November 26, 2022

Published daily by the Lowy Institute
A new study reveals difficult trade-offs between development spending on governance and the decline of democracy.
Foreign Minister Penny Wong appears to have raised the stakes in the debate over a development finance institution (DFI) which has featured here on The Interpreter by telling no less than the United Nations General Assembly that Australia will have a new development policy “in coming months”.
That would seem to suggest that the “owner-builder” model progressively crafted over the past four years from the expanded Export Finance Australia (EFA), the new Australian Infrastructure Finance Facility for the Pacific (AIFFP), and the flagship Telstra purchase of Digicel Pacific will need a substantial renovation.
But the newly released advice to the previous Morrison government on this issue hasn’t made the situation much clearer, by strongly backing the need for a big expansion of non-grant development finance but not providing strong direction on the right institutional structure. The government already has a review of development finance that was promised during the election underway ahead of the now broader new policy.
The Morrison government Eyers report, which it turns out seeded the creation of EFA and the AIFFP in 2018 but was not actually completed until January 2019, outlines a multiplicity of options for a new institution. They range from leaving the task with the Department of Foreign Affairs and Trade, through an expanded EFA, to an entirely new agency, to splitting various non-grant functions across a range of agencies. And the Albanese government has another hybrid idea from the Sedgwick report, released last year, which more modestly suggested better coordination between EFA commercial projects and special grant aid projects, to “demonstrate Australia’s interest in being a long-term, broadly based development partner of key countries”.
These reports say something about the lack of transparency under the previous government as it went about its ad hoc crafting of a development finance functionality. The Eyers report quietly led to the relatively sudden increased capital and powers for EFA (the former Export Finance Insurance Corporation) and is unrestrained in its support for a new agency, saying:
“Helping in the provision of blended public-private finance is a role for Australia which will have relevance and value for decades to come. It could keep on supporting relations with governments which no longer want or qualify for older forms of development assistance.”
But the later Sedgwick work on making the new EFA function better is more restrained, merely observing that EFA is not really up to making the national interest assessments inherent in development finance.
The one thing these Morrison-era studies support is more openness about the aim of all this aid restructuring, as well as the question, will it work? Hopefully the new government will take this on board if it wants to maintain domestic support for aid spending and reassure recipient countries about Australia’s aims, although there is no commitment to making the current DFAT review public.
The Eyers report says there should be a public discussion paper about all this and reading between the lines seems to sympathise with a gradualist approach in which DFAT might trial some new non-grant initiatives on the way to some form of new institution. Sedgwick is more blunt about the need for serious evaluation of this move towards potentially more risky financial mechanisms, saying:
“It would be in the government’s interests to establish and fund a benefits monitoring and evaluation regime to enable it to demonstrate subsequently that financing made available in such circumstances has been applied efficiently and effectively for public policy purposes.”
In an interesting philosophical contrast, the Eyers study argues that the success of the loans and equity investments that would be involved in non-grant aid can be largely assessed by market mechanisms – essentially whether they attract private investment partners and then whether they make the projected profit or loans are paid back. Notably neither the Morrison nor Albanese governments have said anything about judging how the benchmark-setting Telstra Digicel investment actually works.
Multilateral development banks (MDBs) are generally the leading players in non-grant aid in this region. But both studies take a relatively consistent position on how Australia has specific skills that mean it could lead non-grant aid initiatives in some cases, whereas in other cases could just be an influential partner in an MDB-led project.
Given that Australia has been mostly cutting aid spending since the end of the last Labor government until Covid-19 came along, the Morrison government embrace of lending mechanisms that did not involve on-budget cash aid could be seen as a backdoor way of keeping a lid on aid spending. That is notwithstanding the strong argument in the Eyers report about how a small but strategic equity investment can catalyse private finance for some projects and thus get more bang for Australia than conventional cash aid. But the report makes it clear that a shift to a DFI won’t easily allow government to return to cutting on-budget aid. It notes quite bluntly:
“Overwhelmingly, while many governments in the region acknowledged the need for [non-grant financing], nearly all emphasised the continued importance of grants as well, especially in terms of supporting social infrastructure and other areas where cash flows may seem relatively uncertain.”
