Accelerating Aid: the systemic impact of the International Financing Facility proposals

29 January 2004 13:00 - 14:00 GMT+00
Public event

Speakers:

Shriti Vadera, Council of Advisers - HM Treasury

Judith Randel,  Development Initiatives
Chair:

Simon Maxwell, ODI

Description

This event saw Shriti Vadera and Judith Randel discuss the role of financing institutions and how the delivery of aid can be accelerated to help efforts to meet the Millennium Development Goals. They looked at both the structures around aid financing and also what drives the behaviour within these structures. The meeting was chaired by Simon Maxwell.

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1. Shriti Vadera started by stating without unprecedented effort we were going to fail to meet the Millennium Development Goals in many countries. The lack of financing was of course not the only issue in meeting MDGs, but the specific issue of financing provided by donors, as a necessary condition of meeting the MDGs, was today's focus.

2. Characteristics of donor funding that were important:

·      The situation was urgent. Compared to the 1990s many countries were worse off today. Goals like the MDGs were often set then not met, which scales down ambition. The UK treasury was unique among finance ministries in the developed world in that meeting the MDGs is a shared target with DFID. From this basis, it was now necessary to start making a difference.

·      This needed simultaneous investment across sectors for the impact on poverty to be sustained and for aid to be an investment rather than a compensation for poverty. This meant significant sums of money. The need for interdependence between health and education, as just one example, was well known: increasing female literacy decreased child mortality by 10%. All these issues had to be tackled simultaneously.

·      Quality and sustainability were key. Unpredictable funding prevented any form of systemic investment, made planning ineffective and undermined the whole effort.

·      Aid effectiveness was not a subject for the meeting, but had to be rooted in the development process.

3. The Chancellor came up with a "global compact" like a modern Marshall Plan, where the poorest countries had to be integrated into the global economic system. This was not charity but recognition of a political economic imperative, with all countries having the same rights, involving:

  • A rules-based system for global economic growth and stability, based on codes and standards of fiscal monetary policy and transparency.

  • Developing country having an obligation to create the right domestic conditions for private investment, and being reliable partners in engaging in development. In return developed countries had to get serious about trade and developing countries had to understand that trade liberalisation could have a positive effect.

  • An obligation to provide significant increases in aid flows.

4. This was the background to the IFF, which underpinned all other blocks. There was no benefit from trade without the basic capacity and infrastructure for trade. Aid had to increase significantly. Initiatives like the Tobin Tax or SDRs, unless universally applied, wouldn't work. In the long term, the only solution was to increase aid to meet 0.7% ODA to GNI (Gross National Income). Fiscal pressures in the UK and the G7 meant that this wouldn't happen in the near future. If two or three of the biggest countries don't reach 0.7%, it doesn't matter if the smaller do. So the IFF was mainly a front-loading mechanism to meet the immediate need of MDGs. It was not an alternative to 0.7%, but a complement to it. Donors had to make a series of annual year-long commitments; this would leverage the anticipated income in the international capital markets each year, which would provide it with a pool of funds for immediate deployment. It was not intended to be an aid agency or a disbursement mechanism, but simply a financing mechanism.

5. The primary source of income was these long-term commitments, made by a flow of annual payments by the donors to the IFF. Pledges would be say four or five times over a fifteen year period. So each year there would be one pledge for fifteen years for a set of annual payments. The donors would be legally bound to make these payments subject to one or two very high level financing conditions in order to deal with the market. That conditioning was very important for bond-holders to understand - it would be capable of objective determination. These were financing conditions for the pledges, not to be confused with the conditions on the disbursement. The IFF was a completely different set of conditionalities. IFF would then go to the capital markets, and, on the back of the legally committed stream of income, it would issue bonds, securitising each of these pledges, taking a proportion of the future income and frontloading it for immediate use. A triple-A rating of these bonds was anticipated because of the pledge of donors who were triple-A themselves.

