The new aid paradigm

Today I am pleased to launch the Government's new aid policy and performance framework, which I do refer to as the 'new aid paradigm'.

Since the post-war period, Australia has made an important contribution to the development of our region. Our development assistance began in earnest at least as far back as 1950 with the Colombo Plan. As Percy Spender, the Minister for External Affairs in the Menzies Government, said at the time:

"We live side by side with the countries of South and Southeast Asia, and we desire to be on good-neighbour terms with them. Above all, it is in our interests to foster commercial and other contacts with them and give them what help we can in maintaining stable and democratic governments in power, and increasing the material welfare of their peoples. In doing so we take the long view."

The Colombo Plan was ultimately responsible for helping to educate thousands of students across developing Asia by giving them an opportunity to study and live in Australia – today many of the alumni are political, business and community leaders in our region. Over subsequent decades we've found other ways to contribute to the growth and development of our region.

The policy I announce today takes the long view and hails a new phase in development assistance in the tradition of the Colombo Plan. This new phase is being shaped by rapid change. Aid recipient countries are transforming into aid donor countries. Hundreds of millions of people have been lifted out of poverty through China's economic policies. Today China – once a recipient of aid – has an aid budget around the same size as ours.

South Korea which received around $13 billion in aid from the international community after the Second World War till early 1990s is today a significant aid donor and a key aid delivery partner with Australia. Economic growth drove South Korea's transformation. In 2010 South Korea became a member of the developed economies club – the OECD's Development Assistance Committee. That's our aspiration for other countries in our region. As aid deliverers we should be aiming for aid recipient nations to transform into sustainable economies – do ourselves out of a job, not perpetuating past approaches that are not effective.

Aid plays a role in economic transformation and still constitutes a major proportion of national economic inflows for many of our neighbours. However aid alone is not a panacea for reducing poverty. Today, the total of global aid funds is dwarfed by the flows of investment, remittances, and other sources of capital to developing countries.

Total finance flows to developing countries tells a compelling story. In April this year the OECD reported that Official Development Assistance totalled US$134 billion, remittances were around US$400 billion, private capital flows to developing countries were almost $890 billion, and philanthropic aid, a relatively new source of development finance, totalled US$70 billion.

One of the key challenges is that today, most of the world's poor live in middle-income countries. Two-thirds of Australia's development partners in the Indian Ocean Asia-Pacific region have achieved middle-income status. One thing is very clear – the global context for financing development has changed and our aid program must change with it.

Since coming to government, the Coalition has already made major changes to the aid program because even with the best will in the world we have not achieved the results we should be entitled to expect given the billions and billions spent over the decades.

Given the overall budget we inherited, certain changes to Australia's aid program are inevitable. Australia hasn't had a surplus budget since 2008. The last five budgets before the change in Government have recorded the largest deficits in Australia's history. Without a change in policies, government debt was on track to reach $667 billion, the steepest trajectory in spending of any developed economy across the globe.

The previous Labor Government was borrowing money from overseas, to fund an aid programme to send money back overseas - $1 billion each and every month is borrowed to pay the interests on Labor's debt. But my Labor predecessor, with unexpected clarity, admitted this was unsustainable when he said "you can't fund aid on borrowings".

In the Budget released last month, the Government has started the long difficult challenge of turning those numbers around. We've made difficult choices to deliver a responsible budget and introduced measures to rebuild national revenue. We cannot continue to live beyond our means and Australia's aid program is no exception.

Australians are a generous people but they expect Government to impose the same rigours and tests of value for money on our aid program as we do on areas of domestic spending and they want to see results.

We have stabilised our aid budget at over $5 billion a year for the next two years and to increase thereafter at CPI. This is a generous aid program that puts Australia among the top 10 donors in the OECD world. We have aligned aid and trade and diplomacy under one department with the merger of the separate aid agency AusAID with the Department of Foreign Affairs and Trade. Like any merger, corporate or otherwise, the different cultures have to be managed and I thank DFAT Secretary Peter Varghese and his executive team for their diligent and careful management of the merger.