Using more creative leveraging tools in Australian development aid has been on the agenda since the 2017 Foreign Policy White Paper and the experiments along the way, from the Scaling Frontier Innovation Program to the Telstra Digicel deal, should have provided plenty of practical learning on the job experience. But it does seem time for a more coherent institutional structure which can be evaluated more transparently.
Australia’s aid review is timely because it coincides with a recently announced similar review in Japan which emerges in the Eyers report as both an important non-grant aid partner but also as an exemplar of how Australia could go it alone in some specialised areas. It notes how Japan has made itself the preferred partner for urban public transport and Australia should foster its own niches to raise its stature as a valuable partner.
But the report also provides a useful frank warning that Australia needs to go about this latest aid restructuring with its eyes open about how partnerships can change in an unpredictable geopolitical era. Reflecting its origins in the Trump-era, it notes Australia’s interest in a rules-based order but adds tartly that “the current US administration is less helpful in support”.
Japan’s overseas development aid (ODA) has flatlined for several years after a sharp fall early this century but there is some emerging concern in recipient countries that the drop in the value of the yen will restrict new aid flows. The foreign ministry has sought a 12 per cent aid budget increase for next financial year, declaring its priorities to be connectivity through high-quality infrastructure and support for legal systems and human resources as a basis for the rule of law and universal values.
The first review of the country’s Development Cooperation Charter since 2015 seems designed to pull Japan aid more into line with its Free and Open Indo-Pacific policy and its newer economic security policy focused on supply chains. It says:
“Disruption of the global supply chain due to the abrupt changes in the international surroundings and cybersecurity issues with rapid development of digitalisation accelerated by the Covid-19 outbreak have shown that the economy and security are now directly linked …  further utilisation of ODA, an important diplomatic tool, is necessary.”
This is a more bluntly geopolitical approach to aid than that, at least stated, in Australia’s DFI review term of reference, which say: “Innovative financing interests can be a valuable tool to pursue Australia’s foreign policy, trade, climate, and development interests.” And as Wong told the UN, the Albanese government is moving fast with the DFI review supposed to report next month while Japan is aiming for a new charter in the first half of next year.
One of the clear challenges for the sweeping new approach to aid promised by Wong will be the growing reality that all the focus on better governance is not being translated on the ground into more democracy.
This week’s meeting with Solomon Islands Prime Minister Manasseh Sogavare over issues including potential Australian funding for a delayed election only highlight how long-term development or strategic objectives can sit uneasily with short-term political developments.
Indeed, new research from the Organisation for Economic Cooperation and Development shows that the number of autocratic regimes receiving aid increased over the past decade. This was not only because the number of non-democratic regimes has increased, but there has also been an increase in aid flows from countries which don’t place the same emphasis on short-term governance and long-term democratic evolution as, for example, Australia does. So, autocracies received 79 per cent of aid flows in 2019 compared with 64 per cent in 2010. And it is particularly striking that there was a 19-fold increase in humanitarian aid to closed autocracies over the ten-year study period.
Despite this parlous overall picture, the report shows that countries which democratise were generally rewarded with increased aid even though the flow to democracies has fallen due to reclassification of some former liberal democracies as less than democratic. While other factors may have been involved, the ten countries out of 124 studied which were judged to be the top democratisers over the decade received a 120 per cent increase in aid.
However, governance support remained remarkably constant over the decade and across regime types suggesting that donors are persisting with optimistic projects despite the overall downturn in democracy. It is telling that three-quarters of this governance aid goes to less politically sensitive “state-building” projects and only one-quarter goes to democracy support.
Ironically, Myanmar comes up in this research to 2019 as a top ten democratiser with an almost 400 per cent increase in democracy support aid and a 3,000 per cent increase in state building aid over the decade.
The Eyers report (also in 2019) projects that Myanmar will move out of least developed country status by 2024 and thus become more of a non-grant aid candidate for Australia with projects worthy of innovative DFI/private sector partnerships.
At the very least this would appear to be an abject lesson in having a broad portfolio of development aid bets.
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