FLANAGAN, Mr Paul, Private capacity

HOWES, Professor Stephen, Director, Development Policy Centre, Crawford School of Public Policy, Australian National University

CHAIR: We will resume the hearing, and I welcome Professor Stephen Howes and Mr Paul Flanagan. Would either of you like to make an opening statement before we go to questions?

Prof. Howes : I am happy to make a brief opening statement. Thank you very much for the opportunity for both of us to present to you. We have both made submissions to the inquiry. We are academics and, in that sense, they are in an individual capacity, but we are both associated with the centre and we both have a deep interest and significant experience relating to PNG and aid.

In Paul's case it is through his research, through his work with AusAID and Treasury and through his time as an adviser to the PNG government. In my own case it is through my own work with AusAID, through my work as a researcher and, with the NGO, I am involved in PNG. I was also on the 2009 joint government review on Australian aid to PNG. That was an occasion where we took a detailed look at the program. My submission is more an overview covering a range of issues. Paul focuses, in particular, on the issue of advisers and institutional linkages. I will give you a brief summary and then I will hand over to Paul to summarise his submission.

The first part of my submission is a background for you on PNG and aid to PNG. I thought it might be useful, for you, as you conduct your review, and there are a few points from that. One that has become more worrying is the current economic situation in Papua New Guinea. Despite the commencement of the LNG project it is a time of real economic risk in PNG. Outside of the project there is a slowdown of economic growth. There are shortages of foreign exchange and there is a real fiscal crunch that the government is facing. While this has been brought on by the decline in commodity prices there are also policy causes and, in particular, a very rapid growth in spending in recent years and an over-appreciated exchange rate. That is important context for your inquiry.

The second longer-term point is around the uniqueness of PNG as a very resource-rich and resource-dependent, unequal and fragmented country. Those are statements of fact. It does mean that developments are particularly challenging in PNG. Even if you can get economic growth, converting that growth into benefits for the ordinary Papua New Guinean is a challenge. That is an important context, because development—and, therefore, aid—has to be seen as a long-term endeavour. You are not going to get a lot of quick results.

Turning to aid, a lot of people think of PNG as aid dependent. In fact, by global standards, it is not aid dependent at all. It used to be aid dependent but its aid dependency has been declining, sharply, over time. That is mainly because Australia has been reducing its aid to PNG as a deliberate policy. It has reversed, slightly, over the last few years but the long-term trend has been downwards. It is an unusual situation where Australia is—by far—the most dominant donor. There are only one or two other cases where one donor has such a large share of the total aid pie.

That is the overview. Turning to my own recommendations, they are divided into three parts. First are some cross-cutting issues coming out of that overall perspective. I think the Australian aid program has been subject to too much chopping and changing. Given the difficult situation, we need to find a few things that work and stick with them. That requires a bipartisan approach and an evidence based approach. We need to be realistic about what we can achieve. In particular, I notice your terms of reference go to the issue of performance benchmarks. It is important to understand that performance benchmarks have been part of the aid program since the early 1990s and have been used with very limited impact. I am not saying they are not worth having. I do not want to be a cynic, but they are not really going to—it is not as if introducing performance benchmarks is really going to change or improve aid effectiveness.

I do highlight the Manus agreement as something that has reduced Australian leverage, in relation to the aid program. Because we need PNG on board, for the Manus agreement, we have been reluctant to prosecute some of the cases we need to prosecute as vigorously as we might otherwise.

There are a couple of sectoral issues. The sectoral spread of the aid program is very wide. Recently, a decision was made to put 50 per cent of the aid program into infrastructure. That is a big change and something that the PNG government wants. In that sense, it is to be welcomed. But my caution is: the commitment to infrastructure is not to physical infrastructure but also to social infrastructure. There is nothing wrong with social infrastructure, but we already invest in the social sectors. There is no particular reason why investing in infrastructure in the social sectors is more effective than investing in drugs or investing in people. This 50 per cent commitment sounds like it is going to focus the aid program but it is not really, because it is going to be spent in a large number of sectors.

In the social sectors, we should work more with non-government organisations and churches rather than spending on infrastructure. We have done some of that but, in general, the research we have done shows that churches are more effective at delivering services than the government and we should be backing them.

