International Development Committee

Oral evidence: Sub-Committee on the Work of the Independent Commission for Aid Impact’s Report: DFID's Private Sector Development Work, HC 862
Wednesday 10 December 2014

Ordered by the House of Commons to be published on 17 December 2014.

Watch the meeting Wednesday 10 December 2014

Members present: Sir Malcolm Bruce (Chair); Fiona Bruce; Jeremy Lefroy; Fiona O’Donnell

Questions 1-24

Witnesses: David Kennedy, Director General, Economic Development, DFID, Alistair Fernie, Director, International Finance, DFID, and Meenakshi Nath, Head, Private Sector Department, DFID  

Q1   Chair: Thank you very much.  Sorry you have had to wait until the end.  In a sense, this is a follow‑up, because we have already taken evidence from you, so it is really just to get an opportunity for an update.  Formally for the record, could you introduce yourselves?

David Kennedy: I am David Kennedy.  I am Director General of Economic Development at DFID.

Meenakshi Nath: I am Meenakshi Nath.  I am Head of the Private Sector Department.

Alistair Fernie: I am Alistair Fernie, Director for International Finance, and I was Head of the Private Sector Department when this report was prepared.

Q2   Chair: It is fair to say that this Committee is clearly in favour of encouraging economic development in the private sector, and we recognise it as one of the ways of lifting people and countries out of poverty.  It would equally be fair to say that quite a lot of rhetoric comes out of the Department, from the Secretary of State in particular, with indications of pretty substantial amounts of money being committed to it but not, from our point of view, a clearly coherent understanding of a strategy.  You are left with how you are going to spend 30% of the money in private sector development in conflict‑affected states, which is pretty difficult, even if you are the most accomplished and experienced operator in the private sector.  Our feeling there was that you have quite big ambitions, but not a real sense of urgency that you need to get programmes in place that are actually going to make that money deliver real results.  Are you in a position to give us an update on that?

David Kennedy: We are.  I think I should say that I failed last time to give a sense of urgency.  That is clear and it is me who failed, not my colleagues here.  The recommendations that were made in the ICAI report, the four recommendations, are all very sensible and well taken. 

Chair: You only accepted one of them.

David Kennedy: The four recommendations are sensible, whether we recommended them at the time they were made.  What we have here is a timing issue.  The evidence was collected for the report earlier in the year.  This whole space is very fast‑moving, so there is a sense of urgency in DFID.  We are doing a lot of stuff.  For example, we have a pipeline now for 2015‑16.  There is a spending target.  We are not going to spend money for the sake of it, but we are confident.  We have a set of things that we can very usefully spend money on in that space.  The report says we should develop guidance.  We have an inclusive growth diagnostic, which you can regard as guidance to make sure we have a strategic approach going forward.  We are developing a strategic approach to engaging with the private sector, so there is a set of things that have gone through this year, at pace, and we can tell you more about them today.

Q3   Chair: Just in passing, before I bring in Fiona O’Donnell, you have heard reference to our visit to Tanzania, which was looking at jobs and livelihoods, and private sector engagement.  It would be fair to say that, particularly Fiona and I, and all of us, saw some very good programmes.  What we liked about them was that DFID was supporting them, but the practitioners were all, one way or another, private sector, either private sector foundations like Gatsby or the Wood Foundation, or private companies like Unilever.  We felt that that was the right way to do it.  Effectively DFID was deferring to the business leadership and helping to fund it, because it was on the margin.  We can testify that that is the kind of project we would like to see.

David Kennedy: That is our approach.

Chair: To scale that up to a lot of projects of that kind, across some much more difficult countries than Tanzania, would be a point of concern.  In other words, we like what we see, but is it really possible to achieve scale within the timescale, for those kinds of projects.  Can you find enough of those?

David Kennedy: First of all, I agree with what you have just said there.  There was a useful distinction we talked about last time, about whether we have private sector people working in DFID and if you need that.  Paul Collier makes a distinction.  He says, when you are trying to move forward with economic development, you need first of all development economists and then you need the practitioners who come in, the venture capitalists who can make things happen, the private sector people.  Our comparative advantage and where we think there is a market gap is the development economics.  We have very good development economists and private sector advisers, so we can understand the growth processes, the challenges, the opportunities and the responses, and then we can bring in the relevant people, the relevant partners and the private sector players.  That is how we intend to tackle this problem. 

