New ICAI rapid review: Management of the 0.7% ODA spending target

24 Nov 2020

The government’s approach to managing its aid-spending target has become increasingly effective and well-coordinated across government – but making the process more flexible in future could reduce the “significant” impact of major economic shocks, according to a new review from the Independent Commission for Aid Impact (ICAI).

The report from the aid watchdog has been released ahead of this week’s one-year Spending Review, and aims to guide the new Foreign, Commonwealth and Development Office (FCDO) in its management of the spending target. It examines how well the government managed the target across departments between 2013 – the first year it was reached – and 2019, though it does not assess whether the target itself, which was enshrined in law in 2015, is appropriate. The UK is one of a small number of countries to meet the international target of spending 0.7% of Gross National Income (GNI) every year on official development assistance (ODA).

ICAI found that by putting in place a range of cross-departmental coordination and financial management systems, the government had successfully met the target each year since 2013.  Reviewers also found that known risks to value for money – such as pressure on departments to spend the majority of their allocations before the end of the calendar year, and a wider range of departments spending a bigger share of the aid budget – were largely well mitigated. However, ICAI said that these processes were not well-calibrated to handle major fluctuations caused by unpredictable external change.

As a rapid review, it is not scored, but makes four recommendations for how the government can introduce more flexibility, mitigate economic uncertainty and ensure continued value for money. ICAI plans to supplement this review with a further look at the government’s management of the target during 2020, given the significant reductions to GNI as a result of the economic impact of the COVID-19 pandemic, once the final financial data are available.

ICAI Chief Commissioner Dr Tamsyn Barton said: “Overall, the government has done well in managing this onerous and complicated challenge each year, while mitigating value for money risks. Coordination between departments has been increasingly effective and, when economic conditions are stable, the processes they use are well-suited to the task.

“But it is clear that the system was never set up to handle the kind of economic volatility we have seen recently. As the government considers its next round of spending allocations, we have recommended it takes a more flexible and tailored approach in future – which in turn will help ensure greater certainty and better value for money for both taxpayers and aid recipients alike.”

In its review, ICAI acknowledged that meeting the target each year is complex, coordinated across more than 18 aid-spending departments and cross-government funds, and with GNI and other elements of the UK’s aid spend difficult to predict during the year. Reviewers found that a set of cross-government coordination mechanisms had evolved to address this, and had become increasingly effective over time.

ICAI also looked at how the former Department for International Development (DFID) acted as the “spender or saver of last resort”, adjusting its own spending up or down to ensure the target was met across departments without any shortfall or overspend. In order to respond flexibly to unpredictable forecasts and changing economic conditions, DFID had adapted its financial management systems – maintaining a pipeline of approved programmes and rescheduling its contributions to multilateral organisations, which are typically better placed than bilateral programmes to handle variations in payments. ICAI said it found no evidence that rescheduling multilateral contributions in this way had compromised value for money, and in fact found in some instances such flexibility was beneficial, giving the example of DFID’s adjusted contribution in 2019 to the UN’s Central Emergency Response Fund, allowing it to better support UN relief programmes.

ICAI also recognised that departments were under pressure to meet a Treasury requirement to spend most of their ODA allocation (85% for departments other than DFID in 2017-2019, down from 90% in 2016) in the first three-quarters of each financial year, and that “rushing” out spending in this way risked poorer value for money. Reviewers added that the Treasury’s “one size fits all” approach to setting departmental spending targets had not been effective, given the differences between them, and recommended a more tailored process in future. In addition, more aid being spent by a wider range of departments, some of which did not have the necessary systems in place initially, had increased the value for money risks. However, ICAI noted that departments had since made improvements to their financial management processes to address this.

Reviewers concluded that the system was “well suited” to handling typical variations in most years but external shocks, such as volatility in GNI forecasts coinciding with reductions in the proportion of multilateral contributions, as in 2019, pose risks – with 2020 an even more challenging year.  As a result, ICAI recommended that the government should explore options to smooth its spend, such as creating a “tolerance range” for the target, or turning it into a three-year rolling average, in line with similar advice from other bodies, including the OECD Development Assistance Committee and the National Audit Office.

ICAI also recommended that the government should establish a “spending floor” for the FCDO, as the new spender or saver of last resort, to reduce the value for money risks of meeting the target by increasing certainty over its share of aid spending, and that the government should allocate a sufficient share of the UK’s aid portfolio as multilateral aid, to give flexibility without compromising value for money, programme delivery or supplier operations.

Read the report here.

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