The final part of the submission goes to the issue of technical assistance and capacity building, which is also Paul's main interest. It is still more than half of the Australian aid program, so it is a very large chunk that goes in this form of aid. It is not, overall, very effective and it is too high. But it will always be an important part of the aid program. I think it needs to be reoriented—in fact, I have made the case over a period of time to move away from an advisory approach, where you send the aid experts over as advisers, to one where the aid experts are in an in-line role with responsibility and accountability to the PNG government. Interestingly, in recent months—

Senator BACK: Excuse me; just before you get off that point, what are you saying—we have done one, and you are recommending the other?

Prof. Howes : That is right.

Senator BACK: Would you repeat what you said?

Prof. Howes : Yes. Originally, we sent people over into in-line positions, but for a long time we have had them, mainly, as advisers. I think we should go back to having them in in-line positions.

CHAIR: Is that in line with the wishes of Prime Minister O'Neill?

Prof. Howes : That is right. He recently started to make this case, and I support that.

Senator BACK: I did not want to interrupt you, I am sorry; I just wanted to be clear on what you said.

Prof. Howes : I think he is on the right track there. There is a role for linkages—Paul will talk about this—which should be long term and involve partners, typically Australian, that have skin in the game so they are not only in it for commercial reasons but have a commitment. In fact, in our own centre we try to do that. We partner with a number of research institutions in economics and we also work with an NGO that works in the area of domestic violence. We are supported by the aid program but we also invest our own resources. It is important to get a long-term commitment.

We also support the recent shift in focus of the aid program to give more support to tertiary education. You might be familiar with the government's new governance precinct initiative. We are involved with the University of Papua New Guinea on part of that project. UPNG has run down over several decades. It is the only place where you can study economics in PNG. Last year there was only one member of faculty in the economics department and he was a junior tutor. That gives you a sense of how run-down it has become. We are trying, with the university, to turn that around and I think that is worth supporting.

The final point I want to make is in the area of scholarships. That is something I have had personal experience with. Through my role at the Crawford School of Public Policy, where we are situated, we take in a large number of students with scholarships from the aid program. I ran the economics teaching program for five years. The students from PNG tend to suffer, they tend to be the weaker students. That partly reflects the weakness of the education system in PNG but it also reflects the fact that not enough emphasis is given to merit. Too many positions are given to government officials. Of course that is important, but you are not going to get the best and the brightest, and I think that is what we should be aiming for with the scholarship program. There are a range of issues, and I would be happy to discuss any of them further with you.

Senator BACK: Thank you.

Mr Flanagan : First of all, thank you for allowing me to present today. An upfront warning: I am pretty passionate about PNG, and this extends through to things such as wearing this really glary 40th anniversary tie.

Senator BACK: I was wondering if I could have a puff out of it, if ever it produces one!

Mr Flanagan : I guess this interest in PNG now goes back to 1978. I wrote my first public policy paper back in '78 on the economy of PNG soon after independence, and it has continued through the 30 years of public service, including the 2½ years working as senior adviser underneath one of these institutional linkages programs in PNG. I guess I am passionate about PNG in part, because I see we have a real debt to the country. I wrote the submission actually on the Anzac Day weekend and, rather than going along with the other 120,000 Canberrans to the Dawn Service, I was sitting on the computer doing this because, in some ways, I thought it was a better contribution to try and recognise the Fuzzy Wuzzy Angels and other debts we pay through campaigns that so shaped our national character.

The submission is really a reflection of working in AusAID over the years. It is about love of the country, as well as my experience of having worked there in one of these programs, having seen lots of other assistance and having been in charge of adviser programs to other countries in Africa and the Middle East. It is also my thoughts on the most effective way of using Australian aid to PNG. And the submission really has three key components. One of them is that this effectiveness is best served by getting better value for money out of PNG's own expenditure. It is now 90 per cent of public expenditure in PNG. As Stephen mentioned, the share of aid has declined; it is now about 10 per cent and still in decline. So our real value add is getting better expenditure results from PNG's own expenditure. A key component of that is governance assistance, and the contention I would have is that the best form of governance assistance is through a range of institutional linkages programs. One of the key parts there is: can we have an impact on some of those areas of governance to try and improve the effectiveness of PNG's expenditure?

