WRITTEN EVIDENCE FOR IDC INQUIRY ON THE FCDO’s APPROACH TO VALUE FOR MONEY 

Introduction 

 

  1. The Foreign, Commonwealth and Development Office (FCDO) welcomes the International Development Committee’s (IDC) inquiry into its approach to value for money. In October 2024, the Minister for Development, Anneliese Dodds, outlined a new modern approach to development including “making sure our official development assistance reaches those who need it most, and where and when it is most effective”. The FCDO is committed to using ODA spending to achieve better development outcomes as part of a coherent international approach, with a strong focus on poverty reduction and accelerating progress on the Sustainable Development Goals.

 

  1. The FCDO takes seriously its duty to maximise the impact of Official Development Assistance (ODA) spend on eradicating global poverty. Since the merger of the Department for International Development (DFID) and the Foreign and Commonwealth Office (FCO) in September 2020, the FCDO has focused on ensuring we have the right policies and frameworks in place to ensure good value for money of our ODA spend, including the following actions:

 

 

 

Nonetheless, the FCDO’s development capability and the rigour of our application of rules and guidance weakened. This increased some risks to achieving value for money of ODA.

 

  1. There have been two National Audit Office (NAO) value for money studies on the FCDO. The first report in March 2022 was “Managing reductions in ODA spending”, which concluded that the speed and scale of budget reduction, and the lack of long-term planning certainty, increased some risks to value for money, although it was too early to assess the impact of these changes for long-term value for money. The second report in March 2024 was “Progress with the merger of the FCO and DFID”, which concluded that while the FCDO did not clearly articulate or measure the range of anticipated benefits of the merger, with its approach to tracking the costs of the merger incomplete and changed over time, the FCDO had increased the accountability and visibility of international development since the merger was announced. NAO reported that more than three years on from the merger there is still work to do to resolve remaining issues and ensure the basics are delivered, noting that it will take time for the wider cultural change and new ways of working to settle and become fully embedded.

 

  1.                                                                                                                                                                 The FCDO approach to value for money uses the National Audit Office’s definition which is the optimal use of resources to achieve the intended outcomes. 

 

  1.                                                                                                                                                                 The FCDO is focused on strengthening our development capability, systems and focus to maximise the value for money of ODA. The Foreign Secretary has commissioned three reviews into the future functions and priorities of the FCDO. The purpose of the International Development Review is to propose how to maximise the impact of the FCDO’s integrated development and diplomacy model, including through capability and assurance, value for money and appropriate use of public funds. Baroness Minouche Shafik, the independent reviewer leading this work, has now submitted her review to the Foreign Secretary, who will now consider the review’s recommendations with the Minister for Development.

Question 1 – 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? 

 

The FCDO uses the NAO’s definition of value for money which is “the optimal use of resources to achieve the intended outcomes”. For ODA spend, the main objective is to maximise each pound's impact on those living in poverty.

 

The FCDO uses the 5Es criterion to assess value for money and other principles and concepts to help analyse and maximise different aspects of value for money.

 

The FCDO definition of value for money

 

  1. The FCDO uses the NAO’s definition of value for money which is “the optimal use of resources to achieve the intended outcomes”. The FCDO’s PrOF sets out the mandatory rules and principles for good programme delivery. It includes an internal guide on value for money that states “the FCDO has a duty to the UK taxpayer to ensure that we do everything we can to maximise the value for money of our actions.  Our diplomatic work should maximise the impact of foreign policy. For ODA spend, the main objective is to maximise each pound's impact on those living in poverty.”

 

  1. The FCDO uses the 5Es criterion to assess value for money based on the results chain which explains how an intervention is expected to deliver its impact (see Figure 1 overleaf). It builds on the 3Es criterion (economy, efficiency and effectiveness) set out by the NAO[1]. The NAO recognises equity and cost-effectiveness as additional considerations of value for money, which the FCDO has adopted. The five elements of the 5Es criterion are: 

 

 


Figure 1 – 5Es Criterion and the results chain (for an intervention)[2]

 

A diagram of a process Description automatically generated

 

  1. The FCDO also uses internationally recognised principles to consider, assess and maximise wider aspects of value for money. When evaluating the value for money of our programmes, the FCDO’s Evaluation Policy[3] uses the OECD-Development Assistance Committee (OECD-DAC) evaluation principles that the Independent Commission of Aid Impact (ICAI) uses for its assessments of UK ODA expenditure. These are:

 

 

  1. In line with a previous ICAI recommendation, the FCDO’s PrOF encourages staff to consider the development effectiveness principles – such as ensuring partners’ country leadership, building national capacity and empowering beneficiaries - when developing business plans and business cases, and providing aid in such a way that it supports and strengthens local responsibility, capacity, accountability and leadership.

 

  1. The FCDO considers value for money at all levels of FCDO activity: 

 

 

  1. The FCDO invests in central enablers that deliver value for money, such as transparency, building evidence, learning and scrutiny:

 

 

 

  1. In addition to Parliament and the NAO, the FCDO has external scrutiny from ICAI. This is an FCDO Advisory Non-Departmental Public Body established to scrutinise the UK’s use of ODA. ICAI is the vehicle to deliver on the statutory obligation under the International Development (Official Development Assistance Target) Act 2015, to make arrangements for the independent evaluation of the extent to which UK ODA represents value for money in relation to the purposes for which it is provided. ICAI is operationally independent of FCDO (and HMG), establishing its own work plan and reporting directly to the IDC. The Government is committed to ICAI and ensuring it can effectively scrutinise UK ODA spend; that its recommendations are properly prioritised; and that value for money improves as a result.

