House of Commons - International Development

Select Committee on International Development First Report

2 The implications of increasing aid

9. The UK appears to be well on track to achieve the UN target of Official Development Assistance (ODA) equivalent to 0.7% of Gross National Income (GNI) by 2013. DFID's original projection was that the ODA/GNI ratio would reach 0.39% in 2005 rising to 0.47% in 2007-08. Yet by 2005-06, the UK had already reached an ODA/GNI ratio of 0.48%.[7]

10. However, some NGOs have cast doubt on the underlying volume of aid claiming that, excluding debt relief, aid actually fell from 2004 to 2005.[8] A report by ActionAid suggested that debt relief should not be counted as aid as "this can vastly exaggerate the sums available to reduce poverty".[9] When we put this to the Secretary of State, he disputed this, saying that this was the official OECD DAC method of quantifying ODA and that debt relief frees up funds that can assist progress towards development targets.[10]

11. While acknowledging that aid excluding debt relief fell in real terms from the calendar year 2004 to 2005, DFID told us that this was due to timings of large payments (contributions to international institutions were made in late 2004 and then in early 2006) and a negative contribution by the CDC[11] towards ODA in 2005, as it received more from loan receipts and equity sales than it invested in equity purchases.[12] In response to ActionAid's claim that debt relief should not be counted as ODA, DFID told us that:

"Debt relief means that countries pay less or no debt service, and can use the savings for poverty reducing investments, such as education and health, instead. This is why the international community represented at the OECD DAC has agreed that debt relief should be counted as ODA where appropriate. The UK abides by the OECD DAC decision, scoring debt relief as ODA where appropriate and clearly identifying debt relief within our ODA statistics".[13]

It is our view that debt relief can only be counted as ODA where the debt was being fully or partly serviced up to the point of cancellation.

12. Under the International Development (Reporting and Transparency) Act 2006, DFID must now present an annual report to Parliament with a breakdown of total expenditure and indicating progress towards the UN-recommended allocation of 0.7% of GNI to international aid. This is a welcome move towards improved transparency. However, identifying the proportion of debt relief in the statistics within the Departmental Report — as well as the annual report to Parliament — would help provide transparency in the underlying trends in ODA. We recommend that the financial tables in Annex 1 of Departmental Reports include a breakdown of ODA figures, so that readers can easily identify which components of ODA — contributions from CDC, debt relief, the DFID budget — are changing. With regard to debt relief, we recommend that relief only on the amount being paid in debt servicing can reasonably be classed as ODA, and that the UK Government should give a detailed breakdown of this amount when apportioning debt relief to the ODA total.

Increased specialisation, off-shoring and out-sourcing

13. The OECD DAC's 2006 Peer Review has summarised the challenge DFID faces:

"[DFID] proposes to more than double its current level of ODA in the next seven years, to deliver its aid better (aid effectiveness, results monitoring) and to move further into more complex and difficult environments for aid delivery (fragile states and situations of conflict). At the same time, it plans to do so with fewer delivery resources, notably a 10% reduction in DFID staff numbers and support service costs as part of the Efficiency Programme 2005-2008. It will be a challenge for the UK to undertake all these tasks while maintaining the quality and innovative character of its aid".[14]

14. Whether efficiency savings are achieved through 'headcount' or overall administration costs currently seems unresolved.[15] We encourage HM Treasury to make overall administration costs — rather than staff headcount — the focus of DFID's efficiency savings. This will help ensure that DFID has the necessary human resources to support the Department's increasing financial resources.

15. The Permanent Secretary told us that that focusing on core areas, off-shoring (which would involve moving some DFID activity away from UK Headquarters to overseas sites) and out-sourcing (which would involve paying the private sector, NGOs or other bodies to carry out activities currently carried out by DFID) are amongst the options it has to "do more with less":

"The first thing we need to consider is what is core and what is non-core; in other words, what do we want to make in-house — still do the bits it is important for the Department to do — and what sort of things should we do beyond the departmental boundary. We need to look at options for outsourcing and for off-shoring".[16]

16. The OECD DAC's Peer Review also supports greater specialisation for DFID. It recommends that DFID should:

"Continue to pursue the geographic concentration of its ODA on poor countries and should build further on its progress in focusing on fewer countries. It should also continue to strengthen its strategic approach through a sector focus that reflects its overarching poverty reduction objective and its comparative advantage".[17]

