DFID in 209-10 and the Resource Accounts 2009-10

1.2 We are aware of increasing concerns about the impacts of efficiency savings on DFID capacity across DFID’s country programs, as illustrated in box 1 below:

1.3 As an illustration of the impact efficiency savings are having on the demands being made on DFID staff, the average member of DFID staff was responsible for £1.25m of spending in 2004/5, £2.42m by 2008/9 and will be responsible for at least £4.5 million by 2013/14 (if DFID’s staff levels fall further this figure will be higher). [2] This is an increase of around 260% in 9 years. Seen from this perspective DFID’s efficiency savings have been substantially higher than its targets and possibly any other Government Department.

1.4 UKAN members believe there are two main fundamental problems with the way the Government is dealing with DFID’s efficiency program. Firstly, it is asking DFID to reduce its absolute administration spending (5% over the 2007 CSR) when a rising budget should require a focus on administration as a share of total spending.

1.5 Secondly it is asking DFID to benchmark itself against other UK Government departments rather than other international donor agencies, which would be more suitable a reference point given the uniqueness of DFID’s role in Government. Such a comparison shows that the share of administration costs in the UK’s total ODA (3.3% in 2009) is well below the average for OECD donors (4.3% in 2009) [3] and therefore DFID is already a relatively efficient organisation given the challenging context in which it works.

1.6 Of course, the scale-up in DFID’s budget – possibly around 10% per year - expected for the next few years and the new Government’s agenda for DFID – to spend more aid in fragile states and deliver more results focussed aid - only serve to further highlight concerns about future efficiency savings DFID will be expected to make. It is important that a wider focus on value for money - taking into account DFID’s wider capacity to deliver effectively - is not pushed aside by a narrow focus on this goal – focussing simply on administration costs etc.

1.7 Given the above context we believe there is now a very strong case for proposing that a different approach to DFID’s pursuit of efficiency be taken in this Spending Review, one that recognises its growing budget, the wider value for money reform effort the Government is seeking from DFID and the unique challenges that it faces within Government in managing spending in the developing world.

1.8 UKAN members therefore recommend that the IDC propose the following for the way these issues are dealt with at DFID in the future:

• Use the share of administration in DFID’s total budget as a basis for future efficiency targets and avoid letting this share fall any further in recognition that DFID’s administration costs are well below the average for DAC donors

• Protect as far as possible DFID’s program funded admin in its Spending Revie w efficiency program, whilst ensuring that other admin costs are kept at a level that allows DFID to continue to manage its spending effectively

• Undertake a comprehensive review of DFID’s current capacity for managing its spending, how it meets needs and the challenges for delivering on the Government’s emerging reform plan for DFID

2. Significant questions remain about CDC’s focus on poverty reduction

2.1 The net annual investment of the Commonwealth Development Corporation (CDC) – the UK Government’s Development Finance Institution – counts towards the UK’s ODA, which was equivalent to £172m in 2008 and £213m in 2009. This role in contributing to the UK’s ODA confers on CDC a responsibility to invest its resources in ways that deliver maximum poverty reduction impacts. However, CDC’s operations are currently only weakly poverty oriented, posing questions about its suitability to continue to deliver the UK’s ODA and how it can best reform its business model to better promote poverty reduction.

2.2 CDC is the UK Government’s Development Finance Institution (DFI) and is wholly owned by the Department for International Development. Since 2004 CDC has been funding private equity funds in developing countries who in turn invest in firms directly.

2.3 In recent years there have been substantive and growing questions asked about CDC’s policies and practices, i ncluding its weak poverty focus [4] , its oversight of the business practices of the firms its funds are invested in [5] and the excessive remuneration of its management [6] . It is urgent that CDC management urgently address all these issues, however, this submission focuses on the challenges around how CDC can better promote poverty reduction through its investments.

2.4 So, what are the specific indications of concern about the poverty focus of CDC’s

investments?

