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In 2013 the Department for International Development (DFID) will receive its largest budget increase yet as spending on Official Development Assistance rises from 0.56% to 0.7% of GNI. DFID does much good work and enjoys a high international reputation, but it faces a major challenge in ensuring it can spend the large increase in funds cost-effectively while its administrative costs are declining.
To meet the UK ODA's target, at the end of 2011 the Department rescheduled into 2011 payments of c. £450 million planned for 2012, including a payment scheduled for April 2012 of £300 million to the World Bank. It also increased by £130 million the value of payments it was due to make on a number of projects. We understand that DFID operates in unpredictable environments where change is constant, but any rescheduled, or increased spending must provide value for money. DFID should miss ODA calendar year spending targets where there are delays or cancellations to its planned projects and it does not have alternatives which provide good value for money.
About two-thirds of DFID's expenditure in 2011-12, including nearly 40% of the Department's bilateral expenditure (spending through country offices), went through multilateral organisations. While OECD DAC rules require funding given to multilateral organisations from DFID country budgets to be categorised as bilateral expenditure, it is misleading, or at the very least not transparent, to do so when it is actually multilateral. The increasing expenditure through multilaterals represents a major change in recent years and has been accompanied by a decline in general budget support to recipient Governments. DFID states that the change is not a reflection of its need to spend money quickly, but a result of the reduced need for budget support in countries with rising tax bases and improved financial management as well as the greater focus on fragile states.
DFID should carefully examine its growing multilateral expenditure and ensure that it has thoroughly examined other options such as greater use of local NGOs and sector budget support, especially as multilaterals have high costs and too often limited effectiveness. We recommend that DFID develop specific strategies for engaging with NGOs and civil society organisations (CSOs) which ensure that the Department's bureaucratic procedures and funding mechanisms facilitate partnerships with effective, smaller NGOs and CSOs. We welcome the Permanent Secretary's willingness to look at making more use of 'sector' budget support.
DFID has switched expenditure from low income to middle income countries, in part because several countries with a large number of poor people have recently graduated to middle-income status. The Department's policy towards middle income countries is contradictory: it is ending grant aid to India in 2015, but programmes in Nigeria and Pakistan are due to grow rapidly. As expenditure on middle income countries increases, it is even more important that decision-making is rational and consistent; we recommend that the Department establish and make public the criteria it will use to inform decisions of when and how it should cease to provide aid.
We remain concerned that DFID's bilateral programme in one of the world's poorest countries, Burundi, has ended. We urge the new Secretary of State to re-instate a bilateral programme in Burundi.
During our inquiry we raised the possibility of establishing a Development Bank. This would not only mean that DFID was not so constrained by the need to ensure that cash was spent by the end of the year, but also, more importantly, would provide DFID with a mechanism to offer loans and put it in a better position to meet future challenges, including its engagement with middle income countries. We welcome the Permanent Secretary's positive response to our suggestion of a Development Bank. We will consider this in detail in our forthcoming inquiry into the Future of Development Co-operation.
DFID's spending on research is increasing. Over a quarter of this expenditure is spent without market-testing, mainly through grants to international organisations. We recommend that DFID review its procedures for issuing grants for research to such organisations. There are weaknesses in the way DFID staff use the research it commissions. We recommend that the Department improve its staff training and put increased resources into its Research and Evidence Division.
In its Annual Report and Accounts, the Department reported some huge discrepancies between actual and planned spend by pillar. DFID admitted that it got its initial estimates wrong, but said that whilst data on spending was useful it was giving more attention to results. The Department should either improve the accuracy of its planned spending so that it can take well-informed decisions about the overall shape of its programme or cease to use the present system of estimating spending by pillar.
In the past we had expressed concerns that DFID did not have adequate numbers of staff to spend cost-effectively its budget. DFID has addressed this and is rapidly increasing the number of professional advisers and increasing the proportion of its staff working overseas. However, we have some concerns about the mix and skills of staff, including whether it has the staff to oversee the huge expenditure of UK taxpayers' money undertaken by multilaterals.
Postings of UK-based civil servants are typically for three years and usually for a shorter period in the most fragile countries, bringing risks to continuity and institutional memory. The effectiveness with which DFID staff engage with local people will in part depend on their language skills and knowledge of local cultures. We make recommendations for addressing this situation.
While the Department is rapidly increasing its expenditure and the number of front-line staff, it is significantly reducing its administrative costs; the largest reduction has been in employee costs. It is important that as a result too many administrative tasks are not farmed out to front-line staff, thereby reducing the overall efficiency of the Department. The level of administrative costs should not be an arbitrary target, but should be determined by what is best for delivering the Department's results.
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