Conclusions and recommendations
1. We were surprised to see a
huge fall in the percentage of UK bilateral ODA spending on Low
Income Countries. We note DFID's explanation that the main reason
is the graduation of countries to middle income status. Nevertheless,
we recommend that DFID maintain spending on Low Income Countries
as its priority. We further recommend that DFID review its programmes
in all MICs to examine the scope for reallocating bilateral aid
from MICs to LICs and to set a timetable for doing so. (Paragraph
7)
2. There
has been huge progress in developing countries. The number of
people living in extreme poverty since 1990 has halved, and the
prospect of ending extreme poverty by 2030 is within reach. Aid
is still of critical importance, especially for reaching the very
poorest people in Low Income Countries and we believe that they
should remain the priority for UK aid. Aid programmes can help
to build mutually beneficial trade and economic cooperation relationships
with emerging economies and we believe that a stronger emphasis
on economic development can be fully consistent with poverty reduction.
As a first step, we recommend that DFID work with the OECD
DAC to review, update and clarify the ODA definitions. (Paragraph
18)
3. Members
of the Committee, during visits to developing countries, have
observed repeatedly the enormous inequalities in income, health,
education and life prospects for the people in developing countries
compared to those in richer countries like the UK and, frequently
also, the gross inequality between richer and poorer people within
developing countries. The High Level Panel drew attention to the
continuing challenge of addressing inequality and rightly emphasises
the maxim "Leave No One Behind". We recommend that
DFID should set out in its response to this report what steps
it intends to take to assist in the reduction of inequality globally
and within the developing countries in which it has bilateral
programmes. (Paragraph 19)
4. We
recommend that, in general, Middle Income Countries should graduate
from aid, but in a controlled manner which takes account of needs
and resources. During the transition period, we recommend that
aid programmes make more use of technical assistance, support
to NGOs, and loans, as discussed later in this Report. Meeting
the needs of the poorest in Low Income Countries should remain
our priority, but supporting transition in Middle Income Countries,
and financing global public goods all make the case for significant
development finance. We plan to hold a separate inquiry in the
future into climate finance. We fully support the international
commitment to the 0.7% aid target and believe that it should be
maintained. (Paragraph 20)
5. In
this connection, 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.
It should include an assessment of the following issues: (Paragraph
21)
· The function of aid, should
it remain focused on poverty reduction and economic growth, but
in the longer term should it also include international cooperation
on global public goods if so, what are the implications of this
for both future funding requirements and cooperation with other
Government Departments?
· Climate finance, which requires
much more serious analysis, including the extent to which aid
is used to fund climate related projects and which countries should
be eligible for aid to fund such projects.
· The OECD definition of ODA;
how DFID will work with the OECD review to ensure that the focus
remains on addressing poverty? We believe that DFID should make
a statement about its proposals for change in the definition before
the Summer Recess 2014 to give Parliament and civil society the
opportunity to comment on the Government's objectives before the
OECD finalises any changes at the meeting of OECD Ministers in
December.
· Whom is aid for: just for
low income countries, or for people in poverty wherever they live?
Whether the existing definitions of low, middle and high income
countries are still useful or whether there are better ways of
defining priority countries and identifying financing gaps? Should
aid be targeted at extreme poverty, or at other levels of poverty
as well, or at countries with large financing gaps and weak prospects
for economic growth? How can aid help to reduce inequality when
average incomes are rising but poverty levels are not reducing?
· The thresholds for defining
Middle Income Countries needs to be reviewed and updated. We urge
DFID to encourage the World Bank to examine them.
· DFID's strategy for aid to
middle income countries: how will DFID identify and respond to
the continuing development needs of these countries? What criteria
will it use to withdraw aid from countries as they transition,
and how will it decide to start different types of relationships
based on different instruments?
· The contribution of DFID
and its financial mechanisms towards addressing inequality, equalising
opportunities and ensuring that no one is left behind.
6. We
are disappointed that neither Germany nor France appear to have
backed up their stated commitments to achieve the 0.7% GNI aid
target by 2015 with the necessary allocations in their forward
budgets. (Paragraph 35)
7. The
growth in sources and types of development finance mean that developing
countries now have more choice and can in some cases elect to
opt for finance which is delivered more quickly and with less
conditionality than traditional aid. However, aid is still of
critical importance, especially for reaching the very poorest
people, for leveraging in other resources and for helping growth
in low income countries. For some other major national donors,
such as Japan, Germany and France, concessional loans represent
a significant part of their bilateral aid delivery. DFID must
continue to evolve its strategy so that it continues to target
its resources in the most effective way, including providing a
combination of grant aid, loans and guarantees. (Paragraph 38)
8. 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 low income countries, 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. (Paragraph 39)
9. There
are many large public sector projects in the developing world
which require finance. Concessional loans are one way of supporting
such projects which have potential economic benefits for developing
countries. They can offer benefits to donors in terms of recycling
finance and leveraging additional finance; and to recipients in
terms of offering a less expensive option to market loans. For
concessional loans to be effective, donors need to have the appropriate
skills and expertise to ensure that loan finance works properly
and is used appropriately, so that projects are fully implemented
and achieve the desired development impact; that the debt sustainability
of the recipient country is not threatened; and that the loan
is repaid. (Paragraph 47)
10. The
Secretary of State told us that DFID would continue to provide
concessional loans where necessary through multilaterals, but
that it had no immediate plans to start offering bilateral concessional
loans. She also said that DFID might consider providing bilateral
loans on a case by case basis. This ambiguity could be confusing.
