International Development CommitteeWritten evidence submitted by the TUC

1. The TUC appreciates the opportunity to take part in the inquiry into development finance, notes its relevance to the debate on the post-2015 Development Agenda and hopes that its views will be taken into serious consideration and reflected in the IDC recommendations.

Will the 0.7% ODA target be appropriate in the long term?

2. The TUC and its affiliates have long advocated the maintenance of the UN-recommended target of 0.7% of Gross National Income (GNI) as Official Development Assistance (ODA), reiterated our position in previous submissions1 and mobilised support in the international trade union movement for increased ODA.

3. The TUC is of the view that it is appropriate to maintain the target in the long-term, although it may not be adequate in view of the rapidly growing needs for development and related issues such as climate change and protection of the environment. The long-standing2 and painstakingly built global3 consensus4 around the UN-recommended target is worthy of consolidation and preservation. Moreover, it is unwise to call into question its validity and relevance, especially, in view of the pledges made by a number of countries5 including the UK6 to reach the target by 2015. Five—Norway, Sweden, Denmark, the Netherlands and Luxemburg7—have consistently fulfilled their pledges. It would also run counter to the current initiatives supported by the three main political parties to enshrine the target in legislation. It would, in our view, be virtually impossible to agree on a similar target at national or global level in the foreseeable future.

4. The doubts over the appropriateness of the target are likely to adversely impact on the feasibility of any future development agenda, notably, the post-2015 Development Agenda currently under discussion. While agreeing with the need for the search of additional sources of funding, the TUC does not favour any initiative potentially detrimental to existing mechanisms capable of generating funds for development. On the contrary, we would support any measures aimed at further consolidating existing arrangements8 to ensure predictability9 and adequacy10 of ODA.

5. The UK is an important DAC member11 and wields influence on the formulation of aid policies and practices in the European Union and international financial institutions. Any dilution of the commitment of the UN-recommended target by the UK is likely to set a precedent for other developed countries, notably, for other DAC members12 and will not bode well for the current initiatives to increase funding for development.

Has the DFID the right mix of financial instruments? Should it introduce new ones, including concessional loans? And the role of the UK as a provider of climate finance?

6. The UK decided to limit its ODA to grants and gradually phase out other forms of ODA after careful consideration of serious shortcomings associated with the mix of financial instruments, which was applauded by the DAC13 and the international development lobby both at home and abroad, especially, in the case of Least Developed Countries (LDCs).

7. Recent ODA flows from the UK follow the trend in favour of grants in relation to both bilateral and multilateral aid and are in tune with the general trend within the DAC. While recognising the need for concessional loans in exceptional circumstances, the TUC does not support a radical shift in favour of loans and other financial instruments in UK aid for a number of reasons.

8. UK aid is increasingly concentrated on a smaller number of countries, notably LDCs and fragile states already faced with severe financial constraints as well as socio-economic factors retarding their development. It would be imprudent to grant loans even at low interest rates to LDCs and low-income countries in general, as the accumulation of debt—principle and interest—over the years could threaten the stability of their vulnerable economies.

9. Moreover, UK aid is focused on some key sectors—health, education and water and sanitation in particular—vital to human development and future wellbeing of recipient nations. Public opinion in the country is unlikely to be amenable to aid mechanisms that would require some of the poorest nations to borrow funds from rich nations to build schools, hospitals, sewerage systems etc and repay them with interest, albeit, at concessional rates.

10. There is growing criticism of current methods of calculation of the degree of concessionality—grant element—of loans taken out by some developing countries from developed nations including France and Japan. In fact, the methods used by DAC14 tend to inflate the grant element significantly, disguising credit given to, especially, Middle-Income Countries (MICs) as loans at concessionary rates.15 The UK Government’s pledge to increase ODA and reach the UN-recommended target of 0.7% of GNI in 2013 has won praise from many quarters and the use of part of the increase in funds to be loaned out will diminish the value of the gesture and call into question its significance in real terms.

11. It is evident from past experience that there is no guarantee that a nation saddled with unsustainable debts will not default on repayment and that creditors will be forced to write them off often through a process of protracted and arduous negotiations. Developed nations like the UK have gone through the process and it is hard to justify moves to put in place arrangements likely to lead to similar scenarios16 in future. Debt forgiveness itself has been surrounded with controversy with the criteria used for debt relief varying significantly, sometimes even being closely associated with overt political calculations.17

12. The UK has already set up an International Climate Fund (ICF) to “support international poverty reduction by helping developing countries to adapt to climate change, take up low carbon growth and tackle deforestation”18 in an effort to contribute to the delivery of international climate change objectives. The Government has undertaken to adhere to the DAC definition of ODA in the disbursement of funds from the ICF in addition to giving assurances to observe guiding principles on aid effectiveness and value for money. The TUC supports the Government’s initiative in this regard and hopes that priority will be given to job creation and social protection in the sectors concerned.

