International Development CommitteeWritten evidence submitted by Oxfam GB

1. Introduction

1.1 Oxfam welcomes the opportunity to submit evidence to International Development Select Committee’s inquiry on development finance at a time when the UK Government needs to articulate a clear vision and a “road map” for UK development assistance. This submission covers:

0.7 target: To fulfil its international obligation the UK must continue to provide at least 0.7% of Gross National Income (GNI) as Official Development Assistance (ODA) to reduce poverty and inequality;

Financial instruments: Currently DFID does not use its range of financial instruments as effectively as it could. DFID should carefully select the most appropriate financial instrument based on the unique project purpose and country needs. Any loans provided by DFID should be additional to the 0.7% ODA commitment;

Climate finance: Climate finance must be additional to the 0.7 ODA target;

Development Finance Institution (DFI): DFID would need to make a convincing case to demonstrate the added value of a new DFI;

Bilateral and multilateral aid: Whilst Oxfam supports bilateral aid, aid delivered via multilateral organisations can address global problems and provide support for global public goods that cannot be tackled by bilateral funding;

Lessons from other national donors: DFID can take lessons from other donors on aid effectiveness and domestic resource mobilisation. It is also vital that DFID listens to country stakeholders including local officials and citizens;

Monitoring and influencing expenditure by multilateral institutions: DFID should ensure that the multilateral organisations selected follow the OECD guidelines for ensuring effective aid.

2. How Appropriate the 0.7% ODA Target will be in the Long Term

2.1 Oxfam believes that developed nations should fulfil the United Nations (UN) commitment to spend at least 0.7% of GNI on ODA.1 We welcome the UK’s leadership in delivering this long-standing commitment—a move that consolidates the UK’s position as a global leader on international development policy.

2.2 Poor countries lost $140 billion in budget revenues due to the global economic crisis.2 As a result of aid coming too little and too late to fill this fiscal hole, 40% of extra spending by developing countries has been funded by borrowing and risky off-budget private financing initiatives. For all targets most developing countries’ spending on Millennium Development Goals (MDGs) has been well below the amount promised, or international organisations’ estimations of the amount needed.3 To date progress on meeting the MDGs has been uneven within countries and regions with much of the progress a result of success in relatively easier “low-hanging fruit”.4

2.3 For the second year running aid levels have fallen, and donors’ failure to deliver on their aid promises will have drastic implications for the likelihood of reaching the MDGs. Projections indicate that in 2015 almost one billion people will be living on an income of less than $1.25 per day.5 Meeting all MDG targets, including the harder to reach people will be a challenge that will continue beyond 2015. Therefore the UK must commit to providing at least 0.7% of GNI in aid as long as it is needed.

2.4 Oxfam recognises that ODA flows are relatively small as a proportion of total financial flows to developing countries, but for many countries aid is necessary to maintain public spending; in the mid-2000s Ghana, Tanzania and Uganda financed between 36 and 70% of expenditure with aid. Crucially, ODA remains the only source of funding for development that is solely focussed on tackling poverty. This poverty focus has been safeguarded by the OECD Development Assistance Committee’s (DAC) definition of ODA, stipulating that the main objective of ODA is the promotion of the economic development and welfare of developing countries.

2.5 ODA—particularly though multilaterals—has a key role in promoting global public goods and providing financing capacity to address social and economic problems. Aid from national donors that is used to build the human capital of recipient countries acts as a catalyst for poverty reduction, supports effective state institutions and provides resources to help an active population hold their governments to account.

2.6 Given that around 80% of poor people now live in middle income countries (MICs),6 it is crucial that donors continue to provide ODA to MICs to tackle poverty and inequality, achieve the MDGs and reach the poorest people where their basic needs are unmet by the government or market. This does not absolve MIC governments of their responsibility to pursue redistributive policies to tackle poverty and inequality, but while extreme need exists in MICs DFID should provide aid whilst working more with national governments to tackle poverty and inequality.

