Management of the 0.7% ODA spending target

Review

Our review concluded that the government’s approach to managing its aid-spending target has become increasingly effective and well-coordinated across government – but that making the process more flexible in future could reduce the “significant” impact of major economic shocks. We made four recommendations.

Findings

• The spending target poses a complex set of financial management challenges for HM Treasury and aid-spending departments.
• The Senior Officials Group (SOG) has become an effective cross-government structure for managing the target, and an effective mechanism for sharing information and learning.
• DFID successfully fulfilled the main responsibilities of ‘spender or saver of last resort’ and carried the risk associated with the spending target, though it had no overall responsibility for ensuring the value for money of aid spent by other departments.
• Other departments vary in the quality of their governance arrangements for aid spending, but they have improved over time, and DFID and HM Treasury provided useful support to other departments in strengthening their practices.
• The ODA target can create pressure to push the boundaries of what counts as aid, though instances of expenditure being inappropriately classified due to the requirement to meet the target were not found in this review.
• The UK government noted that concerns the spending target encourages a greater focus on inputs than on results are partially mitigated by the scale of international poverty reduction needs.
• DFID developed a set of effective financial management and risk mitigation procedures for meeting the spending target. These arrangements allowed it to absorb significant changes to payment schedules without adversely affecting its programming, and there is no evidence that rescheduling multilateral contributions across calendar years compromised value for money. However, the unpredictability of GNI estimates and non-departmental ODA presented substantial challenges.
• Sudden-onset humanitarian crises were effectively managed through the UK’s cross-government ‘crisis reserve’ fund and DFID’s contingency resources for unforeseen events.
• HM Treasury’s allocations assumed DFID would spend 90% of its budget in the first three quarters of the financial year (April to December), which resulted in an uneven pattern of spending and potential value-for-money risks.
• Variability in expenditure caused disruptions to DFID’s supply chain which it was not always aware of.
• Non-DFID departments initially lacked the systems required for managing value for money risks. To accommodate rising ODA budgets, they sought to adopt some of DFID’s financial management practices with varying degrees of success. However, they have struggled with forecasting their ODA spending, concentration of spending at year end remains a significant problem, and the financial year targets set by HM Treasury were not sufficiently tailored to reflect different departmental programme portfolios.
• The UK will need to revisit its multilateral funding strategy after the end of the transition period of its exit from the EU.
• Separate sub-targets for DFID’s capital budget may have introduced value for money risks, though ODA ‘reflows’ or repayments have become less of an issue.
• Changes to the international ODA definition can introduce some uncertainty into the spending target.
• The current management system is well suited for a typical level of variability and uncertainty. However, larger shocks can pose significant risks.

Recommendations

1.  HM Treasury should consider assigning spending targets for the first three quarters of the financial year to ODA-spending departments and cross-government funds that better reflect the structural nature and spending profile of their programme portfolios and reduce negative effects for suppliers.
2. The UK government should lessen the value for money risks associated with managing the 0.7% target by establishing a spending floor for the FCDO (as the new spender or saver of last resort) that gives it a degree of certainty over its share of UK ODA spending.
3. The UK government should ensure that a sufficient share of the UK’s ODA portfolio is allocated as multilateral aid, so that ministers have the flexibility they need to manage the target at calendar year end, without compromising value for money or adversely impacting programme delivery (or supplier operations).
4. The UK government should explore ways of introducing greater flexibility into the management of the 0.7% target, including, for example, introducing a ‘tolerance range’ for hitting the target of between 0.69% to 0.71% of GNI, or specifying the target as a three-year rolling average.