Should the UK establish a new, independent development finance institution to offer concessional loans?

13. As argued in previous paragraphs, the TUC does not advocate a shift in favour of concessional loans in place of the current practice of outright grants and therefore does not support the establishment of a new independent finance institution for concessional finance. However, the TUC has no objections to the setting up of a separate financial institution for concessional development finance if the new institution is to provide additional finance for development.19

14. The UK is a significant contributor20 to international financial institutions, notably, the International Development Association (IDA) which provides concessional finance for development for 82 low-income countries.21 The use of part of the funds currently set apart for ODA for the establishment of a new financial institution is bound to have an adverse impact on the UK’s continuing support for the IDA and other multilateral financial institutions. The UK, in our view, is in a better position to achieve its objectives of the elimination of extreme poverty and promotion of economic growth in poor countries through close collaboration with the IDA –institution highly commended in the DFID’s own review22 in 2011.

15. The provision of concessional finance for development could be achieved more effectively through regional development banks such as the Asian Development Bank, African Development Bank and similar regional financial institutions rather than through a separate financial institution. In fact, the DFID is already providing concessional development finance indirectly through its support for regional development banks.

16. The Commonwealth Development Corporation (CDC) is a development finance institution wholly owned by the UK Government. It fulfils the role of the provider of development finance for the private sector in developing countries in Asia and Africa and has investments in 77 countries. If the Government is keen on the provision of further finance for the private sector, it can do so by increasing the capital of the CDC,23 enabling it to invest more in businesses and create jobs in developing countries without creating new finance institutions for the purpose. The TUC has consistently called upon the DFID to ensure that the CDC strictly adheres to its investment code including the respect of Core Labour Standards and believes that further finance should be made available only when it has fulfilled the obligation.

17. There is growing criticism of loans granted to developing countries in the guise of concessional finance by some developed countries, notably, Japan,24 France and Germany.25 There is concern over the impact of payment of interest and repayment of principle on the net transfer of resources from developing countries to developed countries. The TUC is also conscious of the possible slippage from concessional loans to tied aid26—practice disapproved by the development community27 which the UK has been able to wean itself from.

Has the DFID got the right balance between bilateral and multilateral aid?

18. The balance between bilateral28 and multilateral aid should be contingent on the aims and objectives of donors and those of recipients and, in our view, there is no hard and fast rule about the ideal balance.29 The publicly declared objective of UK ODA being poverty reduction in poorer countries through the achievement of Millennium Development Goals30 (MDGs), on the whole, the TUC considers the current balance of roughly 60% and 40%31 between bilateral and multilateral aid to be appropriate. However, the TUC would like to see changes in the current allocation of resources between multilateral institutions. Moreover, while recognising the need for concentrating aid on the Least Developed Countries, the TUC remains firmly of the view that aid to Middle Income Countries with large numbers of poor people32 should be continued for the foreseeable future.

19. The TUC does not favour a significant drop in the proportion of UK Aid channelled through multilateral institutions for a number of reasons. Multilateral aid is more effective due to economies of scale in delivery, availability of best technical expertise in specialised agencies, better coordination of policies and practices, and legitimacy due to their global presence. One may recall that the Multilateral Aid Review33 commissioned by the UK Government concluded that the WB Group was one of the most effective multilateral institutions that the DFID funds.34 Multilateral aid could be an effective means of intervention in politically sensitive and fragile situations.35

20. A slight increase in multilateral aid could be appropriate under the current circumstances. The pledge to increase ODA towards the UN-recommended 0.7% of the country’s GNI and reach the target in 2013 is of great importance and will be a significant milestone in UK aid disbursement. In view of the reduced GNI due to recession, the UK Government will now be able to reach the target at a lower level in absolute terms. Nevertheless, if the target is to be reached in 2013, ODA will need to rise by 27.5% and 2.5% in 2013 and 2014 respectively.36 In our view, in the case of bilateral aid, absorptive capacity constraints facing some developing countries could stand in the way of increased aid flows and call into question the appropriateness of sudden increases in aid flows. With UK ODA being increasingly targeted on a limited number of low-income countries,37 sudden influx of aid into some of the countries concerned could cause difficulties. In the short-term, it is advisable for the UK Government to channel part of the increased ODA through EU institutions, UN agencies like the ILO, WHO, UNDP etc in order to minimize the risk of absorptive capacity constraints in some target countries. The TUC hopes that the UK Government will reconsider its decision to withdraw financial support for the ILO and make contributions to the implementation of ILO Decent Work programmes at country level,38 for instance.

