It's hard to build a road with clean hands

A cruel fact about the world is that corruption and poverty tend to go together. This presents a dilemma for donors: do we guarantee our dollars never go astray, or do we focus on countries and programs where the need is greatest? An aid program that offers technical advice to Korea is less corruption-prone than one that uses local contractors to build pit latrines in Cambodia. But if we care about reducing the number of sick children in the world, toilet-building in poor nations is likely to have more impact than providing advice to middle-income countries.

For decades, Australia's aid officials have wrestled with the challenge of how to have an impact on poverty while minimising our corruption losses. The problem is a bit like a football coach trying to reduce injuries: you don't want the lads to hurt themselves, but a strategy that guarantees zero injuries will earn you the wooden spoon.

One example of this is the emphasis on 'improving governance' that occurred under the Howard government. In the decade from 1996, spending on governance programs such as better administration went from 9% of the aid budget to 30%. In Papua New Guinea, where around half our aid goes to consultants and training programs, there have certainly been some success stories. Yet a recent AusAID review pointed out that PNG still ranks highly for corruption, and suggested that the number of expensive expatriates should be cut back.

In The Plundered Planet, economist Paul Collier argues that one of the challenges of development is that poor countries sorely need more construction projects such as roads and ports. Yet internationally, the construction sector has a reputation for being one of the most corrupt sectors. Because each construction project is subtly different, modifications invariably need to be negotiated as the project is built. The consequence, Collier concludes, is that 'a large public investment program is dependent upon a sector which is globally corrupt'.

For the world's poor, a new road enables a farmer to access new markets, permits a child to attend secondary school, and allows a woman to give birth in hospital. Yet if donor countries like Australia were to run a risk-averse aid program, it would involve building fewer roads in places like in Indonesia and the Philippines.

According to the latest figures, AusAID's losses to fraud in 2009-10 were just 0.028% per cent of the total aid program. This is minimal by comparison with other government departments (Centrelink's proportional loss to fraud is considerably higher). Indeed, it's probably lower than fraud losses for businesses operating in Australia, and doubtless much smaller than losses suffered by Australian companies investing in developing nations.

Yet in a world where many good aid programs go unnoticed, while fraud losses are splashed across the front page, the incentive is to be overly risk-averse. Indeed, there are already signs that AusAID has become twice shy. According to a 2009 Australian National Audit Office report: 'AusAID's cautious approach to fund provision, while minimising the risk of corruption, has sometimes prevented resources to getting where they are most needed'.

It is not in Australia's interests for our aid program to ignore the countries most in need (our top nine aid recipients score in the bottom half of Transparency International's corruption ranking). Nor should we return to the old approach of overspending on technical assistance at the expense of schools, health clinics and roads.

Getting aid right is no easy task, particularly with the rise of China as a major donor (a topic I hope to cover in a future column). But there are plenty of fresh ideas about cutting corruption. For example, the UK Department for International Development have reduced graft by setting up a system to pay Afghan police officers via their mobile phone. For nations with large mineral deposits, the Extractive Industries Transparency Initiative attempts to pressure resource companies to publish the monies they pay to governments. And in Indonesia, AusAID not only built thousands of schools, it also created a corruption control mechanism that has now been adopted by the Indonesian Government to use on all its school building projects.

Of Australia's 20 nearest neighbours, 18 are developing countries. This means that our aid program is more than an expression of our generosity – it is also an investment in a richer and safer region. Like a good football coach, we should do what we can to keep our aid projects off the injury bench – but let's not forget that the war against poverty is the big game.