International Development CommitteeWritten evidence submitted by Development Initiatives

The Changing Development Financing Landscape

1. Development financing landscape has changed rapidly over recent years. There is an increasing understanding that you do not need to be an aid agency or be providing aid in order to help eradicate poverty.

2. Rapid growth in many developing countries has helped increase domestic capacity. Government spending averaged over 5% growth over 2000 to 2011 in over half of developing countries (the remainder grew an average of 2.5%). Developing countries’ total government spending is now US$5.9 trillion a year. International resource flows to these countries have also grown in scale and diversity, doubling since 2000 to reach an estimated US$2.1 trillion in 2011, but now less than a third of domestic spending. Official Development Assistance (ODA) from OECD Development Assistance Committee (DAC) donors accounts for a smaller share than in 1990.

Domestic Resources are more than Triple International Flows, with Aid a Falling Share

3. But domestic resources remain low in many countries: 82% of those in extreme ($1.25 a day) poverty live in countries where government expenditure is below PPP$1,000 a year.1 This compares with PPP$ 15,025 across developed DAC countries. Projections suggest that while domestic resources are likely to grow rapidly in some developing countries by 2030, others are likely to face continued severe resource constraints.

4. Where resources are likely to grow more slowly, there is a strong rationale to continue and increase support for essential goods and services, including basic income levels, which in turn can increase resources, raising these countries’ capacity to deliver services themselves. Even where domestic resources are expanding, ODA can help support the expansion and deepening of services provision while ensuring efficient use of resources. India, Indonesia, Philippines and Viet Nam are all forecast to at least double government spending in real terms by 2030 from PPP$600–1,000 to PPP$1,400–2,400.

5. The UNGA post-2015 outcome document states that “mobilisation and effective use of all resources, public and private, domestic and international, will be vital”2 for meeting the MDGs. The same will hold for the new set of development goals to follow them.

Ending Poverty by 2030 is Possible, with Interventions

6. Despite this falling share, uniquely ODA can be targeted at reducing poverty, making it more valuable than ever. This is particularly so if the UN were to adopt the Secretary-General’s High-Level Panel (HLP) recommendation to end extreme ($1.25 a day) poverty by 2030. The UK should use its influence to ensure this goal is endorsed by the UN in post-2015 discussions.

7. The World Bank now estimates that 50 million fewer will be living in extreme poverty in 2015. While it expects similar poverty levels in both sub-Saharan Africa and South Asia, this is because the outlook for the former worsened relative to the latter. Previous 2008 estimates for sub-Saharan Africa were also revised upwards due to improved data becoming available.

8. Brookings Institution scenarios suggest that current growth pattern expectations could see extreme poverty fall to 342 million by 2030. But the potential range is from  million (faster growth, more equally shared) to over one billion (slower growth shared more unequally).

9. Whatever the outcome, around half to almost all extremely poor people are likely to be in sub-Saharan Africa by 2030. This is partly because of the depth of poverty suffered by the poor in certain countries, notably in the Democratic Republic of Congo, people in extreme poverty today have average incomes of just 53 cents a day.

10. Millions are set to miss out on the broader benefits of growth without targeted interventions to overcome the risks and structural barriers. If the best case scenario can be achieved, then the world really can get to extreme poverty by 2030 by harnessing all resources and targeting those most unable to benefit from broad-based growth.

11. Rather than look to abolish itself, aid should evolve to finance future poverty-related goals. The HLP hoped that by 2030 the $2 a day threshold will be regarded as the bare minimum standard of living. Other, multi-dimensional deprivations beyond income will also need to be addressed. Aid can become a resource for providing global public goods, specifically an architecture providing an international backstop commitment to the extreme poor, including a global basic minimum income guarantee, and mechanism for ensuring those raised out of poverty do not return to it due to crisis or conflict.

Poverty and Resource Flow Data are Unfit for Purpose

12. We urgently need better data to inform better decision-making. Our previous submission presaged the HLP’s “development data revolution” call. This revolution must provide policymakers and citizens with access to timely, disaggregated and forward-looking information to ensure resources deliver results. Access to information should be a post-2015 settlement goal in its own right. This would provide the evidence base to ensure success across all goals, enabling governments to improve service delivery, citizens to exercise their rights and hold institutions to account, and reduce corruption. The revolution must include:

poverty data fit for policy purpose: development cooperation is currently being allocated with out of date or at worst entirely missing poverty data. A quarter of the numbers in extreme poverty in sub-Saharan Africa are based on pre-2005 surveys. Aid can only be targeted at extremely poor people if we know who and where they are, and the likelihood that they will be left behind by wider economic progress. This means state-, district- and even village-level data allowing aid to be targeted and delivered where need is greatest.

vastly improved non-aid international resource flow data: The DAC’s ODA database is invaluable, but policymakers need a clearer understanding of the scale of flows—investment, remittances, debt and private giving, etc—in and out of developing countries, and how these flows can best contribute to poverty reduction. This knowledge will help ensure ODA is invested effectively and catalytically, stimulating other poverty-reducing flows.