Whether we can do it to meet the spending target in 2015‑16, the test of that is the quality of the pipeline we have come forward with.  We have done a very detailed assessment now in the resource allocation round of exactly what has come from the countries, what is proposed as central programmes and what is proposed as returnable capital.  We are confident that we have identified a set of things that will have a significant development impact.

Q4   Fiona O'Donnell: ICAI’s report says you should be clear about your comparative advantage.  What would you say is DFID’s comparative advantage in private sector development?  What skills and attributes do you bring to bear, relative to those within this field already, such as the World Bank?  In terms of that pipeline you described, you said that there has been incredible change since January, so how much of that is actually in process in the Department and in country offices?

David Kennedy: I would come back to that description of the development economists versus the venture capitalists.  Clearly DFID is not full of investment bankers and transaction people. 

Fiona O'Donnell: You have to lump the two or it will not happen. 

David Kennedy: You have to have the two.  If we do the development economics, if we identify what the gaps are in taking things forward, in terms of the business enabling environment, for example, there is a second step.  We do not have people who are expert in the detailed design of public‑private partnerships, but we can say that there is a problem with the power sector.  Clearly that is a binding constraint to business investment.  We can bring in experts then to build up the capacity for public‑private partnerships for getting investment in power generation. 

The next step is somebody has to come and invest.  Will that be DFID?  It will not be us directly, because we do not have the people to do those kinds of transactions.  What we can do is use investment vehicles, the Private Infrastructure Development Group, the Commonwealth Development Corporation or partners like the World Bank to address that part of the challenge, which is the investment.  You are right that you have to do all those three things.  What are the high‑level challenges for the economy?  What are the technical responses in terms of the enabling environment, and then the investment?  We are very proactive ourselves in the growth part—what is the growth story and the challenges?—and then we bring others in. 

Can we do that in a space where the World Bank, for example, is present?  Certainly we should not duplicate what the World Bank is doing, but the World Bank is not doing everything on the economic development space.  There are major gaps in all of our countries.  That is pretty clear; the World Bank is clear about that.  The important thing is to work in partnership with the World Bank.  We do that.  For example, 17 World Bank staff came over for two days of discussions about partnership several weeks ago, which I chaired.  Three Vice Presidents came over there and we made a lot of progress on how we can work together in this economic development space.  From their point of view, they did not think DFID should not be here, because we are covering the whole space.  That certainly was not the message.  It was that there is an opportunity for us.  What we have carved out as the opportunity, which I have just described, is understanding the big picture, what the gaps are and then mobilising money and expertise, with a view to getting investment.  They think that that really is a sensible role for us. 

Q5   Fiona O'Donnell: There are particular challenges in fragile and conflict‑affected states, in terms of economic development.  We saw that earlier this year in visits to the Middle East, and the pressures in Jordan and Lebanon because of the number of refugees they are hosting.  What gaps have you identified in those countries that DFID might be able to fill?

David Kennedy: I would start with what it is you want to achieve, first of all.  The set of opportunities becomes more limited in the fragile states and the more difficult conflict‑affected states.  Ideally, if you can join global value chains, which some of our countries are looking to do, Ethiopia for example, if you can export into the global market, that is a good way of kick-starting economic development.  That is probably less of an opportunity the more fragile and the more conflict‑affected your state is, and the worse the governance is there. 

What are the opportunities in that situation?  They are to do with agriculture and moving forward with commercial agriculture, which is about increasing productivity.  It is about developing the micro SME sector.  It is about domestic and regional rather than international markets, and it is about designing things that can work within the constraints of the governance that you have there. 

That is a pretty high‑level response to you.  The detailed response comes at the country level, where you do a deep dive and you say: what are the set of opportunities?  What are the challenges in this country and what we can usefully do to respond?  If you take particular different countries, we are innovatively responding to Somalia, for example.  In the whole range of very difficult countries, there are things we are doing in the economic development space.  To come up with a meaningful response, it has to be at the country level. 

