Introduction

1. The purpose of Australia’s foreign aid program is to help people overcome poverty, which serves Australia’s national interest by promoting stability and prosperity both in the near region and beyond.¹ Through the Australian foreign aid program, the Australian Government anticipates providing an estimated $5.2 billion in official development assistance (ODA)² in 2012–13, including $2.9 billion in bilateral country programs and $1.2 billion in global programs (for example, contributions to international aid organisations).³

2. The Australian Agency for International Development (AusAID) is an autonomous executive agency within the Foreign Affairs and Trade portfolio and is the lead agency within the Government responsible for Australia’s aid program.⁴ In addition to its responsibility for providing advice on development policy and managing Australia’s overseas aid program, AusAID’s functions include:

• planning and coordinating poverty reduction activities;
• collecting, analysing and publishing data or other information relating to development; and
• leading and coordinating responses to humanitarian and disaster crises.⁵

3. In the 10 years since 2002–03, Australian ODA has increased by more than 180 per cent in current prices (98 per cent in constant prices).⁶ As a proportion of gross national income (GNI), ODA is expected to reach 0.35 per cent in 2012–13.⁷ While this is higher than it has been since 1985–86, it is in line with the long term average. The Australian Government has committed to increase ODA to 0.5 per cent of GNI by 2017–18.⁸ To achieve this goal, growth in the aid program will need to increase further in coming years, averaging 14 per cent (or $925 million) a year to 2017–18, compared with average annual growth over the last decade of 11 per cent.

4. ODA to Indonesia has grown strongly in recent years, particularly since the earthquake and tsunami which struck the region in 2004. In the 10 years since 2002–03, ODA to Indonesia has risen by nearly 315 per cent, from $130.7 million in 2002–03, to an estimated $541.6 million⁹ in 2012–13. In 2011–12, Indonesia overtook Papua New Guinea (PNG) as the largest recipient of Australian ODA, receiving $505.2 million compared with $501.6 million for PNG. Further growth in aid to Indonesia has been foreshadowed by the Government, with the Minister for Foreign Affairs indicating in 2012 that total ODA to Indonesia may reach $950 million by 2015–16.¹⁰

5. The scale of Australian aid to Indonesia recognises both the importance the Government accords to the relationship between the two countries, as well as the serious poverty challenges Indonesia is expected to continue to face for the foreseeable future. About 120 million Indonesians do not have access to safe drinking water while about 110 million do not have adequate sanitation. More than 120 million Indonesians live on less than $2 per day and are vulnerable to shocks, like a natural disaster or an economic downturn. However, notwithstanding the growth in Australian aid to Indonesia, the dollar value of Australia’s aid contribution is equivalent to around 0.5 per cent of the Indonesian Government budget.¹¹

6. Support for sustainable growth and economic management is the foundation of Australian aid to Indonesia. Inadequate infrastructure is seen as a key impediment to economic growth and poverty alleviation and, as a consequence, support to improve infrastructure and infrastructure planning is the largest single element of this part of the country program. In 2012–13, infrastructure development aid is expected to comprise around 25 per cent of Australia’s ODA to Indonesia ($130 million out of a total of $541.6 million).

7. Over 85 per cent of AusAID expenditure on infrastructure aid to Indonesia in 2012–13 ($111 million out of $130 million) is expected to be delivered through the $336 million Eastern Indonesia National Roads Improvement Project (EINRIP)¹² and the $463 million Indonesia Infrastructure Initiative (IndII).¹³

