An information note for the International Development Committee’s inquiry into the definition and administration of official development assistance

January 2018

The Independent Commission for Aid Impact works to improve the quality of UK development assistance through robust, independent scrutiny. We provide assurance to the UK taxpayer by conducting independent reviews of the effectiveness and value for money of UK aid.

We operate independently of government, reporting to Parliament, and our mandate covers all UK official development assistance.

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Contents

1              Introduction                                                                                                                                 1

2              Changing the international ODA definition                                                                           1

              Investing in the private sector                                                                                                  1

              Security and peacekeeping                                                                                                      2

              Refugee support costs                                                                                                               3        

              Humanitarian support for countries that have graduated from aid                                  4

3              Aid spent by departments other than DFID                                                                          5

              Alignment with the UK Aid Strategy                                                                                      6

              Cross-government coordination                                                                                              6

              Ensuring appropriate use of ODA                                                                                            7

              Challenges with rapid scaling up                                                                                             8

              Effective capacity building                                                                                                        9

             Summary of ODA spending by other departments                                                             10

1. Introduction

1.1               This is an information note for the International Development Committee to support its inquiry into the definition and administration of official development assistance (ODA). The note draws on information in the public domain and findings from published ICAI reviews.

1.2               The note covers two areas:

• Background information on recent and ongoing discussions on changing the international ODA definition.
• Findings from ICAI reviews on challenges and issues associated with the expansion of non-DFID ODA.

2. Changing the international ODA definition

2.1               The international definition of ODA is set by donors through the OECD Development Assistance Committee (DAC). They meet in periodic High Level Meetings, supported by technical working groups which, among other things, prepare detailed guides and methodologies for ODA reporting. In 2012, the DAC launched an ODA modernisation process, to ensure that the definition and associated reporting methodologies kept up with changes in global aid practice. Because decision making in the DAC is by consensus, changes to the definition take time.

2.2               In recent years, changes have been agreed to the way loans to developing countries are reported as ODA, designed to create incentives for more lending to the poorest countries at lower interest rates. Work has also been underway to clarify the boundaries of the ODA definition with respect to support for the private sector, spending on conflict and security and support costs for refugees in donor countries.

2.3               This section provides information on these processes. It also discusses recent proposals by the UK to extend ODA eligibility temporarily to countries that have graduated from aid but suffer a catastrophic humanitarian disaster.

Investing in the private sector

How is investment into the private sector treated under ODA rules?

2.4               In recent years, there has been a significant increase in the amount of donor support going to the private sector – including through contributions to development finance institutions such as the UK’s CDC Group. Development finance institutions are expected to make a financial return on their investment portfolios, as well as to achieve development impact.

2.5               Private sector instruments do not fit easily within the current ODA definition. Under the traditional rules, loans count as ODA only if they are sufficiently ‘concessional’ – that is, at below-market interest rates. However, development finance institutions are intended to demonstrate the viability of commercial lending in high-risk developing countries. They therefore provide their assistance at market rates in most circumstances.[1] This has led to uncertainty about how loans to the private sector should be reported, and concerns that the ODA definition may be creating disincentives for certain types of private sector support.[2]

2.6               Equity investments into firms in developing countries have counted as ODA since 1995. Each investment can be reported in full as ODA at the time it is made, while funds received back from the sale of an investment count as an ‘ODA reflow’ (or negative amount). Guarantees at present do not count as ODA unless and until they are paid out – even though they create a liability on the donor’s balance sheet.

2.7   The DAC agreed in 2012 to review the treatment of private-sector instruments.

What changes have been agreed?

2.8   These issues were discussed at High Level Meetings in both 2016 and 2017. While there was agreement at the 2017 meeting on the broad principles on spending ODA funds on private sector instruments, discussion continues on the implementation details of these principles. There is agreement that funding through development finance institutions may be reported as ODA in either of two ways:

• The institutional approach: Donor contributions to ODA-eligible development finance institutions can be reported in full as ODA in the year that they are made. The DAC is developing a process for certifying individual institutions and nominating what proportion of their work counts as ODA.