Better analysis of existing statistics and capacity-building: the data revolution is not just for donors. Developing countries need international support to build their own statistical capacities, currently just 0.12% of total ODA,3 even though effective aid allocation rests on a solid evidence base. It will need a donor with the stature of the UK to lead on this. And rapid progress is needed to have accurate baseline data by end-2015. Think-tanks, CSOs, media and parliamentarians also need capacity-building assistance to be able to use these data. This is essential to ensure we all have the information needed to end poverty by 2030.

13. International organisations also need to take a lead in ensuring data coverage, consistency and comparability of resource flows between countries. The DAC is looking at how it can further account for non-concessional flows and new instruments alongside ODA. The World Bank and the IMF can also help push for improved remittance and investment data.

Terms of Reference Responses

Is 0.7% of GNI as ODA appropriate in the long term?

14. The 0.7% of gross national income target remains a significant political commitment. It is a challenging pledge of significant resources to developing countries. ODA is a rare example of international accepted burden-sharing to reach development goals. The benchmark was set by the international community in the 1970s. It was based on an assessment of needs and what was considered politically and economically feasible at the time.

15. But the target has endured. It was the basis of pledges in recent years by EU-15 countries, including the UK, Germany, France and Italy among the G8. It is hard to imagine that aid levels would be at their current level in the absence of the target. But only five countries have consistently met or exceeded 0.7%. DAC donors collectively fell well short of 0.7% in 2012, providing 0.29% of their GNI—a shortfall of US$175 billion.4 Had DAC members met 0.7% this would have resulted in US$300 billion for helping end poverty.

16. The post-2015 outcome document called for developed countries to “urgently fulfil the ODA commitments they have made” and “accelerate progress towards the target of 0.7%” to achieve the remaining MDGs. There can be no doubt there will be a need for aid to invest in the targeted interventions needed to reach the millions of people who will not be reached by growth even in the best-case scenarios millions. ODA will remain a vital resource for several countries, including those where domestic resources remain low and extreme poverty high.

17. The political commitment to 0.7% is important: ODA remains a consistent, reliable and poverty-focused flow to developing countries, and one that can be used to leverage and catalyse other resources that can help end poverty. Providers of development assistance beyond the DAC have seen their contribution grow faster than DAC ODA over the last decade (an estimated US$16.8 billion in 2011, around 10% of total global development assistance including DAC ODA). Emerging providers can contribute based on fair burden-sharing principles, acknowledging their own domestic poverty challenges and their different resource contexts. But until the contours of future global development goals emerge, it is impossible to estimate the magnitude of resources that will be needed.

0.7% and the UK

18. The UK has shown global international development leadership by pledging—and looking on course to achieve—0.7% this year. It will be the first G8 country to do so. Despite a difficult economic situation, the “ring-fence” of the ODA budget is set to last least until 2015–16 (representing 1.6% of total government spending). But as the Treasury Select Committee recently concluded, protected spending areas must ensure value.5 This aid—like that from all donors—must be ruthlessly targeted at poverty reduction and evaluated on this basis. Reporting spending through the International Aid Transparency Initiative helps to ensure transparency and accountability.

19. Overall, UK ODA appears to be strongly poverty-reducing. The bubble charts below show that most UK bilateral ODA goes to countries with both high rates (above the developing country average) and high levels (above one million) of extreme poverty. France is included for comparison.

MOST UK BILATERAL ODA GOES TO COUNTRIES WITH RELATIVELY HIGH LEVELS AND RATES OF POVERTY

FRANCE’S BILATERAL ODA IS LESS FOCUSED ON COUNTRIES WITH HIGH RATES AND LEVELS OF POVERTY

20. DFID provided the majority of UK ODA, some 81.4% in 2012. The International Development Act (2002) stipulates that DFID ODA must be poverty-reducing.6 Non-DFID ODA must only meet the broader OECD criterion, that its main objective is “economic development and welfare of developing countries”. This may mean that the 12.6% provided by departments including the FCO and DECC (around 3% of total ODA each, and which both saw the largest annual departmental increases, 72% and 67% respectively) is less poverty-reducing than it could be.

21. It is unclear precisely how future UK ODA will be allocated between departments.7 DFID currently reports on ODA from other departments, but more detail and an assessment of how poverty reducing it is would be welcome, particularly if their share is to increase. The Committee may also wish to consider calling for all UK ODA to meet the 2002 Act’s requirement.