 

  1. What the FCDO has delivered is captured through monitoring[4] and evaluation processes. At the programme level this is through regular output reviews and outcome likelihood assessments, and in specific cases through full, independent evaluations which provide rigorous evidence at outcome and impact levels. Aggregate results are collected for specific development achievements (education, climate, humanitarian assistance, and gender-based violence interventions). At the organisational level work is underway to strengthen the overarching framework for monitoring outcomes at an aggregate level (e.g. by region) and across the FCDO. The FCDO has seen a loss in in-house monitoring and evaluation expertise which has resulted in a reduced ability to scrutinise impact and a greater reliance on partners. The recent uplift in development capability will include monitoring and evaluation expertise.

 

Other aspects of value for money

 

  1. The IDC’s Disability-Inclusive Development report, published in April 2024 made recommendations on the FCDO’s approach to value for money noting that “the FCDO should review its approach to securing value for money in development programmes, to ensure that these considerations do not impact on the ability of programmes to effectively safeguard people with disabilities”. 

 

  1. In response the FCDO agreed that securing value for money in development programmes should not compromise the safeguarding of people with disabilities and believe the FCDO’s value for money policy is consistent with this. Whilst FCDO has inherited a strong equalities-based approach to value for money and development, it is important staff are supported to apply this across the full range of contexts in which the organisation operates. For this reason, the FCDO intends to update the equity and value for money guide and share across our network. 

Question 2 – To what extent did the merger of DFID and the FCO affect what the FCDO considers to be Value for Money?

 

The merger of DFID and the FCO did not change what the FCDO considers to be value for money in ODA programming - maximising the impact on the poorest.  

 

  1. As mentioned above, the PrOF guide on the FCDO’s approach to value for money (2021) states “For ODA spend, the main objective is to maximise each pound's impact on those living in poverty.” This is consistent with DFID’s Value for Money Framework (2011) that said, “Value for money in DFID’s programmes means: We maximise the impact of each pound spent to improve poor people’s lives.”

 

  1. Both DFID’s and the FCDO’s programmes could pursue secondary benefits, to the UK, but eradicating poverty in ODA eligible countries should be the main objective, in line with the FCDO’s PrOF and the OECD DAC ODA rules. ICAI has flagged the risk that the focus on poverty reduction might be diluted by the pursuit of benefits for the UK. For example, in ICAI’s 2023 review of “UK aid for trade” it recommended “The UK government should develop and publish a set of detailed guiding principles for aid programmes to ensure that the pursuit of secondary benefits to the UK does not detract from its primary poverty reduction objective.” The FCDO accepted and actioned this recommendation by re-emphasising in the business case template and PrOF guidance the importance of poverty reduction and strengthening the requirement to assess the extent of poverty reduction resulting from different options. The ICAI’s follow-up report in 2024 judged that the response was “adequate despite some continued concerns on how the guidance will be employed in practice.”

 

  1. A good example of a FCDO programme with strong poverty reduction impact and secondary benefits to the UK is the North Africa Migration and Development Programme. The programme aims to increase opportunities and protections for vulnerable migrants in North Africa, while improving social cohesion between migrants and host communities. A secondary impact of this programme may be a reduction in migration to the UK.

Question 3 – How effective is the FCDO at monitoring the delivery and outputs of its programming to ensure its achieving Value for Money?  Is there a cohesive approach across the merged FCDO?  

 

The FCDO has a range of tools and approaches for monitoring delivery across its work. At programme level, the FCDO PrOF sets out specific guidance with programmes having results frameworks and annual reviews against reported results.  At the organisational level, work is underway to strengthen the overarching framework for monitoring outcomes across the merged FCDO.

 

Ensuring value for money across FCDO programming

 

  1. The FCDO’s PrOF factors value for money considerations at every stage of the programme lifecycle:

 

 

The role of evaluation

 

  1. Programme monitoring and review is a mandatory part of the PrOF. Formal, independent evaluation complements these activities and provides additional evidence to support value for money in programme design, implementation and learning. Decisions about when and what to evaluate are decentralised across the organisation to prioritise the use of evaluation resources on critical evidence gaps. This approach encourages stronger buy-in, and clear uptake pathways where findings can be applied to support delivery. Evaluations are delivered by an embedded network of accredited monitoring and evaluation specialists, supported by the central Evaluation Unit.

 

Monitoring delivery and outcomes across the FCDO

 

  1. The FCDO publishes a range of development achievements across policy areas including education, climate, humanitarian assistance, and gender-based violence interventions. These are made available on gov.uk[6], following robust technical assurance and Chief Statistician sign-off (including voluntarily complying with the UK Code of Practice for Statistics’ values of trust, quality, and value) and are accompanied by methodological documentation to aid user understanding.

 

  1. The FCDO has been developing an outcome framework to better reflect the aggregate picture of achievements across the whole of the FCDO (including development) and to strengthen cohesion on outcome reporting. This work will continue to develop over the next year, aligning with work to monitor Ministerial priorities by the Foreign Secretary’s Delivery Unit.