This ties in directly with what ICAI recommended.  They have said, “Could you do guidance?”  When I started this job I wanted to have a strategic approach to economic development that was not just from the bottom up, but went through a very systematic assessment of every country and identified what the opportunities, challenges and responses are.  That is a process we are going through now, including for all the more difficult countries, and that will throw up a set of things that we can do in those countries.

Q6   Fiona O'Donnell: We are at the stage just now where we are beginning to identify what we might do.  Is that the stage we are at, because it still feels to me like it is all a bit vague?

Alistair Fernie: It is worth emphasising that we have been doing these kinds of activities for several years in many of these countries, and we are scaling up now.  We are trying to scale up on the basis of a more strategic approach to what we are trying to achieve and a better understanding of our comparative advantage.  Specifically in fragile and conflict‑affected states, we recognise that three quarters of the countries that are DFID priority countries are fragile and conflict‑affected.  If I take my last job for example, the difference between working on Kenya and working on Somalia—I was head of both those programmes—is enormous.  Kenya is fragile for a completely different set of reasons from the reasons that Somalia is fragile.  There is lots you can do in Kenya that you cannot do in Somalia, tailored to the context. 

It is also important to make this distinction between economic sector development and private sector development.  Our spending target is on economic development, and that includes lots of stuff that we will not be doing with the private sector, including in fragile and conflict‑affected states.

Q7   Fiona O'Donnell: I am still getting a lot of general descriptions and the use of the word “stuff”.  Can you tell us some of the actual gaps that you have identified in fragile states?

Alistair Fernie: Across our portfolio as a whole for 2015‑16, about 24% is going to be spent on improving access to financial services for poor people.  That is not generally something that we would think has to be done by the private sector.  We work on financial access with the IFC; we do it with NGOs and a wide range of different partners.  It is quite often possible to do that kind of work in countries that are very fragile, which do not have international investors working with them.

Fiona O'Donnell: That is access to finance that is very small.

Alistair Fernie: It might be microfinance; it might be lending to SMEs; it might be working with banks to improve lines of credit.  We can operate at a wide range of different levels.  A lot of our work is also on the investment climate, so why the domestic or international private sector is not flourishing in a country.  That is generally work we are doing with governments.  It is, in some cases, addressing the absence of the private sector being there, but we think it is a key part of driving economic development.  We would not call it direct private sector development, but it is there to try to enable that.  We are doing that in all but three or four of DFID’s priority countries; we are working with the Government to try to work out how they can help businesses, both domestic businesses and international businesses, to work more effectively. 

We take the particular perspective that, in everything that we do, we want to be focused on inclusive growth.  Part of our comparative advantage is that we have poverty running through our DNA.  We are not interested in growth for the sake of it; we are interested in growth that will reduce poverty that will create jobs for poor people. 

Q8   Fiona O'Donnell: Within that strategy, where does job creation sit?

Alistair Fernie: We have highlighted job creation as one of our top priorities.  You may ask how we are going to measure success against this and, as has been explained to you in evidence in your other inquiry, the measurement of jobs is a particularly vexed international methodological problem, because everyone is taking a slightly different approach to it.

Fiona O'Donnell: Even in this country.

Alistair Fernie: Indeed.  The organisations across the world that are trying to work on job creation have come together under the auspices of the IFC, which has an initiative called Let’s Work, to try to identify how you can measure the creation of jobs and what kind of attribution it makes sense for anyone to take.  The lesson from years of experience in this is that you cannot just design an initiative that creates job.  What you have to do is create the circumstances under which the private sector is going to create jobs, because 90% of jobs being created in any part of the world are created by the private sector. 

Q9   Fiona O'Donnell: It all sounds again like the trickle‑down effect.  Given the stage we are moving to now in development, the sustainable development goals and leaving no one behind, how are you going to ensure that private sector development benefits the poorest, the most marginalised, people with disabilities, women and ethnic groups?  How are you going to ensure that it is not just about a strategy for economic growth and private sector development, but it is rooted in tackling poverty in these countries?

