UK aid: allocation of resources: interim report Contents

4Capability and capacity

DFID’s capacity to scale-up in fragile states and regions

42.As mentioned earlier, DFID already operates heavily in fragile and conflict-affected states, having scaled-up from 2010 to spending 30% of UK ODA in those states. An assessment of that scale-up by ICAI was quite critical of how it had been done and found:

“The targeted volume of expenditure and the planned pace of the increases was out of step with the capacity of DFID, its partners and, most importantly, the countries themselves to deliver. It has taken DFID four years for scale-up to start to deliver impact. Transformative impact in fragile states will take a generation to achieve and is dependent upon development of in-country state capacity. This was insufficiently recognised at the start of scaling up, where increased funding was directly linked to assumed greater impact.”75

ICAI made a similar finding in its most recent Annual Report, “DFID has become, to a significant extent, a specialist in fragile states. We are concerned that DFID is yet to grasp the full implications of this.”76

43.We have been told that DFID is capable of scaling-up, but that it will potentially face substantial difficulties in doing so. Coffey International Development stated that “DFID has significant experience of working in fragile states, but it still faces challenges. In countries where the security threat is high, DFID staff face travel and other restrictions that make it difficult for them to fully appreciate the local context, to visit projects, and to have on-the-ground project oversight.”77 Adam Smith International also said that an “issue that will require attention is DFID’s ability to station sufficient numbers of its own staff in the more dangerous fragile countries.”78 International Alert noted that it is “a reality that working in fragile states requires a high number of expert personnel than traditional development environments: to maintain a deep contextual understanding, to manage risk, build and influence relationships that promote change and properly coordinate and integrate with broader HMG strategies.”79

44.We have also been told that DFID still needs to fully adapt to the timescales necessary to achieve impact in fragile states and regions. ODI said that “DFID will need to scale up human resources capacity and alter staff incentives to respond to the increased focus on fragile states”80 and that the latest “research on assistance in fragile states places a strong emphasis on in-depth understanding of the local context and on building long-term relationships.”81 Simon Gill expanded on this:

“There is a need for a longer-term focus. Our experience, and one of the things we put in the submission, is that DFID staff’s tours of duty in fragile states are still short. There is lots of turnover; they do not necessarily get the best people in those places. We have teams in South Sudan; one has 30 years’ experience engaging with the region. Most have over five years’ experience, and you need people with that depth of knowledge and political understanding to make a real difference, and also people who have the trust and understanding of that context. That is one proposal. Despite the rhetoric, there is still a need to look at posting length in fragile states.”82

We are concerned that the current typical three-year review period for DFID projects is too short, bearing in mind that we have been told that transformational change in a fragile state can take over a generation, and consider that DFID will need to review its timescales and current criteria, such as Payment by Results, which it sets to achieve sustainable impact in such areas.

45.We have previously had concerns about whether DFID’s staffing levels were appropriate to administer its growing aid budget. Mark Lowcock acknowledged that there was a period “where that was something we worried about a lot.” He recently reassured us, however, that DFID has now agreed its staffing budget with the Treasury for 2016–17, and that this “is not currently the worry.” He stated that the new staffing budget “permits us to put extra capacity into areas where we do not currently have enough capacity […] and to provide more advisory services to other government departments.”83 Joy Hutcheon, Director General for Corporate Performance Group at DFID, told us that DFID is “actually expecting to see an expansion in our staff numbers, rather than a contraction.”84

46.We believe that DFID has the expertise and knowledge necessary to scale-up over time and deliver sustainable development in fragile states and regions, in line with the focus of the new UK aid strategy, although we are concerned that DFID may not at present have the capacity to allocate effectively, as stipulated in the new aid strategy, “50% of DFID’s budget to fragile states and regions in every year of this Parliament”. We are reassured that DFID has been given the funds required to increase its staffing levels to administer its ODA budget. It nevertheless needs to recognise that achieving results will require a longer-term focus and greater attention on conflict prevention. DFID’s current programme lengths, posting lengths, review cycles and criteria do not operate on the timescales necessary to achieve transformative impact.

47.To succeed in fragile states and regions, DFID should:

While this may have resourcing implications, it is important for DFID’s ability to deliver the fragile states and regions agenda itself, rather than just relying on contractors.