 

  1. The PrOF requires programme data to be disaggregated by geography, sex, age and disability status wherever possible, as based on our commitment under the Inclusive Data Charter. We include the same requirements when we collect results centrally. However, while response for sex disaggregation is good, relatively few programmes capture disability status. We are in the process of securing the necessary technical resource to develop and publish a new Inclusive Data Charter Action Plan to help us meet commitments to disaggregate data.

 

  1. The Foreign Secretary made clear on his arrival in office that FCDO should act as the international delivery arm of the Government’s 5 Missions. He has also set five policy priorities for the department: i) putting growth and jobs at the heart of our foreign policy; ii) playing our part in enhancing UK security; iii) rebuilding our relationship with Europe; iv) restoring our leadership on climate and nature; and v) modernising our approach to development.

 

  1. The Foreign Secretary’s Delivery Unit will ensure progress of the Foreign Secretary’s Priorities working closely with the Mission Delivery Unit in the Cabinet Office and other Delivery Units across Whitehall to drive forward the Government’s Missions.

Question 4 – How could the FCDO improve its oversight mechanisms to ensure Value for Money of its ODA budget?  

 

The FCDO has put in place strategic oversight mechanisms for the ODA budget. Opportunities for improvement are being pursued through action on programme management capability and capacity and will be considered further in the Development Review and in the context of the Spending Review 2025.

 

Existing Oversight Mechanisms

 

  1. The FCDO’s Development Committee and the Investment and Delivery Committee receive the latest data and analytical insights on the full FCDO ODA programme portfolio. The Investment and Delivery Committee scrutinises major and high-risk ODA projects and programmes, assessing whether the programme proposal represents value for money and is ready to proceed to Ministerial approval. The Investment and Delivery Committee reports to the Development Committee and provides strategic leadership, oversight and accountability for the FCDO’s development work. The Development Committee is working to improve coherence and effective delivery and ODA management across the department’s development portfolio (e.g. through thematic portfolio reviews). The Second Permanent Secretary also conducts deep dives on geographic portfolios on roughly a six-month cycle.

 

  1. The Quality Assurance Unit’s role is to review business cases proposing major new ODA spending and provide an ‘internal and independent’ challenge function. The Unit provides objective, evidence based and expert assessment of proposals, assessing value for money and whether business cases provide a credible estimate of expected outcomes. The Unit reports on its findings to the Investment and Delivery Committee.

 

  1. The PrOF sets out the mandatory rules and principles for good programme delivery including on value for money. The purpose of establishing a framework for programme delivery was to ensure good value for money by establishing a set of accessible and clear mandatory requirements, underpinned by guidance to enable consistent and effective delivery. The PrOF aligns with HM Treasury and Cabinet Office standards – and reflects UK legislation. It has also been endorsed by the ICAI as a credible programme control framework. 

 

  1. The PrOF sets out controls which offer assurance at key points on how the FCDO is spending taxpayers’ money. The framework articulates approval thresholds and the processes for ensuring those with delegated authority are engaged at the appropriate time – officials (e.g. Heads of Mission, Directors and Director-Generals) approve spend at the lower end of spend, and Ministers (including the Foreign Secretary and Minister for Development) and HM Treasury approve higher value and higher risk programmes. The PrOF also sets out the level and type of accountability and responsibilities of those with a role in programme delivery (including programme managers, programme leaders and other key decision-makers) to ensure that it is clear how oversight and delegations should be put in place.

 

  1. At the delivery stage, delivery partners and the FCDO Programme Senior Responsible Owner (SRO) manage and adapt the programme to maintain or increase impact. Best practice in delivery includes monitoring output and outcome indicators, managing risks, and validating results through stakeholder engagement. Monitoring supports informed decision-making, ongoing learning, and accountability, ensuring funds are used for their intended purposes and assessing the impact, outcome, and outputs of the programme.

 

  1. To ensure there is appropriate oversight of value for money, Portfolio SRO letters of delegation are issued by the FCDO Permanent Secretary, setting out the lines of accountability for complying with the PrOF. In addition, accountability is ensured by having:

 

 

  1. The FCDO’s IAID provides independent assurance over the extent to which FCDO’s governance, risk management and control framework supports the FCDO to achieve its objectives and protect its funds.

 

  1. Country and business plans set out what teams will do to help deliver the FCDO and HMG objectives and good value for money. These plans outline team goals, activities, risks, resources and impact, including in development. These include consideration of choices at the aggregate, portfolio level (i.e. Post or Directorate) - grounded in strong evidence that set out how activities at post and directorates contribute to achieving the higher-level FCDO and HMG’s strategic objectives. Every 6 months, teams are asked to review priorities and delivery against plans and course correct if necessary. Feedback suggests there is a mixed experience of how well plans are used as a management tool across the FCDO. As part of the next phase of country and business planning, there will be increased emphasis on best practice to help ensure a minimum consistent standard.

 

 

Opportunities for Improvement to Oversight Mechanisms

 

  1. The existing control and oversight mechanisms for programme delivery, as set out in the PrOF, have been recognised by ICAI as credible for the FCDO’s portfolio of programme delivery. The Cabinet Office Infrastructure and Project Authority (IPA) review of FCDO’s portfolio in February 2024 concluded that the portfolio has a health rating of “managed” (the second highest rating) – having demonstrated that practices are planned, monitored, and adjusted against a defined process and are achieving their purpose in most areas.

 

  1. However, there is evidence of inconsistent levels of maturity in the application of the PrOF rules. In some cases, this means less emphasis on monitoring and accountability beyond the key controls.

