House of Commons - International Development

Select Committee on International Development First Report

3 Efficiency

32. Government Departments are required to reduce their administrative costs to help meet Government targets for efficiency improvements set following Sir Peter Gershon's review of public sector efficiency published in 2004.[79] We have previously commented on the particular challenge which DFID faces. It has a budget which is rising each year as the Government seeks to meet the UN target of 0.7% of GNI allocated to Official Development Assistance by 2013, while at the same time it is obliged to reduce its administrative budget, which in practice means cutting the number of staff it employs.[80] Under the Comprehensive Spending Review 2007 three-year settlement, DFID's budget will increase by an average of 11% a year in real terms, to £7.9 billion by 2010-11. Alongside this rising budget, DFID has agreed with the Treasury a target for administrative cost savings of 5% a year over the period of the CSR.[81]

33. DFID's performance to date in making efficiency savings is impressive. The Annual Report indicates that, against a target delivering £420 million of sustainable efficiencies by 2007-08, DFID had already achieved savings of £434 million by 2006-07 and that it expects to exceed its target for 2007-08.[82] The Treasury published information with the CSR which showed that DFID's efficiency savings had reached £515 million as of June 2007.[83] We explored with DFID in written questions what proportion of the efficiency savings were cashable—tangible, clearly identifiable savings—and how much was represented by non-cashable savings. The latter are more difficult to quantify and validate because they depend on indirect measures of outputs (for example the proportion of bilateral aid moved onto a programme-based approach, or the proportion of EC aid allocated to low income countries) and assumptions about the financial benefit that would result from those output changes (for example that for each £1 of EC aid going to low income countries twice the number of people are lifted out of poverty).[84]

34. The overall 2005-2008 Gershon efficiency target for all government departments indicates that 60% of savings should be cashable.[85] But only a relatively small proportion of DFID's efficiency savings are cashable. Indeed DFID told us that the cumulative target for their two streams of cashable efficiency targets (administration and procurement costs) over the current three year Spending Review period were only £30 million and £19 million respectively out of a total efficiency savings target of £420 million.[86] This is only 11.7%. Against that background, the efficiency savings target under the CSR of £492 million a year by 2010-11[87] will be particularly challenging, perhaps not so much because of its size (6.2% of the £7.9 billion year-three CSR budget) but because, as with all departments, these will be entirely 'cash-releasing' and are already subsumed in DFID's budget.

Impact of Government efficiency targets

35. In order to meet Government efficiency targets, the number of DFID home civil service posts has reduced from 1,907 in March 2004, to 1,719 in March 2006, with a further reduction to 1,610 planned by March 2008. Staff appointed in country have fallen from 1,162 to 865 over the same period (although they are due to increase again to 950 by March 2008).[88] The DFID Capability Review summarises the position which DFID is in as follows:

"The Department's programme budget could double between 2006/07 and 2013 whilst running costs are likely to stay flat or fall [...] in the next five to six years DFID will have to face the significantly greater challenge of delivering a much bigger programme at current or lower administrative costs"[89]

36. In his recent book The Bottom Billion, which discusses ways in which the situation of the poorest people in the world can be improved, Professor Paul Collier expressed the view that:

"The environments in which [aid] agencies should increasingly be operating are those in which to be effective they will need to spend more on administration, not less".[90]

He goes on to say that because they should be operating in the most difficult environments "they will need to accept more risk, and so a higher rate of failure." He believes that public opinion is driving aid agencies in the opposite direction: they cannot risk failure and they have to be "lean" with low administrative costs.[91]

37. The Capability Review acknowledges that: "DFID's mission will increasingly be delivered in more fragile and risky states".[92] To address this, one of the two urgent development areas which the Capability Review identified is the need for DFID to "plan, resource and prioritise".[93] In particular, the Capability Review points out that "DFID has not yet taken sufficiently tough choices on country presence, funding mechanisms and sectoral activity to make the best use of resources."[94]

38. In its Response to our report on Sanitation and Water DFID said that it is carrying out a Strategic Workforce Planning process "to determine what resources are available, where the demands are likely to be over the next five years and how best to match resources to need."[95] The Response goes on to say that although headcount reductions will continue in line with Government policy "we recognise there are some advisory specialist gaps to fill in key countries where we need to deliver on sanitation and water specifically". The Permanent Secretary reinforced this in oral evidence:

"Can we do more to move people, the experts, from the lower priority areas to the higher priority areas? […] The dialogue we need to have with this Committee, Parliament, ministers and also internally is how to define the higher priorities and to shift staffing to those".[96]

