The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, said:
"The amount DfID spends on aid will rise by 35% by 2013, but at the same time the Department has to cut its overall running costs by a third.
Achieving this level of savings at a time of rapid expansion in frontline services involve a substantial challenge if taxpayers' money is to be properly protected and value for money secured.
The Department is going to be spending more in fragile and conflict-affected countries and the danger to the taxpayer is that there could be an increase in fraud and corruption. However, the Department could not even give us information as to the expected levels of fraud and corruption and the action they were taking to mitigate it.
Unfortunately, the Department has not always kept its eye on the financial ball, and in 2010 stopped monitoring its finance plan. That must not happen again and DFID should report publicly on its financial management.
The Department's ability to make informed spending decisions is undermined by its poor understanding of levels of fraud and corruption. Its current approach is too reactive and it needs to develop a sound framework for making sure funds are spent properly on the ground. This will be even more important as the Department channels more of its funding into fragile and conflict-affected states.
The Department's current plan is to spend more via multilateral organizations and less through bilateral programmes. This poses a risk to value for money because the Department will have less oversight than it does over country-to-country programmes. Indeed, we are concerned that the strategy has more to do with the fact that it is easier to spend through multilaterals than go through the process of assessing value for money of bilateral programmes.
To maximise the amount of aid that gets through to the frontline, DfID should have clear plans for how it is going to reduce or control running costs - particularly when channelling funding through partner and multilateral organizations with a management overhead at every stage."
Margaret Hodge was speaking as the committee published its 52nd Report of this Session which, on the basis of evidence from the Department for International Development, examined its financial management capability, its increasing focus on value for money, and the challenges it faces in managing its increasing programme budget while reducing its overall running costs.
The Department for International Development is one of only two government departments protected from overall expenditure reductions. The Government has committed to increasing the UK's aid spending to 0.7% of gross national income by 2013. The Department faces a substantial challenge to improve its financial management and secure value for money from its rapidly increasing programme budget over the next four years, while reducing its administration costs by a third.
The Department acknowledges the importance of financial management and focussing on value for money but, despite previous recommendations from this committee, has not made enough progress to date. The committee welcomes the planned introduction, in 2011, of a finance improvement plan. The Department must now keep up the focus on better financial management, rather than let it slip, as happened in 2010.
We were concerned that the Department does not quantify the likely level of leakage through fraud and corruption. And the Department is only considering fraud risk at the level of delivery method rather than at a country level. Management of fraud risk will require a stronger framework for ensuring money is properly spent on the ground, with effective monitoring and pro-active anti-fraud work. This is particularly important in the context of the growing budget and the expected efficiency savings in administrative expenditure.
The Department's programme budget is due to increase by a third in the next four years. The Department lacked certainty about the future split between bilateral (country to country) funding and funding to multilateral organisations (which then determine how to distribute the aid worldwide). On provisional plans, however, the proportion of the Department's spending that will go through multilaterals is set to increase. The committee was unconvinced that an increase in funding to multilaterals would ensure value for money as the Department does not have the same visibility over the cost and performance of multilaterals' programmes as it does over its own bilateral programmes.
The Department's plans to increase spending in fragile states and in sectors where it has less experience increase the risks to value for money, especially given the Department's patchy evidence on costs and outcomes, and its poor understanding of the levels of fraud and corruption.
The committee is concerned that the Department still has insufficient data to make informed investment decisions based on value for money. The Department was not clear about whether it needs to generate more data, or whether the data exist but need to be better collated. The committee heard testimony from the Department that it has made progress in collecting data on primary education in developing countries and looks forward to receiving the Department's progress report. The Department, however, needs to generate similar data for all of its aid portfolio.