21. There is also scope for the DFID to support development cooperation activities by trade unions and/or enhance the effectiveness and impact of its own interventions through close collaboration with the trade union movement in the UK and abroad. Many development agencies39 and ministries of foreign affairs40 in the EU are keen to exploit the potential, engage with trade unions in policy dialogue and support trade union development cooperation initiatives in a variety of ways.

What lessons can be learnt from other national donors?

22. We appreciate the UK’s standing in the international donor community, not only as a significant contributor to ODA, but also as a leading advocate of aid effectiveness, as well as its influence in shaping the development agenda. The UK also plays an important role in the provision of humanitarian assistance and in engaging with fragile states and is often viewed as a model by other donors.41 Nevertheless, the TUC believes that there is room for improvement in the following areas.

23. As pointed out before, the UK has not yet taken the opportunity to enhance the impact of its aid programmes through engagement and collaboration with trade unions in developing countries, despite its recognition of the role of labour in development. Apart from a few sporadic examples, the DFID has shown little interest in supporting UK trade unions in their development initiatives. There is scope for the DFID to help develop sustainable capacity in trade unions in developing countries to enable them to play a catalytic role in promoting democracy, good governance, the rule of law etc. In general, as the DAC Peer Review points out,42 the DFID has often construed capacity in the context of state capacity and accountability and missed the opportunity to develop capacity in civil society, especially, non-state actors like trade unions capable of holding the State to account. The DFID should learn from the experience of its DAC partners—Denmark, Finland, Germany, the Netherlands, Norway, Spain and Sweden, in particular—who have consistently provided substantial support for trade unions43 and other non-state actors to effectively fulfil their role as partners in development.

24. The TUC is aware of the Government’s intention to improve predictability of ODA in terms of volume over a reasonably long period of, at least, three to four years. In this regard, the TUC is disappointed that the Government took no meaningful initiative to adopt the private member’s bill to enshrine the commitment to devote 0.7% of GNI in legislation in March44 this year. The Danish ODA has exceeded the 0.7% of the country’s GNI in the last 30 years. The predictability of aid in Denmark is, according to DAC,45 assured by the publication of aid figures under the Finance Act and their inclusion in bilateral agreements and the three to five-year disbursement plans made public in advance.

25. The DFID, like DANIDA, has decentralised its work and reduced staff in recent years and is likely to face the adverse consequences of loss of expertise and experience in the delivery of aid and in ensuring aid effectiveness. In our view, the DFID will find it hard to guarantee the quality of its ODA if it continues staff reductions. The development of knowledge and skills of existing staff is a priority and can benefit from the Danish experience.46

26. The UK Government needs to translate into reality its long-standing commitment47 to ensure policy coherence across all departments, notably, the FCO and Department of Business, Innovation and Skills, Department for Environment, Food and Rural Affairs. In our view, all donors including non-DAC donors need to ensure that the aims and objectives of ODA are shared with, and supported by, other organs of government and progress in this regard is long overdue.

27. The DAC has published a series of publications distilling best practice from peer reviews of donors which covers a broad range of themes48 including partnerships with civil society, capacity building, effective aid management etc. The UK Government, notably, the DFID needs to take into serious consideration DAC advice in these areas.

How should DFID monitor and influence expenditure by multilateral institutions, including in countries and regions where DFID does not have bilateral programmes?

28. Multilateral institutions have grown in number,49 diversity and complexity over the years. The UK needs to concentrate on the institutions through which it channels a significant proportion of its multilateral aid and monitor their performance and exercise influence on the expenditure of those critical to the achievement of its ODA aims and objectives50

29. The UK has at its disposal a range of mechanisms to conduct ex-post assessments51 of multilateral aid at different levels in addition to specially commissioned periodic reviews and access to evaluations of multilateral aid carried out by other agencies and should take into account their recommendations and put in place adequate and appropriate arrangements for monitoring expenditure by multilateral agencies.