Alistair Fernie: Ultimately, anybody who is creating a job has to do so on their own terms, unless we think that the Government should subsidise the creation of jobs, which, in our experience, is probably not a good way to create sustainable jobs.  There are various things that we can do.  We can work with people who are creating jobs to try to ensure that they do that in places where they are likely to employ large numbers of poor people. 

We are working, as you know, in the garments industry in Bangladesh, where there are 4 million people now working, quite low‑paid unskilled people.  70% of them are women who were previously, most of them, living in poverty in rural areas.  We have not created those jobs; it has been a combination of Bangladeshi entrepreneurs and international buyers who have created those jobs.  We are trying to ensure that those jobs are reasonable jobs that poor people have a reasonable chance to get access to. 

We can work with people who are creating jobs.  We can work with poor people directly on skills training and we can target that skills training on the most disadvantaged, whether women or disabled people, and clearly youth unemployment is a huge problem in a lot of our countries.  The question with skills training is whether you risk training more people than there are going to be jobs available, so we have to listen to what the labour market is saying about what kinds of people it wants to employ.  There are lots of things we can do.  I would not pretend that we have a fully developed jobs strategy that we can present to you and say, “This is the way to do it”.  It is a challenge with which governments in developed and developing countries are struggling.

Q10   Fiona Bruce: I have several questions, but they can hopefully be answered very briefly.  First of all, can I ask you, from the ICAI report in May, which recommended that you turn your highly ambitious ambitions into clear guidance for the development of a coherent, realistic, well balanced and joined‑up country‑level portfolios, have you a document that provides that clear guidance?

David Kennedy: Yes.

Fiona Bruce: You could bring a document to the Committee that provides that clear guidance.

David Kennedy: It is something that ICAI has been given now, in the context of their follow‑on report.  It is called the transformational and inclusive growth diagnostic, so you will see that in due course.

Q11   Fiona Bruce: Thank you.  My next question then is: “There is no clear strategic link,” said ICAI, “between ambitious overall objectives and project portfolios at the country level.  DFID should develop realistic objectives that focus on its core strengths.”  Have you provided a document that has tackled that recommendation?  Have you got a document you could bring to this Committee?

David Kennedy: It is probably the same document, which is the inclusive growth diagnostic, which says this is what we should do in response to particular things.  That is a tool that takes you from challenges to what DFID can do.

Fiona Bruce: Thank you.  If we asked to see that it would comply with that recommendation.

David Kennedy: I think so, yes.

Meenakshi Nath: There is actually a long list of documents against each of the recommendations that we can give you.

Q12   Fiona Bruce: Thank you.  Similarly, you have provided some practical guidance to assist staff to develop a consistent portfolio of programmes at country level.

Meenakshi Nath: Yes.

David Kennedy: Yes.  That is a thing we are working through at the moment.

Q13   Chair: When are we likely to get that?

Meenakshi Nath: We can send it just after this meeting or even give you a hard copy now.

Q14   Chair: Do you have it now?

Meenakshi Nath: Yes.

David Kennedy: We can give that to you.  It is a document that has been piloted in five countries.  They reported back earlier this week.  It is going to be rolled out to 26 countries, possibly more, and regions over the next several months.

Q15   Fiona Bruce: Thank you.  Lastly on the recommendations, ICAI says that “DFID needs to work harder to understand the barriers and business imperatives faced by the private sector within development.”  Have you got something you can bring to this Committee to show that you have been doing that?

David Kennedy: That is the same thing as well.  The diagnostic is all about what are the barriers that are faced by the private sector and what can be done to address those.

Q16   Fiona Bruce: When we look at that, it will specifically enable us to apply the recommendations of ICAI to the work that you have done since May. 

David Kennedy: I think so.

Meenakshi Nath: There are other documents that we can also provide.

Q17   Fiona Bruce: Clearly we are concerned because, in September when you spoke to us, Mr Kennedy, you said, “We are moving towards a coherent approach.”  Today, you started off by saying, “We are developing a strategic approach.”  It is nearly two months later.  The concerns we have are that you are planning to spend £1.8 billion by 2015‑16.  That starts in a few days’ time.  Is that too ambitious?

