International Development CommitteeFurther written evidence submitted by Bond and UKAN

Introduction

1. Bond is the UK membership body for non-governmental organisations (NGOs) working in international development.

2. The UK Aid Network (UKAN) is a coalition of UK-based development NGOs working together to advocate for more and better quality aid through joint policy, lobbying and advocacy work.

Background

3. Recent indications from the Department for International Development and the Select Committee have suggested that the UK Government is more seriously considering increasing the proportion of UK aid provided as loans to the public or private sector, basically reintroducing bilateral ODA loans, and potentially creating a new facility to deliver that increase.

4. Currently the mandate of any new facility and the delivery mechanism for any such increase in ODA loans has not been determined but seems to encompass several possibilities from no change to a small, more virtual lending window to a fully independent investment bank.

UK Aid

5. Under the 2002 International Development Act, the central objective of UK development assistance is the reduction of poverty. This can be either as bilateral aid, or via support to multilateral agencies. Aid can be targeted towards the public or private sector (or a mixture of the two), as long as it can be reasonably expected to contribute to sustainable poverty reduction.

6. Overseas aid remains the only source of funding for development that is solely focused on tackling poverty. The Prime Minister has spoken in December 2012 of the UK’s “moral obligation” to help the world’s poor, noting that there are still over a billion people living in extreme poverty.1 Despite the real improvements in the lives of many of the world’s poor, there remains much more to do and aid will be an important part of the solution.

7. This is the test against which any change in the Britain’s aid spending must be measured and is explored in the following sections.

Arguments in Favour of DFIs

8. DFIs are usually institutions set up by governments to finance riskier, long-term term ventures, often in the private sector. They provide a wide variety of functions, from direct credit provision, to equity purchases, provision of technical advice, leveraging investment from capital markets, and more. They also take on a variety of institutional formats and governance models; from state-owned bilateral development banks, to privately owned investment funds.

9. Donor governments in particular have historically advanced several arguments in favour of DFIs as development “tools”:

(i)“Recycling” aid money potentially increases the impact of each £ of aid.

(ii)Provide a justification for the continuation of aid to MICs.

(iii)Stimulate private sector growth in the “missing middle” of the business world in developing countries (medium sized enterprises that can’t access international markets and are too large for microfinance).

(iv)Potentially reducing long-term aid dependency.

(v)Stimulate the development of local financial markets.

(vi)Potentially reducing the donor country’s debt ratio as outgoing loans may be considered “off-book”.

(vii)Loans could be funded by money borrowed on the international capital markets and subsidised down.

Arguments against DFIs

10. However there are also some serious questions and concerns about the actual development impact of DFIs based on evidence from other DFIs which call into question the suitability of loans as an aid modality for the UK. These concerns also raise questions about some of the arguments in favour of DFIs/loans discussed above.

11. Arguments about the benefit to donors must also be seen through the lens of development impact and results first and foremost.

12. Evidence from other OECD DFIs suggests that the priorities and performance measurements are more often weighted towards financial return and evidence of contribution to financial growth than social development impacts.

(i)Evidence from the aid effectiveness agenda suggests that aid is most effective when it is a genuine transfer that can be spent by a developing country to support national development strategies—“recycling” aid, certainly in any substantial quantity, would undermine this and potentially reduce the impact of UK aid.

(ii)The question of aid to MICs is a live and complex one however aid of any form to MICs would necessarily still be targeting poverty and development and thus in large part targeting the poorest, most vulnerable and marginalised people. The appropriateness of increased loans and debt would need to be carefully considered in that context.

(iii)Economic growth is not a proxy for development as growth must be sustainable, pro-poor and inclusive to have genuine development impacts and there is currently insufficient evidence to support the argument that this is the case with DFIs. Given this current lack of evidence, potential impacts on long-term aid dependency are also more questionable.

(iv)Equally the area of the market that loans could most usefully seek to target, the missing middle, is potentially hard to reach and requires detailed and appropriate local knowledge suggesting that a donor-based loan facility may not be the most appropriate tool.

