House of Commons - Aid under Pressure - International Development Committee

Aid under Pressure - International Development Committee Contents

4 Donor Support for Development

70. At the start of the downturn many organisations expressed concern that the crisis might cause donor countries to reduce their aid budgets. UK Aid Network told us:

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Commentators have pointed out that this must be avoided, as it becomes more important than ever during a downturn to maintain ODA levels, when aid plays an important counter-cyclical role in supporting developing countries as other sources of funding are reduced. Dr McCulloch of IDS argued that:

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71. The OECD Development Assistance Committee concurs with this view, warning that any decrease in ODA contributions would mean that additional burdens would be placed on developing countries at a time when they face reduced income from other sources, combined with additional calls on their resources due to increased poverty levels. It believed that this could "undo some of the progress already made towards meeting the Millennium Development Goals."[131]

UK aid budget

72. Through the course of the current recession the UK Government has frequently reaffirmed its commitment to meet its own target of allocating 0.7% of Gross National Income (GNI) to ODA by 2013.[132] This intention was reiterated most recently in the 2009 Budget Statement, which confirmed that UK ODA would reach £9.1 billion in the next financial year, signalling that the UK is on track to meet its interim target of allocating 0.56% of GNI to ODA by 2010-11.[133] Under the 2007 Comprehensive Spending Review settlement, DFID's budget was set to increase from £6,843 million in 2009-10 to £7,917 million in 2010-11.[134] We welcome the UK Government's clear determination to fulfil its pledge to allocate 0.7% of Gross National Income to Official Development Assistance by 2013. The increase in DFID's funding of nearly £1 billion in the next financial year, confirmed in the 2009 Budget, is a significant step towards achieving this goal and sends an important message to other donors and to partner countries about the UK's commitment to international development.

73. An important point to bear in mind when predicting aid volumes is that the economic downturn will have a negative effect on growth in many developed countries and that GNI is therefore likely to fall. This would mean that, even if donors continued to meet the percentage targets for aid expenditure, the actual amount derived from that percentage is less than would have been predicted when the 0.7% target was set. Kevin Watkins of UNESCO estimated that the 0.56% of GNI which EU member states have pledged to achieve collectively by 2010 is now worth $4.6 billion less than it was a year ago.[135]

CURRENCY FLUCTUATIONS

74. While there have been no reductions in UK ODA aid levels the financial crisis is nevertheless having an impact on the purchasing power of this expenditure, mainly due to the depreciation in the value of sterling. Since reaching a low-point in January 2009 the pound has regained its value slowly but is still significantly below its rate in August 2008.[136] The Secretary of State told us in January that DFID was already feeling the effects of this: "The changes in the level of sterling have impacted directly […] on our purchasing power in a number of developing countries and is also impacting on our contributions to multilaterals."[137]

75. The Department estimated that exchange rate movements during 2008-09 cost it £122 million. £110 million of this was incurred in increased expenditure to meet commitments made in euros to European Commission (EC) programmes, due to the significant fall in the value of sterling against the euro. Another £10 million arose from increased costs of capital charges; and £2 million was accounted for by rising administration costs.[138]

76. DFID has emphasised that the Treasury expects Government Departments to manage the impact of exchange rate movements (up or down) within agreed settlements.[139] The Department has therefore had to reprioritise its budget to meet these costs. Of the additional £100 million needed to fund contributions to EC programmes, £73 million was found from DFID's contingency fund (from which DFID also provides resources in response to humanitarian disasters).[140] The Treasury has recently informed Departments that they can, if they wish, ensure the predictability in the sterling value of their obligations made in foreign currency by hedging these transactions. This would eliminate the risks, and possible gains, of currency movements but the cost of hedging these transaction would have to be found from within departmental budgets. DFID is currently reviewing the costs and benefits of this scheme.[141] If DFID decides to pursue this course of action it should be arranged by the Treasury on the Department's behalf.

