UK

UK aid: allocation of resources: interim report

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Third Report of Session 2015–16

Summary

The last year has seen several important developments which affect the UK aid budget, including a new UK aid strategy. We are publishing this as an interim report, prior to the publication of the Bilateral Aid Review and Multilateral Aid Review, to deal with the high-level strategic issues arising out of the new aid strategy.

The new strategy emphasises how UK aid benefits the UK’s national interest, and contains an increased focus on fragile states and regions and greater spending of ODA by other government departments (OGDs). These are both welcome, as fragile states tend to have higher levels of extreme poverty and the increase of UK aid for OGDs has the potential to increase its impact.

The most important principle of allocating UK aid should always be that it is allocated where it can most effectively be used to reduce poverty. However, we have heard concerns that increased consideration of the national interest will lead to a reduced focus on poverty reduction, which is only listed as the fourth of four strategic objectives in the new strategy. Poverty reduction is a statutory requirement for the spending of development assistance by DFID, and has traditionally been the primary objective of UK aid spending. The Government should make reducing poverty a legal obligation for the spending of all ODA, regardless of which department is spending it and which legal power it is being spent under, which should be made explicit in all ODA programming.

With the greater spending of ODA now by other government departments we urge a reemphasis of poverty reduction as the primary objective regardless of which department is spending it, particularly in light of Sustainable Development Goal 1 being to “End poverty in all its forms everywhere”.

We have received evidence that DFID’s old definition of ‘fragile states’ did not properly appreciate the complexities of the causes of fragility, which meant that it covered the majority of DFID’s priority countries and therefore did not help with allocation decisions. While DFID has produced a new definition and published a new list of fragile states and regions, it is still not clear to us precisely what that definition entails and how the list was arrived at. We are therefore asking for more detail about the definition and how it will inform allocation decisions, and are keeping a watching brief on the OECD’s upcoming multidimensional fragility framework.

DFID’s choice of priority countries after the Bilateral Aid Review will doubtless be heavily influenced by the new UK aid strategy. We welcome the factors stated in that strategy, but emphasise that foremost amongst these should be effectively achieving poverty reduction. It is also unclear to us how DFID precisely determines its balance between multilateral and bilateral spending. We therefore suggest that DFID sets out clearly the criteria it uses and how those criteria are used, as part of a broader strategy for how it engages with multilaterals.

The new aid strategy includes a commitment to end all traditional general budget support. We have been told that budget support has many advantages, including giving recipient countries ownership of their development, and that it should be retained as an option. We therefore think that DFID should clarify which forms of budget support, if any, will continue, and what its evidence base is for deciding to end this traditional method of financial support. We recommend therefore that consideration then be given as to the case for an option to give general budget support in exceptional circumstances, where systems are in place to effectively monitor transparency and accountability.

Transparency and accountability are vital to ensuring that UK aid is spent effectively.

The aid strategy commits all government departments to being ranked as ‘Good’ or ‘Very Good’ in the international Aid Transparency Index in five years. We think that this timescale is unambitious and unacceptable and recommend that it should be reduced to two years. Furthermore, we think that it is very important that proper parliamentary scrutiny of UK ODA spending should be retained, especially due to the greater involvement of other government departments. We consider that we have an important role to play, both through ICAI and our own inquiries, in scrutinising all UK ODA and we intend to do so.
Evidence indicates that DFID has the capacity to scale-up over time in fragile states, but there is still room for improvement. We recommend that, to succeed in fragile states and regions: DFID adjust its programming accordingly; ensure that it is planning sufficiently long-term across the board to achieve sustainable impact and includes a greater focus on conflict prevention; and consider increasing posting lengths in fragile states to improve the expertise and local knowledge of its in-country teams. We have heard concerns about the capacity of other government departments to deliver aid effectively. DFID should assist in building the capacity of those departments, and must be given the resources required to achieve that. We also have concerns that where different government departments are delivering aid within the same country or region, there can be insufficient clarity as to which is the lead department with overall responsibility to ensuring effective coordination on delivery of the aid strategy there, and that closer attention should be given to this. We will be scrutinising this more closely going forward.

DFID’s own spending is constrained by a Treasury-set ‘non-fiscal’ target, which requires it to spend a certain amount of money in development capital, which does not impact net public sector debt. While we do not think that DFID should reduce its ‘non-fiscal’ spending, this does not necessarily lead to effective poverty reduction and should be relaxed to give DFID the flexibility it needs to achieve its objectives. DFID has also been expanding its use of Payment by Results, despite a weak evidence base for its advantages. We therefore recommend that DFID should reduce its use of Payment by Results until it has a stronger evidence base and the proper knowledge and expertise to implement it without negative consequences.