The capacity of other government departments to deliver aid

48.Unlike DFID, which has years of expertise in this area, many other government departments (OGDs) will be spending much larger sums of ODA than they have in the past. Evidence to this inquiry has acknowledged that this presents an opportunity for policy coherence and the development of new skills in OGDs. We have also heard that OGDs are unlikely to have the capacity and skills necessary to deliver aid effectively. Mott MacDonald said that it is “comfortable with increasing ODA spend” by OGDs, but has “concerns about whether these departments have the staff, skills and systems to ensure effective design, delivery and accountability of ODA spend.”85 The Institute of Development Studies similarly noted that “there are serious challenges to ensure other government departments meet the aid effectiveness and transparency standards achieved by DFID.”86 International Alert recommended, specifically with regards to the Prosperity Fund, that “DFID expertise is drawn upon heavily in the delivery of this fund by the NSC.”87

49.This worry that OGDs do not have the necessary skills was echoed in oral evidence. Simon Gill said, “What I worry about DFID is that hard skills from the MOD, FCO and HMT are useful, but the soft set of skills that those people will need to make them effective operators in a fragile state will need contextualisation and briefing from DFID staff.”88 Julian Egan told us, “DFID has decades of expertise in this area and other ministries are still developing that, so there is a need for some support and guidance in the delivery of non-DFID assistance.”89 Girish Menon also shared this viewpoint, “DFID has a major role to make sure that the other departments, which have possibly not stepped into the sphere in the past to the degree to which DFID has, provide the necessary expertise and skills.”90 Mark Lowcock pointed out, however, that assisting other departments will also affect DFID’s resources, and referred to 30 staff moving across from DFID to the Foreign Office to work on the CSSF as an example of this.91 We have heard from Minister Desmond Swayne himself that DFID jointly administers “the Conflict, Stability and Security Fund together with the Ministry of Defence and the Foreign Office, so I suppose it is a collective effort.”92 However, while the CSSF will be under NSC direction, there does not appear to be a lead department coordinating this work, which needs to be clarified.

50.We are not confident that other government departments currently have the capacity and experience to deliver aid to the same high standards as DFID, but developing this capacity in those departments will be of great long-term benefit. We are also concerned that a lack of clarity may exist as to which department may be leading and coordinating delivery of ODA, where a number of different departments are involved in the same region or area of work.

51.In the short-term, DFID should assist heavily in the administration of programmes run by other government departments, for example through secondments and exchanges of staff, to maintain the quality of UK aid, accountability and transparency. In the longer-term, DFID should share its expertise with other government departments and develop their capacity to deliver ODA effectively. DFID should have oversight of all ODA delivery, including where different government departments are involved. DFID must be given the resources necessary to do this without impacting on its own work and levels of expertise. Clear statistics should be provided by all government departments providing ODA as to the proportion subject to the International Development Act 2002.

Other issues relating to DFID spending

The target for ‘non-fiscal’ spending

52.HM Treasury rules require DFID to spend £5 billion of ‘non-fiscal capital’ over this CSR period.93 ‘Non-fiscal capital’ is spending, such as loans, equity investments and certain contributions to multilateral development banks, which is expected to generate at least some financial return to DFID in the future and therefore does not impact net public sector debt.94 In its report on Business in Development, ICAI examined the ‘non-fiscal’ target and found that such spending faces “an issue of absorption capacity: that is, it may be hard to spend the amounts required in the time available.” The target “may also create a bias in favour of large programmes that allow DFID to deploy quickly large amounts of funding that qualify as non-fiscal.” It added that, in any case, if and when that spending generates a return, the return will be classified as negative ODA, which creates uncertainty and will need careful managing.95 The NAO has also previously expressed concerns over the challenges for DFID in having to meet strict targets.96

53.In this inquiry we have also heard about issues with the ‘non-fiscal’ target. ICAI told us that “DFID has relatively few options available to it to meet this requirement”, being primarily through the International Development Association (IDA) of the World Bank or through CDC, DFID’s development finance institution.97 Bond Disability and Development Group noted “a risk of tension between the non-fiscal spending requirements, and the commitment to leave no-one behind”, as “non-fiscal spending is most likely to suit programmes that yield a relatively quick and recyclable financial return, such as investment in economic development.”98

54.DFID’s ‘non-fiscal’ target does not necessarily lead to effective poverty reduction. Due to the small number of avenues available to DFID for ‘non-fiscal’ spending, the evidence suggests that the target can force DFID to spend large amounts of money through a small number of channels, regardless of whether that money would be more effectively spent elsewhere. While we do not think that DFID should reduce its ‘non-fiscal’ spending, it needs the flexibility to allocate its own spending in line with what will best achieve its primary aim of poverty reduction.

55.The Treasury should relax DFID’s ‘non-fiscal’ target, and grant DFID the flexibility to spend in whatever way DFID deems will be most effective.