17. The Permanent Secretary told us that although from a managerial perspective it would be more efficient for DFID to specialize, stakeholder interests may limit the extent to which it can do so. He stated that frequently both local recipients and the UK Government want a DFID presence in many areas and specialisations.[18]

18. With regard to the options for outsourcing and off-shoring, the Permanent Secretary indicated that off-shoring may be the preferred option and that expanding the local offices in India and South Africa is a possibility.[19]

19. We recommend that information is made available in the Comprehensive Spending Review 2007 on exactly how DFID intends to specialise further beyond its focus on low-income countries, how it plans to divert activities from non-core to core activities and what cost savings can be generated through off-shoring and outsourcing of activities.

Working in fragile states

20. DFID's definition of fragile states "covers those where the government cannot or will not deliver core functions to the majority of its people, including the poor. The most important functions of the state for poverty reduction are territorial control, safety and security, capacity to manage public resources, delivery of basic services, and the ability to protect and support the ways in which the poorest people sustain themselves."[20] As fragile states contain 14% of the world's population but account for nearly 30% of people living on less than $1 a day,[21] the commitment to work more in fragile states fits neatly with DFID's poverty focus.

21. DFID told us that it intends to divert resources to fragile states as part of its process to focus on priority areas or "core business". The Director General for Regional Programmes explained, "We are hoping to put more [DFID] people in fragile states because we recognise that it is a huge source of comparative advantage and there is a huge need".[22]

22. However, whether or not DFID has a comparative advantage in fragile states is a moot point. It is not an area in which DFID has long-standing experience or expertise: the Departmental Report as recently as 2004 makes no mention of the term 'fragile states'.[23] Whilst this may partly be attributable to semantics[24], DFID's comparative advantage has previously been perceived to lie more in facilitating and developing good policy environments (for instance, in Ghana and Tanzania) rather than state-building in fragile states. As our predecessors said in their report on DFID's agriculture policy in 2004, "DFID has a comparative advantage in technical assistance, capacity building and institutional reform and development."[25]

23. Whilst the importance of donors addressing the huge need in fragile states is undisputed, DFID's sudden prioritisation of this area and its decisions regarding countries in which it works pose important questions. A key example is DFID's decision to triple its support to the Democratic Republic of Congo (DRC), so that funding in 2005-06 totalled approximately £55 million. When we asked the Secretary of State about the rapid scaling-up of support to DRC, the reason he gave was twofold: that the end of the conflict and the establishment of the transitional government represented an opportunity, and that too few countries were willing to step in and help in DRC.[26] The Director General for Regional Programmes reiterated this last point: "We try and compensate for the failures of the international system."[27] But this does not fully answer the question of why DFID necessarily should be the donor. The inference from DFID's comments is that it has become a 'donor of last resort' — a role that is difficult to square with the Department's strong international reputation.[28] Furthermore, this attempt to spread itself thinly conflicts with DFID's avowed reason for supporting DRC and fragile states in the first place — to focus on core business and improve quality through specialisation and selectivity (see also the previous sub-section).[29]

24. Improved donor co-ordination is clearly of signal importance to decisions concerning which donors work in which countries. The Permanent Secretary told us that DFID was working towards improved co-ordination in the DRC.[30] However, we found donor co-ordination to be very weak during our visit to DRC in May 2006.[31] Millennium Development Goal 8 seeks to build "a global partnership for development", and towards this goal donors should participate in a coherent process when co-ordinating countries of operation. DFID has not fully made the case for its comparative advantage in focusing on fragile states such as the Democratic Republic of Congo. We expect a clear explanation of why DFID is investing considerable resources in DRC.