6. The IFF would have a limited life of 30 years. For the first 15, the bulk would be for disbursement. The next 15 would be repayment of the bonds. There was a clear economic and moral case for the frontloading model: aid effectiveness rates are much higher than the cost of borrowing. The central scenario was that you leverage 70% of these pledges, so you can convert the $16 billion commitment that was made at Monterrey (yet to be realised) into $50 billion.

7. It must be very clear that this is not a disbursement agency. The disbursement would be done through bilateral and multilateral mechanisms such as DFID or the Global Health Fund. Donors would have some veto over their funds relating to their commitment. There were overarching principal for donors to sign up to: the funds must be untied; they must be targeted for poverty reduction; they must be disbursed in either grant-form or debt relief; they must be in a predictable multi-year programme.

8. The IFF was bringing forward aid to 2015, providing a scale using Monterrey as a base and locking in the commitment of donors to increase long-term aid. The Treasury had been working with partners over the previous twelve months, towards 2005. This would be a great opportunity and a critical year: it would be when the first MDG for gender equality in education would be missed. It would be ten years until 2015 and the last year to do anything serious. After that, credibility would be lost. The UK would hold the presidency of the G8 and the EU. Events had been held to try and take the fund forward: conferences with the IMF and World Bank, who would produce reports for their spring and annual meetings; commitments to consult with emerging markets; engagement with civil society, faith groups and NGOs; support from the Vatican etc.

9. Fail to meet the MDGs is failing ourselves. But it is an enormous long-term commitment. The UK is prepared to do it, but cannot do it alone. It needs others' support and the critical mass of the G7. The obstacle is political will, created through public and civil society support: donors only act if pressured. International organisations, NGOs, trades unions, faith groups need to understand their power in forcing governments to act. It has been done before on debt relief and it will take the power of collective action to succeed now.

10. Judith Randel supported what had been said, and stated that she would speak on what drove behaviour within aid architecture structures, and aid community behaviour.

11. It was clear that more resources were needed. At the time of the Financing for Development conference, donors had never been richer and never meaner. Aid as a percentage of GNI was at an all time low, while GNI was at an all-time high. There had been a widening gap between progress on aid volume and progress on growth. This failure for aid resources to meet needs was long term and in the system.

12. How was that going to change? The DAC must maintain and increase the volume of aid resources and was concerned that the US should give priority to aid flows as ODA. According to DAC, the time could be ripe for the US to look at its foreign relations budget in terms of long-term objectives and the common aid effort, a move that would be welcomed by other DAC members in strengthening the case in their parliaments for maintaining or increasing aid levels. These comments from DAC were from 1987, but still illustrated the difficulty in getting the current aid architecture to deliver the volume of resources necessary.

13. How can the IFF deal with the problem of more resources, and the year on year failure to deliver help? The IFF would be working with the $15 billion at Monterrey, which would be turned into legally binding commitments. It would increase spending up to about 2015-19 and if that extra $15 billion were leveraged, would enable an extra $50 billion to be spent. The rate of return on aid investment was much higher than the cost of borrowing, and what was compared was legally binding commitments against the promise of money later. The promise of money later has been made year on year; so it was better to have legal pledges now. Lastly, the IFF was predictable: this had been a major problem with aid. Lack of predictability inhibited recurrent spending by governments and particularly investment in social assistance for the very poor.

14. In terms of the systemic effect of the inadequate level of resources in the aid architecture, Sachs has talked about the way that donors to developing countries negotiate around the parameters of what the donors have to spend. Developing countries may need a universal health care system, but the donors can't afford it, so the terms of discussion get stuck in what donors want to give. There is a view also that inadequate capacity can be overcome by giving less money. One donor talked about recovery in Afghanistan, claiming its job was to get Afghanistan to be realistic about how much aid it would get. But why isn't it possible to increase aid?

15. Developed countries thought their expertise was more important than resources. The IFF could challenge this whole set of attitudes and free up a much more realistic relationship in development cooperation.