 

  1. The Infrastructure and Project Authority (IPA) recognised that a lack of resource is a key risk factor for the FCDO (particularly programme managers).  While the IPA recognised that there is much ongoing work to recruit and train programme managers as well as encourage project delivery accreditation retention in the profession continues to be challenging. Feedback from Programme Managers indicates that they feel their role is not valued and recognised in the wider organisation, or by their senior managers. The FCDO also operates with smaller programme management teams than is typical elsewhere in government, meaning the FCDO teams are expected to do more.

 

  1. To address capability issues at a senior level (and build recognition and understanding of programme management), the FCDO has put in place mandatory training for Heads of Mission and a wide-ranging project delivery capability offer and has successfully delivered campaigns to raise understanding and awareness of the requirements in the PrOF. Furthermore, as part of the wider “Development Capability Uplift,” (which comprises 203 additional development roles targeting critical needs), we are establishing a “Programme Management Hub” with additional programme management resource, available to surge, and to support smaller posts which lack capability and capacity. The Hub will also contribute to building a “pipeline” of programme management resource – alongside bulk recruitment which has also proved to be an effective route to bring in new resource.

 

  1. Nevertheless, a more consistent level of maturity in how the PrOF rules are applied is desirable. For example, the FCDO could improve top-down leadership from Director General level to Directors/Heads of Mission to strengthen accountability. Programme management capability and capacity, among other things, form part of the Development Review, and the Foreign Secretary and Minister for Development will consider the review’s recommendations on how to strengthen capability and capacity.

 

  1. There are also capacity issues with the central assurance layer of the organisation, which is responsible for ensuring that key control and assurance activities are working effectively (e.g. standards are being met) in the business. This manifests as more limited opportunities to ensure that controls are being operated as intended. We will be considering second line capacity during workforce planning for 2025/26 onwards.

 

  1. With investment in technology, the FCDO could strengthen oversight and assurance of its portfolio during programme implementation. This investment would be in management information systems, as well as considering AI solutions, to support improved measurement of outcome performance (including systems that provide evidence on whether, and how, individual programmes are contributing to high level portfolio goals and objectives). The FCDO could also strengthen its oversight of its most important strategic investments through enhancement of its Major Programme Portfolio initiative. Technology investments are being considered as part of the Spending Review 2025. Additional workforce capacity is also being sought to improve information flows on projects and programmes between posts and country teams, central teams and other government departments managing programmes in country.

 

  1. The FCDO is further improving monitoring and capturing programme-level contributions (qualitative as well as quantitative) to portfolio level goals in country/thematic priorities and the Foreign Secretary priorities. While some progress is being made on implementing this in the FCDO, it is not yet systematic. The Development Review will include areas such as capability and assurance. However, for many programmes, value for money is achieved through adapting to evidence and insights from our local partners, rather than delivering outputs predetermined by us.

 

  1. There are cost savings, as well as efficiency gains, to be made from using FCDO staff in the delivery of programmes in place of outsourced alternatives. FCDO is already making modest use of project-funded posts – and will be considering expanding its use of these in the delivery of programmes (where it adds the most value) as part of the upcoming Spending Review.

 

  1. The FCDO will continue to strengthen programme design by i) synthesising evidence of what works and what doesn’t; ii) bringing in relevant expertise at the right time and in the right way; and iii) recognising the major growth in rigorous evidence about cost effectiveness in development in the last few decades. An internal programme design review (2023) suggested the integration of value for money could be strengthened at the programme design stage, with some Business Cases showing limited evidence of assessing the cost-effectiveness of proposed interventions. A Delivery Solutions Hub has been launched to provide focused support to teams at design stage, drawing on learning from similar programmes and from reviews of effectiveness in programme delivery. The FCDO could support stronger value for money in programme design by ensuring that all teams have access to relevant expertise, including early engagement with Commercial to strengthen the assessment on the cost effectiveness of delivery options. The programme design review found that where economists were involved in business case development, value for money sections were generally stronger, but not all teams had access to this expertise. Development capability (including development leadership, advisory and programme management capability) is being considered in the Development Review, among other issues. 

 

  1. Partners and suppliers have told the FCDO that reducing the transactional burden of working with the organisation would improve their cost-effectiveness, contributing to wider value for money. Measures have been introduced to streamline and reduce bureaucracy, and contracts-related work on this is underway.

 

  1. Enhanced coherence across HMG and with international organisations can prevent duplication and ensure effective use of resources. Reviewing the capacity-building learning package will also help the FCDO and partners improve programme management, so desired outcomes can be tracked more effectively and achieved. Sometimes the work of FCDO programmes can help improve the value for money of spending by our partner governments or other development partners. For example, the UK's Good Governance Fund in Ukraine has been supporting transparency, anti-corruption and procurement reforms, including strengthening the financial oversight of Government's reconstruction projects funded by development partners.

Question 5 – How effectively are the FCDO utilising financial instruments, including: debt relief; Guarantees; Special Drawing Rights?  

 

The Multilateral Development Banks (MDBs), like the World Bank, and their different financial instruments are a central part of the UK’s international development toolkit. They enable us to achieve a scale and level of impact that is not possible through our bilateral programmes alone. The UK is pushing the MDBs to do more with their existing resources. In some cases, we also use new and innovative financial instruments to boost MDBs’ lending. value for money.