77. We were told that "most of DFID's payment commitments are denominated in sterling, and are therefore not impacted by exchange rate movements."[142] However, this seems to ignore the potential impact that the decreasing purchasing power of sterling could have on DFID's expenditure, which the Secretary of State referred to when he spoke to us in January. The second time we took evidence from the Secretary of State we returned to this issue. He downplayed the impact of currency fluctuations, arguing that it was not "unprecedented that there have been variations in the level of dollar aid and sterling aid that is provided." He pointed out that recent changes in currency values had coincided with a fall in the price of oil, food and other key commodities and that this had partially offset the costs associated with the reduced value of the pound.[143]

78. DFID does not change its aid allocations in response to exchange rate movements. The Secretary of State said that it would not be possible for DFID to do this, both because of the administrative burden it would place on the Department and because it would undermine efforts to make the UK's aid predictable for recipient countries.[144]

79. We accept that currency fluctuations are a normal occurrence with which all development agencies have to deal. However, the movements in sterling in recent months have been the most extreme in many years and this is bound to have an impact on DFID's spending power. We request that DFID, in its response to this Report, provides us with a update on how its budget for the current financial year has been adjusted to cope with this challenge. We would also be grateful to know the outcome of its deliberations on the Treasury's proposal to allow Departments to ensure the predictability of foreign exchange commitments by entering into hedging transactions.

DFID EFFICIENCY SAVINGS

80. While DFID's budget continues to increase under the 2007 Comprehensive Spending Review settlement, the 2009 Budget imposed a requirement on all Government Departments to find additional efficiency savings. In DFID's case this will amount to £155 million in 2010-11. The Department has identified savings in the follow divisions:

£50 million from the International Division, which will be partially achieved through pushing for stronger cash management in the multilateral organisations to which DFID contributes.
£40 million of savings in the Policy and Research Division which DFID hopes to achieve through strengthened partnerships on research and analytical work, and improved procurement and management of its policy and research contracts.
A £10 million cut in the budget of the Communications Division, to be achieved by "more effective, focused central communications work and more efficient use of web and social media networks".
A reduction of £55 million in DFID's contingency fund which will reduce the resources available for unforeseen emergencies. DFID has stated that this 60% cut will still leave it with sufficient funds to respond to international disasters.[145]

DFID believes that it can achieve these savings without affecting existing committed flows of funds to its partner countries.[146]

81. We have expressed concern in several of our previous reports that measures which DFID has been required to take to meet existing Government efficiency targets have led to reduced staff headcount and that this in turn may well impact upon the delivery of the Department's objectives. In our report on the DFID Annual Report 2008 we concluded:

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82. Whilst we accept the need for the UK Government to reduce public expenditure, the announcement of further departmental efficiency savings reinforces our concerns about DFID's ability to meet its objectives of poverty reduction in the world's poorest countries. As we have pointed out, DFID is unusual in being a Department with an increasing budget and a reducing headcount. The countries in which it now operates are increasingly more fragile ones and therefore likely to be more labour-intensive. We reiterate that it would be regrettable if "efficiency" measures actually made the Department less effective. We shall return to this subject in our inquiry later this year into the DFID Annual Report 2009.

International donor support

83. The most recent OECD report on aid flows showed that, in 2008, OECD Development Assistance Committee members increased their development assistance by 10.2%.[148] Although the DAC Chairman made it clear "that these figures do not yet factor in any impact the crisis would have on aid flows," he argued that they were encouraging:

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84. The OECD's projections of future DAC development expenditure look even more impressive with an estimated increase in ODA levels of 22% by 2010.[150] However, these figures are based on the assumption that donors will meet publicly announced targets, including the EU's target that each member state should spend 0.56% of GNI on ODA by 2010. It projects, for example, that Italy will increase its ODA spending by 145% over two years. However as the OECD itself noted, the Italian authorities have indicated that "Italy's ODA trend will be influenced by constraints on Italy's public finances."[151] In December 2008 the Italian Parliament approved a cut of 56% for 2009 in the amount of ODA that goes through the Ministry of Foreign Affairs.[152]

85. We note that the OECD's projections of aid expenditure by Development Assistance Committee countries continue to show an upward trend. We are, however, concerned that these may be over-optimistic and do not provide a true reflection of countries' intentions. We are alarmed by Italy's decision to make a substantial reduction in its ODA budget, particularly in the context of Italy holding the G8 presidency. Its actions could send out the wrong signals about donors' intentions and cause development assistance to drop off the international agenda. We urge the UK Government to make strenuous efforts to ensure that assistance to poor countries remains at the heart of international discussions held during the ongoing economic crisis and thereby build on the achievements which the London summit delivered for developing countries.