David Kennedy: No.  It is something I have worried about, first of all.  If you do not have a systematic approach, you say, “How can we be confident that we are proposing to do is coherent?”  The way we have addressed that concern is that we have looked at the portfolio of things that have been proposed, by the country teams, the central teams and what we can do with returnable capital.  We have asked what we know about the growth process and the barriers and to what extent what has been proposed addresses the barriers.  We are pretty confident that not everything that is in the pipeline is great, but there is a lot of other programming. 

At the country level, for example, within the £1.8 billion, we are planning to spend £1 billion through our country programmes.  About £1.5 billion or £1.6 billion of stuff has been proposed and, within that, we have prioritised £1 billion, which we are confident will contribute in a positive way to inclusive economic growth.  Until you have a systematic approach in place, you cannot be absolutely confident that these are the top priorities for the country.  Any bottom‑up approach is always going to leave that question, which is why we have the top‑down, the guidance and the diagnostic that says, “Here is a strategic way of thinking about those things.”  Actually, if you look at what comes out of the pilot applications of the diagnostic that fits pretty well with what has come from the bottom‑up process.  It probably will not in every country, but it fits pretty well. 

Q18   Fiona Bruce: What I am concerned about—and I will make this my last question, Chair—is that we have seen from the whole public debate regarding the 0.7% that value for money is a critical factor in the public’s eyes.  I want to be absolutely sure from you that, whilst you have set this ambitious target, whilst it is coming on stream fast and you have only addressed it since we last spoke, finalising ICAI’s concerns, that we will not be sitting here in a year’s, two years’ or three years’ time saying, “Actually, it might have been better to hold back rather than have projects that have ended up falling under a negative spotlight in terms of impact and value for money.”

David Kennedy: That was my concern as well.  If we had not gone through this exercise, which is a very deep dive on what has been proposed by the country officers and the central teams, then I would not be able to give you any assurance.  Having gone through the exercise, we think that all of this stuff is good value for money. 

Meenakshi Nath: The other thing to say is that wealth creation has been a key priority, one of four priorities starting from 2008.  Country teams have been looking at this issue through their own country‑level diagnostic approach.  For instance, in the last resource allocation round, they all conducted CPRDs or country poverty reduction—again—diagnostic.  They have looked at drivers and the context.  They have trained people in those teams, so they have private sector advisers and economists, and they actually come up with their own strategies.  The projects that they propose have to sit within that. 

In every project, they have to outline how this project contributes to creating inclusive growth or reducing poverty.  The measures that we are introducing now are helping us get better and better at doing this so, whenever you speak to us, we will have something that we are trying for the first time.  That does not mean that we have done nothing before that to do this well.  It just means that we are getting better and better at it. 

David Kennedy: We should give you the figures.  It is not £1 billion at the country level from nothing in economic development.  It is £700 million this year; it is increasing to £1 billion.  As I say, that is from a pipeline of £1.5 billion or £1.6 billion, so we can be selective; we can trade off; we can say, “Actually, we do not think that is going to be good value for money,” and that is what we have done.

Meenakshi Nath: The scale‑up is less than 40% of what was already in place for this year, so it is not going from zero to £1.8 billion. 

Alistair Fernie: The key figure is that we have asked all of DFID to respond to the Secretary of State’s ambition on economic development, and said, “What could you do in 2015‑16?”  We got back about £2.5 billion worth of spending ideas.  We have a target of £1.8 billion.  As David says, we are talking about three quarters of those ideas and we are saying to the other quarter, “We are not going to go with that, because we do not think it is quite ready.  We think it needs further work.  Maybe that can be financed in a further year.”  We have had the material to work with to make some choices, which we think will give us a robust portfolio.

Q19   Jeremy Lefroy: Very briefly, in Tanzania on our visit, we saw a wide range of good economic development programmes, ranging from BRAC, which we visited with Hugh Bayley in Babati.  I feel that that is something that perhaps we could take a closer look at, but we were very encouraged by what we saw working really in grassroots economic development, with villager small‑scale farmers; through to the kinds of projects that the Chairman and Fiona Bruce saw with Unilever, financial sector deepening through the trust there, which has worked for a number of years; and the large‑scale interventions in the ports, which are obviously extremely important for the whole of the regional economy to improve efficiency and exports. 