8. EINRIP was announced by the Australian and Indonesian Governments on 7 December 2005, as part of a series of significant new funding commitments under the $1 billion Australia Indonesia Partnership for Reconstruction and Development (AIPRD). The AIPRD was established in the aftermath of the 2004 Boxing Day tsunami and was governed by a Joint Commission, overseen by the Prime Minister of Australia and the President of the Republic of Indonesia. The objective of EINRIP is to support regional economic and social development, particularly in Eastern Indonesia. Up to $300 million in AIPRD concessional loan funds, and up to $28 million in AIPRD grant funds (for project development and implementation support) were committed to the project by the Joint Commission. The project, as announced, comprised ‘improving the condition of 2000 km of national roads and replacing approximately 4500 m of essential bridging’.¹⁴ It was to be delivered through Indonesian government systems and completed by June 2009. Since the initial announcement, the project scope has been substantially revised to encompass more substantive rebuilding of shorter sections of road (down from 2000 to 395 kilometres) and a reduction in bridge replacement to less than 1400 meters. The project is now scheduled to be concluded in December 2014 and grant funding has been increased to $36 million to accommodate the longer project duration.

9. The second major infrastructure initiative, IndII, was approved by the Australian Government in October 2007, at an initial cost of $65 million, to provide technical assistance to the Government of Indonesia (GoI) (at national and sub-national levels) to enhance infrastructure policy, planning and investment. IndII was subsequently expanded to include provision for additional infrastructure development grants, bringing total expenditure for IndII up to $131 million (including $30 million in contributions to programs administered by development partners). In May 2011, IndII was extended for four years (to 2014–15), with the second phase of activity involving $66 million in technical assistance, $180 million in water and sanitation grants and $60 million in transport related grants. Including contract, operating and evaluation costs of $26 million, the total expenditure to be incurred in IndII Phase II is expected to reach $332 million by 2014–15.

10. While AusAID retains accountability for the extent to which infrastructure aid to Indonesia achieves agreed outcomes, consistent with AusAID’s general business model, delivery of aid is generally undertaken by third parties. This includes private sector, non–government and partner government organisations. In the case of EINRIP, major elements of project preparation were outsourced to the private sector and project management (including procurement, contracting and civil works supervision) is undertaken by the Indonesian Directorate General of Highways. IndII is managed by a private contractor, that oversees the procurement of specialist services and the payment of grants to Indonesian Government agencies, at various levels of government. Under IndII, where grants are made to government agencies, those agencies generally carry responsibility for project management. In these circumstances, the extent to which AusAID is able to direct and control specific aspects of the administration of infrastructure aid projects depends upon the nature of the contracts or agreements that AusAID concludes with third party deliverers (whether private sector or Indonesian Government agencies) and the effectiveness of the operation of institutional governance and oversight arrangements established under those contracts and agreements.

Audit objective, criteria and scope

11. The audit objective was to assess the effectiveness of AusAID’s management of infrastructure aid to Indonesia, with a particular focus on the Eastern Indonesia National Roads Improvement Project and the Indonesia Infrastructure Initiative.

12. The high-level audit criteria focused on the extent to which infrastructure aid met defined program and policy goals, including whether:

• strategies for delivering infrastructure aid to Indonesia were aligned with the aid program's objective;
• AusAID gave strategic consideration to the allocation of infrastructure aid to Indonesia, taking into account country needs and policies, and the work of other donors;
• delivery of infrastructure aid was in accordance with agreed aid objectives and best practice principles, and had appropriate regard to the risks to program outcomes and integrity; and
• monitoring and evaluation of infrastructure aid to Indonesia supported performance improvements and results were transparent.

13. Consistent with its usual business model, AusAID, while retaining responsibility for program and project outcomes, has entered into numerous contracts and agreements to support the delivery of infrastructure aid to Indonesia. This has included with Indonesian government agencies and with private sector firms. Accordingly, consultation with contracted parties and partner government representatives has been an important element of the audit.

Overall conclusion

14. Australia’s foreign aid program helps people in other countries overcome poverty, which also serves Australia’s national interest by promoting stability and prosperity. In Indonesia, AusAID delivers Australia’s largest single bilateral aid program, with expenditure of $476.6 million in 2012–13 and over 50 separate programs targeting health and education, economic growth, improved protection for the poor and vulnerable and the strengthening of democracy, justice and governance. Overall, Australian ODA to Indonesia in 2012–13 is expected to exceed $541 million, a greater than four‑fold increase in the last decade.