2.5 The vast majority of its investments are in larger (the average CDC supported firm had 1,188 employees in 2009 [7] ) established firms, especially in the power generation, retail banking and agribusiness sectors. Although these firms will be contributing to economic development their direct contribution to poverty reduction may be limited as these are not the sectors where poor unskilled workers are likely to be employed. In contrast, a very small proportion of CDC’s funds end up in the small and medium enterprise sector (only £125m planned for 2009-2013; compares to CDC current investment portfolio of £1.4 billion), where poorer entrepreneurs would be operating, and only 2% of its funds are currently invested in microcredit, which can help the poor to ga in access to affordable credit. [8]

2.6 At the root of this pattern of investment is the limited policy framework in place at CDC to direct investments towards areas likely to contribute more directly to poverty reduction. Such investments by their nature are likely to involve greater risk than investing in established businesses. However, CDC management have agreed to accept higher risk in only 15% of their investments limiting space for investing in such areas.

2.7 The only other policy of CDC that could be said to have emerged in response to the concerns raised about CDC’s poverty focus is a commitment to deliver 75% of future investments to low income countries and 50% to sub-Saharan Africa. However, this policy in fact does little to address these concerns as it still leaves developing country fund managers free to invest the funds they receive from CDC in any sector and company they see fit.

2.8 A final concern to raise is that CDC only very weakly monitors and assesses the poverty impact of its investments and its evaluation procedures a re still quite under-developed. [9]

2.9 In fact, if one were to take an honest look at CDC’s policy framework and recent financial performance – it has outperformed other equ ity funders in its key markets [10] - it is hard not to conclude that it first and foremost a standard private equity funder focussed on emerging markets. Its management have arguably been more vocal about its successful financial returns than anything else, hardly the approach one would expect from a DFID-owned DFI.

2.10 It is therefore clear that CDC is far from operating in a way that maximises its poverty focus and impact, an issue which puts in question its management of a substantial share of the UK’s ODA (2.7% in 2009) and certainly should preclude the UK Government from injecting any further investment into CDC.

2.11 So what should CDC do to address these concerns and become a more suitable and responsible member of the UK Government’s development functions?

2.12 UKAN members do not currently have the expertise to identify the specific day to day investment policies required by CDC to improve its focus on investments that are most likely to directly contribute to poverty reduction. However, DFID does have significant private sector development expertise at its disposal and the IDC should direct DFID to work much more closely with CDC to develop such policies and practices. These should be at the heart of CDC’s corporate functioning and the commitments Fund Managers make to CDC when receiving its funds. Such an approach will probably require CDC to accept lower returns on its investments, which should be an acceptable approach for an institution with development as its core mandate.

2.13 UKAN members would also strongly encourage the IDC to demand DFID and CDC are suitably ambitious about the poverty impacts to be achieved by CDC and do not benchmark themselves against other DFI’s which we believe are even more weakly focussed on their responsibilities to promo te poverty reduction than CDC. [11]

3. The poverty focus of the UK’s ODA – progress and future challenges

3.1 DFID’s delivery of the vast majority of the UK’s ODA, a continued focus of delivering ODA to poorest regions of the world and focussing it on basic services, has been critical to focussing the UK’s ODA on poverty reduction in 200910. This approach to managing ODA has been driven by a strong policy and legislative framework, which will be important for DFID to keep in place and continue progress to deliver on in the coming years in order to maintain its focus on poverty reduction.

3.2 The Department for International Development (DFID) is the primary Government agency supporting the UK’s international development efforts, a role it is well equipped to play given due to its significant expertise in supporting development efforts around the world and its recognition as one of the leading international dev elopment agencies in the world. [12]

3.3 DFID’s focus on supporting poverty reduction efforts in the developing world is built on a strong policy and legislative framework.

3.4 In recent years DFID ODA has been increasingly focussed on the poorest countries and the needs of the poorest people, supported by policies to deliver 90% of bilateral ODA to the low income countries, to increase ODA to sub-Saharan Africa and spend 50% of bilateral ODA on basic services.

3 .5 In 2009/10 DFID continued its progress towards meeting these goals by delivering almost 40% of sector allocable bilateral ODA on basic services, 73% of country allocable bilateral ODA to low income countries and 55% to sub-Saharan Africa. [13] If further progress on this important approach to delivering the UK’s ODA is to continue then these policies need to remain in place and the IDC should encourage DFID to commit to doing so.