In fact, one very notable thing that we saw was ships loading Tanzanian maize, because there is a surplus there this year, for Somalia, for Mogadishu.  It was very good to see food aid being sourced from Tanzania, as opposed to coming from the US, Canada or somewhere like that, and being able to go into Mogadishu, which would have been unthinkable not so very long ago.  There were lots of encouraging things.

There are really two questions.  One is: are all those programmes within a strategic framework in Tanzania, or are they just rather ad hoc?  If so, what is happening now to ensure that they do become part of a strategic framework, although probably they form one in an ad hoc manner?  Secondly, time and time again we come back—and we were told this by a number of people to whom we spoke—to the importance of returnable capital.  I have had people saying to me, “Actually, we have had these as grants.  We could have had them as soft loans,” and that money would have been available to DFID to recycle, but DFID effectively said it was almost too hard to do that.  It was better to give a grant.  Can we have your assurance that, in every possible instance, you will ask the question, even on some of the smaller projects, of whether this can be done by returnable capital, as opposed to a grant? 

David Kennedy: I will give a very quick answer and allow my colleagues to come in.  In terms of whether we have a strategic approach in Tanzania and other countries, we do.  That comes through the country poverty reduction diagnostic, which is an economic society‑wide assessment of the challenges and the responses.  The inclusive growth diagnostic, which we will supply to you after this hearing, is a deep dive on the economy.  As Meenakshi says, we want to get better and better; we are having a deep dive and moving forward with the development of the strategic approach.  It is not that we do not have a strategic approach, in response to the earlier question; it is something that is evolving over time and that is the way it should be.  It will always evolve.  We will always look to get better and to innovate. 

              In terms of returnable capital, it is absolutely key.  You have to have investment coming into these countries.  You cannot just do investment climate work and leave it at that.  You need to show the investment climate works and then leverage off that.  You have demonstrations.  You get investment and the whole growth story takes off.  We are looking for that reason very seriously at returnable capital.  Within the £1.8 billion, £700 million at least, we expect, will be spent in the form of returnable capital, so it is a major instrument.  It will not necessary be us spending directly as DFID; it will be through our investment vehicles and with partners.  It is absolutely central, not just because of development impact, but also the Treasury has set us a returnable capital target of £700 million for 2015‑16 and that will probably increase in future, so we have to focus for that reason, but our primary reason is development.  On that rationale, we will be looking more and more at returnable capital.

Alistair Fernie: The key question is: who is the capital going to return to and what are the risks?  The returnable capital target that we have from the Treasury are assets that we need to write, on our balance sheet, and provision against the depreciation of.  We think that we can get good development impact and preserve our capital but, with that set of parameters, we need to be careful how many risks we take.  Some of the most interesting stuff that you can do involves taking risks, where you are going to get something between zero return, which is a grant, and preservation of capital.  We need to be sure that we have instruments that can work in that space to stimulate innovation. 

One of the things you saw was the Africa Enterprise Challenge Fund, which we would say is a very successful private sector instrument, which has stimulated a lot of innovation in agri‑business, climate change and other key areas.  It has tried to ensure that the businesses that it supports are serious by asking for matching funding, but it still gives grants.  There is a failure rate on the investees in AECF and there should be, because they are innovating and they are small startups.  Around the world, a lot of small startups fail. 

The question is: can we make loans from AECF that get recycled, not on to DFID’s balance sheet, because we will then end up with a bad balance sheet, but into some fund managed by AECF, where we expect to get as much of our capital back as possible; we are lending money to successful businesses, but we accept that there is going to be some failure rates among the most innovative things, which are most likely to benefit poor and vulnerable people.  There are different ways of having your capital returned, and we need to find ways that meet the Treasury’s requirements, but which also involve innovating to help poor people the most.

Q20   Chair: Does that avoid compromising ODA, because that was a problem with returnable capital that undermines the 0.7%?