 

  1. Essential to the MDBs’ scale and reach is their financial model. They deliver good value for money by using their strong credit ratings to borrow cheaply from international capital markets and on-lend many multiples of that capital to developing countries at favourable rates. For example, £1 in capital from a shareholder of the International Bank for Reconstruction and Development (IBRD – part of the World Bank Group), can unlock up to £10 of additional lending to middle-income countries over ten years. The MDBs are also influential and effective development partners.

 

  1. Recently, shareholders have pushed the MDBs to ‘stretch their balance sheets’ and boost lending with their existing resources. In response to this, the MDBs estimate that they have already implemented measures that will unlock $200bn in additional financing over the next decade. Most of this does not require any additional shareholder support and offers strong value for money. The MDBs can go further still with their existing resources, and together with other G20 countries, the UK continues to prioritise work with MDBs on this.

 

  1. On top of the $200bn already achieved, the MDBs report that measures are either in progress or planned that could allow them to lend a further $187bn. Most of this will require new financial contributions from shareholders, using the new and innovative financial instruments (such as guarantees and hybrid capital) that the MDBs have recently developed. These instruments provide a way for shareholders to contribute targeted financial support to some MDBs outside of general capital increases (which do not happen often, take time to agree and require all shareholders to contribute). 

 

Guarantees to the Multilateral Development Banks

 

  1. To manage risks and maintain strong credit ratings, MDBs have credit policies that limit lending to individual countries and across their portfolio. Guarantees can increase MDB lending above the level their credit policies would ordinarily allow. By guaranteeing an MDB loan, the FCDO commits to paying it what it is owed if a borrower country defaults on the loan. Risk to the MDB is reduced so it can increase lending to a specific country or countries. Guaranteed loans remain on the MDB’s books and continue to be administered by the MDB, but the risk of borrower default is now partially covered by the guarantor (i.e. the FCDO). MDB guarantees are legally binding and are recorded as a contingent liability in the FCDO’s accounts.

 

  1. In recent years, MDB guarantees have become an important part of the way that FCDO provides support to middle-income countries. The UK’s latest guarantee was provided to the Asian Development Bank’s Innovative Finance Facility for Climate in Asia and the Pacific (IFCAP) in November 2024. Our contribution of a $280m guarantee, alongside approximately $2.2bn of guarantees from six other guarantors, will unlock over $11bn in climate finance.

 

  1. Guarantees make efficient use of the FCDO’s balance sheet by mobilising large volumes of additional finance without immediate trade-offs with the ODA budget. This is because no ODA is scored when a guarantee is issued. ODA is only scored if a guarantee is ‘called’ (i.e. there is a missed repayment or default to the MDB). The risk of a guarantee being called varies depending on the country or countries to which the MDB is lending. However, risk is generally very low due to the MDBs’ Preferred Creditor Status which means countries almost always repay MDB loans before other creditors.

 

  1. The FCDO closely monitors risk for individual guarantees and across the portfolio through a Risk Management Framework. This framework was developed with the Government Actuary’s Department (GAD) and the Contingent Liabilities Central Capability (CLCC, a specialist unit in HMG that advises government on guarantees). FCDO officials work with GAD and CLCC on all aspects of risk monitoring and guarantee development. The guarantee portfolio is overseen by a specialist committee that monitors risk, scrutinises new guarantee proposals, and sets a maximum risk threshold (with FCDO Permanent Secretary approval) for the portfolio and for individual country exposure to keep payout risk within acceptable limits. Lastly, guarantee terms are negotiated with the MDBs to minimise risk and avoid unexpected payouts.

 

  1. In June 2023, the FCDO committed a new $3bn package of guarantees for World Bank lending to Ukraine taking total Ukraine guarantees to $5bn.

 

  1. With the Ukraine guarantees included in the wider portfolio, there is no longer space for further guarantees within current risk thresholds. Nevertheless, there is potential to increase our use of MDB guarantees in the future. This will require the agreement of additional risk headroom in the Risk Management Framework. The value for money of these guarantees will depend on the risk to the UK and the additional finance unlocked, as well as a clear case that the guarantee is needed and constitutes the right instrument for that MDB to unlock additional lending.

 

Hybrid Capital

 

  1. Hybrid capital is a type of innovation to enable MDBs to increase lending. Hybrid capital combines features of debt and equity. It is a loan from shareholders (or potentially other development partners or private investors) that pays an annual interest payment which never has to be repaid in full. In a future capital increase, shareholders can choose to convert their hybrid capital to equity, meaning that it acts like a downpayment on a future capital increase.

 

  1. Due to its design, MDBs can use hybrid capital in the same way as their normal paid-in capital, leveraging it to increase their lending by many multiples of the hybrid capital investment received. So far, only the World Bank’s IBRD has developed a shareholder hybrid capital instrument.  In April 2024, the UK committed £100m in hybrid capital to the IBRD. This offers strong value for money - our £100m hybrid capital contribution will enable the Bank to lend an additional £800m over the next 10 years, providing a highly effective way of boosting the financial capacity of the bank. This leverage is greater than the leverage that could have been achieved from a guarantee to the IBRD, however it also requires an upfront ODA payment from the FCDO whereas a guarantee does not. There is currently no longer space for further guarantees within existing risk thresholds.

 

  1. Following the IBRD, some regional development banks are also developing their own shareholder hybrid capital instruments. Once these instruments are ready, we will be able to assess whether a UK contribution offers value for money based on the expected leverage (finance unlocked) and the need of the MDB for additional capital from shareholders. We will also want to compare against what alternative options the MDB has boost its lending. 

