Wednesday, 29 March 2017

AusAID to PNG Govt - Cash Aid or program aid: A delicate balance

by SAM KOIM - Facebook

AT the 25th Papua New Guinea–Australia Ministerial Forum held recently in Madang, the Government of Papua New Guinea (GoPNG) surprised the Australian Government Ministers in attendance by requesting the Australian Government to take a paradigm shift from its program and project based aid to direct budgetary support as was during early days of PNG’s statehood. Two reasons publicly given by the GoPNG for the request are that firstly, it is claimed that the Australian aid programs are running parallel to the GoPNG development agendas and secondly, it is perceived that a lot of middlemen are chewing up most of the funds that could otherwise be spent on tangible projects. It is understood such requests were made previously and Australia rejected it, but this time, the Australian Government had undertaken to consider it in an upcoming review on aid to PNG.

Although the GoPNG denies the request is driven by the cash flow crises the country is facing, it is an open secret that the GoPNG is desperate for cash. PNG is facing a raft of economic challenges partly caused by downturn in commodity prices. It is believed that GoPNG’s attempts to secure international loans to support the National Budget and prop up depleting foreign reserve were unsuccessful. The fruitless search for cash included a $US1 billion sovereign bond and a $US250m loan facility from the World Bank’s International Finance Corporation through the Central Bank of Papua New Guinea.

There were calls for the GoPNG to resort to the International Monetary Fund (IMF) as the lender of last resort. However, it is understood the IMF option was not considered, may be because of fear of conditions that accompany IMF’s financial assistance and the adverse political implications.

The Australian Foreign Minister, Hon Julie Bishop, did indicate that any changes to the aid program would need to meet Australia's accountability standards but undertook to take the request to the Australian Government for consideration. In a recent interview with Fairfax Media, Australia's Minister for International Development, Concetta Fierravanti-Wells,
rebuffed the idea of budget support and indicated that previous similar requests had been rejected, signaling a similar response, and that any changes would have to consider the interests of the Australian taxpayers as aid is not a charity donation.

This article addresses a number of options available to Australia when it considers this request.

Current Form of Australian Aid to PNG

Australia’s current aid to PNG is program and project based aid and is arguably a form of tied-aid. Program-based aid is designed to be aligned more closely with recipient country strategies and systems. A lot of Australian advisors are attached to various GoPNG agencies under this program. Project aid refers to traditional stand-alone projects, such as a school, a road or an irrigation project. Projects target funds at a specific purpose, and they can be executed autonomously from other development initiatives. Accountabilities are tied specifically to projects, which are often highly controlled by donor agencies and experts. Contracts are awarded based on competitive bidding.

Reasons for the Program/Project Aid

Immediately after independence, it was necessary for Australia to provide budgetary support to its former colony. The direct budgetary support enabled the GoPNG to set its own development priorities. However, Australia did not have much control over how the funds were managed. During the 1990s, the budget support was gradually replaced by program aid. In an assessment made in February 2000, Australia discovered that the shift to programmed assistance significantly improved the effectiveness, transparency and accountability of the delivery of aid. By June 2000, all forms of budgetary support were ceased. The main reason for the shift is captured by the 1997 Simons Review into the Australian aid program which noted that the reason for the shift was that 'budget support was not well used' and that 'programmed Australian aid can be more effective in the restoration of services and the building of capacity'.

Recent figures show that Governance sector takes the biggest slice of the aid budget to PNG, which indicates that Australia takes governance in Papua New Guinea seriously. For instance, Australia had committed 40% of its aid 2016-2017 to effective governance programs. This is consistent with some literature on the effectiveness of aid, where, amongst others, aid would be effective if the quality of the institutions of the aid recipient country are improved. But still, all these programs are run by the Australian Government.

Basis for Adjustment to Budget Support

It is arguable that the aid needs to be aligned to GoPNG’s development priorities as well as reduce the number of consultants and middlemen who consume a significant portion of the total aid budget. To that extent, it may also raise sovereignty issues, in that Australia should allow GoPNG to drive its own development agenda. However, it must also be understood that it is the Australian taxpayers’ money and Australia decides the form and structure the aid should be delivered. As the Minister responsible for International Development stressed it, aid is not a charity and it has to be devised in ways that benefits the Australian taxpayers. Any requests by GoPNG should be justified by mutual benefit to the two countries, and that is what is lacking in the recent request.

This is not a case where the Australian government had not funded the sectors identified by the GoPNG such as Health, Education and Infrastructure. Australia does fund these sectors annually. Perhaps what the GoPNG wants is for the Australian Government to give the cash so that the GoPNG can decide on the expenditure of the funds.

At the PNG–Australia Ministerial Forum in December 2013, Ministers of both countries agreed that Australia would undertake an assessment of its aid investment in PNG. This assessment, titled A new direction for Australian aid in PNG: refocusing Australian aid to help unlock PNG's economic potential, was undertaken by the Australian Government to consider ways in which Australia’s aid program could more closely aligned with both Governments’ priorities. About nine (9) recommendations were made, but none for shifting the current program based aid delivery.