30. As for ex-ante appraisal of interventions by multilateral agencies, the UK has adequate representation on the decision-making organs of the majority of multilateral institutions—WB,52 IDA, EU, regional development banks, in particular, to which it provides substantial amounts of aid as core funding,53 and should be in a position to have an oversight on the design, implementation and monitoring of projects and programmes funded by them.

31. DFID offices should consult, and engage with, trade unions and other civil society groups and get feedback not only on UK bilateral interventions, but also on multilateral action carried out through EDF, World Bank, IDA and other agencies in order to gauge the impact at grass-root level. Moreover, DFID officials dealing with UN specialised agencies—UNESCO, for instance, should work in close collaboration with Education International—Global Union in the sector—in order to enhance the effectiveness and impact of their action.

32. The UK, being one shareholder among others, needs to collaborate closely with other contributors to multilateral institutions in order to increase the effectiveness of multilateral aid. In fact, separate reviews54 of multilateral aid by individual donors such as the UK constitute administrative burdens and costs on multilateral institutions. In addition, it is hard to carry out a rigorous, objective, impartial evaluation of a large-scale intervention funded by the World Bank from the viewpoint of a single shareholder alone. The UK should persuade other shareholders to undertake joint evaluations of their contributions to multilateral aid. In addition, the UK should support reforms of multilateral institutions ensuring more involvement of developing nations in their decision-making processes. Finally, the UK needs to adhere to its commitments to enhance aid effectiveness.55

June 2013

1 All Party Parliamentary Group for Debt, Aid and Trade, TUC Response to the Inquiry into Increasing Aid Finance, 2007

2 In 1969, the Pearson Commission proposed that ODA be raised to 0.7% of GNP by 1975, which was endorsed in a UN resolution in 1970.

3 Switzerland was not a member of the UN until 2002.

4 US, while accepting the concept in principle, has rejected targets or timetables.

5 16 European countries have pledged to reach the target by 2015.

6 We also deliver in this coming year on this nation’s long-standing commitment to the world’s poorest to spend 0.7% of our national income on international development. We should all take pride, as I do, in this historic achievement for our country, Chancellor of the Exchequer, on 20 March 2013, Budget Speech.

7 The contributions from the five countries concerned as a percentage of their GNI were as follows in 2012: Denmark (0.84%) Luxemburg (1%) Netherlands (0.71%) Norway (0.93%) Sweden (0.99%) DAC 2013.

8 Visit http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/EN/foraff/137320.pdf, for EU concerns over ODA

9 The predictability of aid has been a major concern for many developing countries, especially those highly dependent on aid. “We will increase medium-term predictability of aid”, Paris Declaration on aid effectiveness and the Accra Agenda for Action, OECD, Para 26.

10 Net ODA as a % of GNI dropped from 0.31% in 2011 to 0.29% in 2012, DAC Update, March 2013. This reflects a 4% drop in real terms.

11 UK has been a DAC member since 1961.

12 ….. the UK is in many ways seen as a model by other donors. This gives the UK a special responsibility, DAC Peer Review of the UK, 2010, p13

13 There had been broad consensus on the need for grant aid within DAC when a formal agreement on it was reached in 1972.

14 See letter to FT by Richard Manning, former Chair of OECD DAC on 9 April 2013.

15 The TUC favours two changes—use of a more realistic discount rate instead of the current rate of 10% and consideration of only grant element as ODA. At present, all loans with a grant element above 25% are considered to be ODA.

16 The total cost of forgiving debts of 39 countries eligible for debt relief under the Highly Indebted Poor Countries (HIPC) initiatives was estimated at USD 76 billion in end-2011 net present value terms, IMF factsheet on HIPC, April 2013

17 Some researchers point to the number of years of colonial rule, voting patterns in the UN, openness to trade etc as important determinants of debt forgiveness adopted by some developed countries, Eric Neumayer, LSE, World Development, Volume 30, No 6, 2002.

18 International Climate Fund, Implementation Plan 2011–12/2013/2014, Technical Paper, UK Government

19 if it is funded out of resources outside the UK aid budget set to reach 0.7% of the country’s GNI in 2013

20 In 2010, UK pledged £2.7 billion to the IDA-16, representing 15.6% of the total value of donor pledges.

21 40 of which are in Africa and many are among the DFID target countries.