 

Special Drawing Rights

 

  1. Special Drawing Rights (SDRs) are reserve assets that the International Monetary Fund (IMF) issues, which countries can either use to strengthen their reserves or convert to foreign currency to purchase imports. In August 2021 the IMF, responding to liquidity pressures because of COVID-19, delivered a new $650bn global allocation of SDRs. Leaders of G20 countries agreed that richer countries should channel $100bn of their new SDRs to low-income and vulnerable countries, which was broadly equivalent to all G20 countries channelling 20% of their new SDRs.

 

  1. The UK has channelled 20% or SDR 4 bn (~£4.4bn) of its new allocation through the IMF.  The UK’s contribution to the IMF generated a financial benefit of SDR 250m (~£275m) for the poorest countries. By unlocking SDR1.8bn (£2bn) of SDRs for on-lending to vulnerable countries, the £44m ODA contribution represented excellent value for money.

 

  1. There is, however, a limit to the amount of SDRs that can be channelled. In the UK, SDRs form part of our foreign currency reserves, which are governed by a strict legal framework and policy mandate. Increasing our SDR channelling above the current 20% commitment could increase demands on the UK to exchange hard currency for SDRs, when countries seek to sell their SDRs for hard currency. SDR channelling therefore erodes the US dollars that the UK needs to hold for domestic policy purposes. Replenishing our dollar assets has fiscal impacts as it would require gilt financing.

 

  1. There are proposals for ways in which SDRs might be channelled to MDBs, including a proposal by the African Development Bank and Inter-American Development Bank. Channelling SDRs to MDBs could allow the SDRs to be leveraged, generating a boost to MDB lending that is multiple times the value of our SDR contribution. However, the UK is not able to contribute SDRs to these initiatives at this time, given they would require channelling above the 20% of SDRs we are already committed to.

 

Debt Relief

 

  1. The UK has a strong record of working bilaterally and with international partners to assist countries on their road to longer-term debt sustainability and will continue to do so. Debt relief is a tool provided in coordination with other creditors where we have financial exposure and on the request of a debtor country. The UK does not offer bilateral debt relief if other creditors are not participating, as this would mean UK relief could be used to repay other creditors and would not offer value for money to the UK taxpayer.

 

  1. The UK championed the major debt relief initiatives of recent decades, including the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), which reimbursed MDBs for cancelled debt in the early 2000s. Under the HIPC Initiative, the Government has cancelled 100% of loans owed by HIPC-countries when the HIPC criteria have been met., totalling £650m bilaterally. The Government has also provided £1.4 bn of debt relief through contributions to MDRI. The Government is committed to providing debt relief on the debt owed by the remaining eligible countries as they qualify. HIPC has delivered an estimated $74.8 bn of relief so far, freeing up space for investment in social spending.

 

  1. According to the IMF, before the HIPC Initiative, on average, eligible countries were spending slightly more on debt service than on health and education combined. Since the initiative, they are spending about five times more on health, education, and other social services than on debt service[7]. However, in the decades following HIPC, low income countries have significantly expanded borrowing, supported by low global interest rates, and 50% of the countries in receipt of HIPC are now back at high risk or in debt distress. 

 

  1. The UK was also the first bilateral creditor to offer Climate Resilient Debt Clauses (CRDCs) through UK Export Finance (UKEF). CRDCs are an innovation that allows borrowers to temporarily pause debt repayments when they are hit by a major disaster. This frees up money for the country to use for relief and recovery. In total, five bilateral creditors and six MDBs have now launched CRDC pilots or are committed to doing so. 

 

  1. The UK’s bilateral lending portfolio is now a relatively small portfolio compared to other creditors (such as the private sector and emerging creditors like China). The UK’s role in active debt restructurings to lower-income countries is therefore more limited than in the past. Where the UK does participate it does so multilaterally as part of the Paris Club or the G20 Common Framework. An IMF programme is typically required to give creditors the reassurances that a debtor country is committed to the policy and economic reforms required to support debt sustainability.

 

  1. The depth of debt relief that creditors need to reach is independently defined by the IMF. The IMF identifies the scale of debt relief required by all creditors to return the country from ‘in debt distress’ to ‘moderate risk of debt distress’ over the IMF programme period (typically 3-5 years). The goal is to return the country to a sustainable debt pathway over the medium term.  The UK participates in restructurings on the mutual understanding that the debt treatment (or relief) we provide is comparable with that offered by other official bilateral and private sector creditors. Where a debt restructuring is sufficiently concessional, the UK scores debt relief as ODA as per international reporting rules. There is therefore a trade-off between debt relief and other priorities in the ODA budget.

 

  1. Debt for development or climate swaps (‘debt swaps’) are agreements between a government and its creditors to replace existing sovereign debt with cheaper debt, with a commitment that the savings are used for development or climate objectives in the country. The UK does not currently offer debt for development or climate swaps, partly due to our low volume of outstanding debt, but the UK Government supports swaps being part of the general debt “toolkit”. The UK continues to review the evidence and value for money case of bilateral and commercial debt swaps.

 

  1. The Government also seeks to ensure longer-term debt sustainability through our positions on the Boards of the World Bank and IMF, and working in international fora such as the G7, G20, Global Sovereign Debt Roundtable and Paris Club to influence coordinated approaches to debt relief and to strengthen the international debt architecture.