3. DFID’s Financial Instruments

3.1 Does DFID have the right mix of financial instruments?

Different financial instruments are required in different contexts; DFID should select the most appropriate financial instrument based on the project purpose and country needs, whilst retaining a strategic focus on poverty reduction. DFID must take measures to avoid increasing states’ indebtedness, therefore extra caution should be taken in providing loans.

3.1.1 Budget support:

3.1.1.1The World Bank calculated that countries that received debt relief—essentially a form of general budget support as it frees up money in the national budget—increased investments in poverty reduction from $6 billion in 2000 to $17 billion in 2006.7 The European Commission also found aid recipients with higher levels of budget support performed better on a range of development indicators to those with lower levels of budget support.8 Budget support is more predictable and enables partner governments to increase expenditure in their priority areas and align funding with their national development plans, bringing greater ownership and improving a government’s accountability to its own citizens. Despite the positive impact of budget support, in 2011 DFID announced that budget support would be cut by 43%; large reductions in general budget support have only partially been compensated by sector budget support.

3.1.1.2Budget support (general, sector, or a combination) is an effective financial instrument where governments have a strong commitment to fighting poverty and upholding human rights; reasonable financial systems to account for the use of resources; and mechanisms in place to ensure the availability of basic information to its citizens. Oxfam believes that DFID should reverse this decline in its use of budget support.

3.1.2 Technical cooperation and assistance: In some circumstances technical assistance can be an appropriate instrument for example in enabling governments to learn from others’ experience; however recent scandals over the poor targeting of technical assistance and accusations of money wasted have revealed the problems with technical assistance. A recent investigation by the Independent Commission for Aid Impact on DFID’s use of contractors identified the importance of strong stakeholder support as a key ingredient of a project’s success.9 DFID must ensure that there is always national ownership of the development process and buy-in from stakeholders. Additionally, DFID could improve the effectiveness of technical assistance by fully untying technical assistance to use local and regional procurement systems as per the Accra Agenda for Action.10 This would place developing countries in control of technical assistance funds, enabling them to decide whether to hire local or other consultants.11

3.1.3 Civil society: DFID should continue to fund civil society organisations (CSOs), complementing other aid instruments and empowering citizens to hold their governments to account. Strategic, flexible funding like the Programme Partnership Agreement enables CSOs to operate more effectively and efficiently, develop innovative programmes that better meet the needs of poor people, respond rapidly to emergencies and work in risky fragile settings. Alongside project grants and service contracts Oxfam encourages DFID to continue to provide strategic flexible funding to CSOs in the future.

3.1.4 Blending: given the current economic climate and the value for money agenda there is a growing trend among donors to “blend” ODA with private funds to leverage private finance for development purposes—often in the form of subsidised loans. However financial intermediaries at present are unable to track or evaluate the social impact of their intervention and there is a lack of transparency of their selection. Until DFID can demonstrate that blending can deliver on development and poverty reduction results in line with national development plans and aid effectiveness principles the UK should not invest in blending.

3.1.5 Public-private Partnerships (PPPs): Assessing the effectiveness of PPPs is challenging firstly as it is difficult to identify from DFID’s database which projects are PPPs and secondly because the level of scrutiny in reporting impact is weak. DFID must make some fundamental changes in PPP contracts:

Financial flows must be transparent and accountable to both donor and beneficiary—commercial confidentiality must not apply;

PPPs should only be used where funding would be not otherwise be commercially viable and where long-term development impact can be ensured; and

The partner selection process must be public and transparent and the recipient country—including its citizens—must be actively involved in the selection.

3.1.6 Other financial aid: DFID should continue to explore other financial aid instruments that deliver aid on budget. These would help improve partner countries’ financial management and accountability systems to increase ownership and long-term sustainability and reduce transaction costs.

3.1.7 Humanitarian assistance: Oxfam believes that the best way to support fragile states is through an integrated approach which promotes accountability of all actors and respect for humanitarian principles in provision of humanitarian aid. DFID should continue to provide a steady commitment to humanitarian assistance. To facilitate rapid emergency response, DFID should allocate a proportion of its humanitarian/emergency funds directly to NGOs including local NGOs and community based organisations that are well placed to implement emergency programmes including in remote locations.