16. The IFF wouldn't make any progress on 0.7% because it is a donor's contributions to the IFF that would be counted towards 0.7%, not the disbursements made by the IFF. So the contributions were part of ODA, but expenditure of $50 billion by the IFF was not. The IFF alone was not enough. It would benefit low-income countries, but more important than the share is the volume. It wasn't an alternative to 0.7% GNI but there would be a benefit in having transparent inflows to developing countries. There would be more accountability if there were better information available.

17. The IFF's structure was essentially "business as usual". It was not a new disbursement mechanism, but a legal entity owned by donors, and including developing countries. But the nature of their representation was not clear, nor were their voting rights. African Finance Ministers, who generally welcomed the IFF, have not been happy about this. There was no civil society, UN or MDB representation. Donor preferences would guide allocations. There was nothing in the system preventing the current biases being reinforced, beyond the IDA (International Development Association) eligibility. The criteria for disbursement were essentially the priorities of the donors, with no commitment to transparency. However, donors would have to do things collectively: it wasn't government borrowing by another name. You couldn't put your money in, leverage it up and then spend it as you would like. This collective decision-making could contribute to improved harmonisation.

18. Clearly, if poverty eradication were going to happen, resources were needed. The IFF must get off the ground and establish credibility. Although there are missed opportunities in terms of governance, it's quite important that the best is not allowed to become the enemy of the good. The risk is that it gets talked into the ground and this initiative to generate increases in aid expenditure gets ignored. This is where the link to 0.7% and the UK is so important. Donors who are already at 0.7 and who are not in the G7 are less likely to favour the IFF if they see it as an easy way for G7 donors to get off the hook on meeting their commitments. If the UK as a G7 member were to deliver on 0.7% commitments, then it would increase the prospects for the IFF. Can we do both? We do have an unprecedented opportunity, with a Chancellor and Prime Minister who are more internationally minded than any before; we have the presidency of the EU and the G8 next year. If Britain continues at its current growth rate it will reach 0.7% by 2012/2013. To meet 0.7% by the end of the next spending round we need to increase rate of growth, finding about 4.4 billion. This is matter of choice and political will. But the IFF is not an alternative to this, but an addition, a valuable thing in its own right.

Discussion points:

DFID agreed the need for a full partnership agreement between DFID and the Treasury and agreed that countries could absorb this aid. Absorptive capacity needed money and investment to grow that capacity.

  • The World Bank and IMF are required to raise funds through international markets by issuing bonds. So if the IFF raises money vigorously in the international market, would it not crowd out the opportunity for the other development banks to raise money?

Vadera: the amount of bonds issued in the market are multiples of the amount that either the World Bank or the IMF would ever issue. The biggest issuer is the US government, and this would be the most minuscule proportion, and would have absolutely no impact on the capacity of the World Bank or the other development agencies to issue bonds. The World Bank is the benchmark for international development issuers of bonds and it would maintain that status.

  • DFID recently commissioned work by Foster and Keith on the case for increased aid. Within that there is a section on conditionality which says that there is at the moment increasing conditionality on aid disbursements which is a real problem in terms of effectiveness. While welcoming the commitment to untied aid, how, under the current available disbursement mechanism, will we ensure that the kind of conditions that are attached are not too great in relation to the new global compact. What is the relationship between the new global contact and the IFF?

Vadera: the issue of conditionality is fraught: we have a fiduciary responsibility to our taxpayers to use funding effectively and accountably. We are trying to streamline conditionality through the IMF and World Bank, giving a sense of ownership. If we can make PRSPs more effective, country ownership is the way to square the circle of conditionality. The IFF is just a financing mechanism.

  • Does the case for the IFF depend on how the money is spent? Is it possible to sell the IFF without going into the finer details?