Question 6 – Does the FCDO’s funding model impact the cost effectiveness of its aid budget?  

 

The FCDO, in its role as ODA ‘spender and saver of last resort’ (SSLR), is responsible for helping to meet the UK Government’s ODA spending commitment by the end of each calendar year. While the increase in in-donor refugee costs (IDRC) has made this role more challenging in recent years, the FCDO has put in place effective financial planning processes and governance mechanisms to mitigate risks to value for money.  

 

The FCDO’s Funding Model

 

  1. Meeting the ODA spending commitment requires the FCDO to monitor several variables, including other Government Departments’ ODA spending and fluctuations in Gross National Income (GNI) forecasts. The FCDO adjusts its planned spend by moving planned ‘flexible’ payments (largely those to certain multilateral organisations) in-year to help meet the ODA spending commitment. Payments are identified as flexible only if they can be moved in-year without impacting value for money, legal obligations and requirements as set out in the HMT guidelines (2023) on ‘Managing Public Money’. If in-year adjustments are not possible or insufficient to meet the calendar year commitment, the FCDO may look to bring forward planned spend from future years using the same principles.

 

  1. There are established cross-government governance mechanisms for ODA management. FCDO coordinates ODA spending across HMG through the Senior Officials Group, which supports the management of the ODA spending commitment, sharing of information and learning between departments.  

 

  1. The cross-government Ministerial ODA Board, co-chaired by the Chief Secretary to the Treasury and the Minister for Development, scrutinises UK ODA spend, driving value for money and a stronger strategic focus to ODA spending. Previous meetings have discussed IDRC, International Climate Finance, and Research and Development. 

 

The impact of increased in-donor refugee costs forecasts on the FCDO’s funding model 

 

  1. Conditions since 2020 (notably the increased uncertainty over GNI forecasts during the pandemic in 2020, the temporary reduction in the ODA budget to 0.5% of GNI, and the significant increase in IDRC) have placed the SSLR role under greater strain. These conditions have reduced medium-term certainty in budgets and have posed risks to the FCDO’s ability to deliver value for money.

 

  1. Over the Spending Review 2021 period the UK Government spent an increasing proportion of the ODA budget on the cost of hosting refugees and asylum seekers in the UK in line with the OECD DAC rules. ICAI’s 2024 report “Follow-up: UK aid to refugees in the UK”, states that IDRC “continues to represent very poor value for money as humanitarian spend”.

 

  1. The scale and the uncertainty of IDRC, alongside the temporary reduction in the ODA budget to 0.5% of GNI, had a significant impact on the FCDO’s budget given its role as SSLR. It led to a reduction in the level of UK ODA spent overseas and posed challenges for the FCDO in delivering value for money through its ODA spending portfolio.

 

How has HMG responded to increases in in-donor refugee costs (IDRC)? 

 

  1. The FCDO has developed new financial planning processes and governance mechanisms to respond to the risk to value for money posed by sustained high IDRC forecasts. For example, the FCDO has:

 

 

  1. The Government is committed to ensuring that asylum costs fall, and the Home Secretary has already acted on this. This is already benefiting the FCDO’s ODA budget. FCDO’s ODA programming budget, inclusive of the Integrated Security Fund ODA spending, will be £9.24 bn in 2025/26. This will be the highest level in recent years and is a year-on-year increase of around £450m.  

Question 7 – 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?  

 

The MDBs and British International Investment (BII) align well with the FCDO’s approach to development, including the priorities set out by the Foreign Secretary and Minister for Development. Through the MDBs and BII the UK can tailor its support and reach a wider range of partners at a larger scale than through the bilateral programme alone.

 

British International Investment (BII)

 

  1. BII aligns with the FCDO’s development priorities and ambition to achieve high impact development and good value for money. BII has a financial target of 2% Weighted Cumulative Investment Return across its portfolio over a rolling seven-year period.  Its performance is currently 5.2% against this target, providing further benefit to the taxpayer and reducing demand on the development budget by covering its own costs, allowing it to reinvest returns, and crowding in private investment. BII secures additional capital from the FCDO only to increase activities in line with development objectives.

 

Sustainability

 

  1. BII is currently ahead of its target to make at least 30% of its investments in climate finance over its current 5-year strategy. At COP29, BII announced several new climate related investments. For example, $16m will be invested in energy efficient solutions in Africa, like battery energy storage and clean cooking, and a $30m investment is being made in Nigeria to promote off-grid renewable energy.

 

  1. BII has committed to Paris Alignment and reaching net zero at a portfolio level by 2050. Rather than offsetting emissions through purchasing carbon credits from the market, BII will reduce emissions across its portfolio. It will only balance any residual emissions from harder-to-decarbonise sectors by proactively investing in solutions that produce negative emissions, such as forestry.

 

Inclusivity

 

  1. BII champions inclusive growth through gender-smart investing. BII aims for at least 25% of all new investments to qualify under the ‘2X Challenge’ gender lens (investments that support gender equality and women’s economic empowerment). On 27 September 2024, BII launched a report[8] synthesising its lessons from six years of investing with a gender lens. Along with a number of other external experts, The Rt Hon. Sarah Champion MP, Chair of IDC, joined the event to lead a discussion about its findings.

