The Australian (Weekend Inquirer):  In these pages two weeks ago, Natasha Robinson laid bare the sheer number of small grants awarded to indigenous organisations and non-government organisations. According to a recent audit into capacity development for indigenous service delivery, the federal government administered more than 2000 funding agreements to more than 900 indigenous organisations in 2010-11. The average length of these grants was only 15 months.

The Department of Families, Housing, Community Services and Indigenous Affairs funded the largest number of organisations, typically through small grants with a median value of $55,000.

Each agreement has its own reporting and acquittal requirements, often on a quarterly basis.

Significantly, the audit argues how the high number of short-term and small-value grants adversely affected the capability of indigenous organisations to cope with the administrative burden and insecurity of future funding.

As representative bodies, indigenous organisations fulfil a critical connecting role between indigenous people, governments and the broader economy. For much of Australia, they are a part of the third tier – local government – providing a range of essential services. They are therefore a fundamental part of the sustainability of investments by higher levels of government agencies in indigenous outcomes.

It is for this reason the combined governments listed governance and leadership as fundamental building blocks to achieving closing the gap targets.

The capability of indigenous organisations hinges on a public finance system that is enabling, rather than debilitating. We need to reform the basic architecture of the system, including the procurement and grant guidelines owned and managed by the Department of Finance and Deregulation.

This procurement reform can powerfully incentivise the returns to investments in social and economic development outcomes, as the following examples attest.

In April last year, the Department of Finance announced a tightening of the rules for awarding government contracts above $5 million in rural and remote regions by requiring private corporations to have detailed employment and training plans for indigenous workers and businesses. Then in May it relaxed procurement rules, permitting departments to award contracts directly to businesses that were at least 50 per cent indigenous owned, thus bypassing normal tender requirements.

These two reforms have helped improve indigenous employment and business creation, as evident in the success of the Australian Indigenous Minority Supplier Council, which helps Aboriginal and Torres Strait Islander-owned businesses integrate the supply chains of private companies and government agencies.

By the end of last year, AIMSC had certified 124 indigenous business suppliers and granted almost $23m in contracts to these suppliers. Private corporations are also responding positively to these incentives. Suddenly, forming partnerships with indigenous companies and organisations is good for business.

The track record of procurement reform is not so good when it comes to strengthening indigenous governance and leadership. Following the demise of the Aboriginal and Torres Strait Islander Commission in 2005, the federal government had an unstated policy of withdrawing support to indigenous organisations. Long-held service delivery contracts were tendered out, leading to an influx of mainstream NGOs and private corporations. This undermined the sustainability of indigenous organisations and led to an overall increase in the number of service providers and a further fracturing of an already crowded institutional landscape.

So again we can see the powerful effect of procurement reform, in this case working against closing the gap in indigenous governance and leadership. Government interaction with indigenous local government organisations is characterised by a multiplicity of procurement, management and reporting systems across as many as 90 different funding agreements. Previous approaches to building capability have focused on training programs and compliance frameworks.

What is needed instead is a system of administering grants and contracts that encourages organisational capability and rewards performance. This requires that governments reduce the fragmentation of systems and introduce stable rules with an eye to how the public finance system affects local nodes of indigenous organisations. There are several ways to achieve this.

Block funding has been successfully implemented internationally since the late 1980s, predominantly by the World Bank and UN agencies, as a means to strengthen governance and leadership while at the same time delivering services. Known as local development funds, a grant is tagged to an agreed menu of projects from which locally elected leaders choose. Responsibility for choices made and how investments are managed rests squarely with elected leaders, who must account for their performance downwards to their communities, and upwards to higher authorities.

The success of these approaches is evident by the fact the World Bank uses them to manage more than $30 billion in investments in more than 90 countries.

More sophisticated grants systems determine funding in keeping with agreed performance measures. Local government organisations must comply with basic conditions to access grants covering accounting, planning, budgeting and management. Thereafter, levels of funding are increased or decreased according to performance measures, including revenue collection, participatory planning and the quality and transparency of finance systems.

Here is a finance system that encourages leaders and stakeholders to govern well, to socially innovate and to return social development outcomes. Equally as important, it is a system that rests on mutual agreements negotiated between government agencies and local authorities about objectives and evaluation.

Block funding was first mooted by the Royal Commission into Aboriginal Deaths in Custody in 1991, but it has never been trialled. The notion is different to the pooled flexible funding and shared outcome arrangements under discussion or pilot, as these are fundamentally exercises in intergovernment co-ordination.

In comparison, block funding systems involve the devolution of discretionary powers to indigenous leaders and stakeholders, accompanied by good governance measures and downward political accountability to constituencies.

To the extent that governments deem necessary, block funding can be accompanied with a suite of upward accountability requirements, and the net effect can only be an improvement on the system of partitioning accountability across up to 90 funding agreements.

Procurement reforms require a solid measurement framework, including design, monitoring and evaluation tools that capture learning and progress. This is not as simple as setting key performance indicators from afar, and must include the unanticipated and essentially local indicators that only stakeholders hold, and ultimately when it comes to social development outcomes, that only the beneficiaries can know.

The Department of Finance is taking the lead. Progress is being made, including recent advances in multi-year appropriations, such as the recently announced five-year, one-stop-shop remote employment service contracts. But reforms must go much deeper.

Block funding measures would be a major disruption to the territoriality of government silos, and opposition to it is unlikely to abate without changes to the basic architecture of the finance system.

Whatever the obstacles in government, we have to fix the public finance system rather than try to fix communities one at a time.

Mark Moran is a practitioner in indigenous and international development and adjunct associate professor at the University of Queensland; Doug Porter is a public finance specialist and adjunct professor at the Australian National University and governance and justice adviser to the World Bank.