• The instrument-specific approach: Each individual investment may be reported as ODA. Agreement has not yet been reached on the eligibility requirements for different types of private sector instruments, including what level of concessionality is required or how to distinguish between developmental and commercially motivated investments.[3]

2.9  
DFID follows the institutional approach for CDC, reporting its capital contributions to it in full as ODA.[4]
 

2.10  Military assistance does not generally count as ODA, but there are accepted areas of security- related development aid, such as strengthening democratic control over armed forces. Changes introduced in 2016 permit some additional items of security-related expenditure to be reported as ODA, providing they meet particular safeguards:

• Financial support to partner country military forces: Funding of military equipment, operations and salaries are clearly excluded from the ODA definition. However, in changes introduced in 2016, support to the military in partner countries for the delivery of humanitarian aid or development services can be reported as ODA, but only when the military is used as a last resort.
• Training of military forces in development countries: In the past, training of military forces in developing countries did not count as ODA, even if the training was in non-military matters. The rules have now been changed to allow certain “development-related training” of military personnel to be claimed. Examples include training in international humanitarian law, democratic control or the protection of women in conflict. The training should be provided by civilians wherever possible, and offer clear benefits to the local population.
• Activities by donor military forces: If donors use their own military forces to deliver humanitarian aid, the additional cost counts as ODA. For example, the UK navy was involved in delivering support to the Philippines following Typhoon Haiyan in 2013. Only the extra costs of such operations may be claimed as ODA, not costs which are part of the regular budget such as
  equipment, routine maintenance or salaries.
• Peacekeeping: In the past, only 7% of donor contributions to UN-mandated and led peacekeeping operations could be reported as ODA. This was based on an estimate of the cost of ODA-eligible activities by civilian peacekeeping personnel. This estimate was reviewed by a DAC working group, and was formally raised at the October 2017 High Level Meeting to 15%. The UK continues to pursue further changes to the rules, in order to allow more of the cost of contributing military forces to non-UN peacekeeping operations to qualify as ODA. Discussions are ongoing as to whether peacekeeping outside the UN’s auspices should count as an ODA-eligible activity.
• Counter-terrorism and preventing violent extremism: ODA cannot be used to fund counter­terrorism operations by security forces. However, recognising that ‘[d]evelopment, human rights and peace and security are indivisible and interrelated’, the February 2016 High Level Meeting clarified that some related training and other capacity building can count as ODA, provided that the economic and social development of the developing country is the primary objective (rather than control of threats to the donor country). The UK pushed for and achieved some further elaboration of the rules in this area, specifying that education initiatives, support for the rule of law, work with civil society groups and capacity building of security and justice systems can all qualify as ODA.[5]

2.11  Historically, support for refugees counted as ODA only when they were located in developing countries. In 1988, the definition was broadened to include first-year support costs for refugees in donor countries. The rationale was that donors who accepted refugees onto their own territory should not be penalised.

2.12  This rule has always been controversial, as funds are spent within the donor country and the link to the economic development and welfare of the country of origin is an indirect one. The great majority of refugees (86%) remain in developing countries,[6] and critics of the rule suggest that those refugees should be the priority for assistance. The UK only started reporting in-country refugee costs as ODA in 2010, after the UK Statistics Authority pointed out that failing to do so was making UK ODA statistics inconsistent with international practice.[7]

2.13  Following the large refugee movements into Europe from Syria and other countries in recent years, there has been a sharp increase in this category of ODA (see Box 1).
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2.14  At the October 2017 High Level Meeting, the DAC donors approved more precise rules to ensure consistency of reporting on in-donor ODA spending.[10] The guidance specifies:

• Temporary sustenance costs, such as food and shelter, count as ODA.
• Integration expenses, such as training or job-seeking support, are not eligible.
• Certain related costs, including security screening, border control, detention centres and deportation, are specifically excluded.
• 
  Any spending on asylum seekers after their application is conclusively rejected or on migrants who have not declared intent to seek asylum, does not count as ODA.

2.15  The DAC publishes a list of ODA-eligible countries, which is revised every three years. Countries graduate from aid when their per capita incomes reaches the 'high-income' category (over $12,236 (£9,124)) for three consecutive years.[11] (For comparison, the UK’s per capita income was $42,094 in 2016.[12]) 57 countries have graduated since the classification system was adopted in 1970.[13]

2.16  The most recent graduates were Anguilla and St Kitts and Nevis in 2014.[14] By 2030, another 28 developing countries with a total population of two billion are projected to cross the income threshold.[15]

2.17  Occasionally, countries that graduate from ODA suffer shocks to their economies that cause them to fall back into middle-income status. However, the rules do not provide for ‘reverse graduation’ back into ODA eligibility.