The Australian Foreign Affairs, Defence and Trade References Committee (hereinafter “Senate Committee”) conducted a detailed inquiry into the “Delivery and effectiveness of Australia's bilateral aid program in Papua New Guinea”. In its report released in May 2016, the Senate Committee, whilst recommending, amongst others, that the aid budget be progressively increased to 0.5% of PNG’s Gross National Income by 2024-25, did recommend the Australian Government to reassess the priorities of the aid program in the context of GoPNG’s recent budgetary cuts to education, health and infrastructure.

The Senate Committee was also concerned that the governance indicators for PNG do not appear to be significantly improving over time despite a large portion of the Australian aid program devoted to supporting better governance in PNG. The Senate Committee Report does falls short of recommending the current aid arrangements to be changed to budget support.

The writer is unable to ascertain whether similar assessments on the effectiveness of the Australian aid in PNG were undertaken by the GoPNG.

A Delicate Balance

The request by the GoPNG to shift the program/project based aid to direct budget support poses reputational risks to Australia as well as an opportunity to help a friend in need.

PNG is experiencing deepened financial crises and Australia’s intervention in such a critical time would augment the true friendship between the two countries. However, there are concerns that the current economic crises experienced by PNG was partly caused by mismanagement of the economy hence such assistance, though well intended, may be seen as condoning the financial malady and thereby contradict its strong stance on accountability, the basis upon which the aid was initially shifted to program-tied.

Australia also has to allay the perception that a substantial portion of the GoPNG budget is stolen every year and stashed back into Australian shores and invested in real estate property. If the aid funds are untied and given as budget support, will it not be stolen and laundered back into Australia?

It is absurd to expect Australia to suddenly abandon all its current ongoing programs and projects, and transfer all the funds to PNG Treasury to be managed by GoPNG. There are projects and programs that may need to span over a number of years, let alone the accountability issues Australia has.

Some developed countries like United Kingdom do provide budgetary support to partner countries but only a portion of the overseas development assistance. For UK, direct budget support represents an estimated 20% of the country’s bilateral programming. For now, GoPNG cannot expect Australia to transfer more than 50% of its aid budget to directly to support the national budget.

It is also unwise to expect Australia to transfer all funds into GoPNG procurement and distribution systems without improving the governance frameworks around them. By putting more funds through already weak government systems can also run the risk of facilitating further corruption and delaying development results (Svensson, 2008). If GoPNG calls for Australia to align aid by channeling aid through GoPNG procurement and distribution systems, GoPNG must commit to strengthening those systems (Morris & Pryke, 2011).

The stakes are high and Australia has to find a delicate balance in addressing this issue. 
Opportunity to Make a Difference

Whilst the risks are high, the request by GoPNG presents Australia with an opportunity to make a significant difference in PNG. It presents Australia with an opportunity to move away from personality and issue based bilateral relationship, to a more enduring relationship built on same principles and values. Australia has been committing substantial portion of its aid budget to build effective good governance frameworks in PNG. Good governance is fundamental to PNG’s long term economic stability and growth. And it would be in Australia’s interest to have a stable and prosperous neighbor, founded on similar standards and values, with certainty of expectations.

PNG is in desperate need for cash and Australia can seize this moment to adjust the aid from its current program/project-tied to Performance based/Condition-tied to improve governance in PNG. Australia can provide budgetary support with conditions to improve governance and accountability which it can impose sector-wide. Some lessons can be learnt from the European Commission, through its Europeaid, which has a set of guidelines and determinants for budget support that involves direct financial transfers to the national treasury of the partner country – conditional on policy dialogue, performance assessment and capacity building. Adherence by beneficiary governments to the fundamental values of human rights, democracy and rule of law is a major consideration in the Commission's decision to grant budget support through its three different programmes. Australia did not have such guidelines when it granted untied budget support during the years following PNG’s independence, nor does it have any at this stage. There are some literature on how to make aid effective which can serve as a useful guide in considering the GoPNG’s request.

It is risky for Australia to blindly provide budgetary support without conditions attached and hence it would be too much of an expectation. Australian taxpayers would demand some form of accountability on how their funds are being expended, and under the current program/project aid, contracts are awarded through international competitive tendering process, and the funds are managed outside of the PNG procurement process. The taxpayers of Australia have to be assured that the direct budget support will meet the required standard of accountability, so as to justify the shift as requested by GoPNG.

This bilateral discussion also presents and opportunity for a joint assessment on the effectiveness of aid delivery in PNG. Although Australia has the responsibility to undertake routine assessments on the effectiveness of the delivery of aid in PNG as it had done over the years, perhaps it is about time a joint assessment should be undertaken. The 2005 Paris Declaration on Aid Effectiveness demands that recipient countries should be the architects of their development processes, setting development priorities and coordinating development activities in their countries. Donors commit to supporting this ownership and helping to build recipient country capacity. A joint assessment would enable both countries to identify and give effect to the Paris Declaration on how aid can be owned and aligned for mutual benefit.

Sometimes, it may serve well to help a friend, by giving him not what he wants, but what he needs and I believe this is such a time. Ultimately, the decision rests with Australia.


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