Graph 1 on page 6 in the submission is an attempt to try and measure changes in governance effectiveness in PNG—it is really hard to measure, of course. This is the World Bank's best attempt on these governance indicators. There are six of them, but I have tried to just simplify them to a solid line in the centre, and this certainly indicates a pattern of decline—certainly from 1996 through to 2005. The indicators did not start before '96. But I have included in the submission an excellent paper that looks at the views of senior PNG public servants and a pattern they saw of longer-term decline in public administration in PNG. That is in appendix 1. What is interesting in this graph is that through to about 2005 that decline seems to slow to balance out. In fact, there are small improvements that occur there and that is a reflection of an increased focus by the Australian aid program on governance. It was at a time when Australia was very concerned with what it called the 'arc of instability'. We had recently sent troops into Timor-Leste and into the Solomon Islands. In many ways, aid was regarded as a cheap and best form of defence to deal with other potential issues in what was seen as the arc of instability. With the creation of some of these programs from 2003 onwards, I have a sense that there is obviously many potential drivers behind this improvement in the governance indicators. But I think one of those is linked to the increased emphasis in the Australian aid program on governance in that period of time. The decline in the late 2000s was underneath the new governance, but governance seems to have become one of the central pillars of the aid program, and that is something to be commended.

Another part of the submission gets down to the idea of value for money, and that is Graph 2 on page 10. Whatever we do on the governance side can make even small improvements in improving the effectiveness of PNG's own expenditure. In this case, an improvement of only one per cent per year within a relatively short time, led to overall gains that were greater than the entire Australian aid program going to PNG—and those gains will continue to build through time. My own experience is that those sorts of gains of one per cent per annum from a very significant increase in governance assistance could be realistically obtained.

Senator BACK: What is your blue line on that graph?

Mr Flanagan : That is seen as a more realistic one where we would essentially grab some of the low-hanging fruit early. Some of the earliest gains are improving some of the systems and that could be done sooner. Then over time presumably our contribution would diminish as PNG's own capacity also built up.

Senator BACK: Is that realistic?

Mr Flanagan : I think so and in the submission I give examples of certain activities of advisers. I was involved in the Strongim Gavman Program, which involved half a dozen advisers from the Treasury department. We worked on some policy issues. We were part of a team involving other Papua New Guineans of course but we were clear members of that team. The gains to consumers in PNG were, in net present value terms, more than the entire value of the Australian aid program in one year. So the gains from that one intervention—these sorts of net present value terms we use, so bringing forward the gains over the next 20 or 30 years down to a single year—were greater than the Australian aid program. So I do think these sorts of gains are possible.

When you work in the system you are constantly hit with almost this legacy of 1975. So many procedures are locked back into the time of our administration. Australia has moved on in many ways in public administration to improve effectiveness but time and time again you see 1975 procedures still being there as real barriers to gains in the public service in PNG. So I think there is a fair amount of low-hanging fruit there still that could be worked on.

Then there is the other part of the submission. I guess the best way to do that is through an institutional linkages program. For me the issue is not so much an in-line or not in-line; for me I have the sense that it would be very difficult to get sustainable gains from that sort of individual, whether in-line or not in-line. You need the institutional framework. It is a culture that comes through on linkages between institutions. It is knowing that after this one adviser there will be another adviser and another adviser, because sometimes policy change will well and truly extend over many years. That certainly was my experience—picking up things from my predecessors and working them for the 2½ years, and my successors have continued on the same sorts of policy issues with the continuity around views from Treasury.

But that does not have to be limited just to a Commonwealth government to Commonwealth government. A lot of it has to be really at the state government level and local government level. I think the academic linkages program between the ANU and UPNG is an example of the types of linkages programs that can reflect a much broader set of partnerships between Australia and the people of PNG. That is the reason for the submission calling for over half of our bilateral aid to PNG going through these institutional linkages programs.

CHAIR: Professor Howes, you touched on the finances of New Guinea. One of the earlier witnesses said that they had spent most of their money this year and were looking at running out. Is that an accurate assumption?

Prof. Howes : They are running out, yes. Paul could also speak to this issue because he has been following this very closely and was the first to pick it up. The problem is that what they have really run out of is revenue. The revenue is in fact going to be 20 per cent less than what they budgeted for. It is actually going to be less than last year in nominal terms and in real terms it is going to take them back to about the 2011 level of revenue. So their revenue after inflation is back at 2011 levels but they have had this massive series of rounds of increased expenditure. So expenditure has gone up by about 50 per cent, so 50 per cent more expenditure and no more revenue. That is why they are facing this real fiscal crunch this year.

CHAIR: If the revenue is not coming in and there have to be cuts, do you have an indication of where the cuts are going to be and implications for the aid program that we have?

Prof. Howes : Yes. The government acknowledged that they need to cut—perhaps somewhat late—just in the last few months, so that is pushing the burden onto the last part of the year. The government does not seem willing to cut some of the new flagships they have introduced—in particular, the big funding go to schools and the funding going to MPs to spend in their constituency. It is really falling on what can only be described as essential services.