3.6 The 2002 International Development Act, commits DFID to spend ODA in support of development and poverty reduction outcomes, has played a significant role in focussing DFID’s work on poverty reduction, a factor recognised by the recent OECD Development Assistance Co mmittee Peer Review of the UK. [14]

3.7 This legislation has also provided an important foundation from which the UK Government has been pro-actively promoting the use of ODA for poverty reduction in a range of international fora. For example, during 2009/10 the UK Government played a leading role within the EU, G8 and the OECD’s Development Assistance Committee in ensuring donors agreed to maintain strict standards for what ODA can be spent on and how to regulate its focus on development focuss ed interventions. [15]

3.8 UKAN members therefore urge the IDC to encourage DFID to continue to sincerely apply international standards on ODA to its own ODA and to play a pro-active role in protecting these standards and encouraging others to apply them internationally.

4. The need for greater scrutiny of the effectiveness of DFID’s technical assistance

4.1 Technical assistance (TA) – the provision of technical, advice, training and analysis to help build the capacity of developing country institution, organisations etc – is perhaps the most difficult form of development assistance to deliver effectively, DFID delivers at least 25% of its aid in this form and its effectiveness is critical to the ability of developing countries to lead their own development efforts. Despite this, there has been no major assessment of DFID’s TA for many years and certainly not since new guidance was introduced on its use in 2006. UKAN members therefore urge the IDC to direct DFID to undertake such an assessment in order to explore how effectively its TA is being delivered and the suitability of its existing policies and practices around TA.

4.2 Technical assistance (TA) – the provision of technical, advice, training and analysis – is perhaps the most difficult aid modality to deliver effectively. This is because its effectiveness relies on a clear understanding of recipient needs, communicating often complex skills and knowledge and significant challenges in achieving sustainability and empowerment of beneficiaries.

4.3 In large part because of major difficulties in overcoming these challenges, it is widely recognised that the effectiveness of TA across the donor community is far from optimal. The OECD recently concluded that TA is all too often "ad hoc, piece-meal", has involved "donors short term project goals displacing long term incremental change", is "costly" and has sometimes "impa cted negatively on ownership". [16]

4.4 There is certainly no indication that the UK’s TA is any less prone to these problems than any other donor, especially given that no major assessment of DFID’s use of TA has been carried out in recent years. This is a major concern given that probably at least a quarter of all of the UK’s aid is delivered in this form and that the effectiveness of this form of assistance is critical to the ability of developing countries to successfully develop the capacity they require to lead their own development efforts and overcome any dependence they have on aid.

4.5 In an effort to improve the effectiveness of its TA in 2006 DFID introduced guidance [17] to be used across the organisation to support its staff to more effectively engage in dialogue on, design and manage its TA. However, as of yet DFID has not undertaken an assessment of how well this guidance is being implemented and how well it responds to the challenges involved in delivering its TA effectively. [18]

4.6 UKAN members therefore believe an assessment of the effectiveness of DFID’s TA is urgently required in order to help understand the challenges it faces with this modality, to improve its use in the future and to contribute to ongoing efforts to deliver better value for money from the UK’s aid.

4.7 This assessment should not only focus on the degree to which DFID’s TA guidance is being implemented and is fit for purpose, but also the general effectiveness of DFID’s TA, including in relation to the following factors:

• Ownership – to what degree are TA priorities identified by recipients and programs designed and managed in cooperation with them

• Cost effectiveness – to what degree are the most cost effective delivery agencies used, including a focus on the use of deve loping country agencies [19]

• Sustainability – to what degree is its TA supporting long term capacity development and empowerment of developing country stakeholders rather than filling short term technical constraints

• Impact on DFID’s knowledge development and institutional learning – there are concerns that because much of DFID’s TA is managed through contracting-out, opportunities are being lost for knowledge development and learning within DFID

(please see Bond’s submission to this inquiry for more on this matter)

