British MPs have called for the
In a wide-ranging report on the future of
"It is getting increasingly difficult to make the case for giving aid in the form of grants to MICs [middle-income countries]," says the report, adding that loans to poorer countries could also be appropriate in certain cases.
But critics say a shift to lending could overburden developing countries with debt. Meanwhile, the international rules on how donors can count loans as aid have come under attack in recent years for allowing countries to lend at high interest rates.
"If these businesses are successful and make a profit, the money will be returned and redeployed, multiplying the development impact," the development secretary,
The select committee's report acknowledges that there are risks involved in a move to loans. It says: "There are, sadly, many examples of poor use of aid in past years on private investments and large public sector infrastructure projects, which failed to deliver long-term development benefits commensurate with their cost, but nevertheless left the countries concerned with high levels of development debt, which in the case of many least developed countries was eventually written off by donors."
Witnesses contributing to the committee's inquiry warned that tracking the development impact of loans can be particularly difficult. The
The report says DfID will need to develop a more explicit strategy on how best to spend its money and consider what new expertise it would need to start giving loans. It suggests the government should consider setting up a separate development bank.
The committee says grants should continue to be used to fund health, education and other basic needs in low-income countries, in cases of emergency relief, and in conflict areas. But grants to middle-income countries should be used only where no other form of finance is possible.
"The history of CDC shows that the biggest disasters happened when CDC rushed into a market too quickly, without really understanding what worked at small scale and before accelerating investment over time. One of the big challenges will be to resist the temptation to give a new team a big pot of money and incentivise them to spend it quickly."
The committee's 200-page report on the future of
The committee plans to hold a separate inquiry into the future of climate finance and proposes an investigation into DfID's work with the private sector.
A DfID spokesman welcomed the report. "We are already using returnable loans and equity to help create jobs in developing countries. This is a totally new way of using our development budget because, unlike traditional aid grants, we expect our investment to be returned so that we can reinvest it," he said.
"Economic development is now a core priority right across the department, as creating jobs and growth is absolutely the only way of ending poverty. We are looking at a wide range of new ways to boost economic development and work with the private sector."
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