The ODA definition and poverty

22. It is a common misconception that all ODA is directed at poverty reduction.8 As noted above, this is true of UK ODA provided by DFID, but unless other donors have chosen to go further they need only abide by the OECD’s broader ODA definition. This is important because economic growth without extreme poverty reduction is quite possible, as both Zambia and Madagascar have demonstrated on recent years.

23. Within the current DAC discussions about the ODA definition, the UK Government should consider pushing for poverty reduction to become the criterion for all aid, pointing to DFID’s success. Poverty levels should also be considered when the DAC periodically revised the list of countries eligible to receive ODA, with the next review expected in the second half of 2014. The process currently uses Gross National Income per capita and the World Bank income group classifications.9 This does not reflect need, access to other international resource flows beyond ODA, nor levels of domestic resources for poverty reduction.

24. Decisions about inclusion or exclusion of different forms of aid from a revised ODA definition should be driven by their potential for poverty reduction. An understanding of the different components of the “aid bundle” can help guide this consideration. Further work is needed to understand which forms of support are likely to lead to poverty reduction in different contexts.

25. Donors should meet their ODA commitments, but if they fall short it is preferable that the aid they do provide is focused on poverty reduction.

Does DFID have the right mix of financial instruments? Should introduce new ones, including concessional loans; the balance between loans and traditional grant aid; and the role of the UK as a provider of climate finance?
Should the UK should establish a new, independent development finance institution to offer concessional loans?

26. Loans are a valid ODA instrument to leverage additional private capital for aid purposes, notably if it is such practices are used to free up grants so that they can be used elsewhere. The use of loans should not displace but be additional to the use of grants. While there is also potential to increase the use of other instruments, such as equity and guarantees, this does not automatically require a new institution to provide them. There is already large numbers of international development institutions, and existing UK bodies such as DFID and CDC can already deliver some such financing.

27. The “aid bundle” is made up many different components, each with their own merits in different contexts. The majority of UK aid is given as cash grants, more than double the DAC-wide share. UK support for global public goods and NGOs is also more than double the DAC average. Equity investments10 accounted for 5.2% of 2011 UK gross bilateral ODA, compared with 14.3% across all DAC donors.

28. The UK no longer provides bilateral ODA loans, along with 12 other DAC donors. A small number of donors disburse significant amounts of bilateral ODA loan, with 90% of these came from just three donors in 2011: Japan, France and Germany. Japan’s loans were more concessional on average than those of France or Germany.

29. While the UK currently gives no ODA loans directly to developing countries, over 10% of aid is disbursed as loans through financing of the World Bank and other multilateral development banks. One could argue that the UK has opted to channel ODA lending through organisations with expertise and infrastructure to best deploy that lending. If a UK development bank was to be established it would be important to ensure that developing a similar level of expertise and infrastructure to deliver loans was the best use of resources.

30. ODA loans also tend to go to countries with lower extreme poverty rates, because major loan-giving donors tend to give relatively large levels of ODA loans to relatively less poor countries, as the bubble charts comparing loans with grants below illustrate. There is a risk that if the UK was to move towards giving bilateral ODA loans it could end up giving more ODA to countries with less poverty. Repayable ODA loans may also be provided to countries at relatively low risk of default on repayments, rather than those countries with high extreme poverty levels or rates.

DAC ODA GRANTS GO TO COUNTRIES WITH HIGHER EXTREME POVERTY RATES THAN DO ODA LOANS11

Grants Distribution vs. Poverty Levels/Rates

Loans Distribution vs. Poverty Levels/Rates

31. If a development bank were to be established, the parent department would also be important. If established under DFID, a bank would presumably be subject to the International Development Act 2002 provisions that aid be poverty-reducing (as should CDC). If so the factors outlined may lead to investment choices conflicts between this and prudent lending. But if the bank was established under another department, say HM Treasury, then the Act’s provisions would not apply. It is unclear whether legislation would be needed to allow other departments to provide such loans, as the Act does for DFID.12

32. Proponents of ODA loans argue that they allow a greater volume overall of aid to be given than if grants alone were used. Some recipients are also thought likely to exercise greater fiscal discipline if this money needs to be repaid in the future. Furthermore, it is argued loans will enable aid recipients to build credit-worthiness in the eyes of the international financial markets. However, it has been argued that ODA loans may be over-used because donor or development bank lending targets cause loans to be “pushed” inappropriately, or because the concessional nature of ODA loans provides recipients with incentives to over-borrow. There appears to be some support for this criticism in that bilateral donors and international financial institutions continue to make loans to recipients that are at a moderate or high risk of debt distress according to IMF assessments.

