The FCDO's approach to value for money

Professor Bernhard Reinsberg, Dr Cecilia Corsini, Dr Giuseppe Zaccaria

About the authors

We are a team of researchers at the University of Glasgow with expertise in foreign aid and international development organizations. Our primary research interest is to understand under which conditions aid organizations are effective in promoting the Sustainable Development Goals worldwide. To that end, we deploy case study analysis and statistical analysis using large-N data. We would be happy to provide oral evidence to the committee if appropriate.

Summary

• Since 2011, Value for Money (VfM) has been a guiding principle of the the UK’s approach to development cooperation, requiring the Foreign, Commonwealth and Development Office (FCDO) and its implementing partners to maximise the impact of each pound spent to improve lives.
• By prioritising the “3Es,” FCDO’s VfM framework places more emphasis on measurement and standardization than on context-specific analysis and evaluation. This focus on measurement requires clear, universally applicable indicators, which were never fully developed. While equity has gained increasing attention, the 2011 framework fails to incorporate critical aspects of aid programming, such as national ownership and localisation. These omissions limit its relevance to contemporary aid challenges.
• The evidence on whether the merger enhanced VfM is inconclusive. Potential benefits include a more impactful and agile response to emergent issues facilitated by an integrated approach and pooled expertise. Potential challenges include shifting priorities away from development that addresses poverty, reduced transparency, loss of expertise, and administrative costs related to the merger.
• FCDO’s ODA allocations can overall be considered good VfM, as FCDO supports multilaterals that are impactful, efficient, and are well-aligned with the UK’s development priorities, like the International Development Association (IDA) and global thematic funds. Scepticism is warranted about British Investment International (BII)’s alignment with FCDO’s objectives, as BII’s incentives as a business institution might undermine political or development goals.

Recommendations

• VfM should also consider the extent to which donors align with recipients in promoting ownership. Given that IDA only scores average on ownership in our analysis, FCDO could justify greater commitments to regional development banks and global funds based on their better ownership record.
• FCDO could deploy financial instruments for development more effectively, considering its limited debt relief effort and high in-donor costs.
• FCDO should pursue a multi-pronged approach to strengthen its VfM oversight and accountability framework, including strengthening its Development Capability, relaxing operating rules for small-scale activities, and considering alternative forms of evidence for VfM accountability.
• All UK institutions engaged in development financing (particularly BII and UK Export Finance) should adhere to FCDO’s high standards of transparency and accountability.

Detailed responses to inquiry questions

How does the FCDO currently define the term Value for Money? Are there any other aspects of Value for Money that the FCDO should be considering in its assessment?

1. FCDO’s current framework defines Value for Money (VfM) as aiming to “maximise the impact of each pound spent to improve lives.”[1] FCDO operationalizes VfM through four criteria—the “4Es”—economy, efficiency, effectiveness (including cost-effectiveness), and equity.[2]
2. FCDO inherited its VfM framework from the former Department for International Development (DFID), which introduced the framework in 2011. DFID defined VfM as “maximising the impact of each pound spent to improve poor people’s lives” and measured it through the “3Es”—economy, efficiency, and effectiveness—at every stage of programming, from inputs to impact.[3] Over time, two additional criteria, equity and cost-effectiveness, were introduced.[4]
3. Independent evaluations and reviews, including by ICAI (2018), ODI (2021), and ICAI (2023) have highlighted significant limitations of the 2011 VfM framework. By prioritising the “3Es,” the framework places greater emphasis on measurement and standardization than on context-specific analysis and evaluation. This focus on measurement requires clear, universally applicable indicators, which were never fully developed. Moreover, the framework does not address the trade-offs that may arise between criteria, nor does it provide guidance on how to prioritise one criterion over another when conflicts occur.
4. Finally, while equity has gained increasing attention, the 2011 framework fails to incorporate critical aspects of aid programming, such as national ownership and localisation. These omissions limit its relevance to contemporary aid challenges.

To what extent did the merger of DFID and the FCO affect what the FCDO considers to be Value for Money?

