Examination of Witnesses (Questions 60-79)
DEPARTMENT FOR
INTERNATIONAL DEVELOPMENT
3 MARCH 2008
Q60 Mr Mitchell: The evidence of
improvement comes from the developing countries themselves. I
see that the Report says that developing country officials expressed
a preference for budget support, but I have to say that so would
I. If I were bankrupt and the choice was between you building
a hen hut in my garden so that I could sell the eggs and you making
a direct contribution to my personal budget, I would prefer the
money.
Dr Shafik: I think if I gave you
that money with some pretty clear conditions about you spending
it in a way that is going to put you on a self-sustaining, solvent
footing in the future and I am going to monitor you every month
with a whole set of 40 or so indicators on your performance and
your behaviour, you might prefer the hen house.
Q61 Mr Mitchell: Yes, but what do
we get out of it as a country? If it is tied to a specific project
we could go round and say: "Look, we did this and we did
that" but if it is just poured into a bottomless pit of a
budget we get no credit and we have very little control over it.
Dr Shafik: I think saying that
it goes into a bottomless pit of a budget, given the level of
scrutiny that we impose on countries in order to get these resources,
I do not think they would see it that way; they would see it as
quite a heavy burden that they carry in terms of being accountable
for a broad array of expenditures, being forced to report on results
on an annual basis, having to meet with donors and being held
to account both in terms of basic audit reports but also additional
safeguards we might ask for.
Q62 Mr Mitchell: Here you are giving
aid in such a way that it allows some fairly irresponsible and
some corrupt governments to detour public spending into other
purposes, Rwanda into defence, Tanzania into paying off debts.
You are just cushioning the situation for them.
Dr Shafik: I do not think so.
There is no evidence that budget support is any more or less corrupt
than projects. Those of us who have managed development projects
around the world know that the risks of corruption around projects
are really not that much different. I think the difference is
that in budget support we have an instrument and a vehicle for
discussing corruption and changing the systems that can reduce
corruption across the country as a whole.
Q63 Mr Mitchell: Let us face it,
you have as little control over it as we do as parliamentarians
over the British budget.
Dr Shafik: British development
projects?
Q64 Mr Mitchell: No. You have as
little control over the budget priorities and allocations and
the way you are using the money of these developing countries
as we do as MPs over Alistair Darling's budget.
Dr Shafik: I am not sure about
that. We set very clear targets for countries. We expect the level
of education spend to rise from X to Y; we expect the level of
health expenditure to go from Y to Z. We set pretty clear targets
for them about our expectations in terms of spend. We also set
clear targets for them in terms of outcomes. We expect to see
enrolments go up by X; we expect to see children immunised go
up by Y.
Q65 Mr Mitchell: Have you ever found
their use of our money so appalling and so wrong that you have
stopped it?
Dr Shafik: Yes.
Q66 Mr Mitchell: Apart from Kenya
which was a particular case because of the violence.
Dr Shafik: I can give you three
cases. In Ghana, in Sierra Leone and in Uganda we withdrew some
of the funds. We were not satisfied with their public financial
management systems and we cut back some of the money.
Mr Sharpe: It was not because
the money had been used in a different way, it was because benchmarks
for improving public financial management were not met. It was
about the pace of progress on public financial management and
not so much the actual misuse of money. Table seven shows that
defence spending in Rwanda is going down and spending on education
and health is going up. I think that is the primary thing we would
look at when we are asked if we are achieving; are we achieving
a better balance between pro-poor expenditure and non-pro-poor
expenditure on budgets? If spending as a proportion in absolute
terms of the budget is not going up in pro-poor priorities that
is the first thing we look at.
Q67 Mr Mitchell: You are dependent
upon what they tell you—you do not have a chief of accountants
in there—and you do not know how much will be allocated
to defence if you were putting in this money for the people.
Dr Shafik: It is not just good
will. These governments are reviewed by the International Monetary
Fund, they have to produce credible data for a whole variety of
international purposes and we draw very heavily—and I think
the NAO acknowledges that—on these external, independent
reviews of public expenditure to make our judgments.
Q68 Mr Mitchell: How do you answer
the criticism at paragraphs 2.5 to 2.7 that there is no discernable
improvement and the quality of delivery often suffers?
Dr Shafik: Let me just give you
a few illustrations of the kinds of benefits that we have seen
in terms of basic services. As I said, Uganda has doubled education
and immunisation in less than a decade; in Tanzania they have
three million more children into schools; in Nepal they have now
managed to reduce the number of maternal deaths, that has been
halved over a decade. Thousands and thousands of lives have been
transformed as a result of the use of this aid instrument. We
do have clear examples of improved quantities. On quality, as
I have said, we are addressing quality in individual cases where
we see quality slipping. Again those tables show that on average
enrolments are increasing (figure nine); in Rwanda pupil/teacher
ratios have risen but we are working with the Rwandans to increase
the number of trained teachers and increase the number of classrooms
in order to address that concern.
Q69 Mr Mitchell: There is a further
criticism in paragraphs 2.8, 2.9 and 2.10 that there is no indication
that it has reduced poverty. Indeed, in paragraph 2.9 there is
an indication that poverty reduction really comes from economic
growth because your programme has not been going long enough to
have an effect on poverty, and yet this is claimed to be a result
of the programme.
Dr Shafik: I quite agree that
economic growth is the key to poverty reduction. In fact growth
delivers about 80% of poverty reduction in the world. However,
there is a fair amount of empirical evidence which shows that
increasing aid in a form such as budget support increases growth.
