Chapter 3. Financing for development

Overall ODA volume

Peer review indicator: The member makes every effort to meet ODA domestic and international targets

Australia has made substantial cuts to its aid programme since the last peer review, officially abandoning its previous aid target. Australia’s aid volume compared to the size of its economy (ODA/GNI) is below the DAC average and on a downward trajectory, despite continued economic growth. Australia does not currently have a statement on the level of development aid it wants to reach.

Australia has cut ODA, abandoning its previous ODA target

In 2016, Australia provided USD 3.278 billion (AUD 4.410 billion) in net official development assistance (ODA), which represented 0.27% of its gross national income (GNI), a 5.4% decrease in real terms from 2015 (Figure 3.1). Since 2013, in cumulative terms, the Australian aid budget has been cut by over 30% (Hill, 2017).

Australia had previously committed to increase its ODA/GNI ratio to 0.5% by 2016/17. It has since abandoned this target, and budget forecasts and GDP growth estimates suggest that Australian aid will hit a historic low of 0.22% ODA/GNI in 2017/18 (DFAT, 2017c). If Australia is to meet the international UN benchmark of 0.7%, it will need to reverse recent ODA trends. The Australian government has stated that it does not currently support a time-bound aid target as a percentage of GNI.1

Australia is falling behind other DAC members on ODA

The official rationale for cuts to ODA is the need to control the deficit and improve fiscal discipline to achieve a budget surplus.2 Australia has seen 26 years of uninterrupted economic growth, its debt is below the OECD average and fiscal deficits are declining (OECD, 2017a). While Australia is the 10th largest economy within the OECD, it is the 15th largest donor out of 30 DAC members as a percentage of GNI and the 13th largest donor in DAC by total volume. While Australia’s GDP per capita is well above the OECD average, its current ODA volume of 0.27% of ODA/GNI is below the DAC average of 0.32% (Annex B).

At the same time as cuts have been made to ODA, overall government spending has grown by approximately 10% since 2013 (Bruere and Hill, 2016). In particular, Australia’s defence spending has increased including for military contributions to international efforts in Iraq and Syria and to stabilisation and counter-terrorism in the Middle East region (World Bank, 2017b).

Australia has improved ODA reporting and predictability and adjusted its approach to refugees

Since the last peer review, Australia has made efforts to improve the medium-term predictability of its aid despite the continued budget cuts. Australia publishes indicative ODA forward estimates for a four-year period in its Budget Strategy and Outlook that include the overall foreign aid3 projections until 2020.4 DFAT also publishes two year, forward estimates in the Australian Aid Budget Summary, which contains more detailed global, regional and country-level ODA figures.

Australia has also made improvements in its ODA reporting since 2016, when it was rated as “needs improvement” on its reporting to the OECD DAC statistics and to the OECD survey on Forward Spending Plans (OECD/UNDP, 2016). Australia has improved the timeliness of its reporting to the DAC and since 2016 has been in the process of overhauling its data management system to improve statistical reporting.

As recommended in the last peer review Australia has clarified its approach to in-donor refugee costs and as of the 2014/15 budget year, Australia no longer reports such costs as ODA. Australia directs irregular migrants and asylum seekers to offshore “regional processing centres” in Nauru and in Papua New Guinea (PNG) for processing by their respective governments (Chapter 1). In 2014, Australia also signed a memorandum of understanding (MOU) with Cambodia to voluntarily settle refugees from Nauru to Cambodia (Australian Government and Cambodia Government, 2014). Separate MOUs with both Cambodia and PNG committed DFAT to provide additional ODA. This has resulted in an additional AUD 40 million (USD 36 million) for Cambodia and AUD 50 million (USD 48 million) for PNG with a focus on Manus Island. The MOU with PNG (first signed in September 2012 and updated in August 2013), for example, engages the Australian and PNG governments to “develop a package of assistance and other bilateral co-operation, which will be in addition to the current allocation of Australian development co-operation assistance to PNG” (DFAT, 2013).

Bilateral ODA allocations

Peer review indicator: Aid is allocated according to the statement of intent and international commitments

Australia’s bilateral ODA allocations reflect its policy priorities. Australia remains a strong partner in the Indo-Pacific region and to small island developing states (SIDS). Support to least developed countries represents approximately one-quarter of Australian ODA, while support to climate and environment is consistently below that of other DAC member countries. Australia is a staunch champion for gender equality, with ODA allocations consistent with this strategic focus.