5. VfM’s definition has evolved over time. DFID (2011) defined VfM as “maximizing the impact of each pound spent to improve poor people’s lives”. In contrast, FCDO (2016) defines VfM as “maximis[ing] the impact of each pound spent to improve lives”, and FCDO’s Programme Operating Framework (2024) provides no definition at all but mentions VfM in the context of “maximising impact for taxpayer’s money” and “value for money against strategic objectives” (our emphasis added).[5]
6. The evolving definition shows a stronger focus in recent years on the UK’s interest and greater accountability toward UK taxpayers. The VfM definition no longer has a developmental focus on “poor people” but instead is increasingly linked to strategic interests, including foreign policy.
7. The merger of DFID and the FCO into the FCDO has had a complex impact on the department’s approach to VfM. While DFID had a strong focus on VfM and rigorous evaluation processes, the FCO’s priorities were more diverse, encompassing diplomacy, security, and broader foreign policy objectives.
8. The evidence on whether the merger enhanced VfM is inconclusive. Potential benefits include a more impactful and agile response to emergent issues facilitated by an integrated approach and pooled expertise. Potential challenges include shifting priorities away from development that addresses poverty, reduced transparency, loss of expertise, and administrative costs related to the merger.
9. On the positive side, the merger has the potential to improve VfM by integrating development and diplomacy efforts, leading to a more efficient use of resources and greater impact. Combining the expertise of DFID and the FCO could enhance the FCDO’s ability to identify and implement high-impact programs. For example, according to NAO (2024, 13), there is some “evidence of where a more integrated approach has improved the organisation’s ability to respond to international crises and events, which has led to a better result.”[6]
10. On the flipside, the FCDO’s broader remit may dilute the focus on VfM, particularly in areas where development objectives are less prominent. Moreover, where foreign policy interests are concerned, transparency and accountability might decline, which could hinder VfM assessments. In addition, the merger has led to job losses and restructuring, which may have impacted the FCDO’s capacity to effectively manage and evaluate development programs. ICAI (2024) is concerned that “FCDO is not able to retain enough governance advisers at senior levels, including staff in embassies, as these positions are important to assure the impact and value for money of ODA for democracy and human rights, as well as to maintain FCDO’s international reputation of thought leadership in this area.”[7] Finally, according to NAO estimates, the merger cost £30 million over 2020-22, resources not available for country programmes.
11. However, in sum, “[w]ith unclear objectives, and the absence of mechanisms to track full costs and identify benefits, there is insufficient evidence to conclude on the value for money of this merger” (NAO 2024, 13).

How could the FCDO improve its oversight mechanisms to ensure Value for Money of its ODA budget?

12. FCDO appears to have robust oversight mechanisms to ensure VfM, including the VfM cycle and six VfM enablers (DFID 2011) and the Operational Programme Framework (2024).
13. Following independent evaluations, including by ICAI (2018) and ICAI (2023),[8] these mechanisms have been further refined. ICAI (2018) commended DFID’s efforts to “cut waste, detect fraud, and improve efficiency” but made several recommendations—to articulate and report on cross-cutting VfM objectives at the country portfolio level, to encourage experimentation with different ways of delivering results more cost-effectively, and to ensure better partner-country ownership and national capacity-building.
14. Our own research confirms DFID did poorly on recipient ownership, scoring lowest across 23 bilateral DAC donors in 2015-17.[9] We obtained latent ownership scores based on country-level data from two monitoring rounds of the Global Partnership for Effective Development Cooperation (GPEDC), a multilateral initiative tracking development partners’ progress toward the Paris Declaration commitments.
15. While DFID’s VfM framework was quite prescriptive, the merger provided an opportunity for FCDO staff to justify VfM against additional criteria. This could help FCDO achieve VfM in circumstances where it needs to respond swiftly, for instance in humanitarian or political crises. Yet, as ICAI (2023) notes, FCDO’s Programme Operating Framework is “not yet fully aligned with FCDO’s objectives, and not adapted to a new reality of declining aid budgets… it is not clearly written and risks distracting from the important content main messages.”
16. FCDO should pursue a multi-pronged approach to strengthen its VfM oversight and accountability framework. First, FCDO should strengthen its Development Capability, including time and resources for staff to undertake thorough project preparation and appraisal, thereby ensuring that staff gathers the data that allows for evidence-based allocation decisions. Second, the FCDO leadership should relax operating rules for small-scale activities and trust the judgment of local FCDO staff at country level. Next to internal oversight (through senior approval, internal audit, and external audit), FCDO might consider alternative forms of evidence for VfM accountability. We argue that joint funding initiatives with other donors, and co-financed projects with recipients should be considered evidence of VfM accountability. Especially recipient co-funded projects would help promote FCDO’s weak ownership record.

