liberal ACT senator Margaret Reid.

The review came after years of complaints about “boomerang aid” — the huge proportion of foreign aid that went straight to Australian and international contractors in countries like Papua New Guinea, rather than providing on-the-ground assistance. In July last year, Crikey and the Centre for Independent Journalism profiled some of the companies that benefit from the largesse of our foreign aid program.

The review shows that AusAID began switching away from private contractors under the Howard government, and that continued under the Rudd government. In 2005-06, 41% of private aid was delivered via private contractors; by 2008 that had fallen to 23% and last year was 21% — on the basis, the government’s response today said, that “development gains are more difficult to maintain after Australian funding has finished”. Multilateral organisations like UN agencies, global financial institutions and global funds like the GAVI Alliance have instead become the biggest delivery mechanism for aid, at around 40%, from just over 30% five years ago.

The review barely addresses the long-standing complaints about boomerang aid, and seems well-disposed toward contractors. “The use of contractors in bilateral projects should not necessarily keep falling,” the review concludes, urging AusAID to embrace a “delivery partner” model of engaging with contractors, despite acknowledging that AusAID has attempted this and found it unsuccessful. The review also rejected a suggestion from TEAR Australia that private contractors be subject to a code of conduct or accreditation process. However, the review notes the primary source of funding for contractors — “technical assistance” aid — has “correctly been reviewed and reduced” and admits there are problems with private contractors:

“…the number of project management companies involved in international development has diminished through mergers. Not all are interested in projects in every country where Australia operates and thus the tender pool can be quite small. Recent AusAID experience is that three organisations (Coffey International Development Pty. Ltd., Cardno Emerging Markets Pty. Ltd. and GRM International Pty. Ltd.) have won 46 per cent of tenders since 1 January 2010, excluding period offers and panels. This obviously blunts contestability and can pose difficult choices for those responsible for administering the aid program and ensuring value for money. Unless value for money can be reasonably assured, it may be necessary to use the second–best option rather than a contractor. The Review Panel recommends that AusAID explore further ways to deepen competition, including through building on efforts made to date to encourage new entrants into the market.”

As Crikey and the CIJ showed, until late 2009 GRM was part of the Packer business empire and owned from the Bahamas, and had filed some bizarre financial accounts with ASIC since 2005. The decline available aid funding is understood to have driven a series of mergers within the sector in recent years as competition for fewer AusAID dollars became too much.

The review recommends private contractors be used where specialist program expertise is required, it is sensible to outsource rather than bring expertise in-house, and other options have been rejected. The government’s response indicates that is the approach it will take.

The review’s overall conclusion is that our aid program is “improvable but good” but is under administrative stress, lacks an overall strategy and is fragmented, requires too much paperwork, needs to improve transparency and has no effective communications strategy. The review also emphasises the importance of targeting gender barriers, which should “remain a key priority for aid, with increased focus on areas where disparities are the greatest”.

AusAID itself is stretched and will become more so as the government’s scheduled increase in aid takes effect, and burdened by paperwork, the time taken to recruit new staff and a lack of corporate memory. “These challenges may already be affecting AusAID’s ability to manage its core business,” the report states. However, it has strong fraud and audit processes and the overall level of identified fraud in the aid program is miniscule.

The overall sense from the review is that the foreign aid program has significantly improved on the problems of the mid-2000s, when it was dogged by claims of ineffectiveness and reliance on highly-paid foreign consultants and contractors, but still faces serious challenges from the forecast increase in aid to 0.5% of GNI by 2015-16.