86. Italy is not the only country that has announced reductions in its aid budget. On 7 April 2009 the Irish Government announced the fourth cut in its development budget since June 2008, bringing the total reduction to €255 million.[153] The OECD's press notice on aid flows draws attention to several countries that are not even half way towards achieving the GNI/ODA targets, including Austria and Greece.[154] NGOs have argued that, even before the crisis, some countries were not on track to meet their existing commitments. ActionAid told us: "It is […] clear from several governments' medium term finance frameworks that their existing promises for more aid are unlikely to be met (Greece, Portugal, France and possibly Germany.)"[155] Development Initiatives made a similar point believing that, when countries make commitments and fail to take the steps required to meet them, it "undermines the integrity of international diplomacy."[156] At the informal meeting of EU development ministers in Prague at the end of January 2009, the Commissioner for Development and Humanitarian Aid noted that a number of EU member states might have difficulties meeting their commitments.[157]

87. However, when we explored with academic witnesses the relationship between economic growth and aid levels we learned that there was no evidence of a direct link between recession and reductions in government development spending. ODA flows over the last 40 years showed no strong association between the levels of Gross National Product (GNP) or growth in GDP and aid expenditure.[158] We have referred to the UK's pledge to maintain aid levels despite falling GDP but this is not the only example: the Spanish government has indicated that it will fulfil its existing commitments, despite experiencing a very strong economic contraction; and in December 2008 the Swiss parliament invited its government to put forward a budget that increased aid expenditure.[159]

88. This suggests that the recession may not be the only motivation behind recent reductions that some countries have made in their aid budgets, and that the financial crisis should not be seen as an insurmountable barrier to donors meeting their commitments. Dr McCulloch argued that, given that there was no link between levels of development spending and economic growth, the choice as to whether or not to maintain aid spending through the recession was primarily political: "The real truth of the matter is that it is a political choice." This meant that the leadership shown by the large donors would be important in determining whether other countries would meet their commitments. He highlighted the role the UK could play in encouraging others to meet their pledges:

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89. Contributors to our eConsultation were supportive of the UK playing a leading role in international development and thought that this should include putting pressure on other governments to honour the commitments they have made. One contributor said that the UK Government should be "encouraging other governments to contribute more generously, so as to multiply the total amount available for aid."[161] Another wrote that: "Development may be one of the remaining areas in which the UK can be a leader in the world. Yes, the UK should try to encourage others to contribute more aid."[162] On both occasions when we heard from the Secretary of State he emphasised the actions that the United Kingdom was taking to engage with donor partners to encourage them to honour the commitments they had made.[163]

90. Whilst the UK Government has indicated that it will honour its commitments to developing countries, despite the onset of the recession, not all countries have done the same. We would encourage DFID to use every opportunity to press donor partners to continue to meet the promises they have made on aid levels, particularly in the context of high-level international meetings.

Aid effectiveness

91. In our 2008 Report on Aid Effectiveness, we concluded that, if the millions of people still living on less than $1 a day were to be lifted out of poverty, donors needed to provide more effective aid, not simply larger quantities of aid.[164] As the downturn puts increased pressure on developing countries, it is even more important that donors deliver the money they have pledged in a way that ensures that it has the maximum possible impact. The UK Aid Network reinforced this point in their evidence:

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92. As our previous report highlights, full implementation of the 2005 Paris Declaration is crucial. The Declaration is an international agreement signed by over 100 donors which sets out five key principles for the effective delivery of aid:

ownership of development policies by recipient countries;
alignment of donor support with developing country institutions, policies and poverty reduction strategies;
harmonisation and transparency of donor actions;
managing resources and improving decision-making to achieve better results; and
mutual accountability of donors and partners.[166]