33. There have been suggestions that multilateral development banks should transition from giving loans to outright grants.13 Loans can also help a country smooth its financial resources in the face of a temporary, reversible liquidity shortage. However, for countries suffering from a protracted solvency problem loans may only worsen their situation. Loans are also more appropriate for some forms of support, notably for infrastructure investments and other longer-term, commercially viable projects. The financing gap for infrastructure in Africa is also large.

34. Were the UK government to start using bilateral loans as an aid instrument, it should avoid target systems that could encourage inappropriate lending, and exercise caution over the countries lent to, bearing in mind that loans are unlikely to be the most appropriate aid instrument for many poorer countries suffering from long-term resource constraints. The UK could also consider following Norway in aligning its lending policies with UNCTAD’s principles of responsible lending.14

The Balance between DFID Bilateral and Multilateral Aid

35. An accountability gap—real or perceived—will always exist with core multilateral funding. This form of aid can have comparative advantages over bilateral aid, not least in reducing the number of different donors and their own mechanisms that need to be dealt with. There is no ideal proportion of ODA that should be provided bilaterally or multilaterally. Individual decisions should depend on context, with an understanding of other international and domestic resources that might be available and relative comparative advantages in different situations.

36. At 65.2% of total net ODA in 2012, the share of UK bilateral aid is below the all-DAC donor figure (71.1%), and is 7th lowest among DAC country donors. It is notable that the seven donors with the largest multilateral ODA shares are all EU member states and that a substantial proportion of those donors’ ODA is provided via the EU.

THE UK PROVIDES MORE THAN MOST DAC DONORS THROUGH MULTILATERALS, BUT THE BILATERAL SHARE OF UK ODA HAS RISEN IN RECENT YEARS

[Source: OECD DAC database, table 1, net ODA in constant 2011 prices, accessed 3 October 2013]

37. The UK has an established system for managing multilateral aid relationships. DFID’s Multilateral Aid Review provides a mechanism for ensuring effectiveness of money given multilaterally. The UK is seen as a leader in this area, and other donors have adopted elements of the MAR. One possibility would be for the UK to seek wider use of its methodology among like-minded donors, and increasing inter-linkages and harmonisation of cycles with other existing mechanisms, including the Multilateral Organisation Performance Assessment Network (MOPAN), the 17-donor network carrying out joint assessments. This would help keep administrative costs down and so maximise the amount of ODA available to be transferred to developing countries for poverty reduction. There is also a role for the International Aid Transparency Initiative to provide transparency and accountability of aid provided through multilateral organisations.

September 2013

1 Purchasing Power Parity (PPP) attempts to account for differences in buying power across different countries. The $1.25 a day international extreme poverty threshold is also based on PPP, in 2005 prices.

2 UN, Outcome Document of Special Event (on post-2015 development agenda), 25 September 2013; www.un.org/millenniumgoals/pdf/Outcome%20documentMDG.pdf

3 US$185.5 million in 2011 (gross disbursements of ODA to all developing countries from DAC donors and multilaterals). Source: OECD DAC database, accessed 10 October 2013, stats.oecd.org/Index.aspx?datasetcode=TABLE1

4 Source: OECD DAC database, table 1 accessed 26 July 2013 (for DAC members at that time).

5 Treasury Select Committee, Spending Review 2013 report, para 19; www.publications.parliament.uk/pa/cm201314/cmselect/cmtreasy/575/575.pdf

6 REF 2009 IDC report and oral evidence from Minister The then government’s response on this was: We would like the IDC to make public information about how non-DFID ODA will be spent in the coming years and detail measures it will take to ensure that all ODA spending is delivered utilised solely for development objectives

7 Budget allocations for many departments for 2013 and 2014 are stated in HC Deb 13 September 2013, c916W and for 2015-16 in HC Deb 18 July 2013 c938W. These figures are not directly comparable with those for 2012 in DFID/ONS, Provisional UK ODA as a proportion of Gross National Income 2012 statistical release, March 2013.

8 See for example, DFID’s evidence to this inquiry, para 6, although of course DFID’s ODA is under the terms of the International Development Act 2012.

9 Specifically, having been classified as “high income” in the three years prior to a periodic DAC review.

10 CDC provides equity investments. It recently re-focused on poverty-related investments in South Asia and sub-Saharan Africa, where the majority of extreme poor people currently live.

11 Note that the y-axis is a logarithmic scale, the zeros on the axis are 0.1, 0.01 and 0.001 million.

12 See DFID supplementary evidence to this inquiry, July 2013

13 The 2000 Meltzer Commission called for this (Report of the International Financial Institution Advisory Commission, Department of Treasury, Washington, 2000). A 2005 paper by Bulow & Rogoff concluded “the case for shifting to a grants-only multilateral regime seems compelling” (www.aea-net.org/annual_mtg_papers/2005/0107_1015_0703.pdf)

14 http://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=591

Prepared 11th February 2014