The total volume of bilateral ODA has declined

Australia’s bilateral ODA has been declining along with the cuts in total ODA volume. Total gross bilateral ODA in 2016 was USD 2.29 billion (AUD 3.08 billion), representing 70% of total gross disbursements. Since 2012, when gross bilateral aid peaked at USD 4.65 billion (AUD 4.49 billion), it has been on a steadily downward trajectory.

In 2015, 69% of bilateral ODA was country programmable aid, well above the DAC country average of 47% (Figure 3.2).

Australia applied ODA cuts across the board and has consolidated the focus on the Indo-Pacific region

Since 2013, cuts to Australian bilateral ODA have taken place across the board. In line with DFAT’s revised aid policies, substantial cuts (approximately 70%) were made in aid to sub-Saharan Africa. Aid to Asia saw more moderate cuts (approximately 40%). Spending in the Pacific region was largely maintained. Australia met its target to invest at least 90% of country programme aid in the Indo-Pacific region in 2015/16 (Chapter 2). In the same period, aid to the Middle East region remained relatively constant at 4% (Figure 3.3). Australia also has made efforts to consolidate its ODA portfolio. In the last three years, the average size of its aid investments increased by more than 26% and the number of aid agreements decreased by 33% (DFAT, 2017a).

Australian aid to and through civil society organisations decreased between 2012 and 2016 by 30%. In 2016, aid to and through civil society was 9.6% of total net ODA and 13.8% of bilateral ODA (Annex B).

Australia has increased its focus on its main bilateral partners, many of which are small island developing states

The government of Australia is the largest DAC member provider to small island developing states (SIDS), many of which are located in the Indo-Pacific region. Between 2012 and 2015, Australia provided USD 3.94 billion or 26% of its total ODA to SIDS, accounting for 25% of all ODA to SIDS in the Pacific and Caribbean.

Consistent with Australian policy, 19 of Australia’s top 20 recipients of bilateral ODA are in the Indo-Pacific region. Concentration on its top five beneficiaries is high, at 38% of gross bilateral ODA. Papua New Guinea and Indonesia are by far the two largest partners for Australian aid, with PNG receiving 15% and Indonesia receiving 12% of Australia’s bilateral aid budget in 2015-2016. Concentration on the top 10 beneficiaries is also high at 50%, compared to the DAC average of 33%. Australia has a relatively high number of total partners (133 recipients) but the majority receive less than 1% of total ODA, suggesting that Australia could make further efforts to consolidate (Annex B).

Support to least developed countries is slightly below the DAC average, but should be viewed in light of the focus on the Pacific

In 2016, Australia provided 36% of its bilateral aid to least developed countries (LDCs), slightly less than the DAC average of 40% (Annex B). The volume of aid to LDCs has been decreasing slightly each year between 2012 and 2015. Total ODA to LDCs was 0.08% of gross national income in 2015, well below the UN target of 0.15%. Aid to fragile contexts and conflict-affected states represented 38% of Australian bilateral allocable aid in 2016, above the 2015 DAC average of 34% (Annex B).

Australia’s allocations to LDCs, however, should be viewed in the context of its focus on the Pacific region. This region includes many countries that are not LDCs but nevertheless are recognised as vulnerable, are subject to environmental shocks and include many SIDS. Seen in this light, lower middle income countries received 55%, the highest share, of Australia’s bilateral ODA in 2016 (Annex B).

Australian sectoral allocations are in line with Australian policy priorities

Australia has committed to increase aid for trade investments by 2020 (Box 1.1). Between 2014 and 2015, Australian aid for trade increased by 21.5%. In line with Australian policy priorities, aid also has increased for the economic infrastructure and transportation sectors. While bilateral health spending has declined over the last five years, DFAT has launched an Indo-Pacific Health Security Initiative (Chapter 1).

Australia’s level of ODA spending on gender equality is consistent with its strategic focus on this area and with the government target requiring that at least 80% of investments effectively address gender issues.5 In 2015-16, 57% of Australia’s bilateral allocable aid had gender equality and women’s empowerment as a principal or significant objective, considerably higher than the 2015 DAC country average of 36%. Australia has remained a leader in its support for gender equality (Box 2.1).6

Official development assistance to climate has stabilised, but is below the DAC average

Australia committed in 2015 to invest at least AUD 1 billion (USD 751 million) of ODA to building climate resilience and reducing emissions over five years. While this target has helped protect this area from further budget cuts, Australia spends less ODA on support to climate change than many other DAC members. In 2015, 13% of Australian bilateral allocable aid (USD 334.7 million, equivalent to AUD 445.5 million) focused primarily on climate change, compared with the DAC country average of 26.2%. In 2016, climate-related bilateral allocable aid increased to USD 398 million (AUD 535.4 million).