Meenakshi Nath: No.

David Kennedy: There are lots of debates at the moment about how you can score returnable capital in the ODA space, and those are ongoing.  There is a discussion next week, where we hope to get some progress on the treatment of private investment, so it is an open discussion, but we think we can do returnable capital.

Q21   Chair: I can say, before Jeremy Lefroy, that it does suggest that our idea of a bank is not completely beyond the next phase.

David Kennedy: There are different ways we can do it.  We could have a bank.  We could regard the CDC as the bank, and we could beef that up.  At the moment, Meenakshi is looking at developing a number of platforms for returnable capital investment, with different partners from the IFC to PIDG. 

Q22   Jeremy Lefroy: The key that we would say is that, from the various inquiries we have done around this issue, there has not been a place in DFID where this has been co‑ordinated.  We have seen programmes in Pakistan with guarantees for private sector business given to banks, where the guarantee was not drawn down on £10 million returnable capital.  There is no consistent approach to saying, “We need to make the best possible use of our ODA.  We need to get as much returnable as possible, where it’s appropriate.”  I fully accept that there are circumstances under which it is completely inappropriate, but one should always ask the question and that should be monitored and consolidated, rather than being bits here, there and all over the place, which we are not aware of. 

David Kennedy: You are right.  Probably that is true of the past, but now that is consolidated.  Meenakshi is in charge of that, in a central team, the Private Sector Department here at headquarters.  We have brought her over given her experience on the India programme and the returnable capital there, so we are now taking a more strategic approach across all of our countries, saying, “What can we do in this space?”

Alistair Fernie: You have a fair point.  We have consolidated the returnable capital, which is going to appear on our balance sheet.  We now have a very good grip on that.  We have a policy, which is nearly finalised, on how we are going to use it and an investment committee approach to managing that.  For the things that are not on our balance sheet, which country offices are giving to other institutions, which you might call recyclable capital, we are still developing best practice on how we do that.  To go back to the ICAI report, we would accept that we do need to produce more guidance to country offices in best practice in managing capital that is not going to be on our balance sheet, but which is appropriate to lend to the private sector, rather than to give away.

Q23   Fiona O'Donnell: Can I just quickly ask about the documentation that we are going to be sent?  I realise that we asked for a sense of urgency, but this is really important work that we are doing.  Did you have time or space to consult with NGOs and the private sector on the content of this and, if so, can we have details of that consultation and who was involved?

David Kennedy: We have said we will give you the inclusive growth diagnostic.  Now, the first thing we have done is to pilot that in five countries.  We have done it in Zambia, Ethiopia, Afghanistan, Bangladesh and Burma.  As part of that exercise, the country offices will have consulted widely to understand what are the priorities, challenges and responses that DFID could usefully contribute.  What I want to do now is, before we go to roll this out to the 26 countries, bring in different groups of people and say, “This is where we have got to with the growth diagnostic.  What do you think?” as part of our updating it before we then move into the full implementation phase. 

Q24   Fiona O'Donnell: Where is the space that that is happening?

David Kennedy: The space is over the next few weeks, so into January we will be bringing people in, talking with them, getting feedback and taking that into account, as we move forward with this exercise.

Meenakshi Nath: Could I just add on the UK bank?  It boils down to the comparative-advantage question.  The first port of call for us would be what the existing institutions out there are, what they are good at and what we can use those partnerships to deliver.  If it turns out that there are big gaps in areas that they have not been able to tackle, perhaps we would be quite willing to look at promoting new institutions.  They could be multilateral, like we promoted PIDG, primarily because infrastructure was a gap particularly in fragile and conflict‑affected states.  They have solved some of those problems.  Similarly, we could look at bilaterally promoted new institutions as well, but that is something that we would like to look at after we have looked at what the existing institutions can deliver.

Chair: I am glad to hear that it is open.  Thank you very much.  You can see that this exercises the Committee a lot.  We want you to succeed, obviously, but you have quite a challenge on your hands.  We want to keep working closely with you to see how it rolls out.  Thank you very much for coming in.

              Oral evidence: The Work of the Independent Commission for Aid Impact, HC 862                            6