I know that in the case of the university they are putting in a hiring freeze and they are actually struggling to pay salaries. We know that the Catholic health services are saying they have not been paid and the ambulance service is saying that it has not been paid. Unfortunately, with this very severe shortfall and an unwillingness to cut back on some flagships, the cuts really seem to be falling on essential services.

In terms of the implications to the aid program, I know that the aid program is receiving lots of requests for assistance, because people are pretty desperate. It is certainly making the aid program more difficult to operate; it is harder for the government contribute anything and it certainly brings further into question the emphasis on infrastructure because, if you cannot maintain the infrastructure, what is the point of building it?

Mr Flanagan : Possibly the only thing to add to that in terms of the revenue side is that is also appears that some of the revenue that was going to be coming in from the PNG LNG project has collapsed because of the fall in international commodity prices, but it looks like a substantial set of the dividend stream that was expected has been taken essentially off budget. It seems to have been redirected to potentially paying some loans that have been taken out from other forms of government investment—the most likely one of those being the Oil Search acquisition. The loss of revenues there is estimated at around $500 million or something broadly equivalent to the cost of the tuition-free education program that has been introduced.

Senator BACK: Government, in that case, has actually taken an equity position in Oil Search. Is that right?

Mr Flanagan : That is correct. They purchased 10 per cent—

Senator BACK: As we learned during the WA Inc era, it is not the role of governments to take equity positions; it is the role of governments to extract the required funding—and they do have every right to do that through royalties or through other means but not to be putting taxpayers' funds at risk by taking equity positions.

Mr Flanagan : There is obviously quite a strong history in PNG of seeing a very extensive role for government in state owned enterprises as well as in mining and gas projects. I guess Australia did a similar thing after World War II in many ways. Hopefully, we have learnt some lessons from that experience and, hopefully, through these types of institutional linkages programs we can try to share some of these lessons as to the gains that can come from the government focusing on some of the things it does best.

Senator BACK: Could I follow up on your question, if I may, Chair, with regard to institutional links. In East Timor, which is a very much younger independent country than even Papua New Guinea, they have relied—and, I understand, are probably still relying heavily—on institutional links they have with both Australia and New Zealand, often state government departments, who provide them with enormous levels of support without any fee, including ongoing support. As one person departs the scene, they are immediately replaced. Is that what you have in mind when you speak of institutional links? Is it the case that you would then be suggesting that that institution's contribution would be supported or paid for by the Australian government in an aid fashion? Or are you saying that in the case of an institution such as ANU they would see that as their social obligation to a near neighbour? Can you understand that?

Prof. Howes : I would say a mix—a balanced approach. To be realistic, PNG is a very expensive place to operate. It is not core business for the ANU—it used to be but it is not core business now. ANU is focused, understandably, on China and Indonesia. We could not do what we do without aid support, but I would not want the aid program to cover all of our costs. I think it is also important for us to show that we are serious about it. It is easy for it to degenerate into a commercial venture and then it tends not to be sustainable, because people do not fight for the money and they do not look for opportunities. We have only been doing it for a few years, but we did go in first and we were able to demonstrate partnership and, on the back of that, the aid programs came on board. So I think a balanced approach is what is needed.

Senator BACK: We know from submissions to this committee that the Australian Taxation Office, the Department of Finance and Treasury have all got personnel in those equivalent agencies in Port Moresby. Do you know whether their contribution is effective and adequate, and should other agencies from Australia be there? We also know that the AFP is involved at the police level. Can you give us some advice on where you think Australia's most effective spend is in this context? Can I extend your word 'institutional' to be 'departmental' as well?

Prof. Howes : Sure.

CHAIR: I think we heard some evidence that it cost about $6,000 a month to accommodate people in Port Moresby. If you add that on top, can you just give us an idea of what is happening?

Mr Flanagan : The role I had while in Papua New Guinea was team leader of the Institutional Linkages Program between the Australian Treasury and the PNG Treasury. It was one of those nine departmental linkage programs that are funded underneath the current SGP. The example that I provided—and I will get to this—was in very generic terms. I see tremendous gains that are available through those linkages. I saw that that was very much the case with the role that the ATO was playing, the role that the Attorney-General was playing, linked in with Queensland legal assistance, and also the role that Immigration, Customs and other agencies were playing there. But we are expensive. I think some of that should be more on a cost-sharing basis. Local salaries should be paid by the PNG government, but that will inevitably be small. A departmental head in PNG is paid only a fraction of a middle-ranked officer within Australia. We need senior people to go across there, with the judgement and some of the management skills that we would expect more in senior officers and senior executive officers. The actual costs are still about the same as having a person in the embassy.