15. Infrastructure aid is a key element of Australia’s aid to Indonesia and is expected to account for around 25 per cent of all Australian ODA to Indonesia in 2012–13. The majority of Australian infrastructure aid to Indonesia is provided through the Eastern Indonesia National Roads Improvement Project (EINRIP) and the Indonesia Infrastructure Initiative (IndII). These two initiatives are expected to account for $111 million of the $130 million that AusAID anticipates spending on infrastructure aid to Indonesia in 2012–13.

16. EINRIP and IndII are well aligned with, and supportive of, AusAID’s strategic objectives for the bilateral country program and the aid program generally. However, AusAID’s strategy for its overall engagement in the Indonesian infrastructure sector is not explicit, and the extent to which EINRIP and IndII are directed toward, and are meeting, shared sectoral objectives is not clear. The development of such a strategy would assist AusAID and external stakeholders in assessing the performance of EINRIP and IndII, and provide AusAID with a sound foundation for the long term planning, management and evaluation of its infrastructure sector interests. AusAID has advised the ANAO that an explicit infrastructure sector strategy for Indonesia will be produced in 2013.

17. EINRIP and IndII are both mature initiatives, with implementation of EINRIP having commenced in 2006 and IndII in 2008. However, AusAID’s early management of these infrastructure initiatives was not effective in addressing key areas of risk, and both initiatives experienced significant early difficulties. In particular, significant increases in the complexity and cost of the work undertaken through EINRIP has seen a major reduction in linear scope and a doubling of project duration¹⁵, and greater challenges in securing quality outcomes, while IndII was slow to commence activity and has faced challenges in maintaining project momentum.

18. The experience with both initiatives underlines the importance of AusAID having a good understanding of the environment and key stakeholders to inform its approach to planning and delivery of aid projects in Indonesia. This has been the focus in more recent years with AusAID giving greater attention to the arrangements necessary for the management of its key infrastructure aid initiatives, which recognise its accountability for overall outcomes but which are consistent with the shared responsibilities for project implementation. AusAID has also established good working relationships with GoI counterparts and implementation partners and maintains a high degree of visibility over key project outcomes. AusAID is now better placed to achieve currently forecast project outcomes and its current management of the initiatives is generally effective. EINRIP is now delivering road improvements that, with close ongoing oversight and successful completion of necessary remediation, are generally achieving targeted quality standards. In addition, EINRIP’s rate of progress is consistent with the revised project scope and in line with the anticipated project conclusion date of December 2014. IndII has a broad portfolio of technical and policy engagements and grant activity in train, consistent with agreed project outcomes. Feedback received by the ANAO is that both programs are highly valued by GoI counterparts.

19. Both projects face ongoing risks, reflecting the complexity of the projects and their associated delivery arrangements. There are ongoing risks to EINRIP’s project schedule, quality and sustainability, which will require intensive and ongoing engagement. For IndII, it is too early to assess whether the measures to address identified risks in relation to activity scheduling and continuity have proven effective. These risks have been identified and are being managed by AusAID, but require ongoing priority if the full benefits of the aid investment are to be realised.

20. The ANAO has made four recommendations directed towards improving the management of infrastructure aid to Indonesia.

The Eastern Indonesia National Roads Improvement Project (EINRIP)

21. The initial scope and timing of EINRIP were announced well ahead of the substantive work necessary to clearly establish project parameters and to validate the assumptions that underpinned initial advice to government. As this work was progressed, greater clarity emerged regarding the nature of work being sought by the GoI. In particular, it became apparent that, to meet project objectives agreed with the GoI, civil works would be required to be more substantive than originally assumed, and as a consequence, the implementation task would be more complex. Accordingly, both project scope and timing were progressively revised. EINRIP is now expected to deliver 395 kilometres of road reconstruction and widening, compared to the 2000 kilometres of improvements initially announced. Furthermore, it is not likely that civil works will be completed before December 2014. In late 2005, when EINRIP was announced, it was expected to be completed by June 2009.