Randel: a dilemma for the IFF is that it is set up as a simple mechanism, not to solve the problems of the aid system. The question is whether it will make things worse for the aid system by reinforcing some of the problems. There are two areas for optimism. First, the IFF may provide a capacity to give budget support for countries that currently find it difficult. The conditions of the IFF are that it must go to IDA-eligible low-income countries and be geared to the MDGs, thus it goes to a good investment. Secondly, the IFF can increase transparency in the aid architecture, by publishing its transactions. This decrease in corruption can make the system transparent.

  • Why not just increase the capitalisation of IDA? Why have a separate IFF? Why not create some new, more flexible instruments in IDA, for getting money out on grant terms? If not, why not more debt relief? The weak link in the aid architecture is disbursement. The global funds already need to be reformed and they are relatively new. They can't mobilise funds quickly and aren't aligned in the PRSPs.

  • There are absorptive-capacity problems for very large and rapid increases in aid flows. The result is not immediate, nor proportionate to the increase in funding. The best thing to do is to ratchet up spending progressively, otherwise, like the Global Funds, the countries best able to absorb get the most.

Vadera: One IFF technical aspect is that there are some high-level financing conditions which allow the donor not to pay for that particular country. For that risk to be acceptable to bond holders, the funding has to be spread among different countries. This can be done by the IDA system, or by having a 5% cap on one country receiving funds. Who gets funding has to be publicly available for bond holders and credit ratings agencies. It has to be public for funding to go for it. This makes transparency inherent. So regarding the capacity of countries which can absorb more funding, the mechanism requires a degree of distribution that won't permit more given to certain countries.

  • Regarding IDA and debt relief, giving funding to IDA can only be directly from our budget. IDA could become an IFF, but capitalising IDA must be done through aid budgets. We expect that a significant portion of the IFF would go to organisations geared up to dispersing, like IDA. We can't give more to debt relief because it is not free. IFF would like to give debt relief, but the outstanding debt is not bilateral debt - it is IMF/World Bank debt. So we have to fund these institutions to give debt relief from our aid budget.

Randel: On absorptive capacity, why don't we do it all? The IFF can be used to lever up all sorts of things. Tony Blair said that international poverty reduction should be based on the same method as our domestic objectives, i.e. we borrow to pay for it. What is the counterfactual for absorptive capacity? If you don't spend money, what is the consequence, and who bears the risk? This question is not being taken sufficiently into account. We set up frameworks which make it impossible for us to spend money. Britain is committed to primary education so it hasn't spent money on secondary education, although higher education in developing countries is in dire need of investment. Lastly, because aid doesn't perform to the optimum, we say that we should give less to it. We should look at how we can spend effectively, not take away the funding.

  • Reaching the target 0.7% would strengthen most of IFF; is there a timeframe on this?

  • On political will, how will we bring in new constituencies to support aid in a domestic-agenda driven climate?

  • The IFF shouldn't be taken as a pretext to reduce resources that would ordinarily be going into debt relief. Also, in terms of eligibility for this fund, the ultimate goal is to achieve the MDGs, so we need more flexibility in access to this fund.

Randel: on the domestic agenda, we can't underestimate the degree of support for "real aid" (basic needs and human priorities) which still finds great support in British public. We must make this atomised public support more active in the political arena.

Vadera: 0.7% does not yet have a timeframe, but the Chancellor feels that he is on track. This is a tactical issue regarding whether the UK goes to 0.7 will get G7 on board or not. In reaching our percentage, people are interested in this if you can get them interested: it was a swing factor in the last election for new voters. We need to create political space for the public to act, not concentrating on the negative agenda. We can then mobilise young people and faith groups.

We are committed to all countries working on the same rules, and this will increase not decrease the amount of debt relief for Nigeria, for example. France and the UK are those who are at present supporting this. Developing countries which are not going to be recipients of IFF are also supporting it, including Brazil, China, South Africa and India. For donors, the position is that this isn't a priority, and they ask why they should bother themselves striving to do something that nobody is asking them to do. We must mobilise civil societies to put pressure on governments to support the IFF.

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