How effectively are the FCDO utilising financial instruments, including: Debt relief, guarantees, and Special Drawing Rights?

17. ‘Effectiveness’ is an elusive term and difficult to assess. Here we offer our perspective on which financial instruments are effective in the sense of the VfM framework and to what extent the UK has oriented its allocation toward these instruments compared to the pre-merger period. Empirical analyses are complicated by limited up-to-date data on financial flows, especially non-ODA flows.
18. Theoretically, debt relief is the most valuable type of financing from a recipient perspective. Debt relief frees up resources for development that are otherwise earmarked for debt repayment. As a pure public good, debt relief is coordinated multilaterally, through the HIPC initiative. Guarantees can mitigate risk for otherwise not commercially viable activities, mobilizing private capital and promoting development. Guarantees are attractive from the UK’s perspective;[10] for recipients, they may enable countries to unlock finance at low cost; yet, they also set incentives for riskier fiscal behaviour. Their impact on pro-poor development thus is uncertain and contingent on guarantees’ design and targeting. Finally, SDRs cannot be readily used for development programmes. According to a CGDEV (2024) paper, SDRs could be rechannelled to MDBs to leverage new development funds, used to pay for debt relief, or bolster reserves.[11]
19. Empirically, we analysed recent UK financing data from the OECD/DAC Development Statistics to examine the extent to which the UK uses various financial instruments.[12] In fact, Official Development Assistant (ODA) continues to play a major role ($7 billion committed in 2022). In contrast, Other Official Finance (OOF), which supports equity investment and debt instruments, was insignificant ($0.139 billion committed in 2022—or 2% of the UK’s total public development finance). Yet, it was only in 2021-22 that the UK made any OOF commitments, which could reflect FCDO’s renewed emphasis on private-sector partnerships in development finance.[13]
20. Given the UK’s limited OOF, we further unpack the UK’s ODA. With respect to the main purposes of aid, the UK committed bilateral debt relief only once ($194 million in 2020) and disbursed multilateral debt relief through the HIPC initiative of $673 million in 2019-22 (with the bulk provided in 2019-20). This is surprising given the escalating need for debt relief in many developing countries following the COVID-19 pandemic.
21. Another alarming trend in the UK’s ODA is the rise of in-donor costs, mainly for hosting refugees. The UK disbursed in total $1,462 million in 2019-20 but $5,913 million in 2021-22. As this money never reached recipient countries, it could not possibly have had a development impact, thus reflecting poor VfM.
22. In sum, the FCDO could deploy financial instruments for development more effectively, considering limited debt relief effort and high in-donor costs. A limitation of our analysis is that we could only examine ODA flows to different purposes and recipients. Data on OOF is insufficient to warrant reliable analysis. A key recommendation therefore is that all UK institutions engaged in development financing (particularly British Investment International and UK Export Finance) should adhere to FCDO’s high standards of transparency and accountability.

Does the FCDO’s funding model impact the cost effectiveness of its aid budget?