2.18  In 2017, Hurricanes Irma and Maria devastated a number of Caribbean islands, including several British Overseas Territories. The UK government responded by distributing food, water and other humanitarian supplies through the Royal Navy, Royal Marines and Royal Air Force, and by pledging £62 million for relief and recovery efforts.

2.19  Some of the worst-affected countries and Overseas Territories are not ODA eligible, including Anguilla, the British Virgin Islands and Turks and Caicos which have all graduated since 2000. This led to criticism that the international rules were preventing the UK aid programme from responding effectively. However, DFID and the FCO inform us that the UK government allocated funding to the Overseas Territories based on their humanitarian need, irrespective of ODA eligibility (The International Development Act gives DFID authority to spend in the Overseas Territories regardless of whether or not it can report this spending to the DAC as ODA). The FCO informs us that £57 million out of the total £62 million allocated to the Overseas Territories after the hurricanes were non-ODA funding taken from the Conflict, Stability and Security Fund (CSSF).

2.20  At the High Level Meeting in October 2017, the UK asked the DAC to introduce waivers of the ODA eligibility rules for support to countries and territories that had graduated from aid but were at risk of falling back below the income threshold as a result of the hurricanes. The proposed waiver was to be temporary, for no more than 36 months.

2.21  However, the UK’s proposal was withdrawn before it was put for a decision.[16] The proposal has nonetheless triggered an ongoing debate on ‘reverse graduation’ following humanitarian crises, in addition to long term economic decline. The UK has asked, and DAC members have agreed, that the DAC Secretariat look into the possibility of establishing “a process to examine short-term financing mechanisms available to respond to catastrophic humanitarian crises in recently graduated high-income countries”. Members have also asked the Secretariat to develop an evidence-based mechanism for reinstating a graduated country on the DAC list, if its per capita income drops back below the threshold.[17]

3         Aid spent by departments other than DFID

3.1   ICAI has an important scrutiny role over non-DFID ODA. It is the main mechanism by which the International Development Secretary fulfils the government’s statutory obligation to make arrangements for the independent evaluation of the value for money of all UK aid.[18]

3.2  
Over the past two and a half years, ICAI has reviewed aid spending by other departments in five completed reviews: on international tax, Somalia, the Prosperity Fund, migration and the Global Challenges Research Fund (GCRF). We are currently conducting two more, on global health threats and the Conflict, Stability and Security Fund (CSSF), and we plan two more in the coming year, on climate change and the Newton Fund. This section presents a summary of findings from the completed reviews.
 

3.3   The increased involvement of other departments in spending UK ODA provides the UK government with more options for using ODA resources in support of the 2015 UK Aid Strategy. The strategy signals a more prominent role for UK national interest concerns, including security issues, prosperity and trade, irregular migration and global health threats. In these areas, departments other than DFID play the leading role. Having access to ODA gives them more options to pursue their objectives.

3.4   The non-DFID ODA work that we have examined is aligned with the objectives of the Aid Strategy. For example:

• Strengthening global peace, security and governance: The Conflict, Stability and Security Fund is a flexible instrument for supporting the implementation of the National Security Council’s country, regional and thematic strategies. It is accessed by the FCO, DFID, the Ministry of Defence and the Home Office, as well as the National Crime Agency and the Crown Prosecution Service. In Somalia, we found that the CSSF’s work is well aligned to the National Security Council’s objective to “reduce the threat that Somalia poses to UK national interests by building a more stable, peaceful and prosperous Somalia.”[19]
• 
  Promoting global prosperity: The Aid Strategy commits the UK to promoting economic development and prosperity in the developing world, and at the same time strengthening UK trade and investment opportunities around the world. The cross-government Prosperity Fund was established to pursue these twin goals, with its programming designed to promote economic development and deliver secondary benefits to UK and other international companies. In contrast to DFID, it prioritises middle-income countries, which the government sees as offering both growth potential and opportunities for international business, including UK companies.[20]
   

3.5   Our reviews have found that the growing share of ODA being spent across government creates a growing risk of duplication, overlap or conflicting priorities. The management of this is likely to present a continuing challenge.