3.1.8 Debt relief: The UK should continue to provide debt cancellation to poor countries but Oxfam is opposed to the inclusion of debt relief in reporting ODA figures.

3.2 The balance between loans and traditional grant aid

3.2.1 Loans do not necessarily comply with the ODA definition ie “administered with the main objective of promoting the welfare and the economic development…”,12 therefore any loans provided by DFID should be additional to the 0.7% ODA commitment and not used as a substitute for grant aid. If DFID does provide loans this should be where other forms of finance are difficult to access. There is also a risk that loans may skew funding towards cash-generating and productive sectors such as infrastructure at the expense of national developmental objectives and public goods.

3.2.2 As set out in the International Development Act (2002),13 the UK Government must ensure poverty reduction is the overarching purpose of British development assistance. Whilst Oxfam recognises the changing donor landscape and the concentration of the poor in MICs, traditional grant aid will remain essential in both MICs and LICs.

3.2.3 There is no one-size-fits-all balance between loans and traditional grant aid, and loans may be appropriate in MICs where economic growth should enable the repayment of loans. However, DFID must apply caution to ensure that loans—even concessional loans—do not increase the indebtedness of countries. Simultaneously DFID should assist developing countries to manage their public debt.

3.2.4 DFID must ensure that ODA remains concessional in character and convey a grant element of at least 25%.14

4. The Role of the UK as a Provider of Climate Finance

4.1 As the UK and other countries scale up towards meeting the $100 billion per year commitment by 2020, using aid money for climate finance is unsustainable.15 In 2010 15% of ODA was counted as climate finance.16 New sources of finance must be found to protect recent development gains.

4.2 Climate change is an additional burden for poor countries, requiring additional resources to tackle it.17 A failure to deliver new and additional resources—over and above existing ODA commitments—risks diverting essential aid for health, education and other development priorities. The UK must work with other governments to agree innovative sources of supplementary public finance, such as carbon pricing of international shipping and aviation emissions.18

4.3 The UK must fulfil its commitment to allocate 50% of its climate finance provision for adaptation to address the significant imbalance in adaptation/mitigation funding globally. The UK must maintain a strong commitment to provide public finance for adaptation, because private finance is often unsuitable for adaptation interventions, especially those involving community-based adaptation and basic services that offer little or no commercial return-on-investment.

5. Potential for a New Independent DFI to Offer Concessional Loans

5.1 DFID already invests in the private sector through CDC and makes substantial contributions to the vital work of multilateral development banks—an efficient and effective mechanism for channelling ODA and delivering value for money. As yet the added value of setting up an additional DFI is unclear and unconvincing.

5.2 If a new DFI is established it must deliver a progressive approach to the quality of growth and investment and not assume that benefits will trickle down to the poorest. It would have to adhere to the following principles:

Demonstrate its added value over and above existing multilateral mechanisms and DFIs;

Prioritise poverty reduction and development returns over financial returns and have a strong pro-poor development strategy; and

Actively seek to ensure that intended beneficiaries get maximum outcome.

DFID could do this through:

Identifying indicators of success, including impacts on poverty reduction, pro-poor growth and human rights; and regularly assessing and publicly reporting on performance against objectives, going beyond financial, economic and private sector development performance;

Fostering responsible business and transparency mechanisms in line with international standards;

Ensuring it is not involved in, or facilitating questionable investments, such as land grabbing; and avoid investing in any companies that keep their finances in tax havens;

Basing investment decisions on the development and poverty reduction needs of the country in which it is investing and aligning with national development priorities; and

Establishing and effectively implementing adequate safeguards to uphold peoples’ fundamental rights including food, land and water.