25. DFID's growing presence in fragile states also raises questions of risk management. Working in fragile states presents its own particular challenges. It is more costly to deploy staff in fragile states because there are increased security costs.[32] Finding the people with the right level of experience is more difficult. As the Permanent Secretary put it: "You get people who are interested in conflict development issues and you tend to get the younger people — people who are not attached and do not have family issues to deal with [...] Some of the issues like getting mid-career people to these places is coming up."[33]

26. Exposure to risk is also increased because aid spent on fragile states may be less likely to have an impact on poverty reduction than aid spent on states with stronger institutions. When asked how the Department manages this increased risk, the Director General for Regional Programmes stated:

"The most important mechanism by which we manage risk that you identify is having a diversified portfolio. So for every additional pound we try and spend in a very difficult fragile environment, like DRC, we also intend to spend more in Tanzania, which is very stable, has reasonable policies, has lots of poor people and we know is quite effective at delivering poverty reduction. So we do not necessarily have to turn to middle-income countries for safety; I think we can do that by having a diversified portfolio of low-income, fragile states but, also low-income, good performing countries."[34]

27. But this raises the question of whether, by diversifying its portfolio, DFID is also diversifying the risk to which it is exposed. The Department will need to work hard to manage, not just the efficiency of taking such risks, but the public perception of working in risky environments. The OECD DAC Peer Review recognised this: "In coming years, the balance between good performance and fragile states in DFID's portfolio will need to be assessed against the ability to have the greatest impact on poverty reduction while demonstrating results to ensure continued public support".[35] We welcome DFID's commitment to work in fragile states. However, in order to maximise poverty reduction and retain public support, we encourage DFID to make information available on exactly how it intends to balance good performers and fragile states while at the same time increasing its specialisation and focusing on what it deems to be "core" activities.

Working with multilateral institutions

28. Whilst recent years have seen a gradual decrease in DFID's contributions to multilateral institutions, it appears that the increasing aid budget may be prompting a re-think within the Department. The Permanent Secretary told us that one option for increasing aid without increasing staff levels is through raising contributions to multilateral institutions.[36] Currently around 39% of DFID's budget is channelled through such bodies. The largest contributions go to the European Development Fund, the International Development Association (IDA) of the World Bank (the IDA is the concessional lending arm of the World Bank) and international humanitarian organisations, including the UN High Commission for Refugees and the Red Cross.[37]

29. DFID research indicates that there is a 25% efficiency gain on money channelled into IDA compared to bilateral aid.[38] However, there is a case for saying that using multilateral institutions dilutes DFID's ability to influence aid objectives, including the extent to which aid should be poverty-focused. In its written evidence, DFID told the Committee that: "Increasing aid will mean that donors will need to rely more on multilateral channels to distribute it but at the same time some parts of the international system have either become too complicated and inefficient or simply don't work at all."[39]

30. Evidence that DFID has real concerns over the way certain multilaterals operate became clear in September 2006, when the Secretary of State withheld £50 million from the World Bank due to the Bank's insufficient progress in implementing reforms on conditionality for countries with high levels of corruption.[40] When we asked the Secretary of State in October 2006 whether he was now satisfied with the Bank's reforms, he told us he was waiting to read a further report, promised by the Bank in the run-up to the 2006 Autumn Meetings.[41] He said that the production of this report — which will review conditionality policy — was a direct response to his decision to withhold funds from the Bank.[42] The fact that DFID has such serious concerns about the manner in which multilateral institutions spend funds raises important questions about the wisdom of potential increases in DFID's funding of multilaterals. Questions also exist around how the Secretary of State will proceed if he is not satisfied with the Bank's report once it is published and whether he has any realistic options to spend this pre-allocated money elsewhere.

31. We have highlighted concerns around increased contributions to multilaterals in the past: our predecessors' report on the 2004 DR identified that "the European Union has been a particular cause for concern as regards the poverty focus of its aid"and pointed out the importance of providing information in the DR on this:

"If stakeholders, including Parliament, are to be able to assess whether sensible decisions are being made about channelling aid through multilaterals, then the Departmental Report must show clearly the poverty focus of the multilaterals though which UK aid is channelled".[43]

32. It should be noted that DFID has taken on board this recommendation and Table 5b of the DR 2006 shows the spend in low-income countries of all the multilaterals.[44] However, a National Audit Office Report on DFID entitled "Engaging with Multilaterals", published in December 2005, also notes that DFID is not very selective in choosing the multilateral institutions it funds:

"We could not find any multilateral development institution that DFID had not funded through the provision of either multilateral or bilateral aid. And in only one case had DFID withdrawn funding for a period. The lack of selectivity in choosing multilateral partners raises concerns that the cost-effectiveness of funding has not been considered".[45]

33. DFID uses a Multilateral Effectiveness Framework (MEF) to evaluate the effectiveness of its multilateral donors. It intends to carry out the evaluation exercise in full every three to four years. DFID told us that, overall, the EC scored above average for the institutions so far reviewed.[46]

34. It is not yet clear how funding to multilateral institutions is influenced by DFID's evaluation of their work through the MEF. DFID is to review the proportion of spending channelled through multilateral institutions for the Comprehensive Spending Review 2007.[47] We recommend that, when it reviews the proportion of spending channelled through multilateral institutions for the Comprehensive Spending Review 2007, DFID makes information available on how it allocates its funding across such institutions. We also recommend that, when publishing this information, DFID makes clear how the Department assesses multilateral institutions using the Multilateral Effectiveness Framework (MEF) and how the MEF influences its funding decisions.