We have aligned the goal of poverty reduction with the pursuit of regional economic growth. This goal is in Australia's national interest, as well as unambiguously in the interest of our region and it is consistent with our focus on 'Economic Diplomacy'. Just as traditional diplomacy seeks to promote peace, economic diplomacy seeks to promote prosperity.

This means there must be a major role for the private sector in the development sphere. It is important also to leverage new sources of development capital to pursue our objectives. The performance framework that I will announce today is agnostic about how aid is delivered, other than to ensure it is effective and efficient and we partner with the most effective organisations that have the capability to achieve the best possible results.

Aid will be dedicated to promoting prosperity, reducing poverty, lifting standards of living, thus enhancing stability in our region. Ours will be a responsible, affordable and sustainable aid programme.

The policy I launch today reflects feedback from many in the development community. I thank some of those here today for your input over recent months – your thinking has been vital during our wide consultation with the aid sector – led by Parliamentary Secretary my colleague Senator Brett Mason.

I have also met with representatives of the World Bank, aid agencies in US, UK, Japan, Canada, New Zeland, Norway, to name a few, international agencies and public and private sector groups, drawing inspiration from their work, and from my own observations of visiting Australian aid projects over many years.

We must maintain a bold vision for Australian aid. Our aid program will have an unmistakable regional focus.In the past, it's been spread far too thinly across the globe for reasons often not related to poverty alleviation, thus putting at risk our ability to achieve results in the geographic region where I believe we have a primary responsibility the Indian Ocean Asia Pacific. We must direct our aid to where we can make the biggest difference and align it with our national interest.

The government will invest over 90 per cent of our country and regional program funding in our region. We will harness the private sector in those countries, so that Australia's aid programme promotes the major driver of poverty reduction – economic growth.

All new aid investments must consider innovative ways to engage the private sector and promote private sector growth in recipient countries.Globally the private sector generates 90 per cent of jobs and funds over 60 per cent of investment.A strong private sector delivers higher growth, more jobs and will help reduce poverty. If there is a private sector solution available that is efficient and effective, we will embrace it.

And we'll introduce Performance Benchmarks. The government will introduce a rigorous system of performance benchmarks and mutual obligations tailored to each country's circumstances. In the past, underperforming programs would sometimes continue to be funded, even when it was clear they were not delivering, throwing more money at a failing program rather than admit failure.

While the Australian Government will be held to account for the performance of our aid program, partner governments are responsible for leading their own development processes. Sovereign governments have responsibilities to their citizens and should not use the provision of foreign aid to shirk those responsibilities. This is a process of developing mature relationships with our near neighbours. We must get away from the old stereotypes of aid donor and aid recipient and embrace the concept of economic partnerships.

We will strengthen the way we assess the performance of contractors, NGOs and multilateral organisations delivering Australian aid. We will build on what works so that funding will increasingly flow to the best performing organisations. When projects don't deliver the results we expect, they will be put on a rigorous path to improvement or be terminated. If a program has failed we will call it for what it is and come up with a better way to meet the challenge. I am increasing significantly the rigour around performance management to ensure we achieve better value-for-money.

Our aid program will have two principal strategic goals for recipient countries – human development and private sector development. To achieve these goals, we will have six core priority areas.

First – infrastructure and trade. Australia will give high priority to tackling infrastructure bottlenecks in our region which are hampering economic growth. Projects that help developing countries enhance their trade in regional and global markets – including aid-for-trade projects – and they are particularly important.

World Trade Organization research shows that every dollar invested in aid-for-trade is typically associated with an increase of around $8 in exports in developing countries¹. Aid-for-trade investments will be increased to 20 per cent of the aid budget by 2020.

We already have an evidence base from which to draw. For example, in the Pacific, we train farmers to improve production and to meet international export requirements On the back of Australian aid, Tongan watermelon exporters increased export volumes from 100 to 280 tonnes in 2013. Solomon Islands are now exporting fish to the value of $46 million to the European Union.