23. FCDO’s financial model consists of two dimensions. On the input side, FCDO’s primary source of funding is the UK government’s annual budget. This budget is allocated by the UK Parliament and ultimately approved by the Treasury. The specific amount allocated to the FCDO varies from year to year, depending on the government’s priorities and overall economic conditions. Amidst growing economic difficulties and competing spending priorities, it must be expected that the FCDO’s budget remains flat in the medium term.
24. On the output side, FCDO can commit Official Development Assistance (ODA) and non-ODA flows, including loans, guarantees, and equity. Available data suggests that non-ODA flows are negligible, though the extent of underreporting is unknown. Hence, our discussion of the FCDO’s funding model focuses on ODA flows.
25. FCDO’s use of different ODA modalities does impact FCDO’s cost effectiveness. A key consideration is the ODA delivery channel. It is commonly assumed that core contributions to multilateral development banks (MDBs) deliver most VfM, as each pound provided gets multiplied due to burden-sharing and financial leveraging. Other multilaterals like the United Nations (UN) still involve burden-sharing but no leveraging. Bilateral aid involves neither of these (financial) benefits but ensures the UK does not need to compromise on its specific interests. Multi-bi aid—earmarked contributions to multilaterals—uses the implementation capacity of multilaterals but allows the UK (and other donors) to retain some influence over allocation.[14] Multi-bi aid can deliver VfM to the extent that it advances the UK’s development interest in certain areas together with like-minded donors, but it involves considerable management costs for both the multilateral organization and the donor administration[15]  and is less effective than comparable core-funded projects.[16]
26. Considering the UK’s delivery channels in 2019-22, UK ODA has substantively declined across all channels in 2019-21. The UK’s multilateral share increased from 40% to 50% over 2019-21. The UK’s multi-bi aid has declined sharply, from $4.2 billion in 2019 to $1.1 billion in 2021. From 2021 to 2022, the UK’s bilateral aid share has grown more than its multi-bi aid budget—from 33% to 62% relative to 15% to 21%—suggesting that FCDO is on track of pursuing better VfM.

To what extent does the philosophy of aid at the FCDO align with its finance delivery partners, including British International Investment, and other Multilateral Development Banks?

27. The FCDO’s philosophy of aid, as outlined in the UK’s International Development Strategy,[17] emphasises the importance of promoting economic development and reducing poverty through sustainable solutions. BII and MDBs have a similar aid philosophy and thus represent valuable partners for FCDO.
28. MDBs are particularly well-aligned partners. An ICAI (2022) review of the International Development Association (IDA)—the World Bank’s concessional financing institution for low-income countries—concludes that IDA is good value for money, explicitly mentioning its high performance, alignment with UK development priorities, and scope for influence by the UK.[18]
29. Considering transparency, IDA ranks fourth in the 2024 Aid Transparency Index (ATI), after African Development Bank (AfDB), Inter-American Development Bank (IADB), and the US Millenium Challenge Corporation (US-MCC).[19] Transparency is a key enabler of VfM in the FCDO’s approach, and FCDO expends considerable effort to ensure transparency and accountability—as reflected in the highest ATI transparency score among bilateral donors. In 2024, FCDO was together with US-MCC the only agency to receive a “very good” transparency rating.
30. VfM should also consider the extent to which donors align with recipients in promoting ownership. Our own analysis shows that IDA performed only average regarding recipient-country ownership.[20] Other MDBs, specifically the African Development Bank (AfDB), the Asian Development Bank (AsDB), and several global funds, obtained higher ownership scores. Hence, FCDO could justify greater commitments to these institutions based on their better ownership record.
31. In principle, BII is also aligned with FCDO’s aid philosophy. Both organizations prioritize responsible investment practices and seek to generate positive social and environmental impacts alongside financial returns. They collaborate on various projects, such as infrastructure development, renewable energy, and financial inclusion. However, there are some differences in their approaches. The FCDO, as a government department, has a broader mandate that extends beyond investment to include diplomacy, humanitarian aid, and security cooperation. BII, on the other hand, is a development finance institution focused on commercial investment.
32. There are also concerns about the extent to which BII meets other critical VfM dimensions, specifically transparency and ownership. According to the 2023 DFI transparency index, BII scored 26.5/100 and thus is less transparent than other development finance institutions, like US DFC (38.2/100). Multilateral DFIs, like the World Bank’s IFC, AfDB, AsDB, and IDB-Invest, were all assessed as considerably more transparent.[21]
33. There are also concerns about BII’s responsiveness and accountability to recipients. ICAI’s 2022-23 evaluation on UK aid raised particular concerns around the oversight of investments via funds by BII. ICAI found that BII had invested via an Indian fund in firms including a social media site, which featured abuse of women and glorification of the Hamas attacks on Israel. Overall, scepticism is warranted about BII’s alignment with FCDO’s objectives, as BII’s incentives as a business institution might undermine political or development goals.