(v)Lack of coordination and coherence with development agencies even within the same country. In some countries, such as Belgium, there is barely even any communication between the two different institutions.

(vi)Bilateral development banks are the least preferred option for recipient countries (DFID was rated the best and bilateral banks the worst in a recent study of 32 HIPC countries2).

(vii)Potentially undermining local ownership, a key principle of aid effectiveness, as the companies invested in are frequently based or owned outside the developing country.

(viii)Lack of transparency particularly given the increasingly complex financial structures employed by DFIs including the use of financial intermediaries that use tax havens. These structures include which include direct equity purchases and debt financing, channelling money through pooled intermediary funds, use of financial intermediaries, private equity funds, and even financial derivatives. Given ongoing discussions about the need to harmonise global policies on tax avoidance, the UK government should be particularly concerned about the prevalence of using offshore tax havens by financial intermediaries.

(ix)Duplication of costs and work—there are costs involved in running a bank which could increase the amount of the UK spends on administration particularly when there are already other DFIs which we fund through multilateral aid and our EU contribution—so the real additionality from a new UK bank is questionable.

(x)Some DFIs have funded projects which have negative environmental, human rights , gender and social impacts despite exclusions blocking harmful activities.

(xi)Loans evidently have an impact on a recipient country’s debt sustainability—there are current concerns about growing debt burdens in many countries already and the “development loans” sector is already overcrowded potentially over-heating local financial markets instead of stimulating them. In addition, there is currently not an effective means of resolving a debt crisis and the IMF and WB debt sustainability frameworks are focused on whether a debt can be paid not the impact on poverty/development and inequality and the UK has previously disregarded the Debt Sustainability framework.

Conclusion and Recommendations

13. Overall there is currently insufficient evidence to suggest that a new UK development bank or loan facility would provide true development additionality or that it would be an effective modality to deliver UK aid. Evidence from other DFIs suggests that it could in fact be less effective than current modalities.

14. There is currently no evidence to suggest that the current range of development cooperation tools provided by the UK government, including DfID and the CDC,3 are insufficient to meet recipient country needs.

15. Any decision to change must be based on meeting the additionality and development impact test and we would recommend that DFID produce a clear and detailed business case to support any such change.

16. If a new loan facility is created it must ensure that UK aid remains focused on genuine development outcomes, poverty eradication and tackling in equality and not assume that benefits will trickle down.

17. Any new UK development bank or loan facility must follow best practice policy and procedure including:

(i)Ensuring a focus on qualitative development objectives rather than simply quantitative financial and economic ones;

(ii)The inclusion of civil society in the design, monitoring and evaluation of project loans to ensure a pro-poor approach;

(iii)Supporting host country ownership to ensure the benefits of investments accrue locally;

(iv)Following standard investment exclusion lists and adhering to emerging international environmental, labour and human rights norms (eg the Rugge principles);

(v)Avoiding financial intermediaries who use tax havens;

(vi)Developing systems for full public transparency and accountability (ie over commercial confidentiality);

(vii)Undertaking careful debt sustainability assessments with independent civil society participation to avoid creating new public (or private) debt crises in developing countries;

(viii)Develop a common rating tool that could be used by all EDFI members, in order to facilitate comparability development impacts between DFIs.

June 2013

1 The Daily Telegraph Dec 28, 2012. “Cameron: UK has a ‘moral obligation’ to help world’s poor”

2 Organisation Internationale de la Francophonie, April 2013.

3 Please note that civil society has previously raised some questions and concerns about the CDC as part of the Future of CDC inquiry—written evidence from UKAN is available online here http://www.publications.parliament.uk/pa/cm201011/cmselect/cmintdev/605/605vw16.htm and from Bond here http://www.publications.parliament.uk/pa/cm201011/cmselect/cmintdev/605/605vw05.htm.

Prepared 11th February 2014