Our efforts in the Mekong to train customs officials and establish one common set of cross-border paperwork helped reduce processing times for cargo trucks by up to 70 per cent. Brett Mason turned the first sod on the Australian-funded Cao Lanh Bridge which will directly benefit the lives of five million Vietnamese by connecting communities and markets.

These are the types of programs that will be replicated or scaled up under our new aid program.

Second, we will invest in agriculture, fisheries and water management projects – areas where we have particular expertise. These sectors provide the livelihood for millions of people and are critical to improving food security and nutrition, which in turn enhances economic participation. A few years ago, an infestation of cocoa pod borer devastated much of PNG's valuable cocoa crop.

Research supported by our agency, the Australian Centre for International Agricultural Research – ACIAR – identified new procedures and trained small scale farmers to manage the pests. One of the communities where this work was carried out – Tokiala – raised its sales of cocoa beans from 19 tonnes to 128 tonnes in just two years.

ACIAR is a diamond in the DFAT crown and I intend to utilise its remarkable research capabilities to better effect and I acknowledge the presence of the head of ACIAR Dr Nick Austin here today.

Third, we will focus on effective governance to help development partners strengthen accountability, transparency and the rule of law.

For example, when Indonesia rolled out 3G mobile services Australian aid helped ensure the 3G auction was transparent and fair. Now, mobile internet services deliver more than $600 million in government revenue and Indonesia is the twittersphere capital of the world.

If nations don't have good governance, if there is misuse, or corruption or other poor practices, we can hardly expect our aid dollars to make up the difference. We need to build the capacity of countries to control fraud and corruption and stamp out tax avoidance.

After a period of instability back in 2002 and 2003, the regional assistance team in the Solomon Islands, including Australia and New Zealand, engaged financial and tax advisers to work side-by-side with the local Ministry of Finance and Treasury – the local officials – for quite a period of time. As a result from 2003 to 2011, tax compliance and increased revenue in the Solomon Islands grew from $370 million to $1.34 billion, a multiplication of more than three and a half times.

Supporting anti-corruption measures is also a priority as corruption is pervasive in parts of our region.

Fourth, we will focus on education and health.While I firmly believe that private sector-led economic growth has a great effect on poverty reduction, this is not just about lifting productivity or maximising exports.Our aid program will invest in people so that they can create and take advantage of economic opportunities.

Education creates a skilled and productive work force. We will support partner governments to improve the quality of education so that school leavers benefit from employment opportunities. And scholarships will be a key pillar of our programme - With around 4,500 scholarship recipients through the aid program this year alone.

Protecting human health also empowers people to make meaningful contributions to the development of their communities. From 2014-15, Australia will spend around $30 million a year from our aid program on health and medical research. This is the most we have ever invested in this area in a single year and it complements the Government's Medical Research Future Fund, announced in the recent budget.

We want to make our health spending in our region more innovative and promote medical breakthroughs in the debilitating or deadly diseases that occur in our region. For example Australian funds will support the development and trial of a new TB treatment in partnership with the Global Alliance for TB Drugs and the Bill and Melinda Gates Foundation. We will do much more in this area of innovative health and medical research.

Fifth, we will increase our humanitarian assistance. This year, we have increased humanitarian spending by almost 30 per cent to appropriately $340 million and that's right given the calls on our support.

And Australia will continue to be a generous friend to countries in need, responding rapidly and effectively to emergencies often caused by natural disasters in our region. Last November, Australia was able to promptly provide assistance to the Philippines after the devastation of Typhoon Haiyan. But we need the reserves to do this so I have increased by over 30 per cent the funds held in our disaster Emergency Fund to $120 million.

And finally – our sixth and perhaps most important priority and one that is a personal passion. Our aid program will promote the empowerment of women and girls in our region. When women are able to actively participate in the economy, and in community decision-making, everybody benefits.