5.3 Using scarce public resources for private finance is only worth the risk if it has clear poverty alleviation purposes and proven benefits for the neediest. The World Bank’s Independent Evaluation Group found that less than half of the IFC’s projects successfully reached the poor.19

5.4 The Compliance Advisor Ombudsman (CAO) found a lack of transparency and that the IFC is unable to track whether or not investments are causing harm to poor people and the environment, let alone measure whether they bring development benefits.20 Oxfam is concerned that the “financialisation” of aid—especially with respect to infrastructure—has implications for what is funded, and who benefits. Financialisation of aid often results in privatization with the poor being increasingly priced out of access to the infrastructure constructed.21

6. DFID’s Balance between Bilateral and Multilateral Aid

6.1 Whilst Oxfam supports bilateral aid, aid delivered via multilateral organisations can have cumulative lower transaction costs, reduce fragmentation, tackle global problems and provide support for global public goods that cannot be addressed by bilateral aid. For these reasons multilateralism is central to the fight against poverty and inequality and in the UK’s approach to multilateral assistance.22

6.2 Oxfam supports bilateral funding when it brings added value in diversity of instruments, innovation in policy and practice, and alternative development schemes enabling developing countries to have more and better options to reduce poverty. It is vital that poverty reduction remains the main strategic goal of UK development policy—through bilateral or multilateral support.

6.3 Good quality multilateral aid can be a win-win for DFID: ensuring results in the lives of the poorest people, with a lower administrative burden. Where possible DFID should use its multilateral contributions to help fill the funding gaps such as the Global Partnership for Education and the European Development Fund. DFID’s multilateral and bilateral aid should remain around the current levels.

7. Lessons from other National Donors

7.1 DFID must listen to country stakeholders including local officials and citizens. Simultaneously DFID should encourage citizens to demand more from their government.

7.2 Among national donors DFID has demonstrated a leap forward on transparency, however is lagging behind in other areas of the aid effectiveness agenda such as improving country ownership. Finland has set a good example in articulating how to improve its aid effectiveness and recognises the importance of continuing to provide ODA in times of austerity. Finland’s Development Policy Programme commits to improve the predictability of its development cooperation funding to enable partner countries to implement their development plans, and increase its focus on multilateral organisations and DFIs in a more strategic manner to reduce fragmentation and align activities with the national objectives of partner countries.

7.3 Denmark’s progressive strategy for development cooperation recognises that sufficient domestic revenue to finance reform and public services is a prerequisite for development. In line with this DANIDA has committed to “strengthen efforts in the fight against tax loopholes, address illicit financial flows and promote fair taxation of natural resources in the world’s poorest countries”.23 Similarly Norway—a leader in tax and transparency—highlights that “more emphasis is placed on the possibilities of developing countries to increase their own revenues by expanding their tax base…”.24 Norway supports both governments and civil society in their efforts to achieve effective, transparent tax regimes, for example by working through the Financial Transparency Initiative and Tax Justice Network in Southern countries. Finland supports the efforts of the African Tax Administrator’s Forum, a body based in South Africa that provides a forum for sharing best tax practices and tax policy coordination to address issues including tax avoidance by multinational companies.

8. Monitoring and Influencing Expenditure by Multilateral Institutions

8.1 DFID should ensure that the multilateral organisations selected follow the OECD guidelines for ensuring effective aid and endorse the Busan Partnership for Effective Development Cooperation, focussing on agencies that promote poverty reduction, accountability, transparency, ownership and results.

8.2 The UK should continue to use its influence within the multilateral development agencies to ensure their governance becomes more democratic and their policies and practices better support poverty reduction, accountability, transparency and ownership, building on progressive approaches shown by agencies such as the European Commission.

June 2013

1 UN Document: 2626 (XXV). International Development Strategy for the Second United Nations Development Decade http://www.un-documents.net/a25r2626.htm

2 Based on actual revenues compared with levels forecast by the IMF before the financial crisis hit. Government Spending Watch, May 2013, http://www.governmentspendingwatch.org/images/pdfs/GSW_Report_2013/Executive_Summary_GSW_Report_2013.pdf

3 Only one third of the 52 countries assessed are meeting promised or needed levels on health, one-quarter for education and one-fifth for agriculture and water, sanitation and hygiene, Government Spending Watch Report 2013, Development Finance International and Oxfam, http://www.governmentspendingwatch.org/research-analysis/latest-analysis/51-mdg-spending-in-developing-countries.