22. The announcement of EINRIP, including its objectives, scope and timing, was made by the AIPRD Joint Commission in December 2005 as part of a series of announcements concerning Australia’s response to the 2004 Indian Ocean earthquake and tsunami. The ANAO has previously observed that the development and delivery of the AIPRD over a relatively short time frame presented a substantial challenge for AusAID, particularly in view of the lead times normally associated with identifying, designing and implementing suitable projects.¹⁶

23. Within the context of the constrained development timetable, AusAID sought to mitigate its inexperience in administering loans, and in the infrastructure sector in Indonesia, by consulting broadly in project development, leveraging relevant structures and practices from the World Bank and the Asian Development Bank, and contracting in relevant expertise. Nonetheless, the early announcement of EINRIP was not informed by a clear statement of the assumptions and risks associated with the nature and scale of announced works. In addition, key assumptions had not been able to be tested adequately with GoI officials, who were heavily engaged in the disaster relief effort. Once the needs of GoI as the borrower became clear, it became apparent to AusAID that some key assumptions that had informed initial advice regarding the nature and possible scale of works were no longer relevant.

24. At the time of the audit, all key structural and administrative elements to support project implementation were in place and the rate of implementation was consistent with the revised project completion date of December 2014. This has included, by September 2012, completion of six of the 20 EINRIP packages of civil works, totalling 105 kilometres, and of separate packages of bridge replacement totalling 1385 meters. A further eight packages of road works were more than 50 per cent complete. Early evaluation results suggest completed works are delivering anticipated benefits to local communities.

25. EINRIP has piloted revised arrangements for activity design, implementation supervision and independent assurance which are consistent with international best practice for promoting quality, and reducing the opportunity for collusion and corruption in civil works. Nonetheless, EINRIP faces ongoing implementation challenges. Targeted quality standards, which are designed to provide higher quality and more durable roads, are generally being achieved, although this has required ongoing monitoring and remediation investment at higher levels than originally foreseen. While a broad anti-corruption framework has been put in place, there are gaps in its implementation, and AusAID lacks visibility over implementation partners’ compliance with the anti-corruption framework. In addition, there are important challenges to project sustainability, such as road maintenance practices and vehicle overloading, which remain to be effectively addressed. Further work is also required if the revised design and supervision practices piloted through EINRIP are to have a broader impact.

26. The institutional framework and the broader relationship context inherent in the shared responsibility arrangements for EINRIP delivery constrain AusAID’s capacity to directly influence project administration and outcomes. This is relevant to any assessment of AusAID’s management of the initiative, and needs to be clearly communicated to both internal and external stakeholders.

The Indonesia Infrastructure Initiative (IndII)

27. During its first phase of activity, IndII provided targeted grants and technical assistance, project preparation and implementation support to a range of GoI agencies valued at around $50 million. In addition, AusAID has reported that, through $25 million in output-based water and sanitation grants, IndII has supported the provision of 77 000 new clean water connections and 4826 new sewerage connections to low income households.

28. Stakeholders, including representatives of the GoI and of multilateral agencies operating in Indonesia, advised the ANAO that they consider the initiative to have made significant contributions to a number of important infrastructure development issues. However, IndII has faced substantive difficulties in its establishment and early operations, and there are ongoing challenges that AusAID will need to address if the planned objectives for the project are to be achieved.

29. Significant delays in IndII’s establishment and early commencement of operations resulted in more activity expenditure in the last five months of Phase I operations than had occurred in the first 30 months. Such a rapid increase in late–term activity, following start–up delays, is not desirable as it makes it more difficult for project governance to give full and proper consideration to spending decisions and to manage activities to achieve planned objectives.

30. The late build-up in activity was followed by a significant loss of operational momentum, caused when AusAID was unable to secure an early and actionable decision on IndII’s extension. This adversely impacted on project continuity and saw new operational activity in the first year of the extension well below forecast levels. AusAID will need to be closely engaged in the development and initiation of new activity in 2012–13 if the planned rates of project activity are to be achieved and if the momentum of the engagement, when regained, is to be sustained in the longer term.