Poverty Reduction Budgetary Support

35. Another potential vehicle for increasing aid provision without requiring significant additional Departmental staff is spending via Poverty Reduction Budgetary Support (PRBS). PRBS is a form of financial aid in which funds are provided directly to a partner government's central exchequer, to spend using its own financial management, procurement and accountability systems and in support of a government programme typically focusing on growth, poverty reduction, fiscal adjustment, and strengthening institutions, especially budgetary processes.[48]

36. The DFID DR shows that in 2005-06 PRBS was a significant funding mechanism for DFID. 25% of the total DFID bilateral programme was delivered through PRBS. It was provided to fifteen countries, including nine countries in Africa, five in Asia and one in Europe.[49]

37. As with multilateral aid, however, PRBS has risks in terms of its sustainability. Our predecessors' Report on DFID's DR 2004 stated:

"While we understand the department's enthusiasm for PRBS, it must be applied using appropriate risk considerations to determine whether it is the most suitable way of delivering aid, and whether the potential development benefits outweigh the risks that are being taken. Most importantly, future decisions about PRBS must be based on evidence of whether or not PRBS has produced the developmental benefits expected of it. Any future roll-out of PRBS must be evidence based".[50]

38. Earlier this year, an evaluation of budget support was commissioned by a consortium of donors, led by DFID.[51] The report concluded that PRBS can be an efficient, effective and sustainable way of supporting national poverty reduction strategies and played a clearly positive role in five of the seven case study countries (Burkina Faso, Mozambique, Rwanda, Uganda and Vietnam). However, it also pointed out that PRBS, "as presently designed, is vulnerable to a number of risks, including political risks. These threaten its ability to operate as a long-term support modality. Its sustainability depends on making it more resilient."

39. The vulnerability of PRBS to political risks was demonstrated when DFID withdrew PRBS in Uganda[52] and Ethiopia[53] because of concerns about political governance and human rights abuses. In Uganda, PRBS was cut by £20m and £15m was reallocated to humanitarian assistance in the north of the country. In Ethiopia, the UK approved £94 million for a new Protection of Basic Services Grant to support education, health care and water and sanitation. The Secretary of State said that the very act of withdrawing budget support was a deterrent to poor governance and rights abuses: it "sent a very strong message about what we regard as acceptable conduct, and I think that is worthwhile in itself".[54] However, questions exist around the effectiveness of the measures DFID is putting in place to help these countries get back on track (particularly in Uganda): the sending of political signals — signals that are perhaps partly aimed at bolstering UK taxpayers' support for development interventions — should be part of a restorative process rather than a stand-alone gesture.

40. We note from DFID's written evidence that the Department's expenditure in Ethiopia will increase to £130 million in 2007-08, making Ethiopia the largest DFID programme in Africa.[55] Whilst we support this effort to address the obvious need in Ethiopia, it is unclear how this scaling-up of resources sits with the political message of PRBS withdrawal.

41. An Overseas Development Institute Opinions Paper argues that these cases show that PRBS may be limited as a tool to encourage good governance amongst states: "Donor pressures and threats to cut aid are less important than internal control over the levers of power, especially in countries with weak democratic institutions and traditions".[56] The paper also suggests that DFID needs to clarify the political conditionality of aid and form a more robust assessment of the sustainability of PRBS:

"As a number of commentators have pointed out, Zenawi's [Prime Minister of Ethiopia] and Museveni's [President of Uganda] democratic credentials have only been established relatively recently [...] Political and historical analysis could have led to a much sounder appraisal of the likelihood of such crises taking place, possibly avoiding today's need for such drastic measures. Such analysis should inform the shape of the aid agreements that donors sign with recipient countries, spelling out the boundaries of 'acceptable behaviour' that both undertake to respect. In existing agreements, governance issues tend to get excessively watered down".[57]

It is our view that identifying institutions and processes required for effective PRBS will decrease any risk of personalising decisions over budget support.

