UK aid funding headed for 'part privatization' after new announcement, observers say

United Kingdom Secretary of State for International Development Penny Mordaunt. Photo by: Suzanne Plunkett / Chatham House / CC BY-NC-ND

LONDON — The United Kingdom aid chief wants to recycle profits from its private sector investments in a controversial move that could reduce the amount of funding the government puts toward official development assistance.

In a speech delivered Tuesday morning, Secretary of State for International Development Penny Mordaunt said she hopes profits made by the U.K.’s development finance institution, CDC, could be reinvested in projects in developing countries to count toward the 0.7 percent of gross national income target.

Currently, CDC’s profits are reinvested in development but cannot count toward ODA under the international aid rules, meaning new funds have to be put up each year to meet the 0.7 percent — a United Nations-set target for aid spending, which is currently only met by the U.K. and four other industrialized countries.

Speaking at CDC’s headquarters in central London, Mordaunt hinted she would be willing to break with the rules if she cannot reach an agreement with other members of the Organisation for Economic Co-operation and Development’s Development Assistance Committee to change them.

“Currently, we count toward the 0.7 money that we put into our investment vehicles,” Mordaunt said in response to a question from Devex. However, “if we have profits coming back into those vehicles and we reinvest them toward development, they don’t count towards ODA, and if we took them out and spent them on social care or something else, they would count negatively against that,” she explained.

The change she is seeking at DAC would “enable [the U.K.] to count profits coming back into those investment vehicles as ODA.”

Asked about what she would do if she fails to convince DAC to change the rules, she replied: “We currently choose to be a member of the 0.7 club ... but I think we always have to be looking and reviewing and seeing what that balance is. Could we actually be doing more by generating returns; could we be … levering more into development? And if there are rules that prevent us doing that, we always have to be assessing what the balance is between those two competing issues.”

Samantha Attridge, senior research fellow at the London-based Overseas Development Institute, said the announcement represented “a move toward the part privatization of the funding of ODA.”

CDC has a portfolio of £3.9 billion ($5.09 billion) on which it made an average return of 10.6 percent over the period 2012-2017. If it comes into force, the move could ultimately make CDC’s budget self-sustaining, reducing the draw on the public purse.

Attridge said the measure would prove “very controversial.” Given the current impasse at DAC about how to count private investment toward ODA in the first place, “it complicates things even further.”

The rules around how investment in private sector instruments can be treated as ODA are currently being discussed, but Mordaunt’s announcement throws a new element into the mix.

Mordaunt added that, given the vast financing gap that exists in reaching the Sustainable Developments Goals, “the private sector has to be part of the answer,” adding that she sees significant opportunity to be “doing good while making money.”

Judith Bodie, interim head of Bond, the U.K. aid network, said NGOs have been “building stronger relationships with the private sector to boost investment and maximize [development] impact. But the priority needs to be poverty reduction over profit and this must be demonstrated if we are to meet the SDGs.” She also raised questions about how CDC plans to improve the transparency, effectiveness, and impact of aid money it spends.

The DFID chief, who took over almost a year ago, has ramped up rhetoric on the role of the private sector in aid, and earlier this year announced plans to partner with the financial services sector.

Several statements from DFID in recent months have suggested the department is willing to break with the DAC rules if it cannot achieve what it describes as a “modernization agenda” on issues such as countries’ ODA eligibility, security-related spending, and the private sector.

Update, Oct. 9: This story was amended to clarify comments on the “part privatization” of the funding of UK ODA

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About the author

  • Jessica abrahams

    Jessica Abrahams

    Jessica Abrahams is Devex's Associate Editor for Europe. Based in London, she was previously an editor at Prospect magazine and has written for publications including the Guardian, the Telegraph, Bloomberg News, and Germany's taz.die tageszeitung with a focus on global women's rights and social affairs. She holds graduate degrees in journalism from City University London and in international relations from Institut Barcelona d'Estudis Internacionals.