AusAID has recently suspended its scholarships program in Afghanistan, pending investigation of fraud allegations in the program. GRM International, one of the largest private managing contractors in the world, was stripped of its management of the program, and the new contractor, US-based International Relief and Development, is facing fraud allegations in a separate $498 million program with USAID.

Fraud in the aid program can only be expected to increase as AusAID puts more and more money through third parties.

The AusAID scholarship program has always been an awkward fit for the aid program. It emerged out of the Colombo Plan in the 1950s, an initiative of the Cold War to promote co-operation between the West and developing countries in Asia, as well as a way of combating communism. It is now one of AusAID’s largest programs, with more than $331 million budgeted for 4300 students in 2011-13. This represents more than double the number in 2008-09.

The program has struggled to prove its effectiveness, with little evidence of its impact beyond anecdotal evidence of individual success stories and self-serving indicators (such as completion of a degree as an indicator of success). There is no evidence the program has been particularly successful in targeting those who can’t afford or have limited access to overseas educational opportunities, such as people with disabilities, rural populations or those living in poverty. For the amount of money spent on scholarships, its development outcomes are disappointingly small. A review of the Africa program in 2011 found:

“Providing opportunities to study in Australia is not the most immediate way to reduce poverty. Scholarships generally do not target the poor and they directly affect a very small number of individuals.”

Although there has been some laudable support of co-operation, such as the Malaysia-Australia Educational Facility for Afghanistan, the vast majority of this money ends up in elite Australian universities, such as Sydney University, Melbourne University and the Australian National University. In recipient countries, mostly foreign-based private contractors are appointed to manage the program. AusAID refuses to release the details of profit margins within contracts under commercial-in-confidence clauses, but a review of the Cambodian program released in 2012 estimated $1.4 million in managing contractor fees (including English language pre-departure programs) to administer 55 student scholarships in 2011.

As the aid program grows but its staffing budget doesn’t, AusAID has chosen to rely on managing contractors, primarily for-profit consulting companies. The Independent Review of Aid Effectiveness strongly criticised this practice, as well as the reliance on consultants, in 2011. AusAID responded by taking concrete steps to take more ownership of the program as well as putting ceilings on consultant remuneration. Under the current Foreign Minister Bob Carr, this trend has been reversing.

The reliance on private contractors underlies a key contradiction in the aid program. While AusAID staff have an obligation to reduce poverty at low cost to the Australian taxpayer, the obligation of private contractors is primarily to their shareholders or owners. In many cases, payments to private contractors are only made when certain “milestones” have been achieved. It is therefore in the contractors’ interests to ensure programs are implemented as designed to meet the trigger points, regardless of concerns around impact, results or sometimes over corrupt practices to facilitate outputs.

Fraud is just one symptom of an underlying accountability problem in the aid program. If the Australian government is serious about having a large and responsible aid program, it needs to retain real oversight and not be an agency simply about signing cheques. If not, we shouldn’t be surprised to see more and more instances of fraud from contractors that put profit above principle.