Official development assistance to environment is low compared to other donors’ aid

Australia spends less ODA on support to the environment than other DAC members. In 2015, 14.7% of Australia’s bilateral allocable aid focused on the environment, compared with the DAC country average of 33.2%. Overall, the level of Australian ODA focused on the environment has not increased since the last peer review, although the 2015-16 average shows a slight upturn from the 2013-14 low (Figure 3.4).

Multilateral ODA allocations

Peer review indicator: The member uses the multilateral aid channel effectively

Australia has increased its multilateral aid and remains a solid partner for multilateral organisations, providing un-earmarked core contributions. Australia could further consolidate its multilateral funding to decrease fragmentation and enhance multilateral effectiveness.

Australia has increased funding to the multilateral system

Australia has been increasing its multilateral aid in both relative and absolute terms. In 2016 Australia allocated 30% of total ODA (USD 987 million equivalent to AUD 1.33 billion) as core contributions to multilateral organisations, up from 21% in 2015. In 2016, Australia channelled 25% of its bilateral ODA for projects implemented by multilateral organisations, a slight increase from 23% in 2015. In sum, this reflects a 57.7% increase in gross multilateral aid from 2012 to 2016.

Multilateral aid to UN agencies increased from around 4% of total ODA per year in 2010 to around 5% in 2016 (USD 168 million equivalent to AUD 226 million).7 In 2016, Australian aid to the World Bank rose to 7% of total ODA, while ODA to regional development banks rose to 12% (from 3% in 2015), accounting for the overall increase of ODA to multilaterals from 2015 to 2016. Australia is the largest partner for grants to the Asian Development Bank (Asian Development Bank, 2016).

Australia’s multilateral allocations are consistent with its policy objectives. DFAT also has made strong commitments to global and regional programmes that are administered by multilateral organisations, in line with its stated priorities.8 Australia aims to provide indicative multi-year funding to multilateral organisations and has made an effort to ensure the predictability of funds.

Australia has reduced reliance on non-core funding since its peak in 2011/12

Non-core multilateral contributions allow Australia to fund specific initiatives that are in line with DFAT’s geographic and thematic priorities. They also help with spending the budget by providing DFAT flexibility to make end-of-year adjustments among country and regional programmes (ODE, 2015). Multilateral contributions have low overhead and administrative costs and can help ensure greater harmonisation with other donors. While Australia’s use of non-core funding has decreased since its peak in 2011/12, DFAT could further consolidate its multilateral funding by providing fewer but larger non-core contributions (ODE, 2015) and more core contributions. This would help to achieve economies of scale and encourage a longer-term strategic focus.

Financing for development

Peer review indicator: The member promotes and catalyses development finance additional to ODA

In line with the Addis Ababa Action Agenda, Australia uses aid to support domestic resource mobilisation in developing countries and leverages additional finance for development from the private sector. Australia measures and tracks the value of private sector investments leveraged through its aid programme and is active in international fora to support finance for development beyond ODA. Despite Australia’s efforts to see them reduced, the costs of remittances from Australia to the Pacific region remain high.

Australia has increased focus on attracting finance for development beyond ODA

Australia has a clear and increasing focus on attracting finance for development beyond ODA, in line with the Addis Ababa Action Agenda. Since 2014, Australia has placed a greater emphasis on leveraging finance from the private sector and aims to leverage additional funds in countries that have greater potential for attracting additional finance.

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 (Australian High Commission, Solomon Islands, 2017). DFAT (2017a) reports the value of private sector investment leveraged in Australia’s aid programme was AUD 411 million (USD 306 million) in 2015/16, based on its Aggregate Development Results reporting.Australia also reports on other official flows and private flows at market terms to developing countries to the OECD, but needs to resume reporting on private grants.