The Accra Agenda for Action agreed in September 2008 set out further steps which developing and donor countries would take to "accelerate and deepen implementation of the Paris Declaration."[167]

93. DFID has informed us that it has already met seven out of the ten 2010 targets and is on track to meet the remaining three.[168] The OECD recently published an update on implementation of the Paris Declaration. This found that, although some progress was being made, a further acceleration was needed if countries were to reach the targets set for 2010.[169] In oral evidence, the Chairman of the OECD DAC said that he felt furious that the same discussions on the need for aid effectiveness had been taking place for years. The actions which were required were clearly understood but "this is a matter of political will and I am asking for this political will." He was hopeful that the economic downturn would prompt donors to pay more than "lip-service" to this issue, and would provide the necessary incentive to accelerate movement towards full implementation of the aid effectiveness agenda.[170]

94. The effects of the economic downturn on donors and recipients could provide the necessary motivation to make more rapid progress on aid effectiveness. This would produce tangible benefits in the impact that existing aid levels have on poverty reduction as well as helping to maintain public support for development. We agree with the Chairman of the OECD Development Assistance Committee that the time is over for governments simply "paying lip-service" to the principles of aid effectiveness set out in the Paris Declaration. Although DFID has been a good performer to date in implementing the Paris Declaration principles, there is no room for complacency. We recommend that the Independent Advisory Committee on Development Impact (IACDI) consider including evaluation of DFID's progress towards meeting its Paris Declaration commitments as part of its future work programme.

95. We have received evidence from the Local Government Association (LGA) which suggests that DFID could make more effective use of its resources if it exploited the expertise that exists within local government in the UK. It gave one example of Warwick District and Warwickshire local government officers working on a waste management and health education project in Sierra Leone. This resulted in "reduced incidence of malaria and waterborne disease, improved hygiene practices and capacity in local councils to generate their own revenue."[171] When we raised this with the Secretary of State he said that the Department was already in discussion with the Commonwealth Local Government Association about the work that DFID was doing. He undertook to take this matter forward with the LGA.[172]

96. We believe that DFID could improve the effectiveness of its development activity if it made greater use of the expertise that exists within local government in the UK. We recommend that DFID explore the possibility of a development partnership with the Local Government Association and other local government organisations. We will examine this issue in more detail in our inquiry into Urbanisation and Poverty.

TIMETABLE FOR MEETING THE 0.7% GNI TARGET

97. If developing countries are to make the most effective use of development assistance they need to know how much they are going to receive and when they will receive it, so that they can set their budgets and plan future expenditure. Dr McCulloch emphasised the importance of donor governments maintaining aid budgets and providing a predictable flow of support to developing countries. He said:

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The Chairman of the OECD DAC made a similar point, arguing that ODA needed to be a reliable and predictable source of funding if it was to achieve sustainable development results: "anything else would defy the very purpose [ODA is] meant to have and it would be a terrible cost for developing countries and for tax payers in the donor countries."[174]

98. One proposal for increasing the amount of information partner countries receive about aid flows is for donors to set out timetables explaining how they plan to meet their aid commitments. These timetables would contain annual targets for aid allocations. Development Initiatives believed that this would make it much easier to judge whether a donor was meeting its pledges: the current lack of intermediate targets means that it is impossible for a donor to be formally "off track" against the overall 2015 target of 0.7% GNI.[175]

99. The EU has agreed that all member states should set out "rolling multi-annual indicative timetables showing how they will reach agreed ODA/GNI targets."[176] However, Maciej Popowski of the EC told us that half of member states were yet to produce a timetable. In a recent report the Commission noted that most countries which have not provided timetables for future spending "cite legal restrictions related to their national budget cycle" as the reason that they have been unable to provide this information although some countries are in the process of reviewing these obstacles. The EC says that "these efforts have to be pursued and concluded urgently, especially in those countries that had referred to internal discussions on the issue in previous years."[177]

