There has been huge progress in developing countries. The percentage of the world's population living in extreme poverty since 1990 has halved, and the prospect of ending extreme poverty by 2030 is within our reach. The aim of developing countries taking on the responsibility of funding their own services is increasingly being realized. However, aid is still of critical importance, especially for reaching the very poorest people in Low Income Countries (LICs) and the World Bank has noted that aid is expected to remain a critical input to achieve the new development agenda. The UK should retain its focus on using aid primarily to help poor people in poor countries. Meeting the needs of the poorest in Low Income Countries, supporting the transition in Middle Income Countries (MICs), and financing global public goods all make the case for significant development finance. We fully support the international commitment to the 0.7% aid target and believe that it should be maintained.
Development aid in the form of grants is very limited and precious and it is getting increasingly difficult to make the case for giving aid in the form of grants to MICs. We believe that DFID should also develop the capacity to distribute aid in the form of concessional and non-concessional loans either "in house" or by establishing a UK development bank. We recognise that it is will take time to build the capacity to manage loan finance but the expectation, once the capacity has been established, should be that grants to MICs should only be used where no other form of finance is possible. There may also be circumstances where loan finance would be appropriate in LICs, for example to finance infrastructure, such as power generation, which will generate a return on investment, but care should be taken not to re-burden least developed countries with unmanageable debt. We believe that grants should continue to be used for financing access to basic minimum needs in LICs like health, education, sanitation and water and where speed is of the essence, for example for emergency relief; for failed states and major conflict areas; and for global public goods which cannot be funded in other ways.
Supporting the private sector can have significant benefits in terms of boosting economic growth, creating jobs in developing countries and helping to deliver projects with other social benefits. We think that there is considerable scope for support to the private sector, but it will be necessary to avoid the disadvantages such as giving one private company a competitive advantage over others. As private sector projects are expected to make a return, we recommend that when DFID is dealing with the private sector, the presumption should be that finance will be provided as returnable capital.
Establishing a UK development bank could give the DFID bilateral programme a way of providing a wider range of finance instruments, including concessional loans and so increase the impact of its aid spending. We recognise that it would be a major undertaking, but believe that DFID must plan for the long term.
One option open to DFID would be to channel more of its finance through multilaterals, and to make use of their wide range of specialist skills and expertise, rather than attempt to replicate all of these in its bilateral programmes. In order to determine the appropriate balance of bilateral and multilateral spending, DFID must be able to compare the relative outcomes and value for money of these different channels. DFID must also maintain sufficient influence within multilaterals in order to monitor and influence their spending priorities.
We recommend that DFID establish a financial instrument team that can prepare a development finance strategy; coordinate the various finance initiatives that are currently being piloted by DFID; draw together the different bilateral and multilateral approaches; design new instruments and build up the necessary skills for future innovation and development. Without this effort, DFID may not be in a position to establish a development bank if and when it were deemed advantageous to do so.
We welcome the Secretary of State's initiative of conducting a review into how DFID should respond to the changes in the development landscape. We recommend that this should include the publication of a development finance strategy for the coming decade, setting out DFID's analysis of the issues to which it must respond, the pros and cons of different options, its preferred approach and the reasons for those choices. This should take the form of a Development Finance White paper, to be published during 2014.