When you look at the cost of accommodation in the private sector, where these programs often are, Port Moresby is, I think, the third most expensive city in the world. It is more expensive than New York. The rents are extraordinary. House prices are unbelievable. We were also finding accommodation for people who were obviously within DFAT. The costs are of a similar order of magnitude. So I guess it is: are you getting value for money from those people? I think it is going to be very much horses for courses as to when you decide to go down the path of a long-term adviser or when it is possibly best to have a series of shorter term linkages, bringing people from PNG across to Australia, some various forms of system support and other arrangements that can also be useful as part of those linkage arrangements. So it is an expensive form of assistance, but my experience would be that it still represents value for money.

CHAIR: If you did not have this, would the risk to our own aid program be more exacerbated? If we did not have these in line—Treasury and taxation—their economic position may well be worse and our aid programs ineffective.

Mr Flanagan : We are clearly dealing with a sovereign country, and the final decisions are made by the government and ministers of that country. It is question of what sort of influence the advisers, whether in line or purely advisory, have in some of those decisions. I think often there are two things to that. Sometimes we have knowledge, systems and mistakes from our own experiences in Australia or from other areas around the world that we can share and bring into some of those discussions. It makes for probably better discussions or better input to the scope of options that ministers end up seeing by having advisers there. I think that is important.

There are also a lot of things that are not really contested. There is a lot of white space in public policy, particularly in those areas where you can improve systems that can help improve things around, let's say, the accountability of overall expenditure. Putting in a monthly or quarterly statement as to what expenditure has gone out by vote is something that is not particularly controversial. It is something in line with systems of accountability and public information sharing that we would expect. We can bring in and encourage that sort of innovation. Hopefully, those sorts of things can improve some of the accountability of other forms of assistance as well. So, I think, yes, there are positive spin-offs from this type of program to other elements.

But, to me, the key thing is that I almost feel as if it would be all right if we did not do any work on roads or on economic infrastructure, because PNG is doing so much. I think it is better that we improve the management of their tendering processes for those roads and the monitoring arrangements as to what is happening in project selection. That, to me, is the real value gain rather than the direct provision of funds for the roads themselves.

CHAIR: So they have got plenty of construction capability; it is just that their governance and due diligence around contracts are a bit suspect. Is that what you are saying?

Mr Flanagan : There are issues around allocation and maintenance, which I think Professor Howes mentioned earlier. That is a higher level decision. Part of the problem is the stop-go. One of the risks we face at the moment is, again, a stop-go. There has been a very significant increase in infrastructure spending and, because of the shortfalls in revenue that have come through, a lot of those may be wound back. If you are a contractor trying to stay engaged in PNG, whether as a PNG local firm or an international one, stop-go is really hard. It is hard to get the equipment in and then stop again.

Senator BACK: Both of you have had a keen interest for a period of time. Could you explain to us why you believe there has been this sudden change, as you say, to an emphasis on infrastructure in the aid budget? One would have thought that, with your expertise, if someone were thinking of making a change of that nature they might have come along and knocked on your door and said, 'Someone suggested to us that this is what we do,' or that Prime Minister O'Neill might have got into Prime Minister Abbott's ear and said, 'This is what we want.' I am just interested to know why there is this change, because clearly expenditure going into infrastructure takes expenditure away from other programs that I want to ask you about.

Prof. Howes : I can give you my view. It is something that the PNG government has wanted for some time. You are probably aware that it has not been an easy aid relationship. The reason why our review, which was a joint review between PNG and Australia, was launched is that the PNG government then under Somare was unhappy with the aid program and so it convinced Rudd to have this review. One of the criticisms they have had of the aid program is that there are too many advisers. So there is some scepticism about the value of advisers. They used this term 'boomerang aid'. The other criticism is: you can't see the results of where all the aid is going.

CHAIR: We agree. We want to know too. We are on the same page, finally.

Prof. Howes : Often the solution of the PNG government is to say, 'Let's have these visible infrastructure projects that can be seen as being high impact and we can then point to where the aid money is going.' I think that push has been there from PNG government for some time. The Manus agreement is where I think we have lost leverage. We have been in a position where we have had to go along with what PNG wanted, and it did fit in with this government. The Australian government had an emphasis on the private sector—although that would reflect more in physical infrastructure than social infrastructure—and it might have played some role. But it was mainly that this was something the PNG government wanted. With the Manus agreement, I think we felt that we should give it to them. I have worked on aid in many countries. It is obviously important to bear in mind what the recipient wants. I am not saying you should not, but at the same time it should be a matter of negotiation. I think we could have pushed back more on this.