42. The OECD DAC Peer Review considered that, "A further clarification of the UK's approach to political conditionality in light of recent events (e.g. Ethiopia) could also help harmonize donor approaches".[58] However, the Secretary of State told us that he believed donors were already co-ordinating effectively over PRBS, and gave the example of how a number of donors had come behind the decision to divert PRBS to Ethiopia to the new Protection of Basic Services Grant.[59]

43. The criteria listed in DFID's policy paper for gauging the appropriateness of PRBS include: "the country's planned budget priorities in support of poverty reduction; the status of administrative, technical and financial systems; and the specific costs/benefits of PRBS against other types of aid".[60] These criteria do not explicitly mention political governance issues, which formed the main reasons for withdrawing aid from Uganda and Ethiopia.

44. The Ethiopia and Uganda cases also flag up the importance of having contingency plans in place in case budgetary support is withdrawn. The cases raise the question of whether the logical corollary to cutting PRBS is the need for all PRBS countries to have contingency plans in place in case the government goes off track. If so, the creation of such contingency plans — which would exist as an alternative way of delivering the same benefits to poor people — surely needs to be taken seriously as a reciprocal arrangement by which the 'added value' of PRBS can be assessed. Uganda's contingency plan turned out to be a redirection of DFID funds to UNICEF. However, when we took evidence from DFID in July, UNICEF had yet to disburse the funds.[61] This again supports the need for effective and sustainable contingency plans to be in place before PRBS is withdrawn.

45. In the case of Ethiopia, the UK approved £94 million for a new Protection of Basic Services Grant to maintain and expand such services as primary schooling, basic health care, water supply and sanitation and agricultural extension.[62] The Grant carries more comprehensive monitoring burdens than PRBS arrangements, and for the first time requires detailed budgetary information to be made available to citizens.[63] We were pleased to hear that Ethiopia's Protection of Basic Services Grant provides for regular financial monitoring, including the provision of detailed budgetary information to citizens for the first time. However, we recommend that these monitoring arrangements — particularly making detailed budgetary information available to citizens — are extended to all PRBS arrangements to enable improved transparency and accountability. We plan to visit Ethiopia early in 2007 as part of our Water and Sanitation inquiry and will follow up on these points during the visit.

46. One World Action notes that PRBS also brings new challenges for NGOs who wish to track aid effectiveness:

"DFID could increase action in the following areas:

Identify and institute clear mechanisms for tracking policy commitments in new aid modalities, especially poverty reduction budget support,
Greater transparency on levels of poverty reduction budget support.
Support to Southern CSOs [Civil Society Organisations] and especially gender aware organisations, to strengthen their capacity to engage in national budget processes and monitor expenditure."[64]

47. We recommend that DFID examines the long-term viability of budgetary support before it is introduced in order to reduce the likelihood of withdrawal and that it includes political governance where appropriate in the criteria for PRBS. We also recommend that DFID considers immediate follow-up measures to assist countries in getting back on track, puts contingency plans in place prior to PRBS being withdrawn and builds NGOs' capacity to track the effectiveness of PRBS.

7 DFID Departmental Report 2006, Cm 6824. para 7.41 Back

8 The Guardian, April 4 2006 Back

9 ActionAid International, Real Aid: Making Technical Assistance Work, para 2.1. Back

10 Evidence taken before the International Development Committee, 19 October 2006, Q 67 [Secretary of State for International Development] Back

11 CDC Group (formerly the Commonwealth Development Corporation) is a UK Government-owned fund-of-funds with a mission of "maximising the creation and growth of viable businesses in poorer developing countries, through responsible investment and the mobilisation of private finance". Back

12 Ev 19, written response to question 1 Back

13 Ev 19, written response to question 2 Back

14 OECD DAC, Peer Review: Main Findings and Recommendations, UK (2006) Back

15 Q 4 [Sir Suma Chakrabarti] Back

16 Q 2 [Sir Suma Chakrabarti] Back

17 OECD DAC, Peer Review: Main Findings and Recommendations, UK (2006) Back

18 Qq 8 and 9 [Sir Suma Chakrabarti] Back