6Value for money
Profits and fees
107.A further focus of media scrutiny on DFID in recent months has been on profits made by contractors, the fees they charge and the value for money they offer for the taxpayer. It is clear that DFID holds value for money as the prime objective in its strategic use of contractors, as it said it written evidence “the preferred delivery route is fundamentally determined by value for money considerations, for example which model delivers the maximum impact and outcome for DFID money.”184 The increasing use of contractors suggests that, in DFID’s view, they offer better value for money in many cases. Mott MacDonald argued that it is the competition in the contractor market that drives this. It wrote:
“The very nature of competitive tendering requires contractors to deliver the very best value for money. If contractors cannot demonstrate in their bids that they can deliver the best results for the most competitively advantageous price then they will not win the contract.”185
108.DFID’s Statement of Priorities and Expectations (SoPE) for suppliers states that contractors may incorporate “fair but not excessive” profits into their costing.186 In practice, fair but not excessive appears to mean different things to different contractors, as demonstrated in the different rates of net profit reported to this inquiry.187 In its written evidence, Palladium summarised typical profit rates:
“Companies House data reveals that most DFID suppliers are earning an average net profit of 5.5%. Levels of net profit in the sector are typically between 3 and 7%. Comparing other industries, profit levels are 50% lower in development than in UK government consulting.”188
109.When questioned about what the Department deems “fair but not excessive”, Nick Ford did not provide a definition as such, but told us that DFID uses competition and cost transparency to drive this. However, as this report has already noted in other chapters, there is a danger inherent in assuming that market forces are working sufficiently well to drive down profits to a level that is “fair but not excessive” in the views of the taxpayers footing the bill. The Centre for Development Results, a group formed of contractors, stated in written evidence that contractors “would welcome a conversation with DFID about setting industry standards on issues such as what constitutes a fair and reasonable profit.”189
110.DFID also states that it uses benchmarking “across Government, across our programmes and across the international development system” as evidence that it is achieving value for money.190 Since 2016 it has used a fee benchmarking database to do this.191 The Independent Commission for Aid Impact (ICAI) has also supported this with a benchmarking exercise in 2013 which concluded that “DFID obtains highly competitive prices from its contractors.”192 However, Dr James Morton stated in written evidence that “DFID rates are now ahead of those paid by other donors.”193 It is difficult to establish the details of these rate comparisons (or indeed, if they are a valid comparison of like for like) as they are internal.
111.We agree with DFID’s position that, where contractors offer the best value for money, programmes should be tendered rather than delivered through multilaterals or civil society organisations. However, we stress that there is a critical difference between profiting and profiteering. The vague definition of “fair but not excessive” profits provides little reassurance to the public that contractors are not getting rich from UK Aid. While we recognise that being too prescriptive on what is “fair but not excessive” may distort the market, there is room for discussion on what this constitutes. Benchmarking against the rates paid by other donor agencies to contractors is key to ensuring that DFID is getting value for money. The fact that this is done internally with no reporting or details of methodology points towards a lack of transparency.
112.DFID should determine some clear parameters on what constitutes fair but not excessive profits. It should also commission an independent review which benchmarks contractor fees across DFID programmes (including in different locations and comparing fragile and non-fragile states) as well as against other donors. It should also consider whether other donors are achieving better value for money through their differing procurement processes.
113.Media reports have also focused on the daily fee rates paid to contractors—something which our predecessor Committee raised concerns over in a 2011 report.194 While we stress the importance of continuous scrutiny by DFID of the value for money in the fees it pays, we note that delivering development impact requires highly qualified staff with the specialist skills required to solve some of the world’s toughest challenges. We also recognise that comparing daily fee rates with an annual salary can be highly misleading. One consultant pointed out in written evidence that he is only paid for the days that he works (which can result in long, unpaid stretches due to procurement delays or illness), he is responsible for his own social security and pension costs and is often liable for local income tax.195 Comparative analysis suggests that, comparing on a like for like basis, DFID frontline staff cost 50% more and multilateral staff three times more.196 It should be noted that this analysis was conducted by a contractor and has not been verified by DFID.
114.However, concerns were raised to this inquiry that in past DFID programmes, the management mark-up fees were high. Staff costing breakdowns provided to us in confidence suggest that, for one project, the contractor had a margin of 141% between what staffing costs were charged to DFID and the cost at market rates.197 DFID has taken crucial steps towards eliminating this practice. It implemented open book accounting last year, so that it can see “all the way through from net costs, including all overheads and fees.”198 When contractors submit a bid, DFID can use the costing template to separate out and compare profits, overheads and pay rates at the bidding stage. This is a significant improvement on previous practice, though it is unclear why it was not adopted earlier to stamp out profiteering.