CHAIR: On infrastructure, I think the Joint Standing Committee on Foreign Affairs, Defence and Trade Department received a briefing from a former high commissioner who said the political system is: 'If I want to be elected, I’ll promise to build a road, and the next person who comes along campaigns to build an airport or a town hall.' The turnover of politicians is absolutely enormous. Consequently, you end up with a road, an airport and a hall, and no-one has maintained any of it.

Prof. Howes : Yes.

CHAIR: I think I visited a bridge in Vietnam over a part of the Mekong which we part-funded. Clearly the productivity gains were enormous for that whole region. If we were to do this sort of stuff in New Guinea, it has to be tied to maintenance and upkeep, hasn't it?

Prof. Howes : That is right, yes. There is this well-documented phenomenon called the build-neglect-rebuild cycle, which is what you are describing.

CHAIR: That is part of the political system there.

Prof. Howes : Yes, it has political roots. By focusing on infrastructure, we are contributing to that rather than helping to solve it, and this is at a time when, as I said and as Paul said, the government has been putting a lot more of its own money into infrastructure, and you have the Chinese government now. That is the sort of aid they provide, as do the World Bank and the ADB. So it really does not seem to be such a priority for us.

CHAIR: What would the Chinese aid look like? Do they have advisers? Do they have in-line? Do they just give them the cash or what?

Prof. Howes : Infrastructure. Chinese aid is still much smaller than Australian aid. It is important to keep it in perspective. They would be, I think, the second largest donor, but much smaller—perhaps only a tenth of the Australian government. So we still dominate, but their aid tends to be for infrastructure and is often for buildings and for roads. It is tied to Chinese companies, with some Chinese labour. It is good having Chinese companies. They are very competitive, so when the ADB or the World Bank runs an international bid it is often a Chinese firm. For example, they are building the Lae port under an ADB bid. So they are good at what they do, and they are much appreciated, but they are filling that gap.

Mr Flanagan : There are possibly a couple of other areas that they seem to have been focusing on, in part linked to, I guess, ICT technologies. That is on information systems—a government information system—as well as, I think, assistance with the identity card.

CHAIR: Are Huawei in there?

Prof. Howes : Yes.

CHAIR: They are in every part of the world except Australia, because we will not let them in, apparently.

Senator BACK: I just go back to your comment about expenditure being possibly more effective when allocated through NGOs and churches. I have a couple of questions. In your experience, has there been any or much evidence of corruption, lack of transparency or ineffectiveness of expenditure that has gone from the Australian government in the aid program to the NGOs and churches?

Prof. Howes : If you get aid from the Australian government—I know this—you have to do annual audits, and you are pretty intensively supervised. There is some fraud, but it tends to be very low. I think that is a minor problem.

Senator BACK: Sure. I ask because we have had representations from church groups and NGOs, and they have made two observations, or at least we have concluded two observations: (1) the proportion of their overall expenditure that comes from aid is not high; and (2) they spend an inordinate amount of time, resources and therefore money being accountable. It seems to me that it is possible for us to take a risk management approach. An agency—be it a church or an NGO—that has a long track record of ethical behaviour should be rewarded by two things: (1) guaranteed ongoing funding for a two-to-three-year period if it is a three-year project; and (2) a level of accountability that, whilst necessary, is commensurate with the level of funding they are being given and the risk to the Australian taxpayer of it being misappropriated. Is that a reasonable proposition?

Prof. Howes : I certainly agree with you about the long-term approach. In fact, I would say not just two to three years but five or 10 years. You may not be able to make that commitment all at once—

Senator BACK: No, you cannot.

Prof. Howes : But the best projects are those that go for a long period of time. The risks I have seen are that a project or an organisation will get funding and then when the two or three years is up that funding will be withdrawn. This happened to the National Research Institute, and there was no real reason. It was not that people said, 'You weren't doing a good job,' it was just that people changed and priorities had changed. They had a two- or three-year gap before they got the funding again, and I think that is a real problem.

Senator BACK: Which does nothing for your credibility at the coalface, does it?

Prof. Howes : Exactly. It does nothing for your credibility and it damages your effectiveness—especially in a difficult operating environment, which is what PNG is.

Senator BACK: And the quality of the resource that is actually delivering it, because they are going to spend the last of the three years wondering what they are going to be doing.

