EAC Report: Development Aid

Lord Hollick Excerpts

Monday 22nd October 2012 Lords Chamber

[Lord Hollick]

My Lords, I, too, would like to thank our chairman, Lord MacGregor, for leading us through this important review of overseas development aid and, somewhat to our surprise, leading us to unanimity. But that is where the evidence led us as well. In 2010-11, our gross spending on development aid was £9 billion, representing a 53% increase over four years. As a percentage of gross national income, aid increased from 0.43% to 0.56% over the three years to 2010. As noble Lords have said, the UK is the second largest provider of development aid in the world. DfID has been consistently held in high regard over the past 15 years. So the UK has much to be proud of in its commitment to alleviate poverty and despair in some of the least developed countries in the world.

The premise that economic growth is the most effective way of achieving a reduction in poverty is universally shared, but there is a wide divergence of views on the contribution that development aid makes, or does not make, to economic growth. The insurmountable difficulties of measurement make it unlikely that this debate can be resolved by conventional analysis, not least because, as the noble Lord, Lord Tugendhat, mentioned, development aid is but a fraction of larger private capital and trade flows. But there is a good deal of evidence that development aid is an important and vital catalyst in bringing about all the changes that are prerequisite to the flow of private investment and long-term economic growth, from improved healthcare and education to better governance, administrative capacity building and infrastructure investment.

It is possible to measure the impact and effectiveness of aid aimed at achieving many of these specific objectives and that must be the starting point of the value-for-money analysis to which DfID is committed in its business principles. That value-for-money analysis can be made only if the objectives of the project are clearly established at the outset and the outputs and impacts can subsequently be monitored and measured. Far too much development aid is channelled through multilateral organisations or direct budgetary support, where transparency is low or non-existent. DfID is to be commended for weeding out some of the worst offenders, but it needs to impose far tougher conditions of transparency on large multilateral organisations to establish whether its laudable operating objectives of making British aid more effective by imposing transparency and value for money are being met and met in all cases.

Are the objectives of multilateral organisations consistent with DfID’s objectives? For instance, is the European Commission’s support for Turkey, an increasingly wealthy country that can attract all the private capital it needs, a proper use of development funds aimed at helping the world’s poor? Helping accession countries to transition to full EU membership is itself an important objective, possibly worthy of EU support, but it falls well outside DfID’s objectives.

Aid transferred directly to Governments is too often general in its nature, can be spent on anything that the recipient Governments choose and can in turn undermine the legitimacy of those Governments while enriching their members. It is all but impossible for DfID to follow the money involved in these transfers and monitor value for money. Project finance, which has been reduced by DfID, provides greater transparency and less scope for manipulation. DfID should re-examine the merits of increasing project finance. As my noble friend Lord Boateng said, NGOs provide a higher level of transparency—I was very impressed by the evidence that we received about the general effectiveness of their work. I urge DfID to work more closely with NGOs and, in particular, to help them to scale up their activities.

Many of our witnesses were alert to the ever present risk of corruption, particularly in fragile states. Yes, it will always be with us and every effort must be made to eliminate or reduce the redirection of aid to private pockets. Of course, we wring our hands, but we should also take note of the uncomfortable fact, carefully documented by Transparency International and the Tax Justice Network, that many of the bolt-holes for funds obtained corruptly fly the Union Jack or have it incorporated in their national flag. Too many of our protectorates and former colonies, many of which continue to have close relationships with the City of London, operate as tax havens with high levels of secrecy, so let us look in our own back garden first and clear up some of the shortcomings there.

Transparency International also provides an invaluable analysis of illegal capital flight, which shows clearly that many countries that are major aid recipients, such as Ethiopia, also suffer from very high levels of illegal capital flight. DfID should pay close attention to Transparency International’s index and insist that improved governance and effectiveness at the recipient country’s central bank and more effective tax collection in the country should be preconditions to the receipt of development aid.

Visits that I made to Burma and Palestine this year provided further insight into the complexities of overseas aid. In Burma I met with people from Aung San Suu Kyi’s National League for Democracy to discuss election campaigning—she did not need much advice, as it was more of a coronation—and policy formulation. They were keen to secure support for Burma’s development from the outside world but warned against a sudden flow of funding, which they said would immediately be siphoned off into the wrong hands. Instead, they wanted to rebuild civil society, which has been hollowed out over the past 50 years, to ensure that the country has the professional and administrative skills and structure to cope with the anticipated rush of inward investment. They were in particular looking to Britain to provide that support and suggested that DfID might partner with UK professional bodies representing accountants, lawyers, engineers, tax experts and civil administrators to help to fill the capacity gap. This is a potentially fruitful co-operation which could deliver direct economic benefit to the UK—something that we should also bear in mind—without compromising the quality or effectiveness of what we offer to Burma.

The issue in Palestine was more deep-rooted and, I fear, more intractable. The UK gives some £86 million a year to Palestine, largely to support civil society, yet a World Bank analysis shows that Israeli policies to contain and control Palestine’s economy reduces its GDP to less than a quarter of the level it should be. Much of the GDP lost is in effect transferred to the benefit of the occupying power, so we have the absurd position whereby hard-pressed UK and EU taxpayers are providing development aid in effect to fund the gap in the Palestinian economy created by measures imposed by Israel and which in turn benefit Israel’s treasury. This is an unacceptable situation, which surely should be tackled at both UK and EU level.

The need to monitor and manage the complexities and to scrutinise funding before, during and after implementation demands skilled resources. DfID’s staff receive high praise, but a time when funding is increasing and there is a requirement to manage that funding on a more detailed basis is not the time to reduce staff. Indeed, more resources are needed if DfID’s business plan is to be met and implemented effectively. The committee’s encounter with the recently established Independent Commission for Aid Impact, set up to monitor the performance of aid programmes, was, if I can put it most diplomatically, underwhelming. It did not appear up to the important task that it has been set. Against that background, the planned reduction in staff is a very bad idea, which could increase the risk of ineffective outcomes or, worse, a scandal that could undermine the aid programme itself.

The evidence that we received showed that in general our money is being well spent and, indeed, better spent as the years pass, and that the monitoring of outcomes is improving. On that basis we should continue to support additional funding to meet specified demand, always assuming that it can be managed effectively. However, I remain unconvinced that a further substantial increase in funding to an arbitrary level of gross national income is either desirable or manageable. If such funds are available, I would prefer to see the proposed increase in funding, equivalent to between 1.5p and 2p on the basic rate of taxation, used to reduce the basic rate of tax in the UK to stimulate demand, reduce the burden of recession on the hard-working squeezed middle and stimulate growth, for in the longer term it is growth here that will help to fund an increase in the development funds that we send to the most needy in the world.