Recent research shows that a one dollar increase in aid results
in a one dollar and 67 cent increase in growth in present value
terms. These are fairly high rates of return that we are seeing
in many countries from aid in the form of instruments like budget
support.
Q70 Mr Mitchell: Claims about the
reduction in poverty are a bit doubtful because, for example in
Rwanda and Zambia, the data for measuring it is so weak. You do
not have your own data, the claims are therefore spurious.
Dr Shafik: Again this data is
reviewed by various exogenous groups like the IMF and the World
Bank. The links between budget support and growth are there; it
is not like growth just happens exogenously by itself. The nature
of public expenditure affects that. Is the government investing
in roads which make markets work? Is the government managing the
economy and not allowing hyperinflation? Is the government changing
the investment climate for business so that people can invest
and build small businesses and grow? All of those things—the
investment climate, macro-economic management and investments
to enhance productivity—are things we support under budget
support programmes.
Q71 Geraldine Smith: Can I ask the
National Audit Office, did you consult with the aid agencies and
did they have any views on budget support?
Mr Sloan: Yes, we had meetings
both when we were out in country and back in the UK. The larger
UK aid agencies are broadly in favour of budget support, at least
to the extent that it is bound up with improvements also in domestic
accountability which is usually their main concern about the balance.
They view a strong state or a developing state as important and,
apart from perhaps some smaller aid agencies that were formerly
dependent on donor money, the larger ones—the Oxfams, the
Cares—in policy terms are in support of budget support.
Q72 Geraldine Smith: Moving to the
accountability, just because a country has a public accounts committee
and people watch it on television does not mean that corruption
does not exist. One of the problems we have is trying to establish
what difference you are making to a country. Obviously if you
are putting millions of pounds in you would expect to make that
a considerable difference to people's lives and there seems no
way of you actually measuring that or making sure that British
tax payers are getting good value for the money that is being
spent in those countries and that it is making a real difference
to people's lives. I am still not convinced, listening today,
that you do have those controls in place.
Dr Shafik: I think there are a
couple of ways you can derive some comfort, I hope. First, if
we were not achieving development outcomes I would be worried;
if enrolments were not going up, if roads were not being built,
if people were not getting connected to water supplies, if children
were not being immunised I think that would be a big worry. We
would be giving them aid and nothing would be happening.
Q73 Geraldine Smith: Is enough happening,
that is the question?
Dr Shafik: Absolutely.
Q74 Geraldine Smith: How much is being
wasted?
Dr Shafik: I think we can demonstrate
quite clearly that we are delivering outcomes and improving people's
lives in dramatic ways. Is it enough? Are we getting enough value
for money? Are we getting the most poverty reduction for every
pound we are spending? I think the NAO Report has been quite useful
for us in challenging us to try to measure that better. I think
one of the things we are doing to try to improve our own performance
on that is that we recently created an Investment Committee which
actually met for the first time last week. The committee is trying
to develop international benchmarks to say, for example, on average,
for this amount of aid, we should be able to get X number of children
into school in Africa. What are the average unit costs of a water
connection globally or in this part of the world? Is DFID getting
enough water connections per pound we are spending? I do think
we need to do a better job over time of building up that knowledge
of what are the benchmarks to ensure that everything we do gets
maximum value for money. I do think that our track record so far
is pretty good, but of course we could do better.
Q75 Geraldine Smith: You seem pretty
convinced that budget support works and you seem to think it is
the best way forward. Do you appraise other possible aid, or other
ways of providing this aid?
Dr Shafik: Absolutely, and as
I said we do not do budget support in many countries. We do it
in 15 countries out of 120 countries where we provide some form
of aid. We are very selective about where we think it has the
most impact. Where we can do it we do think that it is the most
powerful instrument we can provide for achieving broader development
outcomes.
Q76 Geraldine Smith: If you are saying
that you have been really selective, then how come there have
been so many examples today and indeed within this Report of where
corruption has existed? As has already been said, in Rwanda defence
has gone up and health and education have gone down, even though
you have provided funding.
Dr Shafik: I believe the Rwanda
number is not correct actually because the defence numbers in
Rwanda have actually declined over the period.
Q77 Geraldine Smith: Not according
to the Report.
Dr Shafik: Box seven on page 13
shows that defence spending has declined in Rwanda.
Q78 Geraldine Smith: Since when?
In 2006 it was 2.5%, in 2007 it was 2.9%.
Dr Shafik: Sorry, you are right;
it did go up in one year.
Q79 Geraldine Smith: Whilst education
and health spending has fallen, that has gone down. What are you
doing about that?
Dr Shafik: In those cases we do
have to look at the individual cases. In Rwanda in 2007 there
were serious issues on the border with DRC and there was a serious
risk of conflict. We have to look at that and ask whether it makes
sense. To give another example, in Zambia recently we saw an uptick
in defence expenditure; we were very concerned about it and we
raised it with the Zambian Government. Zambia has incredibly low
defence expenditures by African standards; they were spending
the money on improving housing for soldiers because most of the
soldiers were living with their families in their barracks because
the conditions were so cramped and they could not afford anything
else. Thirdly, as they said to us, most of their troops are used
for peace keeping across Africa, that is why the have military
In that case our judgment was that a very modest increase in defence
spending was legitimate, given what else Zambia was doing to improve
health and education spend. In other cases we have kicked up a
fuss if we think it is illegitimate.
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