Opinion: If the UK wants to increase the provision of aid to the private sector, we must play it straight

This summer, the British Conservative Party, through their manifesto and the pages of the Daily Mail, issued the OECD DAC — a multilateral group of donors that sets the definition of aid — an ultimatum: allow us to widen the definition to include more private equity, more military spending, and more domestic spending, or Britain will pull out.

Those negotiations, to decide the rules by which developed nations can spend their aid, will start next week in Paris.

Pulling out of the OECD DAC would mark a dangerous precedent. Can any donor country chalk up anything it wants as aid? Export credit? How about concessional arms sales? And what would pulling out of this multilateral group do for the international norms and standards for the delivery of aid that Britain has helped shape over decades?

During an International Development Committee evidence session on Tuesday, looking at the Department for International Development’s 2016/17 report, I asked development secretary Priti Patel about her ultimatum to the OECD DAC. I was relieved when she said Britain would not be leaving DAC, rowing back on another of her party’s manifesto commitments.

But Patel will still be working within the system to broaden the definition of aid, allowing her to overhaul U.K. aid based on “core Conservative principles” by using our aid pot to scoop trade deals for British business in developing countries.

She has been busy laying the domestic ground. After much talk of “jumpstarting” economies and “turbocharging growth,” she quadrupled the limit DFID could give to its private equity arm, the CDC Group. Formerly the Commonwealth Development Corporation, the CDC can now receive from government up to 6 billion pounds over its lifetime, with a provision to increase it to 12 billion pounds (equivalent to the annual aid budget) with parliamentary approval.

To prepare for the upcoming 3.5 billion pound recapitalization of the CDC, Patel is pushing for a rule change to allow the government to count upfront all the money it gives to the CDC as aid.

I have no problem in principle with counting so-called private sector instruments as aid. Providing seed capital in the form of equity or loans selectively to the private sectors of nations with limited access to international finance can create jobs, develop infrastructure, and diversify economies away from resource extraction and agriculture.

But as your bank manager will tell you, lending somebody 10 pounds is not the same as giving them 10 pounds. Aid statistics are supposed to measure the transfer from donor to recipient. I question the wisdom of pushing for a rule that allows for all the money the government gives to CDC to be lopped off the aid budget, when many of CDC’s investments would only constitute a small transfer to recipients under the OECD definition of aid. Many are outright profitable.

Parking the question over how U.K. aid can always achieve its legal objective of reducing poverty when, according to the government, it now also has to drum up trade for Britain, I also question whether the CDC is the right vehicle for this mission.

Last year, the National Audit Office said that the CDC could not demonstrate how its investments cut poverty. “It remains a significant challenge for CDC to demonstrate its ultimate objective of creating and making a lasting difference to people’s lives in some of the world’s poorest places,” said Amyas Morse, head of the NAO at the time.

Morse’s report also said that the CDC could not show that its investments are being made in nations and sectors where finance is limited. This comes as no surprise; the CDC’s “priority sectors” include African telecoms and financial services, highly competitive sectors with access to private capital.

The CDC buys up stakes in bankable companies in the developing world. But it is structuring its investments in a manner that is consistent with tax avoidance. Despite repeated attempts by NGOs including Action Aid, The Tax Justice Network, and Christian Aid, the CDC has refused to provide consistent information about the tax paid (or not paid) by the companies in which it invests. As my colleague Stephen Doughty has pointed out, the Panama Papers scandal revealed CDC subsidiaries in three different secrecy jurisdictions — exactly the type of investment structure used to avoid paying the tax that would support welfare systems in the global south.

The global south is haemorrhaging wealth to the Global North. The International Monetary Fund calculates that lower income countries lose around $200 billion in revenues every year to the hidden profit-shifting of multinational corporations operating on their territory. That is around one-third more than the total amount received in aid by poor countries from rich countries.

It is unacceptable for Britain’s state-owned development finance institution to refuse to publish tax positions of companies in which it invests, or to ensure the tax and ownership transparency of the complex and opaque structures that it has set up to do business in the global south. CDC’s approach risks facilitating revenue losses for precisely the countries it claims to help. At the same time, CDC’s antipathy to transparency means that nobody, including CDC, can even be sure whether its investments provide a net development benefit at all.

If we want to increase the provision of aid to the private sector, we must play it straight. No accounting tricks, no misrepresentation.

For more U.K. news, views and analysis visit the Future of DFID series page, follow @devex on Twitter and tweet using the hashtag #FutureofDFID.