115.While open book accounting affords greater transparency and thus enhanced scrutiny of value for money, it does not control fee rates in itself. Australia’s Department for Foreign Affairs and Trade (DFAT) employs a different method in the form of its Aid Adviser Remuneration Framework (ARF) (see Box 4).199 We recognise that there are certain risks associated with having a prescriptive remuneration framework for consultants. Nick Ford highlighted one in oral evidence:
“If you set a rate and say you will not pay more than £1,000 a day, then over time you will see contractors typically putting people forward who may historically have only been on £800 and are moving up to the top of the different rate bands, depending on what you have for the professional roles that you are recruiting. You will find that you always pay at the top of that band.”200
Contractor B highlighted risks that DFID may struggle to attract the top development consultants if it operated such a rigid pay structure, though also noted that this could be overcome with the right amount of flexibility.201
Box 4: Australia’s Aid Adviser Remuneration Framework (ARF)
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The ARF prescribes a set of rates, allowances and support costs which all consultants (advisers) engaged directly or indirectly under Australian Government contracts must be paid in accordance with. The Terms of Reference (TOR) for an adviser position must be classified according to a set of professional discipline categories and job levels, must be paid as per classification of their role, not according to an individual’s skills and experience. In exceptional cases higher rates may be awarded by senior DFAT officials, though this is subject to a business case. Justification should demonstrate:
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Source: Australian Government, Aid Adviser Remuneration Framework (ARF) (October 2016)
116.We recognise that much of the media focus on the fees paid to consultants has been misleading, and that comparing these daily rates to the annual salaries of employees (and their benefits) is not comparing like for like. We welcome DFID’s move towards more transparent, open book contracting. However we also note concerns that this only happened last year and that, in the past, contractors may have exploited DFID’s inability to see costing breakdowns at the expense of value for money. We also note the approach of other donors towards fees, particularly Australia and its Aid Adviser Remuneration Framework (ARF). While we recognise concerns that such a prescriptive framework could distort the market, we believe that, if designed carefully, it can enhance transparency and deliver better value for money.
117.We recommend that DFID consider an Australian-style consultant remuneration framework as an output of its Supplier Review. This framework should be prepared in collaboration with contractors to take into account their views, and should be designed carefully—building in an appropriate level of flexibility—to avoid any market distortions that may emerge.
Value for money and inclusion
118.Disability inclusion is a high priority for DFID. In a recent speech, the Secretary of State said that “disability is shamefully the most under-prioritised, under-resourced area in development.”202 In 2014, DFID launched its Disability Framework to set out the Department’s approach on how to increase disability inclusion in programming and strengthen departmental capability on disability. Disability inclusion is a critical component of the ‘leave no one behind’ agenda of the Sustainable Development Goals, which DFID is a key supporter of.203 However, in written evidence the Bond Disability and Development Group (DDG) stated that “historically, we have seen less evidence on the extent to which people with disabilities, and other marginalised groups, are included in programmes delivered by the private sector.”204
119.In written evidence, DFID stated that “our Standard Contractual Terms and Conditions mandate a requirement of non-discrimination and inclusion, with specific reference to disability.”205 However, a non-discrimination clause is not the same as disability inclusion. The latest version of the disability framework states that “civil society and private sector partners should outline their approach to disability inclusion as standard in all proposals and if they need extra support, we should be asking that they engage Disabled Peoples Organisations or disability-specific NGOs.”206 Herein there appears to be a mismatch between the commitments DFID made in the framework and the level of disability inclusion required in programmes delivered through contractors.
120.A narrow definition of value for money can create worrying incentives for contractors. The Disability Framework acknowledges that “unless we continually publically demonstrate that ‘VfM [value for money] doesn’t mean we only do the cheapest things, but instead is about the impact we have, we may be inadvertently incentivising partners to focus on easier to reach groups rather than on programmes that are attempting to leave no one behind.”207 Given competition in the market, contractors are under high pressure to cut costs. This may result in disability inclusion being overlooked because disability inclusive programming often costs more per head.
121.Disability inclusion is a key part of DFID’s strategy, as outlined in its Disability Framework. However, there is evidence to suggest that this issue is not being addressed in programmes delivered through contractors. A narrow definition of value for money may encourage contractors to focus on the easiest and cheapest to reach. The competitive nature of the contractor market and DFID’s strong focus on value for money may therefore be creating worrying incentives for them to overlook disability inclusion.
122.DFID should ensure that the principles outlined in its Disability Framework are enforced in programming delivered through contractors and it should require that disability inclusion be written into contracts.
186 See Appendix
187 Confidential written evidence from contractors
192 ICAI, DFID’s Use of Contractors to Deliver Aid Programmes (May 2013) para 2.71
194 International Development Committee, Third Report of Session 2010–11, Department for International Development Annual Report & Resource Accounts 2009–10 (February 2011) para 79
195 Confidential written evidence (DUC0004) p3
196 ASI, Comparative Analysis: DFID Contractor Costs (2016) p3
197 Confidential written evidence (CON0007) Table 1
199 ‘Consultants’ or ‘Advisers’ are used here to describe development professionals hired by contractors to implement development programmes
201 Q36 (See Annex 1)
202 DFID, Secretary of State speech - Bond Annual Conference 2017 (20 March 2017)
203 DFID, Leaving no one behind: Our promise (January 2017)
206 DFID, Disability Framework - One Year On (December 2015) p8
207 DFID, Disability Framework - One Year On (December 2015) p8
6 April 2017