4 The MDG and 2 sub-goals met to date: halving extreme poverty, halving the proportion of people without access to improved source of drinking water and significantly improving the lives of at least 100 million slum dwellers: UN MDG Report 2012, http://www.undp.org/content/undp/en/home/librarypage/mdg/the-millennium-development-goals-report-2012/.

5 The Millennium Development Goals Report 2012, United Nations http://www.un.org/millenniumgoals/pdf/MDG%20Report%202012.pdf

6 Sumner, A (2012). Where will the world’s poor live? IDS In Focus Policy Briefing Issue 26

7 IDA/IMF (2007). “HIPC/MDRI Status of Implementation Review”, 28 August 2007.

8 Budget Support and MDG Performance, March 2010, European Commission, http://www.gopa.de/uploads/media/budget_support_MDG_performance_development_paper_en.pdf

9 DFID’s Use of Private Contractors to Deliver Aid Programmes, ICAI, May 2013

10 Accra Agenda for Action http://www.effectivecooperation.org/files/resources/Accra%20Agenda%20for%20Action%20in%20Brief%20ENGLISH.pdf

11 For more details on local procurement see Eurodad’s report, by Bodo Ellmers 2011: How to Spend It: smart procurement for more effective aid http://eurodad.org/uploadedfiles/whats_new/reports/eurodad%20-%20how%20to%20spend%20it.pdf

12 Is it ODA? OECD DAC, 2008 http://www.oecd.org/dac/stats/34086975.pdf

13 International Development Act, 2002, http://www.legislation.gov.uk/ukpga/2002/1/contents

14 Ibid.

15 Oxfam, The UNFCCC Work Programme on Long-Term Finance, August 2012 http://policy-practice.oxfam.org.uk/publications/the-unfccc-work-programme-on-long-term-finance-238191

16 The OECD statistics with country breakdowns for climate finance spending are available here: http://stats.oecd.org/Index.aspx?DataSetCode=RIOMARKERS

17 International, Adaptation to Climate Change: What’s needed and who should pay? 2007 http://www.oxfam.org/sites/www.oxfam.org/files/adapting%20to%20climate%20change.pdf

18 Oxfam/WWF, Out of the Bunker: Time for a fair deal on shipping emissions, 2011
http://www.oxfam.org/en/grow/policy/out-bunker-shipping-emissions

19 World Bank Independent Evaluation Group, Assessing IFC’s Poverty Focus and Results, 2011, p.XVIII. http://ieg.worldbankgroup.org/content/dam/ieg/IFC/ifc_poverty_full_eval.pdf

20 CAO Compliance Audit of IFC’s Financial Sector Investments, CAO, February 2013, http://www.cao-ombudsman.org/newsroom/index.html

21 More than Brics and Mortar Infrastructure-as-asset-class: Financing development or developing finance? A Critical Look at Private Equity Infrastructure Funds, Nicholas Hildyard, The Corner House, September 2012 http://www.thecornerhouse.org.uk/sites/thecornerhouse.org.uk/files/Bricks%20and%20Mortar.pdf

22 For further details see Oxfam’s submission to the ‘UK Multilateral Aid Review’, Oxfam GB, August 2010, http://policy-practice.oxfam.org.uk/publications/uk-multilateral-aid-review-126007

23 The Right to a Better Life Strategy for Denmark’s Development Cooperation, Ministry of Foreign Affairs of Denmark, August 2012 http://um.dk/en/~/media/UM/Danish-site/Documents/Danida/Det-vil-vi/right_to_a_better_life_pixi.pdf

24 NORAD’s Strategy Towards 2015: results in the fight against poverty, February 2011

Prepared 11th February 2014