(Paragraph 48)
11. We
believe that there is a strong case for providing concessional
loans, especially to lower Middle Income Countries. For example,
DFID is working with the Indian Government on a programme to support
the transition from a grant aid based relationship to one of mutual
cooperation on trade and economic development. We believe that
DFID should consider the scope for providing loans to regional
governments within India as part of this transition programme,
in order to support public sector projects in those regions which
continue to have high levels of extreme poverty. This could provide
a model for the transition arrangements for other middle income
countries. (Paragraph 49)
12. We
recommend that DFID sets out criteria which it can use to judge
whether it still has the most appropriate multilateral and bilateral
instruments. Given the rapidly changing context, it should actively
consider introducing new finance instruments, or it will risk
reducing its effectiveness. We recommend that DFID includes an
assessment of the following issues in its finance strategy:
(Paragraph 50)
· Is there a demand for bilateral
concessional loans for public sector projects, and if so, from
which countries and sectors?
· What additional skills and
expertise would DFID need to provide and manage bilateral loans?
What additional processes would it need to introduce?
· What are the relative merits
of providing loans through multilaterals, and bilaterally? In
what circumstances and for what projects would DFID consider providing
bilateral loans?
13. It
is important to be clear where public money (ODA) is likely to
strengthen the private sector and where it risks compromising
the useful free play of market forces. DFID has provided effective
support for the private sector (establishing land registries,
strengthening support for SMEs, capital markets, trade facilitation
etc). However, there are potential dangers, notably in creating
non-competitive businesses through public funding. (Paragraph
60)
14. Supporting
the private sector can have significant benefits in terms of boosting
economic growth, creating jobs and raising incomes in developing
countries and helping to deliver projects with other social benefits.
Finance provided as returnable capital could potentially play
a greater future role, and enable the finance which has helped
businesses to become sustainable and profitable, to be reinvested
in other projects. We think that there is significant scope for
support to the private sector, but as such 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. (Paragraph 67)
15. We
welcome the launch of the Impact Investment Fund and ask DFID
to supply further details of the role and operation of this fund,
including details of whether finance will be provided as grants
or loans or other instruments.
(Paragraph 68)
16. We
recommend that private sector support should be an integral part
of DFID's finance strategy, and that support for the private sector
could be scaled up. We recognise that this will require new skills.
We recommend that DFID's finance strategy includes an assessment
of the following factors:
(Paragraph 69)
· How can DFID target its private
sector support such that it supports inclusive growth?
· How can DFID assess and measure
the development impact of its private sector support so as to
take account of broader outcomes such as improved livelihoods,
income growth and leverage, as well as jobs created?
· Should the remit of CDC be
extended? Have the recent CDC organisational changes increased
its development impact? Would bringing CDC under more direct DFID
control improve DFID's development impact?
· Can the success of PIDG be
further extended or replicated for other countries and sectors?
We propose in a future inquiry to
look at DFID's private sector work.
17. In
addition, the creation of a new UK institution with the capacity
to provide a range of bilateral finance instruments and technical
assistance and the ability to work in partnership with other development
banks and multilaterals could enable it to deliver a range of
longer term support to build on its humanitarian and rapid response
to emergencies, such as that to Typhoon Haiyan in the Philippines.
The Philippines is a lower middle income country with which the
UK has no bilateral aid programme. It will need substantial investment
to enable it to rebuild essential infrastructure and services.
DFID has promised to assist in the reconstruction of the Philippines;
the technical assistance, guarantees and loan finance which will
be needed might best be delivered through a development bank.
(Paragraph 74)
18. The
UK is unusual in the G20 in not having its own development bank.