31. Initial arrangements for IndII’s governance did not operate as anticipated during Phase I, and did not provide timely strategic input to guide IndII operations. This has been recognised by AusAID and GoI partner agencies, and in 2011 revised arrangements at both the strategic and operational levels were implemented. At the time of the audit, it was not yet clear that the revised arrangements would effectively address the issues identified in the first phase of IndII operations, with the activity plan for 2012–13 not approved until halfway through its implementation. AusAID will need to monitor and refine the revised arrangements so that IndII is provided with appropriate and timely strategic guidance and performance oversight.

Managing delivery risks associated with infrastructure aid projects

32. In the design and implementation of infrastructure aid initiatives, AusAID has acted to identify and document risks, design mitigation strategies and monitor their implementation. EINRIP has piloted revised arrangements for activity design, implementation supervision and independent assurance which are designed to promote quality, and reduce the opportunity for collusion and corruption in civil works. Risk mitigation strategies were also inherent in the design of individual IndII activities. In particular, IndII’s use of output-based grant programs, which provide for a partial reimbursement of GoI costs after sustained delivery to agreed standards has been demonstrated, reduces the potential for fraud or corruption to impact on program outcomes.

33. Nonetheless, in both EINRIP and IndII, effective risk mitigation has been challenging. In EINRIP in particular, the risks to project schedule, quality and sustainability have required intensive and ongoing engagement, and some controls, such as the remedies and sanctions framework, have been less effective than anticipated. In IndII, measures to address identified risks in relation to activity scheduling and continuity have yet to prove effective. In both instances, the level of residual risk remains high. A clearer description of levels of such residual risks in public documents, such as country program performance reports or Annual Reports, would aid transparency and assist stakeholders in assessing the adequacy of AusAID’s efforts to manage risk in the Indonesian aid program.

Managing and reporting infrastructure fraud risks

34. The risk to infrastructure aid posed by fraud and corruption is managed at an initiative level and the levels of identified and reported fraud are very low. Fraud and corruption remain a significant concern for the GoI and for AusAID. Internationally, Indonesia is recognised as a challenging environment in which to operate: in 2012 Transparency International ranked Indonesia 118th out of 176 countries in terms of perceived levels of public sector corruption.

35. The risk that fraudulent or corrupt activities would impact on AusAID initiatives in the infrastructure sector was acknowledged during project development. AusAID has incorporated controls to reduce opportunities for fraudulent or corrupt behaviour in program design and, in 2011, AusAID increased its investment in risk management and fraud mitigation in Indonesia. In the past five years AusAID has not identified any net loss through fraud in its infrastructure initiatives in Indonesia. Over this period, AusAID reported losses in the Indonesian country program that are equivalent to only 0.006 per cent of ODA, well below the level reported for Australia’s aid program generally.

36. In arriving at publicly reported losses through fraud and corruption, AusAID does not estimate the potential loss to the Indonesian aid program of unreported fraud or corrupt activity. Fraud against AIPRD loan programs has not been included in reported estimates of potential loss through fraud, and fraud against development partners is only included once AusAID has determined, in consultation with that partner, that losses are attributable to AusAID funds. Public reporting of potential loss through fraud, for example in AusAID’s annual reports, is based on point in time estimates and has not previously been updated to reflect changes in the status or quantification of fraud cases. However, AusAID advised the ANAO that it will now publish point in time updates of its annual fraud loss figures, commencing with an update of 2010–11 figures.

37. Without clear reference to the approach adopted, the ANAO considers that there is considerable scope for misinterpretation of the publicly reported aggregate data on ‘estimated potential losses’ to the aid budget arising from fraud and corruption. In light of the acknowledged ongoing risk that fraud and corruption will affect the aid program in the environments in which it operates, it would be appropriate for AusAID to provide greater clarity as to the basis of its aggregate fraud reporting, to reduce the potential for misunderstanding.

Summary of agency response

38. The proposed report was provided to AusAID for formal comment. AusAID provided the following summary response, and the formal response is shown at Appendix 1.

