Why most of the UK's aid budget rise cannot be spent on frontline aid

Only one-third of a big increase in the United Kingdom’s aid budget can be spent on frontline development because the rest of the money must be invested in private sector assets instead, an expert is warning. Andrew Mitchell, the international development minister, has hailed a welcome turnaround after years of painful spending cuts at the Foreign, Commonwealth & Development Office, or FCDO, with a forecast 12% rise — amounting to £900 million ($1.14 billion) — in the financial year 2024-25. But the small print of the U.K.’s spending plans suggests around £600 million of this £900 million will be swallowed up by a Treasury demand to allocate it to “financial transactions” — meaning private sector investments by British International Investment and other development finance bodies. The requirement to double these transactions to almost £1.2 billion in 2024-25 was agreed by former Prime Minister Liz Truss when she briefly led FCDO in 2021 and has not been unwound. “The FCDO still has its hands tied by the government’s refusal to move on from the Truss-era approach to private sector investment,” Ian Mitchell, a senior policy fellow at the Center for Global Development, told Devex. The little-known commitment casts doubt on FCDO’s pledge, in last year’s fresh international development strategy, to return to making “ending extreme poverty” its central policy aim. British International Investments, or BII, has been criticized, for lacking “a clear poverty focus,” and for excessive lending to middle-income countries — criticisms it and FCDO have rejected. Ian Mitchell said the financial transactions target appeared to commit FCDO to funneling two-thirds of its extra funds through either BII, the International Finance Corporation, or the Private Infrastructure Development Group. “It’s hard to know how much the government absolutely wants to be doing this for development reasons, and how much it’s because it has a financial transactions target from the Treasury,” he told an evidence session held by the Parliament’s International Development Committee. Mitchell said he anticipated “ongoing negotiations” between FCDO and the Treasury, but added: “We’re obviously two weeks short of the new financial year and there’s certainly no public information that suggests that £1.2 billion won’t have to be spent.” Romilly Greenhill, the chief executive of the Bond network for international development organizations, accused the U.K. government of a “tail-wagging dog” approach — arguing for cheaper finance ahead of asset investment. “It feels like sometimes allocations are being made based on needing to meet those arbitrary targets, rather than actually what’s the best thing the U.K. can do to support the SDGs,” she told the committee. “We need an awful lot more concessional financing, if we’re going to meet the SDGs and there is a wide body of evidence that suggests that.” FCDO believes it has turned a corner on the cuts that wrecked aid programs and brought international criticism — even as the promise to quickly restore aid spending to 0.7% of national income was exposed as a mirage. A higher budget has allowed it to fund a £1 billion humanitarian relief pot and a £150 million “resilience and adaptation” fund to help low-income nations prepare for climate disasters, as set out in the white paper. However, despite attempts to cut the share of official development assistance grabbed by domestic departments, the Home Office has defied widespread criticism by spending an extra £600 million of ODA on the hotel bills of asylum-seekers in the U.K. In a statement, an FCDO spokesperson defended the funding arrangement, saying: “Financial transactions are a vital component of our comprehensive aid strategy. “These include investments in infrastructure, healthcare, education and other sectors that directly contribute to sustainable development in recipient countries. They enable us to leverage private sector capital to support economic growth and poverty reduction, which are crucial elements of frontline aid and development.” Update, April 2, 2024: This article has been updated with a comment from FCDO.