Establishing a UK development bank could give the DFID bilateral
programme a way of providing a wider range of finance instruments,
to complement its grant aided programmes which we would expect
to continue for the poorest countries. A UK development bank could
offer a range of new instruments, including concessional loans,
together with technical expertise which is often valued as much
as finance. However, there is a real danger that establishing
a new UK development agency outside DFID would fragment UK development
policy. Great care would need to be taken to avoid this danger
and to ensure that a new development bank would work closely with
existing institutions. (Paragraph 81)
19. We
recognise that establishing a new UK development bank would be
a major undertaking, which would need careful planning and a measured
implementation, but believe that DFID should plan for the long
term. Creating new institutions is challenging but not impossible;
for example the Government has created the Green Investment Bank
in less than three years. The 'do nothing now' option carries
the risk that DFID's bilateral approach becomes less effective
over time and that it is unable to play a key role in the future.
(Paragraph 82)
20. 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.
(Paragraph 83)
21. We
recommend that DFID considers the following questions in its finance
strategy: (Paragraph 84)
· What are the development
financing gaps in terms of instruments, sectors and countries?
What niche could a new UK development bank fill? Would the new
instruments be more effective in terms of fostering growth, reducing
poverty and addressing global public goods?
· What would be the potential
advantages and disadvantages of establishing a UK development
bank? What could be achieved, or achieved better, through a new
UK development bank compared to existing institutions? What comparative
advantages would a UK development bank have over existing institutions?
· What are the pros and cons
of other alternatives, including no change; developing closer
working arrangements with multilaterals; providing concessional
loans through the existing DFID structure; and expanding the scope
of CDC?
· How would a UK development
bank cooperate with other UK finance institutions and other development
finance institutions?
· What are the institutional
and legal issues which would need to be addressed?
· What would be the costs and
possible timetable for establishing a UK development bank?
· What new skills would DFID
need to acquire and how would it do so?
· What is the potential role
of new finance instruments, such as Development Impact Bonds and
Diaspora Bonds?
22. 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, both in countries where it has a bilateral
presence and those where it does not. We reiterate the recommendation
that we made in our recent report on the Multilateral Aid Review,
that DFID develop mechanisms for comparing the relative effectiveness
of bilateral and multilateral aid. (Paragraph 88)
23. Whilst
we recognize the strengths of multilaterals in some areas, we
firmly believe that DFID must continue to maintain a strong bilateral
presence in order to maintain the UK's influence in individual
countries, and to monitor the performance of multilaterals which
the UK finances. DFID must also maintain sufficient influence
within multilaterals in order to monitor and influence their spending
priorities. We recommend that DFID explore the potential for
embedding more DFID staff within key multilaterals, and for increasing
the opportunities for sharing learning and experience with its
partners. (Paragraph 89)
24. We
welcome DFID's work on promoting South-South cooperation, as a
complement to development finance efforts. Emerging economies,
such as Brazil, have much to contribute to developing countries.
DFID has only a limited presence in Latin America, and we recommend
that it explores the potential for small DFID teams to work closely
with multilaterals on specific projects, so as to benefit from
their specialist knowledge and to contribute to its learning from
emerging economies. We recommend that DFID establish an innovation
and knowledge transfer unit which would be responsible for identifying
good development practice and transferring relevant knowledge
and experience to other projects and country programmes. We would
expect the unit to be based in the UK, but to have sufficient
capacity to deploy a few people to participate in and learn from
country programmes, and to cooperate with the FCO where necessary.
We also recommend that DFID explore ways of helping low income
countries to share their knowledge and experience with each other.
(Paragraph 93)
25. An
increasing number of people living in poverty are in Middle Income
Countries, which should eventually graduate from traditional grant
aid. Donors are likely to combine grant aid to the poorest countries
with new forms of engagement in Middle Income Countries, including
technical assistance, support to NGOs and loans. They will want
to invest more in supporting South-South cooperation and they
are also likely to spend more resources on global public goods.
If DFID is to retain a leading role in this changing development
world, and maintain its relevance, it will need to innovate in
its use of development finance. DFID will need to think carefully
about the balance between bilateral and multilateral aid, and
about how to deploy new forms of finance. (Paragraph 94)
26. DFID
needs to have a more explicit overall strategy on what financial
instruments to use when, how much in each case, to which countries,
via which channels, under what circumstances, and what skills
are required to use them effectively. It also needs to address
how the UK can remain relevant for developing country needs, how
it can remain an innovator in the provision of aid, what UK aid
will look like over the coming decade, and its strategy for getting
there. In particular, DFID will need to think carefully about
whether and how to provide bilateral loans to developing countries.
This will not be a process that can be done quickly, and will
require a different set of skills. DFID will also need to consider
the mechanisms which would be required for providing bilateral
loans, including whether and under what conditions a development
bank would be required. To do this effectively, we recommend that
DFID develops a comprehensive statement and development finance
strategy to define its future role and how it will be financed.
This should take the form of a Development Finance White paper,
to be published during 2014, which should, inter-alia, set out
the contribution of DFID and its financial mechanisms can make
towards addressing inequality, equalising opportunities so as
to "Leave No One Behind", as advocated by the High Level
Panel. (Paragraph 95)
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