Getting smarter on aid spending

11 Mar 14
The UK is radically changing its approach to aid by focusing on jobs and growth. This benefits both developing countries and domestic businesses, the permanent secretary of the Department for International Development tells Mike Thatcher

By Mike Thatcher | 11 March 2014

The UK is radically changing its approach to aid by focusing on jobs and growth. This benefits both developing countries and domestic businesses, the permanent secretary of the Department for International Development tells Mike Thatcher.

Tea farmers in Tanzania are some of the first to benefit from the UK’s new approach to aid, which sees a much stronger emphasis on stimulating economic development in poor countries. 

The Department for International Development is investing £7.5m in a project that will boost the incomes of more than 3,600 tea farmers spread throughout 27 villages. It’s one of a number of projects in Tanzania and should create both jobs and growth.

Known as ‘smart aid’, the assumption in Tanzania and beyond is that a job is the best way out of poverty. And by using returnable loans and equity, a virtuous circle is created.

‘If these businesses are successful and make a profit, the money will be returned and redeployed, multiplying the development impact. We’re sharing the risks as well as the rewards of investing in business ventures,’ Justine Greening, the UK’s international development secretary, said in a recent speech.

Greening is so convinced by this strategy that she has promised to spend £1.8bn of UK aid on economic development in 2015/16. This is nearly three times the £620m that was spent in 2012/13.

The fact that ‘smart aid’ can also build business for British companies has not been lost on the coalition government. With questions being asked about the protection given to the UK aid budget and suggestions the funding should be used to provide flood relief at home, it’s useful to be able to highlight some domestic benefits.

‘Everybody accepts that the main driver of poverty reduction is growth and that the private sector is the engine of that growth,’ the department’s permanent secretary, Mark Lowcock, tells Public Finance. ‘It is not just good for developing countries, it also creates markets for us, so it’s a win-win.’

Lowcock says that the UK is on track to hit its aid targets: to secure schooling for 11 million children; inoculate more than 80 million children; provide 10 million women with access to family planning; and protect 30 million people from malaria. This means that it can focus more of its attention on building the economies of ‘frontier’ countries in Africa and South Asia. 

DFID will be changing its management structure to facilitate the change. More people with business experience are being brought in, including the appointment of the first director general for economic development.

Lowcock suggests that as countries develop, the help they need develops too. No country wants to rely on aid for the long term – and a strong economy can negate the need for assistance.

‘The first borrower from the World Bank was France. In the 60s and 70s the big borrowers were the likes of Singapore, Malaysia and Korea. These countries are now financiers of development rather than users of development aid. That is a journey every country wants to be on,’ he says.

It’s unlikely to be plain sailing, however, as DFID has painful experience of when smart aid can be less than clever. Last year, the Independent Commission for Aid Impact pointed out ‘serious deficiencies’ in a flagship project to boost trade in Southern Africa.

The TradeMark Southern Africa programme was eventually shut down following the criticisms. Lowcock accepts that it was ‘not a project that we handled well’, but he says that DFID has reviewed the way it operates as a result.

A new head of internal audit has been appointed, hundreds of officials have been put through enhanced project management training and all the senior civil servants in the department have taken a commercial skills course.

‘The top 100 people – all of us are doing that programme,’ says Lowcock. ‘The first course was in January and I was one of the people on it.’

TradeMark South Africa can be seen as a blip in what has been a good year for the department. It has reduced its administration costs by 30% and moved its headquarters, saving the taxpayer £63m in the process.

Meanwhile, the department is on course to achieve the government’s target of spending 0.7% of national income on aid. In 2012 this figure was 0.56%, but all the indications are that it will have been hit for 2013 – we’ll know for sure when the final 2013 output figures are published in the next few weeks.

And DFID was named as ‘most improved government body’ by the Public Accounts Committee in the recent Civil Service Awards. PAC chair Margaret Hodge described the department as an ‘international leader in its field with a global reputation’.

This is rare praise indeed from a chair famed for her less-than-favourable assessments of overspending mandarins, tax-avoiding companies and poorly performing public sector suppliers.

The test for the department will be how well it implements the new focus on growth and jobs. Most development experts support the move in principle, though some wonder about how things will turn out in practice.

Matt Andrews, associate professor of public policy at the Harvard Kennedy School, is one who has his doubts. He argues that a ‘fixed agenda’ will prevent relevant, local solutions from being taken forward.

‘Let’s hope [economic development] is not just another DFID fad. I wonder how the organisation is meant to get things done when the vision changes so much, from poverty to governance and now to growth,’ he tells PF.

But Lowcock emphasises that the change is evolutionary and that the revamp to departmental structures and systems will smooth the process.

‘This is a journey and an evolution. We are absolutely going to keep working on core poverty indicators. Those jobs are not finished yet. But because we have made progress on those goals, we have freed up some capability and resource to invest in economic growth.’

This article was first published in the March edition of Public Finance magazine

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