AusAID welcomes the ANAO's report AusAID's Management of Infrastructure Aid to Indonesia, in particular its recognition that current management of the Eastern Indonesia Roads Improvement Project (EINRIP) and the Indonesia Infrastructure Initiative (IndII) is effective; and that these projects are highly valued by Government of Indonesia and are delivering tangible benefits for a large number of poor Indonesians.

AusAID welcomes the report's recognition of the robust systems and processes AusAID have in place to manage these programs effectively. ANAO observed a high degree of compliance by AusAID with core elements of AusAID's performance and evaluation framework and with current risk management policy. The report highlights that AusAID has acted to identify and document risks, design mitigation strategies and monitor their implementation – for example noting that EINRIP has piloted revised arrangements for activity design, implementation supervision and independent assurance which are consistent with international best practice for promoting quality and reducing opportunities for collusion and corruption in civil works.

Recommendations

Footnotes

[1] Commonwealth of Australia, Australia’s International Development Assistance Program 2013–14, Statement by the Hon Bob Carr Minister for Foreign Affairs, 14 May 2013, p. 8.

[2] The OECD definition for ODA is included in the glossary to this document. The terms ODA and foreign aid are often used interchangeably.

[3]Commonwealth of Australia, Australia’s International Development Assistance Program 2013–14, Statement by the Hon Bob Carr Minister for Foreign Affairs, 14 May 2013, p. 11.

[4] In 2012–13, the delivery of $835 million (16 per cent) of Australian ODA will be managed by other government departments and agencies, such as the Australian Federal Police (see Commonwealth of Australia, Australia’s International Development Assistance Program 2013–14, Statement by the Hon Bob Carr Minister for Foreign Affairs, 14 May 2013, p. 11).

[5] AusAID, Annual Report 2011–12, p. 8.

[6] Commonwealth of Australia, Australia’s International Development Assistance Program 2013–14, Statement by the Hon Bob Carr Minister for Foreign Affairs, 14 May 2013, p. 145.

[7] Commonwealth of Australia, Australia’s International Development Assistance Program 2013–14, Statement by the Hon Bob Carr Minister for Foreign Affairs, 14 May 2013, p. 11.

[8] ibid.

[9] Of this, the country bilateral program manages $476.6 million. Regional and global AusAID-managed initiatives receive $30.1 million and other Australian Government Departments manage $34.9 million (Commonwealth of Australia, Australia’s International Development Assistance Program 2013–14, Statement by the Hon Bob Carr Minister for Foreign Affairs, 14 May 2013, p. 41).

[10] AusAID, Helping the World’s Poor through Effective Aid – Australia’s Comprehensive Aid Policy Framework to 2015–16, 2012, p. 14. This target was announced in the context of government policy at the time to increase ODA to 0.45 per cent of GNI by 2015–16. On 14 May 2013, the Government announced a slowing of growth in the aid program, with ODA now expected to be reach 0.45 per cent of GNI in 2016–17. However, the Government has not publicly announced whether the revised growth targets will affect anticipated growth in ODA to Indonesia.

[11] The scale of the challenges facing Indonesia means that Australian aid equates to around $5.20 per person living in poverty in Indonesia each year, compared to $155 per person in East Timor and $71 per person in Papua New Guinea.

[12] This comprises up to $300 million in concessional loan funding and $36 million in associated grants. Grant funding, originally set at $28 million, has been increased in response to the lengthened timeframe for project implementation.

[13] The remaining $19 million is comprised of Australian contributions to a number of smaller projects managed by, or funded in cooperation with, the World Bank and the Asian Development Bank. The performance of these initiatives has not been assessed as part of this audit.

[14] Australia Indonesia Partnership for Reconstruction and Development, ‘Third Joint Ministerial Statement’, media release, 7 December 2005.

[15] As discussed at paragraph 8 above.

[16] ANAO Audit Report No.50 2005–06 Arrangements to Manage and Account for Aid Funds Provided Under the Australia‑Indonesia Partnership for Reconstruction and Development, p. 14.