International Development (Official Development Assistance Target) (Amendment) Bill [HL]

Lord Hollick Excerpts

2nd reading (Hansard): House of Lords
Friday 18th November 2016 Lords Chamber

[Lord Hollick (Lab)]

My Lords, I, too, thank my noble friend Lord Lipsey for his great perseverance and for giving us the opportunity today to consider and discuss how effectively our development aid programme is being delivered, and what improvements might be made.

My noble friend Lord Lipsey and I were both members of the Economic Affairs Committee, which in 2012 published the report he referred to, entitled The Economic Impact and Effectiveness of Development Aid. The report was enthusiastic about the positive role of development aid. We concluded that aid should be increasingly targeted towards building stronger and sustainable economies if it is to help reduce poverty and improve the quality of life in developing countries. We recognised that development aid is of course a fraction of the private capital now flowing into developing countries, but that it can play a vital catalytic and enabling role in promoting prosperity.

Our report expressed concern that a sudden increase in funds available to DfID, and the requirement to spend those funds in one particular financial year, would place great pressure on DfID’s resources and might lead to unwise decisions being made about the deployment of those funds. Noble Lords will be aware that in any walk of life the requirement to spend funds within a short period of time and by a certain deadline can promote a very perverse and dangerous set of incentives. It can elevate the need to spend above the full and proper—and sometimes lengthy—consideration of how best to spend that money. It is a case of invest in haste and repent at leisure. This is not an approach well suited to deliver the wise investment of considerable sums of public money. Good opportunities for grant aid or investment do not march to the drumbeat of Her Majesty’s Government’s financial year. That is why the Bill’s modest proposition that replacing the rigid annual spending window with a cumulative five-year window is common sense and can help to promote better outcomes and better value for money.

Since the report was published, I have had the opportunity to see DfID’s work at close quarters and to better understand the process of designing and delivering development projects, large and small. In 2014, I was appointed, like the noble Baroness, Lady Nicholson, by the Prime Minister as a trade and investment envoy, to Kenya and Tanzania. I now work closely with DfID, the Department for International Trade and the Foreign Office to help to promote trade and investment into both countries. In a way, Dr Fox is my boss—and he is not unaware, I hope, that I like playing golf on Friday afternoons.

I have been very impressed by the range and quality of DfID’s work and by its deep knowledge of different sectors of the east African economy. It has wholeheartedly embraced the prosperity agenda and is becoming the partner of choice for government, civil society, local business, and international funders and investors. Its business model has evolved from the traditional donor model of cash grants, often made to host Governments and international intermediaries, to direct investment in partnerships with specialist venture investors to help fund early-stage business and co-operatives, or to fund the expansion of small social enterprises. Direct loans are made to support projects which improve the infrastructure, the skill base and the regulatory environment, all of which help the economy to flourish—and in some of the smallest and most remote communities in east Africa.

A not-for-profit venture which is successfully implementing this model is TradeMark East Africa. It was set up in 2010 and has already invested $550 million over the last five years. Its success has attracted funds from 10 other nations, and TradeMark will now invest $700 million over the next five years, with 60% of funding coming from DfID—or “UK Aid” as it is now rather more snappily branded. TradeMark is funding investments to improve infrastructure, to ease the crossing of land borders by introducing digital cargo tracking, to improve skills and to simplify taxation—something we might perhaps try to do here.

TradeMark used to receive an annual disbursement from DfID, but now capital is released by DfID only when investments and projects are fully evaluated and approved. This funding method concedes the principle underlying my noble friend Lord Lipsey’s Bill: namely, that funding and cash transfers should follow approved investments and not precede them. We need look only to DfID’s practices to understand the importance of the principle that lies behind the Bill.

This funding model mirrors the hard reality of project funding and investment: the funding arrives only if the project is viable and the sums add up. Large or small projects take time to design, test and gain approval, and the level of funding required is often lumpy and does not fit into the neat world of government’s annual cash accounting. It is a world where funding flows to rigorously reviewed projects, not one where there is a guaranteed level of funds available to invest by a deadline unrelated to the readiness of the project.

My noble friend Lord Lipsey’s Bill reflects the tried and proven structure of the commercial investment fund world. Investors place their money in a fund, either in one payment or in a number of them over several years, and then allow the fund to make the investment when the opportunities have been extensively evaluated and approved. In the private sector, the fund’s five-year investment period can be extended if not enough suitable investments have been identified. This type of patient capital investment has proved time and again to generate better outcomes than investments made in haste under the threat of arbitrary deadlines.

Although the Government may be reluctant—perhaps the Minister may surprise us—to align the legislation to the way the project-funding and investment world works on the ground, there is a ready-made administrative solution. They can establish a fund, centrally, which is funded annually in line with government accounting rules. That would address the concern raised by the noble Lord, Lord Judd, that underspending one year might somehow disappear in subsequent years. The holding fund can then disburse funds to the country or to regional funds—just in the way it is doing with TradeMark at the moment—when the investments have been approved. This approach could, and indeed should, become the funding model for the newly established and rather clumsily named Cross-Government Global Prosperity Fund, which will disburse £1.3 billion of ODA money over the next five years to promote economic growth.

As DfID’s prosperity agenda matures and develops, it is likely to fund an increasing number of projects with debt or equity. This is to be welcomed, for debt repaid and equity sold for value will replenish the funds and allow them to become more self-sustaining and evergreen. Annual ODA targets can then be met, supported with the benefit of the proceeds and repayments from successful investments made in prior years. For instance, if DfID had adopted that approach when it originally funded M-Pesa in Kenya and made it an equity investment rather than a grant, it would now be the proud part-owner of the world’s leading mobile banking and payment system, worth well over £1 billion.