3.6   No single department is responsible for overseeing implementation of the Aid Strategy, nor ensuring the coherence or quality of the aid programme as a whole. There is a cross-Whitehall senior officials group on value for money, which reports to an ad hoc ODA ministerial meeting. This group was initially focused on meeting the 0.7% of GNI ODA spending commitment, but also pursues value for money and improved collaboration.

3.7   In our reviews, we have found that coordination mechanisms are beginning to emerge in particular thematic areas, but are at different stages of maturity and effectiveness.

• ODA-funded research: There has been a major increase in ODA-funded research, including through the Global Challenges Research Fund (GCRF), which has a budget of £1.5 billion over five years. At the time of our GCRF rapid review in mid-2017, coordination across the ODA research funding streams was informal. This had contributed to a research portfolio that was not well targeted towards high priority development objectives. The government has since established the Strategic Coordination of Research (SCOR) board, to develop a more strategic approach to ODA-funded research.
• Prosperity Fund: The Prosperity Fund is supported by a Ministerial Board, a Directors’ Group and a Portfolio Board. In our rapid review, we recognised the progress that had been made on strengthening the governance structure, but raised concerns about a lack of clarity over roles when representatives of departments were involved in advising on and approving bids from their own departments in a competitive process.

3.8   Our reviews found that the increased aid budgets of other government departments, particularly where there are explicit UK national interests at play, has pushed UK aid closer to the limits of what is a permissible use of ODA under UK legislation and international rules.

3.9   Each department is responsible for ensuring its own ODA spending complies with the international ODA definition. In addition to the international rules, some ODA-spending departments rely on the International Development Act as their spending authority. In those cases, the legislation requires that aid spending must have a likelihood of contributing to poverty reduction and must give due attention to the possibility of promoting gender equality. Departments are also bound by UK government commitments not to tie aid (that is, not to make it conditional on it being spent on goods and services from UK companies).[21]

3.10  Some departments and cross-government funds are moving towards “dual purpose” aid, with development objectives as the primary purpose and UK national interests as secondary objectives. This raises new and important questions about the definition and measurement of secondary benefit as well as the management of the potential tensions between the primary purpose and secondary objectives of UK aid.

• Prosperity Fund: In our rapid review, we assessed the funds allocation process and the initial batch of concept notes against the requirements of the ODA definition and UK legislation. We were not convinced that the assessment criteria and procedures were robust enough, and recommended tighter screening and more guidance on how to balance primary and secondary benefits.
• GCRF: We found that the Research Councils and Academies, which are the main partners for allocating ODA research funds, are used to handling ODA funds and have solid screening processes. However, the portion of GCRF funds channelled through the Higher Education Funding Council for England, and other regional councils, mixed ODA and non-ODA funds and did not provide sufficient assurance of ODA eligibility. BEIS reports that it will address this issue through more comprehensive monitoring. We were also concerned that the GCRF requires the primary applicants for funds to be UK research institutions (often in partnership with institutions from other countries). We asked BEIS and DFID to look into whether this was consistent with the UK government’s position on tied aid. They responded that the government remains committed to keeping aid untied, and gave assurances that this is consistent with donor practice in reporting on the tying status of research funds, although we were not able to obtain confirmation of this from the OECD DAC Secretariat.
   

3.11  Each department prepares its own ODA return, with technical support and training from DFID. DFID compiles the overall UK ODA return. As the volume of non-DFID ODA grows and more departments are required to balance “dual purpose” objectives, it is an open question whether there is a sufficient level of verification of ODA reporting across government.

3.12 
We also note that ODA eligibility is only a threshold question. It says nothing about whether programmes are likely to prove an effective use of ODA or to deliver value for money. Checking for ODA eligibility should therefore only be the first stage in ensuring the quality of UK aid. This is reflected in the 2015 UK Aid Strategy, which states that all “departments spending ODA will be required to put in place a clear plan to ensure that their programme design, quality assurance, approval, contracting and procurement, monitoring, reporting and evaluation processes represent international best practice".[22]

3.13 
A number of large new cross-government funds and programmes are being developed and scaled up rapidly. We have found that this has forced new funds and programmes to begin spending even before basic systems and processes were in place.