Prof. Howes : That is right. Exactly. You are unable to hire people in the last year, and that sort of thing. In terms of the reporting, of course NGOs and universities would always prefer less reporting. But I have to say that, from my experience, I do not think it is that onerous. I think having audited accounts is obviously essential; then doing the six-monthly reports and the annual reports and having external evaluation—perhaps it could be marginally reduced. But I think that, especially in contrast to other donors, Australia is quite a reasonable, pragmatic donor. I do not think the problem is with the reporting; I think the problem is with too much chopping and changing and not enough certainty.

Senator BACK: The time and expense in an application process, particularly for continuing funding, and the delay in some form of a decision, seems to me to be totally disruptive and totally non-productive. If indeed whoever makes these decisions—whether it is the Australian government or an association within Papua New Guinea—whatever the project is, they have made the decision that it is essential for a time frame. It just seems to me that we can take a very much more—I was about to say 'commercial', and I do not mean commercial in terms of—yes, I probably do. I mean a more effective approach.

The last question I want to ask you in this space is: why do you make the observation that you think Australia's aid funds could be most effectively channelled through NGOs and church groups in the Papua New Guinea context?

Prof. Howes : That is based on both my research and my experience. Our centre with NRI, our partner, did a very extensive survey of health clinics and schools—about 300, I think, from right across the country, including in very remote areas—in 2012. The same survey had been done in 2002, so we had a very rich database where we could compare over time and across sectors, and we could also compare church and non-church schools and health clinics. It is roughly 50-50 with the clinics and schools—50 per cent are church-run and 50 per cent are government-run—and we found that, especially for the health clinics, the ones that were church-run did better. They were more likely to have staff turning up; they had better facilities; the resources were more likely to reach the clinics. It comes down to governance, I think. The non-government organisations are better able to enforce discipline and governance. The result did not surprise me, but it was interesting to see.

In our own work we support a non-government organisation in Lae that in turn supports victims of domestic violence. It is a non-government organisation that runs a case management service, so it is like a social work service, and it works with government agencies—the police, the courts, community development. Obviously I am involved in it, and we have only been going for a year, but our experience is that having a non-government organisation that is able to represent the victims and help them to negotiate what is often a complex and dysfunctional system really works well. It is similar to the Australian position—we are not saying government does not have a role, but the system seems to work best where there is a mix of government and non-government entities.

Senator BACK: And the private sector—do you put them with the NGO and church group, or do you—

Prof. Howes : Potentially, yes. PNG is not like South Asia or South East Asia; the private sector is much less developed. For example, in India half of the schools are private schools, and these are not private schools for the rich; these are private schools for the ordinary person. You do not see that in PNG. Perhaps we will. What we do see are resource companies. I am sure you have talked, or you will talk, to Oil Search. I think that kind of effort where you can build on existing efforts of the resource companies, and help extend them further, is also one that can be promoted.

Mr Flanagan : I will just make a quick comment on a couple of the questions: the questions around some of the monitoring, reporting and other arrangements with churches and NGOs. I would see an institutional linkages program as certainly extending through to churches and NGOs, through to the private sector—it is certainly not limited to government. If there were these long-term commitments and understanding that you were essentially delegating to an institution the responsibility for forming the partnership relationship with a counterpart in PNG then, with the need for some of that reporting and continued compliance costs, in some ways you can delegate parts of that across to that broader trust that must be involved in the institutional linkages program. I think it not only increases the effectiveness but can also possibly streamline some of those monitoring and other arrangements.

My own experience in having to provide those sorts of reports was often about the difficulties of measurement. Some of the key things, especially in the area—yes, I was involved with government. It is different from if you are supplying a health facility—are medicines actually on the shelf?—and going out to clients. But in an area where you are dealing with policy these things are incredibly difficult to measure. We were asked constantly, 'Where is the direct line of sight to the things we were doing to deal with poverty in PNG?' Just as in the Australian Treasury, it is hard to get that direct line of sight to talk about improved fiscal management. It seems to be a long, long way from some of their requirements through us to report on. Some of it is also appropriate reporting and acceptance that time frames for getting results can often be in years also, so do not expect six-monthly improvements necessarily. A bit of it is horses for courses in those monitoring systems also.

CHAIR: Just before you go, some of us are saying that there needs to be a more long-term approach taken. If we have had 40 years of aid to New Guinea and on the Human Development Index we have slipped, and we are not meeting the millennium goals, how is it possible that we have invested for so long and we do not actually know what works? I struggle with that. We should be on track in certain areas to do things right and there must be areas where we have done that, surely?