22 IDA scored 39/52 or 75% in the MAR.

23 The CDC claims that it has not received any new funds from the Government since 1995.

24 Japan introduced Special Terms for Economic Partnerships (STEP) loans in 2012.

25 See, for instance, Rob Tew, ODA Loans, Discussion Paper, Development Initiatives, Feb 2013

26 Japan was asked to consolidate progress in untying its aid in the DAC Peer Review in 2010, p72.

27 See, Untie Aid, Para 31, Paris Declaration

28 It should be noted that some bilateral aid is disbursed through multilateral institutions.

29 In 2011, bilateral aid was 58.39% of total UK ODA.

30 DFID’s overall aim is to reduce poverty in poorer countries, in particular through achieving the Millennium Development Goals (MDGs), 1.6, DFID Annual Report 2012, see also International Development Act 2002.

31 The UK part (40%) is roughly equivalent to DAC average. See, What do we know about multilateral aid? The 54 Billion Dollar Question, DAC, OECD, 2012

32 A view supported by DAC Peer Review 2010, “Where it engages in middle income countries (MICs) such as India, the UK should sustain its focus on poverty reduction.”, p16

33 The UK Government, following the MAR, decided to limit the number of multilateral institutions through which it channels ODA and concentrate it on fewer of them.

34 Overall, 15 of the 43multilateral organisations were judged to be strong in performing a role which is critical to meeting UK development and humanitarian objectives, and 21 were deemed to be satisfactory. This is a very strong endorsement of the central importance of the multilateral system for meeting UK development and humanitarian objectives, MAR, Para 15, Chapter 3

35 The DAC Report on Multilateral Aid in 2008 enumerated the advantages of the multilateral system.

36 The 0.7% Aid Target, Standard Note, SN/EP/3714, 17 Sept 2012

37 Following the Bilateral Aid Review in 2011, the DFID decided to reduce the number of countries from 43 to 27 in the coming years.

38 http://www.tuc.org.uk/tucfiles/394/A_Decent_Job.pdf

39 Social Dialogue and Workers’ rights, The Right to a Better Life, DANIDA, June 2012

40 http://www.fnvmondiaal.nl/media/pdf/352260/1194602

41 See The DAC Peer Review of the United Kingdom, p13, 2010

42 “The UK’s development policies are relatively strategic in their approach to capacity development; however, neither the UK government nor DFID has articulated a clear or explicit vision for capacity development in the context of UK development co-operation.”, DAC Peer Review of the United Kingdom 2010, p20

43 In 2012, a comprehensive study of 25 trade union recipients of financial support from development agencies in 18 countries concluded that “TUs should be seen as development actors in their own specific right, and should not be limited by the same uniform requirements for short-term impact indicators, geographical concentration and thematic focuses as for other CSOs.”, Trade unions’ views on working with donor governments in the development sector—A review of 18 donor governments’ support mechanisms, TUDCN Development Papers, 2012–14, p45

44 In February 2013, in a letter to the Secretary of State for International Development, the TUC urged the Government to ensure the adoption of the private member’s bill

45 DAC Peer Review of Denmark 2011, p.15

46 The Danish Ministry of Foreign Affairs should “Review its human resource policy, its staffing levels and strategy for recruiting specialists, and its training plan for headquarters and embassy staff to ensure they can effectively implement the new strategy, especially in light of the focus on fragile states,” recommends DAC Peer Review 2011, p18,

47 “Our government will work together as one. We created the Department for International Development in 1997, not to confine development, but rather to make sure it had enough influence across all our choices—whether in diplomacy, trade or security strategies.”, Secretary of State for International Development, Eliminating World Poverty: Building our common future, DFID White Paper, 2009.

48 See, for example, Partnering with Civil Society, Supporting Partners to build their Capacity, Managing Aid: Practices of DAC member countries

49 According to the OECD, there are about 210 major organisations and funds. MAR commissioned by the UK Government included 43 of them.

50 See terms of reference of MAR

51 National Audit Office, International Development Committee, Independent Commission on Aid Impact, for instance

52 The voting rights in WB and IMF are determined by a country’s share in the capital which entitles 78,550 votes, for example, in the WBG. UK has 1,212,241 votes in the IDA.

53 70% of core funding by the UK went to EU and multilateral development banks in 2011–12. The use of funds provided as core funding is at the discretion of the management in line with the aims and objectives agreed by members.

54 Since MAR, four countries—Australia, Denmark, the Netherlands and Sweden—carried out separate reviews of their multilateral aid.

55 Paris Declaration on Aid Effectiveness (2005), Accra Agenda for Action (2008) and Busan Partnership for Effective Development Cooperation (2011)

Prepared 11th February 2014