Foreign Affairs minister Murray McCully says aid agencies must adapt to a new era of greater accountability or they will not get Government funding.
Catholic aid agency Caritas says the new system for applying for Government money for aid projects has been a fiasco.
The New Zealand Aid Programme approved projects worth $40 million but rejected 60 of the 104 applications to the Sustainable Development Fund, saying they were poorly done and lacked information.
Caritas had 12 of its 14 applications turned down. The charity says the decisions are three months late, meaning its partners have to consider laying off staff and cutting key programmes in the week before Christmas.
Murray McCully says many applications to the fund were very poor, but some agencies have been professional and had a very high success rate.
He says unless agencies such as Caritas get their act together, they won't find public money available to them.
Christian World Service is facing a $1 million funding hole, having had only one project out of six approved.
The Council for International Development, which represents almost all the country's aid agencies, says the process did not run well.