5. The challenges for DFID in measuring its effectiveness and establishing an independent Aid Watchdog

5.1 There is clearly much that DFID can do improve its focus on results, including developing better results systems and establishing the independent Aid Watchdog. Such efforts must though be sensitive to the complex issues aid aims to address and therefore include a focus on tangible results as well as intangible ones (such as empowerment); long term as well as short term objectives; tolerate and work with difficult questions of attribution; and allow for learning, innovation and risk. It is also important that DFID maintains it focus on aid effectiveness reforms agreed in the Paris Declaration and Accra Agenda for Action – such as the use of budget support, of which DFID is a pioneer - and these are critical to efforts to deliver country-led, sustainable and cost-effective results.

5.2 Recent assessmen ts of DFID’s corporate systems [20] and approach to monitoring and

evaluation [21] have clearly shown that there is more DFID can do to improve its results systems and culture and its monitoring and evaluation practices. Motivated by these concerns and the need to manage DFID’s funds more effectively in a challenging economic climate the new UK Government has announced its intentions to improve DFID’s focus on results and to establish an independent Aid Watchdog to better scrutinise the impact of the UK’s aid.

5.3 Such steps have the potential to contribute to efforts to improve the development results achieved from the UK’s aid and with the effort to achieve the MDGs faltering there is no better time for DFID to have maximum ambition on delivering development results.

5.4 The business of development is a complex and unique one and therefore DFID needs to take an approach to results that is sensitive to these complexities and the unique goals of aid and builds on the decades of experience within the development community of using external assistance to support development.

5.5 UKAN members currently come together within a number of Bond working groups to discuss challenges around their effectiveness, monitoring and evaluation and how to pursue results, and they have prepared some inputs to this inquiry on the challenges around development results. These are presented in Bond’s submission to this inquiry , which in summary calls on DFID to take an approach to results that focuses on tangible results as well as intangible ones (such as empowerment); long term as well as short term objectives; tolerates and works with difficult questions of attribution; and allows for learning, innovation and risk.

5.6 The independent Aid Watchdog needs to be responsive to these issues and will only be able to do so if it is staffed by a multi-disciplinary team of development professionals who are able to utilise their diverse development experience to develop a suitable approach to results and communicating about the challenges of development free from political interference.

5.7 The donor community has spent the last decade reflecting on the types of practices that have hindered its ability to deliver aid efficiently and effectively and to contribute to development efforts. A substantive and growing body of evidence is now available to illustrate the impact of some of these practices on the value of aid.

5.8 From this process of debate and analysis a solid consensus has emerged about some of the most significant of these practices that need to be reformed culminating in donors committing to a range of reforms in the 2005 Paris Declaration on Aid Effectiveness and the 2008 Accra Agenda for Action.

5.9 At their heart these reforms ultimately aim to ensure that aid recipients can take ownership of their development efforts with donors working together to support these efforts. Such an approach to aid not only helps to deliver value for money in the short run, but by empowering aid recipients also helps to ensure that development assistance is focussed on country needs and priorities and has greater potential to be sustainable.

5.10 DFID has been the leading proponent and implementer of these reforms internationally – especially the use of budget support - it is recognised that they have made a contribution to improving the effectiveness of the UK’s aid in supporting development. [22] In recent years DFID has also been integrating these practices into its corporate management and performance systems, so that they become part of the culture of the organisation.

5.11 The Paris Declaration expires in 2010 and in late 2011 international development agencies and developing country governments will be coming together in South Korea at the 4th High Level Forum on aid Effectiveness to discuss what reform commitments will follow on from it. An ambitious and progressive outcome from this conference is vital to future international efforts to promote aid effectiveness.

5.12 UKAN members urge the IDC to encourage DFID to continue to make the Paris Declaration and Accra Agenda for Action (and subsequent aid effectiveness reforms agreed to in 2011) a corporate priority for DFID in recognition of their critical role in supporting sustainable country-led development results.

5.13 DFID should also be encouraged to play a leading role in ensuring that at the 4th High Level Forum on aid Effectiveness an ambitious and progressive framework of aid effectiveness reforms is agreed.