Payment by Results

56.DFID has also expanded its use of results-based aid, also known as Payment by Results (PBR), so that PBR contracts now represent, between April and October 2015, “nearly 80% by value of all new centrally-procured contracts over this period.”99 These are programmes “where payments are made after the achievement of pre-agreed results, rather than being made up front to fund future activities.”100 DFID acknowledged in its written evidence that “innovative PBR approaches require careful design and management if they are to deliver on their potential”,101 and pointed to its Evaluation Framework for Payment by Results102 and its Smart Guide to PBR Contracting.103

57.We have received much evidence raising concerns about the efficacy of PBR.104 Dr Paul Clist, while praising DFID for piloting these mechanisms, highlighted in his written evidence that, “There is currently no publically available evidence that DFID’s use of results-based aid has had an additional positive effect on development outcomes.”105 He also told us about the possibility that PBR leads to illusory success, due to “misleading data”,106 “distortion of incentives”,107 and “evidence of PBR rewarding short term success and ignoring long-term effects.”108 He added in oral evidence, “One of the problems with Payment by Results is that it will often look like it is a success when it is not, because it is essentially a one-way bet. If the results have not been met, you do not disburse anything. If the results have been met, you disburse everything, and therefore it looks like a success, and naïve evaluations will often claim success when there genuinely is not.”109 Marie Stopes International also urged “some caution in the rapid expansion of Payment by Results contracts” and stated that “the evidence base for Payment by Results needs to increase before it is used as DFID’s standard funding mechanism.”110

58.We heard that some features of PBR are potentially particularly problematic in fragile states and regions, including its bias towards larger aid deliverers, the possibility that it incentivises easier to achieve short-term results, and its lack of flexibility. Ben Jackson told us that Bond’s concern “is that it has a danger of biasing towards certain institutions—particularly those with a lot of capital—that can deliver and have the money to be able to do that”, given payment does not come until results have been achieved.111 The Tropical Health and Education Trust (THET) wrote that “there exists a risk that PBR and other cost-effectiveness-based approaches will focus DFID’s attention on short-term, easily measurable goals, at the expense of potentially transformational programmes that respect context and complexity and that require long-term cooperation by disparate stakeholders”.112 Simon Gill said that “Payment by Results forces you to work in a very binary way, and it is much more complicated than that.”113

59.Evidence to the Committee suggests that there is still only a weak evidence in support of Payment by Results and that it can have negative consequences. We are therefore alarmed by its rapidly increasing usage, as this is not yet supported by the evidence. DFID must be very careful that the use of Payment by Results works effectively in a fragile states and regions context, with the necessary focus on real transformational change and flexibility to adapt to changing circumstances.

60.DFID should reduce its use of Payment by Results until it has a stronger evidence base and the deeper knowledge and understanding to implement it without negative consequences.

77 Coffey International Development Ltd (ACH0026) para 6

78 Adam Smith International (ACH0025) para 1.4

79 International Alert (ACH0023) p 4

80 Overseas Development Institute (ACH0014) para 8

81 Overseas Development Institute (ACH0014) para 9

82 Q112

83 Oral evidence taken on 23 February 2016, HC (2015–16) 576, Q24

84 Oral evidence taken on 23 February 2016, HC (2015–16) 576, Q30

85 Mott MacDonald (ACH0017) para 12

86 Institute of Development Studies (ACH0028) para 3.1

87 International Alert (ACH0023) p 6

88 Q154

89 Q75

90 Q102

91 Oral evidence taken on 23 February 2016, HC (2015–16) 576, Q14

92 Oral evidence taken on 8 March 2016, HC (2015–16) 675, Q43

93 Department for International Development (ACH0033) para 32

94 ICAI, Business in Development (May 2015), para 2.19

95 ICAI, Business in Development (May 2015), paras 2.20–2.22

96 NAO, Managing the Official Development Assistance Target, HC (2014–15) 950, January 2015, p 7

97 ICAI, The 2015 ODA allocation process (December 2015), paras 3.8–3.9

98 Bond Disability and Development Group (ACH0008) para 4.4.1

99 Department for International Development (ACH0033) para 41

101 Department for International Development (ACH0033) para 37

104 For example see World Vision UK (ACH0004), Tropical Health and Education Trust (ACH0005), and Bond and the UK Aid Network (ACH0006)

105 Dr Paul Clist (ACH0002) p 1

106 Dr Paul Clist (ACH0002) para 6

107 Dr Paul Clist (ACH0002) para 7

108 Dr Paul Clist (ACH0002) para 8

109 Q138

110 Marie Stopes International (ACH0021) para 8

111 Q136 [Ben Jackson]

112 Tropical Health and Education Trust (ACH0005) para 16

113 Q136 [Simon Gill]

© Parliamentary copyright 2015

Prepared 17 March 2016