We will focus in particular on women's economic empowerment – on promoting women's leadership in politics, business, communities and families and nd on eliminating violence against women and children. One of our performance benchmarks is that all of our aid investments must assess gender issues with at least 80 per cent focused on support and empowerment of women.

Training women for employment, building their capacity and challenging barriers to their participation will deliver social and economic benefits to all societies. Evidence shows that it is women who spend extra income promoting the health, education and well-being of their families.

This Government has appointed former Senator Natasha Stott Despoja to advocate on gender issues, regionally and internationally, as Australia's Ambassador for Women and Girls. Natasha and I first bonded over aid issues on a trip we took to the Pacific in late 2002.

In her new role, Natasha already has travelled extensively in the Pacific, drawing attention to the links between economic development and the status of women. In fact, within hours of her appointment last December we travelled together to Solomon Islands, Vanuatu and Nauru to launch a number of initiatives.

So – infrastructure and trade facilitation, agriculture, fisheries, and water management, governance; education and health, humanitarian assistance and empowerment of women – those are our six priority areas to promote economic growth and reduce poverty in our region underpinned – I say it again – by private sector support.

I'm also announcing today the creation of a Performance Incentive Fund, which I envisage will have significant funding attached in coming years. From next year's budget – 2015 – this incentive fund will offer increased funding for programs and organisations found to be particularly effective in meeting targets and benchmarks.

Innovation will be the watch word. Innovation will drive the way we deliver aid. We have taken advice from the World Bank and other likeminded aid agencies and this is ground breaking stuff for Australian aid. Over the next four years we will spend $140 million in trialling and testing development innovations. Finding much more creative and clever ways to achieve better results. Thinking differently and being more entrepreneurial in our approach.

We will become a founding partner in the new Global Development Innovation Ventures program, this is an international program supported by the United States and the United Kingdom aid agencies to identify, test and scale up successful new approaches to development.

And I'm particularly enthusiastic, indeed incredibly enthusiastic, about my next announcement. Within the Department of Foreign Affairs and Trade we will establish a new Development Innovation Hub to drive increased innovation throughout Australia's aid program so that innovation is intrinsic to our thinking and our policy development.

The Innovation Hub will have a mandate to reach out to the best and brightest, inside and outside the Department in Australia and internationally. Using partnerships, personnel exchanges and secondments to make sure we are bringing into our Department ideas and approaches to development from leading innovators – people in the private sector, the academic world and civil society organisations. Our search is on for creative, imaginative thinkers and original or innovative ideas.

For example, we would welcome people who think like Steve Jobs and come up with transformational new ideas. I learned from my days at Harvard how in the early days at Apple, Steve Jobs is said to have made his own pirate flag and flew the Jolly Roger over the building housing his small product development unit, as a sign that this hub would do things differently, challenge the status quo and innovate.

Successful private sector enterprises embrace innovation and manage risk because they realise the most exceptional methods and technologies can be the most difficult to develop but bring the best results. Our innovation hub will be a model for exciting change in the aid program and perhaps elsewhere in public service. So to Ewen McDonald and the Australian aid team – put up the flag, fly the Jolly Roger – could be a kangaroo with crossbones.

The Coalition Government is making bold changes to the aid program. We are deeply aware that a $5 billion aid program is a substantial contribution to the needs of our neighbours and that's why our aid program must be responsible, affordable and sustainable. Aid is in our national interest because it builds a safer more secure region.

Our signature policy in foreign affairs is the New Colombo Plan, which will make a significant difference to the lives of Australian students who will have the opportunity to live, study and undertake an internship in a country in our region. But it is through this initiative that our foreign policy aim of deeper engagement in the region finds its real expression. So too with our new aid paradigm.

This represents a significant and positive policy shift that reflects our commitment to economic growth, poverty reduction and increased standards of living in our part of the world. The Coalition Government is taking the long view.

• ¹OECD / WTO, 2013: AID FOR TRADE AT A GLANCE 2013: CONNECTING TO VALUE CHAINS