News analysis DfID faces value-for-money issues over aid allocation

21 Jun 07
'Grotesque failure' and 'total farce' were the more polite terms anti-poverty activist Bob Geldof used earlier this month to signal his disenchantment with the aid record of the world's richest countries.

22 June 2007

'Grotesque failure' and 'total farce' were the more polite terms anti-poverty activist Bob Geldof used earlier this month to signal his disenchantment with the aid record of the world's richest countries.

Two years ago, when the Group of Eight pledged to increase aid by US$50bn a year by 2010 in Gleneagles, Geldof said of the Make Poverty History campaign: 'Mission accomplished, frankly.'

Now he knows better. Official figures show that actual aid given dropped the year after Gleneagles for the first time since 1997.

Italy has missed the European Union's 2006 0.33% of gross national income target altogether while France and Germany – like Spain and Austria – met it only by counting large chunks of debt relief as 'aid', a tactic dubbed 'creative accounting' by Concord, a confederation of 1,600 European Union non-governmental aid organisations.

The heat has also turned been up on the UK – hitherto the good guy in recent campaigns to increase aid. Concord placed the UK fifth from the bottom of the class, for using 'creative accountancy' to inflate its official 2006 aid figures from £4.95bn (0.38% GNI) to £6.85bn (0.52% GNI) by including £1.9bn of debt write-off to Nigeria.

The problem, says Concord, is that for Nigeria to secure its £9bn write-off from the UK, France, Italy and Germany, it first had to repay them £6.16bn over two years – a relative windfall for the creditor countries, given that total annual repayments on the debt had averaged just £0.29bn since 1985. 'This is a double-win for creditor countries,' says Concord: first they received an unexpected £6.16bn of debt repayment, then they reported up to £9bn as aid, without having to dig into tax revenues.

But International Development Secretary Hilary Benn demurs. 'I emphatically reject the argument that debt cancellation doesn't constitute aid,' he told Public Finance. 'In Nigeria – the biggest write-off in history – debt relief is allowing a significant increase in public spending, meaning more teachers will be trained and more children able to go to school.'

He did concede that the deal had flattered the UK's 2006 figures. 'Because debt cancellation comes in lumps, the figures may go up and down, but the underlying trend, excluding debts, is very clear in the UK: it's rising and we are the first government in British history to commit to a date to achieve the United Nations' 0.7% of GNI target, which is 2013. We're on course to do that,' he said.

Yet while celebrity-backed campaigns grab the headlines, Benn's department faces pressure from the opposite direction. With the Department for International Development one of the few likely to receive above-inflation funding increases in the Comprehensive Spending Review, DfID officials are bracing themselves for difficult questions.

A precursor for those came in DfID's recent Departmental Capability Review. Although much poorer performance in other departments meant DfID came out top in its tranche, the reviewers questioned its ability to prove value for money in a context where its programme budget was set to double.

Those concerns were followed on June 19 by a call from the Commons' international development select committee for the incoming prime minister to boost DfID's ministerial capacity from two to three.

Government sources say that doubts over value for money are likely to encourage sniper attacks from departments such as Defence, the Home Office and Foreign Office, who would like to see more, not less, 'creative accountancy' at DfID – especially if it means expenditure such as peace-keeping and the repatriation of failed asylum seekers can be shunted to DfID.

But the prime source of jitters at DfID is a National Audit Office report which is expected to raise doubts over the effectiveness of UK aid, and more specifically General Budget Support, which forms the centrepiece of DfID's development strategy.

GBS has become prominent as a bilateral aid strategy since the late 1990s. It differs from so-called 'project support' as it removes the ring fences from aid and channels funds directly into government budgets, allowing the recipient government to determine how and where it is spent.

Advocates of GBS argue it can be more effective as it reduces fragmentation and increases domestic accountability. However, while other donors have tended to channel around 5% of their aid as GBS, DfID spends 28% of its budget that way.

That increases DfID's exposure to the risks inherent in GBS, particularly government corruption. This point was underlined last year when a Kenyan whistle-blower revealed that some £480m had been siphoned out of Kenya since 1997 via fictitious procurement contracts.

While the media fallout prompted a reversal of DfID's strategy in Kenya, a recent evaluation of GBS – commissioned by DfID, 18 other bilateral donors, the World Bank and the International Monetary Fund among others – found little evidence that it was any more affected by corruption than other forms of aid.

But the study also concluded that in countries such as Vietnam, Rwanda, Uganda and Mozambique, aid – much of it in the form of GBS – had taken 'more than its share of the credit for… reductions in headline poverty figures,' which were more likely related to a 'post-conflict rebound effect'.

The University of Birmingham researchers went on to warn that GBS was not in itself an 'anti-poverty' strategy. They said that the lack of democratic accountability and financial management mechanisms in the recipient countries limited the impact of the aid given – a theme likely to be pursued by the NAO.

Aware of these increasing risks, DfID and other bilateral aid agencies are matching increased use of GBS with a new focus on improving financial management, Noel Hepworth, the chair of CIPFA International, told last week's CIPFA conference in Bournemouth.

Caroline Rickatson, senior governance adviser at DfID who takes up her position as international director at CIPFA in September, said that as well as improving financial management that also meant an emphasis on 'demand-side' initiatives. 'We need to do much more work with citizens to help them hold their governments to account,' she said.

In 2005, donor governments and aid agencies agreed a performance management framework to assess the financial management and accountability mechanisms of recipient countries.

Rickatson told the conference the assessments were used to influence the shape that support might come in. 'We aim to make sure there's a positive trajectory; we want to engage and avoid the situation where those that need the most help don't get it,' she said.

John Wiggins, a member of CIPFA's International Panel, illustrated how far some countries had to go, with budget plans and actual spends 'varying very greatly – often because revenue and aid are themselves unreliable.'

He added: 'Actual spend often doesn't relate to Parliament and democracy, but to the relationships between the treasury minister and those who are able to apply pressure to him.'

Donor country attempts to address that by stimulating accountability mechanisms are often seen as 'interference and not welcomed',Wiggins said.

The scale of the problem is partially illustrated by the fact that out of 77 completed PMF analyses, just four have been published – with recipient government and donors both interested in keeping the results private.

But with campaigners wising up to the small print, that might not be sustainable for long.


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