Prof. Howes : Yes, that is a very good and very profound question that you are asking and not easy to answer. As someone, again, who studied aid for a long time, I know the key determinant of aid effectiveness is not the donor but the recipient. If the recipient has some good systems in place, and a development orientation, they can make fantastic use of these additional resources. But if the recipient is weak, corrupt and not focused on development then it is very hard to deliver effective aid. I think the primary reason is that the government in PNG is weak and is corrupt. I think we have to be up-front about that.

The question then becomes: do we want to give aid to this country? We have reduced aid to PNG. We are giving less than half of what we used to at the time of independence, while its population has doubled, so we are giving less. It is our nearest neighbour. We do owe it a responsibility. I can see why we continue to give it aid. I personally do not feel that PNG should have been exempted from the recent aid cuts. If you are cutting the aid program by 20 per cent, it is not clear to me why you would not have cut the PNG aid program. We are going to be giving a substantial amount of aid to PNG, so then it is a question of working out what are the good forms of aid that we can give and then, as you said, where the success stories are. I think there are success stories. As Paul said, the partnership with Treasury has been a good one. There has been a good partnership with the Institute of Medical Research. We show in our research that the schools have done well over the last decade. On the school boards there is more community engagement and that can be traced back, at least in part, to the aid program. So you can find successes, but it is a difficult environment. I think we have to be realistic and we have to do more to find the successes and then stick with them once we have found them.

Mr Flanagan : If I can add to that: when talking about PNG, I often find it is the challenge of the 'glass half full' or the 'glass half empty'. This is a nation that was arguably left in 1975 without much preparation. I am not saying that the timing of independence should have been delayed, but the reality is that university graduates were only coming out a few years before the time of independence. It was a country that a lot of people had doubts about whether it would survive 40 years. Fiji was taken as a good example of a democracy, and there was hope that PNG would be able to emulate Fiji's successes. It has obviously done better in many elements of democracy since then. There are three million people who live in absolute poverty there 10 kilometres from our shore, and that is a major moral challenge that we still have. In terms of the people who are not living in absolute poverty in PNG, there has also been a very significant increase over that period of time. The population is 2½ times that, and, you think of the challenge that that sort of demographic growth imposes every year for schools, health centres and the like. That is an extraordinary challenge. I think even the Australian government would be wrestling with that on occasions.

Obviously, we think that things should have been better too, and there is a really 'glass half empty' story there, as you talk about, in a lot of those indicators. But I think of examples where we have almost punished organisations for underperforming—let us say the National Statistics Office, where we pulled out of the type of technical assistance we were providing. Now, several years later, we do not have a measure of their economy. I think 2007 was the last time that there was a comprehensive measure about even the size of their economy. You have to be very careful with how you use some of that performance feedback, because sometimes those institutions are absolutely critical ones for us.

As I say, there are currently three million people living in absolute poverty and two million people are essentially malnourished or receive less than 2,000 calories per day, in a nation so close to us and with such historical links. So it really is, I think, about the effectiveness of that assistance. I could see strong arguments for us increasing the level of assistance but very much thinking about well how we can, once again, gear up on the expenditure that they are making to make that expenditure more effective as the way forward.

CHAIR: Thank you.

Senator BACK: If you were government officials, you would not want to answer my question; you are not, so you can. From your experience in the provision of aid, is it your view that Australia should focus on our geographic region and leave countries in Africa to European countries to render most of the aid and the assistance? Is it that we are trying, or have tried, to spread too thinly and, therefore, are not honouring our geographic, moral, ethical and cultural commitments in the region in which the world regards Australia as being the dominant country?

Prof. Howes : In short, yes. But, I think, with two exceptions. One, we do have a responsibility as a global citizen to Africa, but we can discharge that by supporting other organisations—we give funds to NGOs and multilaterals, and they work in Africa. Second, obviously when there is a humanitarian disaster we should contribute.

Senator BACK: Of course.

Prof. Howes : I think, with those two exceptions, I agree. We should be focused on the Asia-Pacific. We have been traditionally, and this government has further intensified that. I guess what this government has done is said, 'Within the Asia Pacific, it is really going to be the Pacific which is the main focus,' and the argument there is that Asia are doing much better and they need our aid less. I will not go into that, but I can understand that argument.

Senator BACK: Thank you both very much.

CHAIR: Thank you very much for your submissions and for your evidence.

Prof. Howes : Thank you.