 

  1. BII partnerships also bring UK private sector finance and expertise to developing countries by investing in or alongside UK firms that share its mandate. This includes Lightsource BP, a leading British developer of renewable energy projects, which invests alongside BII to develop renewable energy in India through BII majority-owned renewable energy company, Ayana. To increase its ability to partner with organisations and corporations in-country, BII is growing its country office footprint and strengthening its partnership with the HMG network, including closer engagement with the FCDO, DBT and UK Export Finance.

 

Geostrategic Priorities

 

  1. BII focuses its coverage in the FCDO’s priority areas. It has good coverage of fragile and conflict affected states, helping to reduce the risk of conflict and increase stability. BII is the biggest investor amongst European bilateral DFIs (EDFI) in Fragile and Conflict Affected States (FCAS) - 30% more than its nearest EDFI equivalent. BII also has a wealth of experience investing in Africa and South Asia, which allows it to target investments in the sectors and regions with the highest development impact. In line with the FCDO’s development focus, around 90% of BII’s investments are in Africa and South Asia. 

 

Continuous improvement

 

  1. The IDC carried out an inquiry into the UK’s strategy towards DFIs in 2023 and made recommendations to enhance BII’s development impact. We continue to work with BII to implement relevant reforms. For example, BII now has a goal to become the most transparent bilateral DFI as measured by the Publish What You Fund DFI Transparency Index, and an ambition for over 50% of BII’s annual investment commitments to be in the poorest and most fragile countries by 2030.

 

Multilateral Development Banks (MDBs)

 

  1. The MDBs - including the World Bank and the regional development banks - are leading development actors and key multilateral partners in the UK’s international development toolkit. The work of MDBs align well with FCDO priorities and approach to development, as described below.

 

Strategic Fit with UK priorities

 

  1. The MDBs in which the UK is a shareholder provide around $170bn in financing annually to low- and middle-income countries. They help deliver key UK international development objectives (e.g. supporting economic transformation and job creation), as well as UK national security objectives (e.g. working in Ukraine and fragile states). They are also a leading source of climate finance and are increasing operations in fragile and conflicted contexts. The recent World Bank Gender Strategy (2024–2030) sets out the Bank’s ambition to accelerate gender equality in line with Ministerial objectives. In 2023, the Bank reported USD $14 bn of IDA lending to promote gender equality.

 

Scale

 

  1. MDBs provide the largest source of sustainable development finance for low- and middle-income countries. The World Bank’s International Development Association (IDA) illustrates the MDBs’ alignment with the UK well. It is the largest source of development and climate finance in the form of grants (to countries at higher risk of debt distress) and low interest loans for the world’s poorest and most vulnerable countries. Every $1 in donor contributions to IDA translates to over $3.5 in commitments. Through the MDBs the UK can achieve a scale and level of impact that is not possible through our bilateral programmes alone. 

 

  1. The MDBs are also major providers of climate finance. At COP29, MDBs issued a joint statement outlining financial support and other measures for countries to achieve ambitious climate outcomes. MDBs estimate their annual collective climate financing for low- and middle-income countries will reach $120 bn by 2030, and they aim to mobilize $65 bn from the private sector.

 

Influencing all Aid

 

  1. The MDBs are also influential and effective development partners. They develop projects in partnership with client countries and across a range of sectors, responding to their demands and needs. The World Bank is a leader in conducting high quality research, which it, partner governments, and other development actors use to improve the effectiveness of their interventions. The regional development banks are often the leading public financial institutions in their regions setting the development agenda. They are majority owned by countries from the region, which gives them trusted status with borrowing members and ability to engage in sensitive policy areas. As a shareholder and donor, the UK can influence MDBs and help shape the wider development architecture.

 

[1] See https://www.nao.org.uk/successful-commissioning/general-principles/value-for-money/assessing-value-for-money/#:~:text=The%20National%20Audit%20Office%20%28NAO%29%20uses%20three%20criteria,results%20of%20public%20spending%20%28outcomes%29%20%E2%80%93%20spending%20wisely.

[2] 

[3] Based on HMG’s Magenta Book (HM Treasury guidance on what to consider when designing an evaluation) definition and the OECD DAC Network on Development Evaluation, the FCDO defines evaluation as “a systematic and objective assessment of the design, implementation and outcomes of an intervention, programme or policy, or a portfolio of interventions, programmes or policies in a particular area or theme.  It can involve understanding the process behind implementation, the effects or outcomes, for whom and why.  It identifies what can be improved, and where appropriate, can estimate the overall impacts and cost-effectiveness”.

[4] Monitoring is the routine and systematic collection, analysis and use of information about an intervention’s progress and the results being achieved.

[5] https://assets.publishing.service.gov.uk/media/6644948aae748c43d3793bb9/Programme_Business_Case_2018.pdf, 2018).

[6] https://www.gov.uk/government/organisations/foreign-commonwealth-development-office/about/statistics

[7].https://www.imf.org/en/About/Factsheets/Sheets/2023/Debt-relief-under-the-heavily-indebted-poor-countries-initiative-HIPC#:~:text=Before%20the%20HIPC%20Initiative%2C%20on,services%20than%20on%20debt%20service

[8] https://www.bii.co.uk/en/news-insight/insight/articles/closing-the-gap-lessons-from-six-years-of-investing-in-women/?fl=true&utm_source=Master+List+-+British+International+Investment+PLC&utm_campaign=6b9d5db97f-EMAIL_CAMPAIGN_2020_06_09_10_51_COPY_02&utm_medium=email&utm_term=0_e6d7d8d8fb-6b9d5db97f-