100. The UK Government is one of those unable to provide a complete timetable due to the national budget cycle. It has, however, set out a timetable to 2010-11, the period covered by the 2007 Comprehensive Spending Review. Its plans for 2011-13 will be set out following the next Spending Review.[178]

101. We understand the difficulties which national budget cycles pose for donors in setting indicative timetables for reaching the 0.7% goal for aid allocations by 2015. Agreeing timetables would, however, make it much easier to assess whether pledges were being met. Just as importantly, it would greatly assist partner countries in planning future expenditure by giving them more certainty about the amounts of aid they would receive and when. We believe the European Commission should continue to push member states to set timetables. The UK has a good record on aid predictability and meeting its funding pledges. Ways must now be found to improve on this as part of the overall aim of aid effectiveness, notwithstanding the stated obstacle of the Comprehensive Spending Review cycle. The UK has set a more ambitious target than other donors, aiming to reach 0.7% of GNI by 2013. We therefore recommend that DFID now sets out a clear timetable for how this will be achieved over the next four years which includes annual milestones.

MAINTAINING A CLEAR DEFINITION OF ODA

102. In its submission ActionAid argued that the recession had led to an increase in what it terms "phantom aid"—aid that does not support poverty reduction.[179] A 2008 report by Concord, a group of European development NGOs, made a similar point, criticising EU governments for distorting their aid figures by including spending on debt relief, the education of foreign students and support to refugees in Europe. It asserts that this spending has no developmental impact and points out that, in 2007, European countries spent almost €8 billion on these non-aid items, making up 17% of all European ODA.[180] The report did, however, concede that the share of "inflated" aid had recently declined dramatically, largely due to ODA comprising less debt relief than in previous years.

103. The OECD DAC is responsible for defining what expenditure may be counted as ODA. Its most recent guidance explicitly states that assistance to refugees from developing countries arriving in donor countries "is reportable as ODA during the first 12 months of stay, and all costs associated with eventual repatriation to the developing countries of origin are also reportable."[181]The Concord report argued that this practice should be stopped, as it believed that "this spending does not contribute to development in the countries of origin."[182] The UK does not count such costs towards its ODA expenditure. Concord does however highlight the UK's joint DFID/Department for Energy and Climate Change £800 million Environmental Transformation Fund as being wrongly counted as ODA expenditure, saying "Unfortunately, this funding line is not additional to previous UK ODA pledges and […] further clouds reporting and diverts money from other poverty reduction priorities."[183]

104. The clear view of the DAC Chairman was that all finance for projects in developing countries not aimed at the reduction of poverty, for example climate change projects, "should be additional". He said that, in principle, he was open to the prospect of looking again at what contributions could be counted as ODA but before such discussions took place, there would need to be an agreement that countries would not seek to use them as an opportunity to escape their existing commitments, by trying to get items that were excluded in previous negotiations, for example expenditure on security or military engagements, reinstated as part of ODA. He questioned whether there was an appetite to reopen the ODA debate, pointing out that most countries were relieved when "Pandora's box was closed three years ago" and ODA definitions were agreed.[184]

105. We believe that it is vital that every pound that countries pledge as Official Development Assistance (ODA) is spent on programmes whose main purpose is poverty reduction. We recommend that the internationally agreed definition of ODA is tightened to reflect this. We will return to the specific issue of the relationship between ODA and funding for climate change adaptation and mitigation in our forthcoming report on Sustainable Development in a Changing Climate.

129 Ev 146 Back

130 Ev 132-133 Back

131 "Development aid at its highest ever in 2008", OECD Press Release, 30 March 2009 Back

132 Qq 29, 31 [Mr Alexander] Back

133 "Budget 2009 - keeping our promises to the world's poorest people", DFID Press Release, 22 April 2009 Back

134 2007 Comprehensive Spending Review, p 240. The 2010-11 figures was reduced by £155 million in the 2009 Budget to meet efficiency savings requirements (see paragraph 80-82). Back

135 "Forgotten victims of the downturn", Financial Times, 11 March 2009 Back

136 Ev 156 Back

137 Q 15 Back

138 Ev 158 Back

139 Q 255; see also Ev 158 Back

140 Ev 157 Back