3.14  In our rapid reviews of the Prosperity Fund and the GCRF, we identified several areas of concern:

• Strategies, objectives and results framework: Both the Prosperity Fund and the GCRF began operating before they had finished developing their strategies and clarifying their objectives. Both began allocating funds in parallel to developing the criteria and systems required to ensure quality aid spending. They lacked the results frameworks that would enable them to identify whether their portfolios were delivering the intended results. In the case of the GCRF, we found that weaknesses in strategic planning had led to a funding approach that was not sufficiently focused on high priority development challenges.
• Aid management capacity: We found that the planned pace of scaling up the Prosperity Fund which was scheduled to reach a £350 million annual expenditure within three years – was likely to test the capacity of the participating departments to design and manage quality programmes. The Treasury responded to our concern by extending the lifetime of the Fund by a year, to reduce spending pressure. The Foreign and Commonwealth Office manages a large share of expenditure under both the Prosperity Fund and the CSSF. Past ICAI reviews have found that the FCO’s financial management system is not well suited to supporting the management of complex aid programmes.[23]

3.15  The UK Aid Strategy notes the importance of drawing on the complementary skills available across departments to support the delivery of the aid programme. For many departments and specialist agencies, their main potential role in aid delivery is capacity building. By working with counterpart institutions in developing countries, they offer an alternative to private contractors or multilateral partners.

3.16  In the right circumstances, these peer-to-peer engagements can be an effective form of capacity building. They are often welcomed by counterparts in developing countries, as they provide access to relevant, practical and up-to-date experience. They can also help to build lasting ties between the institutions, to the benefit of both.

3.17  However, in our review of UK aid’s contribution to tackling tax avoidance and evasion, and also across our reviews more broadly, we have found that there is a steep learning curve for new departments entering into this form of capacity building assistance. Typical challenges include:
 

• Ensuring that engagement is grounded in a good understanding of the country context. There is a risk that they offer advice that is not well suited to low capacity environments.
• Ensuring that the capacity building work reflects good development practice. There is a tendency to resort to training as the default form of assistance, even though training is usually not enough to address deep-seated institutional weaknesses.
• Maintaining continuity of engagement (including of staff) over a long enough period to make a difference.
• Monitoring and evaluation: the departments may lack programme design and management experience, leading to a failure to articulate clear objectives and monitor results.

3.18  In the case of HMRC’s Capacity Building Unit, we found that an effective partnership with DFID, with HMRC experts participating in wider DFID programmes, proved an effective model for addressing these challenges.

3.19 
We note that DFID has developed a ‘GREAT for Partnership’ programme (£35 million; 2016-21) to promote, broker and support partnerships between UK government agencies and counterparts in developing countries. The initial focus is on three sectors: extractive industries; rule of law; and anticorruption and financial accountability. The programme provides DFID with a means of scaling up its support to other government departments in their capacity building efforts.
 

3.20  Building up the capacity across a range of departments to provide effective development assistance is a major organisational challenge that will take time to accomplish. As aid spending by other departments rises towards the planned 30% of the UK aid budget,[24] the question of how quickly other departments can build the necessary systems and capacities will be a major determinant of the overall effectiveness and value for money of UK aid.

3.21  We have identified a set of challenges and issues that we intend to keep under review in the coming period:

• What level of coordination is required for UK aid programming? Is the current system of ad hoc coordination structures for particular themes and areas fit for purpose?
• What else needs to be done to ensure compliance with the international ODA definition and the requirements of the International Development Act, where applicable?
• How are secondary benefits to the UK from aid spending to be measured and monitored? How transparent will they be? What systems and capacities need to be developed in other government departments to manage the scale of aid expenditure assigned to them in the coming years? Are the responsible departments putting enough effort into developing those systems and capacities?
• How can the UK make better use of the skills and experience across the UK government for technical assistance and capacity building, in accordance with principles of good development practice?
• What types and level of support should DFID provide to other departments to improve the effectiveness and value for money of their aid spending? Is DFID resourced to play this role.

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