Australia recognises the importance of increasing domestic resource mobilisation for financing the 2030 Agenda. Under the Addis Tax Initiative, Australia is committed to doubling its technical co-operation in the area of taxation and domestic resource mobilisation, to AUD 32 million, by 2020.9 Importantly, its 2016 framework for supporting tax policy and administration through the aid programme outlines its domestic resource mobilisation policies and approaches. In 2015, USD 7.7 million (AUD 10.2 million) of Australian ODA was committed to the mobilisation of domestic resources in developing countries (OECD, 2017b).10

Australia works to reduce the costs of remittances but they remain high to the Pacific

Australia has advocated for reduced remittance costs through global fora.11 At the 2014 Brisbane G20 Summit, Australia committed to reduce the cost of remittances from Australia to 5% ( G20, 2015). This predated the target set in the Sustainable Development Goals of 3%. Australia supports initiatives in the Pacific aimed at helping facilitate remittance flows between Australia and the Pacific and reducing remittance costs.12 Despite these initiatives, the cost to send remittances from Australia to the Pacific remains high; a trend of declining remittance costs to the Pacific has levelled off, with no substantial further declines in recent years (Figure 3.6).13 Remittance costs from Australia are the third highest of the G20 countries sending remittances and are significantly higher than in most OECD countries of similar size (World Bank, 2017a), suggesting that Australia will need to step up its initiatives on reducing its remittance costs if it is to meet its government target.

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Notes

← 1. In a 2013 document on foreign policy, the Coalition government said it “remains committed to a target of an overseas development assistance budget equivalent to 0.5 per cent of GNI. However, it is not possible to commit to a date given the current state of the federal budget”. See http://lpaweb-static.s3.amazonaws.com/Coalition%202013%20Election%20Policy%20%E2%80%93%20Foreign%20Affairs%20-%20final.pdf.

← 2. The Australian government currently has a target of reaching a surplus of 1% of GDP. See OECD Economic Surveys: Australia at www.oecd.org/eco/surveys/Australia-2017-OECD-economic-survey-overview.pdf .

← 3. The foreign aid figures in the budget report reflect aid spending by DFAT in accrual terms, which is different from the international measure of aid or official development assistance reporting, which is measured in cash terms.

← 4. This is in line with the Australian Government Budgeting and Reporting Framework.

← 5. This requirement applies to all development, regardless of its main objectives.

← 6. In 2016, Australia rated 78% of aid investments as effectively addressing gender equality.

← 7. The UN agencies receiving the largest amount of funds include the Department of Peacekeeping Operations (UNDPKO), WFP, WHO, UNDP, UNICEF and UNHCR. Australia supports reform of the UN Security Council and is a strong advocate for peacebuilding and peacekeeping, which is reflected in its significant core contributions to the UNDPKO. In 2015, it was the 11^th largest financial contributor to the UN peacekeeping budget with a contribution of USD 146 million (AUD 196 million).

← 8. For example, in 2016, Australia committed to providing an additional AUD 220 million (USD 164 million) to the Global Fund to Fight AIDS, Tuberculosis and Malaria. It has committed increased funds to Syria, primarily through the UN system.

← 9. See http://dfat.gov.au/aid/topics/development-issues/domestic-resource-mobilisation/Pages/domestic-resource-mobilisation.aspx (accessed 18 November 2017).

← 10. Australia is currently reviewing its reported expenditure on domestic resource mobilisation for 2015.

← 11. Among these are the World Bank Global Remittances Working Group and the G20 Global Partnership for Financial Inclusion.

← 12. For example, Australia supports the Pacific Islands Forum Economic Ministers’ Meeting (FEMM) work on improved remittance flows in the Pacific. Australia, along with the European Union and New Zealand, supports the Pacific Financial Inclusion Programme (PFIP), which is jointly administered by the UN Capital Development Fund and UNDP and supports Pacific Island governments to improve financial services for low-income households. See www.g20chn.org/English/Documents/PastPresidency/201512/P020151228305176436731.pdf . Australian aid also has been used to support transparency initiatives such as the Send Money Pacific, a remittance comparison website aimed at helping reduce Australian remittance costs to the Pacific. See www.sendmoneypacific.org (accessed 4 September 2017).

← 13. See https://remittanceprices.worldbank.org/sites/default/files/rpw_report_june_2017.pdf. The average cost of sending remittances from Australia has declined by over five percentage points since 2011, but in the last few years there have not been any substantial additional decreases. See www.gpfi.org/sites/default/files/documents/CORRECT%20VERSION%20Final%202017%20Progress%20Reporting%20-%20National%20Remittance%20Plans%20endorsed%281%29.pdf .