It would be a long bow to say Peter Varghese's speech to the 2016 Australasian Aid Conference in Canberra last week was in the same league as St Paul's conversion on the road to Damascus. But it does reflect a major and welcome shift in the 'traditional' DFAT understanding of foreign aid and its contribution to stability and prosperity in developing countries.

As the head of DFAT acknowledged in his speech, he was an aid sceptic sitting on the periphery prior to the demolition of AusAID and the integration of the aid program into DFAT. He was not alone among the senior levels of Canberra's security community. No doubt, there are still a number of senior officials who continue to view Australia's aid program as simply the go-to ATM in times of diplomatic and security challenge in nearby developing countries.

It was a fear of this expedient view which encouraged such alarm within Australia's aid constituency when the Abbott Government made the shock announcement soon after its election in 2013 that AusAID would be demolished and DFAT would take control of Australia's aid program.

As expected, the subsequent amalgamation was painful. The aid budget was chopped and the Department lost many of the experienced and respected development officials it had inherited from AusAID. At play too were the decades-long cultural tensions between DFAT and former AusAID officers as legitimate diplomatic objectives jostled for supremacy over equally legitimate development objectives. It was never going to be an easy marriage.

So now, two plus years on, the head of DFAT has acknowledged the complexities, challenges and limitations of development assistance.

That's important because firstly, aid is simply that: an aid to development. It's a very small, albeit potentially potent, element of a much bigger social and economic development picture. The figures speak for themselves: in 2014, global official development assistance totaled US$136.4 billion; inward FDI flows to developing economies reached their highest level ever at US$681 billion. Secondly, the drivers of a country's development must be the country itself, not its donors. As Peter Varghese stressed, no aid program can compensate for the absence of good policies and good leadership in poor countries.

But therein lies the challenge for the international development world, including DFAT. The face of poverty is changing. For a start, the poor are increasingly found not in poor countries but in middle-income countries where economic inequity is growing, leaving the poor behind within increasingly wealthy societies. And despite global progress in poverty reduction, the dilemma now is that poverty is concentrated in so-called fragile states vulnerable to conflict and instability. While only one-fifth of the world's poor lived in fragile states in 1990, the figure now is more than half.

Adding to this mix is the fact that although the number of middle-income countries has ballooned to over 100, the number of fragile states has risen from 28 in 2006 to 50 (as identified by the OECD), 30 of them in Africa. Of direct relevance to Australia's aid program, given its emphasis on Asia Pacific, is that only six of these countries are in what the OECD calls East Asia-Pacific, with another five in South Asia. The geography of poverty is further complicated by the fact that, while most fragile states were low-income a decade ago, now almost half are middle-income and ten are in the fastest growing economy category.

There is another conundrum which aid programs have to deal with: making substantial and sustainable social and economic improvements which match the aspirations of the receiving country is a slow process. It is certainly slower than the Australian electoral cycle and the radical changes in aid policy that often go with it. Just look at what happened in the most recent electoral cycle: Australia's current aid policy is less than two years old; the hitherto presumed budget which guided planning was slashed and a new administration formed to implement the program. The impact of those radical changes in Australia's aid policy leaves a long and choppy wake. On top of that, as Peter Varghese highlighted, there is an emphasis now on private sector-led economic growth to address poverty alleviation. This is a big departure from the previous policy.

However, those are the sorts of policy challenges Canberra's aid officials, whether within DFAT or in the former AusAID, have always had to deal with. The measure of their success has to be how well they respond to a government's policy dictates and changes while working to ensure an effective aid program. Abolishing the agency where the skill-base was located while at the same time pushing the program through a major policy shift has made that task even more difficult.

Has the government succeeded?

From my perspective it's too early to judge, though it is encouraging that at least at the top of DFAT, there is now a strong understanding of what effective development assistance means and requires.But there seems to be a persistent concern among Australian aid stakeholders that our aid policy is off track. Results from the 2015 Australian Aid Stakeholder Survey conducted by the ANU's Development Policy Centre reflect a concern that Australian aid has lost strategic clarity, that reducing poverty is becoming a less important goal, and that Australia's strategic and commercial interests now play a larger role in shaping the program. Peter Varghese's speech was no doubt part of the official response to those concerns. But it's the government's policy which is under scrutiny, and there needs to be a better response from the government, not just its senior officials.

Photo courtesy of Flickr user DFAT