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| UK development bank plans raise fears of loading debt on to poor countries | UK development bank plans raise fears of loading debt on to poor countries |
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| The UK is considering whether to provide more British aid to developing countries in the form of loans – a practice it all but abandoned in the late 1990s. | The UK is considering whether to provide more British aid to developing countries in the form of loans – a practice it all but abandoned in the late 1990s. |
| Supporters of the proposals, which include the creation of a UK development bank, argue that moving into loans would help Britain to foster economic development overseas, for example by supporting large infrastructure projects, and would cost the UK taxpayer less, as loans would have to be repaid. | Supporters of the proposals, which include the creation of a UK development bank, argue that moving into loans would help Britain to foster economic development overseas, for example by supporting large infrastructure projects, and would cost the UK taxpayer less, as loans would have to be repaid. |
| But some development experts and NGOs warn that many poor countries already face rising debt burdens, and that loans could push aid funding towards projects that offer high financial returns at the expense of support for key social sectors like health and education. | But some development experts and NGOs warn that many poor countries already face rising debt burdens, and that loans could push aid funding towards projects that offer high financial returns at the expense of support for key social sectors like health and education. |
| Both grants and "soft loans", which are deemed to have a grant element of at least 25%, are eligible to be counted as official development assistance (ODA) under Organisation for Economic Co-operation and Development (OECD) rules. Globally, the share of ODA given as loans has increased steadily since 2007. | Both grants and "soft loans", which are deemed to have a grant element of at least 25%, are eligible to be counted as official development assistance (ODA) under Organisation for Economic Co-operation and Development (OECD) rules. Globally, the share of ODA given as loans has increased steadily since 2007. |
| Next week, representatives of the European Investment Bank and KfW, the German development bank, will give evidence to the international development select committee, some of whose members support the reintroduction of loans. The committee is weighing "the pros and cons of setting up a UK development bank" in its inquiry into the future of UK development co-operation. | Next week, representatives of the European Investment Bank and KfW, the German development bank, will give evidence to the international development select committee, some of whose members support the reintroduction of loans. The committee is weighing "the pros and cons of setting up a UK development bank" in its inquiry into the future of UK development co-operation. |
| In written evidence to the committee's inquiry, the Department for International Development (DfID) said it is considering the skills and administrative cost of moving into loans, as well as how lending could allow a "new partnership" between the UK and countries receiving British aid. | In written evidence to the committee's inquiry, the Department for International Development (DfID) said it is considering the skills and administrative cost of moving into loans, as well as how lending could allow a "new partnership" between the UK and countries receiving British aid. |
| "Lending could occur either on DfID's balance sheet or through a separate legal entity, which could be a small-sized entity or a larger independent development finance institution," it said. "All of these options could lend to multilaterals such as the World Bank, who then on-lend, or to countries either by co-financing multilateral loans or as standalone lending." | "Lending could occur either on DfID's balance sheet or through a separate legal entity, which could be a small-sized entity or a larger independent development finance institution," it said. "All of these options could lend to multilaterals such as the World Bank, who then on-lend, or to countries either by co-financing multilateral loans or as standalone lending." |
| Earlier this year, the department told the committee that providing aid in forms other than grants has "potential advantages in terms of value for money, including enabling funds to be recycled". | Earlier this year, the department told the committee that providing aid in forms other than grants has "potential advantages in terms of value for money, including enabling funds to be recycled". |
| DfID permanent secretary Mark Lowcock has said he is "personally quite sympathetic" to exploring how the UK could move into loans. | DfID permanent secretary Mark Lowcock has said he is "personally quite sympathetic" to exploring how the UK could move into loans. |
| "We have a narrower suite of instruments, ways of providing support for development, than some other donors do," Lowcock said in January. "Next year, in a way, is not a bad year to be having a look at that, because the goals for international development with the post-MDG [millennium development goal] panel, the G8 and so on will evolve after 2015." | "We have a narrower suite of instruments, ways of providing support for development, than some other donors do," Lowcock said in January. "Next year, in a way, is not a bad year to be having a look at that, because the goals for international development with the post-MDG [millennium development goal] panel, the G8 and so on will evolve after 2015." |
| In 2010, aid donors reporting to the OECD provided more than $28.5bn (£18.5bn) in ODA loans – or roughly 20% of total aid given that year. France, Germany and Japan give between 18% and 54% of their ODA to developing countries in forms other than grants. | In 2010, aid donors reporting to the OECD provided more than $28.5bn (£18.5bn) in ODA loans – or roughly 20% of total aid given that year. France, Germany and Japan give between 18% and 54% of their ODA to developing countries in forms other than grants. |
| DfID does not give any of its ODA as loans, though some of the grants it provides to multilateral institutions are then given out as loans. When he was chancellor, Gordon Brown wrote off all ODA loans to middle-income countries. The UK had written off aid loans to low-income countries in the 1970s, after a major meeting of the UN trade and development agency Unctad. | |
| The Commonwealth Development Corporation (CDC), the government's private-sector-focused development finance institution, gives aid in non-grant forms. The CDC, which provided less than 1% of UK ODA in 2012, deals largely in equity and venture capital-type investments, although it began moving back into loans in 2010. | The Commonwealth Development Corporation (CDC), the government's private-sector-focused development finance institution, gives aid in non-grant forms. The CDC, which provided less than 1% of UK ODA in 2012, deals largely in equity and venture capital-type investments, although it began moving back into loans in 2010. |
| Some critics of the proposals warn that many developing countries already face rising debt burdens. | Some critics of the proposals warn that many developing countries already face rising debt burdens. |
| Tim Jones, policy officer at Jubilee Debt Campaign, said: "Too much 'aid' is already given as loans, for instance through the World Bank. Lending to many countries is booming, threatening to create another debt crisis, while crowding out local investment and development. Shifting more UK aid into loans is a bad idea." | Tim Jones, policy officer at Jubilee Debt Campaign, said: "Too much 'aid' is already given as loans, for instance through the World Bank. Lending to many countries is booming, threatening to create another debt crisis, while crowding out local investment and development. Shifting more UK aid into loans is a bad idea." |
| In its submission to the committee's inquiry, the Overseas Development Institute said grants are more suitable for countries with "lower levels of income, higher levels of inherited debt, higher risk of economic volatility and limited fiscal capacity". The UK aid budget has focused increasingly on a small number of low-income and fragile states. | In its submission to the committee's inquiry, the Overseas Development Institute said grants are more suitable for countries with "lower levels of income, higher levels of inherited debt, higher risk of economic volatility and limited fiscal capacity". The UK aid budget has focused increasingly on a small number of low-income and fragile states. |
| Ben Jackson, chief executive of Bond, a group of UK development organisations, echoed concerns that moving into loans could contribute to debt crises. "The danger is that you can be funding things where you think you can get a return and that can bend priorities away from poverty reduction," he said. | Ben Jackson, chief executive of Bond, a group of UK development organisations, echoed concerns that moving into loans could contribute to debt crises. "The danger is that you can be funding things where you think you can get a return and that can bend priorities away from poverty reduction," he said. |
| Others fear proposals to set up a UK development bank are motivated by a desire to return to "tied aid". The 2002 International Development Act requires that UK aid is focused on poverty reduction, and formally "untied" from British commercial objectives. But there remains confusion over whether the act applies only to DfID or to other UK agencies that contribute to overall ODA. | Others fear proposals to set up a UK development bank are motivated by a desire to return to "tied aid". The 2002 International Development Act requires that UK aid is focused on poverty reduction, and formally "untied" from British commercial objectives. But there remains confusion over whether the act applies only to DfID or to other UK agencies that contribute to overall ODA. |