He went on to say that "with a further increase in the budget, if the headcount shrinks further we shall have to make some choices: possibly whether to operate in fewer countries and whether to do less directly and more by working with multilateral bodies."[97] The Director General, Corporate Performance highlighted the decisions that DFID needs to make on reducing staff in countries which are performing well, such as Tanzania, so that staff in more challenging countries, such as the Democratic Republic of Congo, can be increased. However, the cost of deploying a member of staff in a fragile country is double that of a more stable state and in Iraq or Afghanistan it costs four times as much.[98]

39. There may be a case for DFID to offer advice and support for poverty reduction strategies in middle-income countries which could be compromised by DFID staff restrictions. One way round staffing limits is for DFID to fund specialist staff within country budgets thus also helping to strengthen capacity. It would be unfortunate if headcount constraints led to DFID employing more consultants or diverting additional resources for the wrong reasons.

40. We accept that DFID cannot be exempt from efficiency targets set for the whole of Government. The Department has made good progress in reducing administrative costs, albeit predominantly in the less tangible form of non-cashable rather than cashable savings. We are concerned, however, that the need to reduce headcount and to make administrative efficiencies, and under the Comprehensive Spending Review settlement to meet a significantly higher cash-releasing efficiency target, will act as a constraint on DFID working in the parts of the world where its assistance is most needed: the poorest countries, often fragile states, which have so far failed to benefit from the vast volumes of international aid. DFID therefore needs to make some very difficult choices about withdrawing from some countries, or some sectors, so that it can focus development assistance where it will have the greatest effect on poverty reduction. We look forward to contributing to this decision-making process as part of our future work.

Budget support

41. One of the ways DFID deals with disbursing a growing aid budget with fewer staff is through poverty reduction budget support (PRBS). This funding mechanism enables development assistance to be delivered directly to the governments in recipient countries to be used as part of their general expenditure (general budget support) or for particular sectors, such as health and education (sector budget support). In 2006-07, DFID delivered 28% of its bilateral programme through PRBS to 16 countries.[99] We commented in our report on last year's DFID Annual Report on some of the issues this raises.[100]

42. We were concerned that there was some confusion in the way DFID defines budget support and whether all funding provided directly to governments was classified as poverty reduction budget support. This arose particularly in relation to DFID's funding for Afghanistan. In oral evidence DFID officials clarified the position. The funding mechanism DFID uses for Afghanistan is unique. Most of the funding is channelled through the World Bank's Afghanistan Reconstruction Trust Fund. The Director General, Country Programmes explained that this Fund differs from budget support in two ways: the Afghan government is only allowed to use the funds for specific, predefined categories of expenditure, for example, education or water supply; and is reimbursed on an ex post basis —after it has incurred the expenditure rather than the money being provided in advance as with the normal poverty reduction budget support system.[101]

43. The Director General, Corporate Performance told us that the Trust Fund system "has some appealing qualities for fragile states and it is one that I should like to see tried in other countries". The Permanent Secretary considered that, as the fiduciary risk from providing conventional budget support in fragile states was high, the Afghanistan Fund merited further evaluation as a possible future model for funding fragile states. It is also the Afghan government's preferred aid instrument.[102] We believe that the funding mechanism offered by the Afghanistan Reconstruction Trust Fund is an interesting development, particularly as DFID is increasingly likely to be operating in fragile states of this kind. We will be exploring this in more detail in our inquiry into DFID's programme in Afghanistan.

79 Releasing Resources to the Front Line: Independent Review of Public Sector Efficiency, Sir Peter Gershon, HMSO, July 2004 Back

80 First Report from the International Development Committee, Session 2006-07, DFID Departmental Report 2006, HC 71, paragraphs 13-19 Back

81 Ev 24 Back

82 DFID Annual Report 2007, paragraph 10.27-10.28 Back

83 2004 Spending Review efficiency progress to June 2007, HM Treasury Back

84 Efficiency Technical Note 2005-2008 Back

85 See The Efficiency Programme: A Second Review of Progress, National Audit Office, February 2007, Box 1, p 8 Back

86 Ev 36 Back

87 Cm 7227, p 237 Back

88 DFID Annual Report 2007, Table 10.1, p 220 Back

89 Capability Review of the Department for International Development, March 2007, p 14 Back

90 The Bottom Billion: why the poorest countries are failing and what can be done about it, Paul Collier, Oxford University Press, 2007, p 118 Back