Government warned over 'unacceptable' proposals that could slash foreign aid spending

Charities warn of 'unacceptable dilution' of aid as international development secretary proposes including profits on investments

Penny Mordaunt speaks during a ìSolutions to Disability Inclusion event at Microsoft UK (PA)

Hundreds of millions of pounds in UK government aid given to developing countries each year could be cut under new plans put forward by the international development secretary.

Penny Mordaunt announced proposals for a major change that would see profits of government investment in developing countries counted as aid.

In a move that experts warned could cut the total amount of funding going to developing countries, Ms Mordaunt will ask the Organisation for Economic Co-operation and Development (OECD) for permission to treat profits of the government’s development finance arm, CDC, as part of the UK’s overall aid spending.

At present, CDC returns that are reinvested in development spending are not counted as aid. If they were, it would allow the government to cut hundreds of millions from the aid budget while continuing to meet its commitment to spend 0.7 per cent of GDP on aid.

The proposal also prompted concerns that other countries could follow suit, leading to a global cut in aid spending.

Charities said the change would be an “unacceptable dilution” of government aid.

Speaking in London, Ms Mordaunt said: “In future years, as the amount of funding coming back into our own development financial instruments increases we should be open to using these profits to count towards the 0.7 per cent, and I’m exploring the scope to reinvest those funds with the [OECD’s development committee] to maximise the value of our investments.”

“We remain committed to 0.7 per cent, but as we do so we should ensure the British public get a triple return on their generosity and compassion: a personal return to them, a stronger Britain and a more prosperous and stable world.”

The proposal is likely to be welcomed by many Tory MPs who have been urging the government to spend less on international aid, but development experts raised fears that the change could lead to a cut in overall government aid spending.

Alex Thier, executive director of the Overseas Development Institute, told The Independent: “This is a proposal for real changes that could have an impact, because profits are not currently counted as aid.

“If you did change the rules to include profits, that would count towards the 0.7 per cent target and could mean less money overall being spent on overseas development assistance.

“Currently that profit is reinvested and is not counted. If you reinvest it and counted it then overall you could have less in total, because there would potentially be less from other streams.”

He added: “It certainly could lighten the load on the Treasury and that might be one of the motivations.”

Mr Thier said the proposal could prompt fears that other countries may try to follow the UK’s lead, meaning a significant fall in global aid spending.

However, he warned that it would be difficult for the UK to convince the OECD to change its rules because this would require the support of all members of the organisation’s development committee.

He said: “There are principles that make it challenging to change the rules. The big picture principle is that investments must be going towards the purpose ending of poverty, not investing in anything, even if it’s in a developing country. It has to have a poverty reducing cause.

“The concern will be whether these proposals contribute to genuine charitable purposes for reducing poverty.”

CDC has delivered an average return of 7 per cent in recent years – equating to around £600m of money that is not currently treated as aid spending but could be under the proposed changes.

While this is a fraction of the government’s total aid spending, the move is likely to raise concerns that ministers are looking for ways to quietly cut government aid spending.

Mike Noyes, director of policy at ActionAid UK, said: “If Britain is to continue the global leadership in this area that Penny Mordaunt rightly asserted, then UK aid must continue to be fully transparent, and focused on supporting people’s rights – not just on increasing trade.

“Private sector growth on its own doesn’t always translate into prosperity for the poorest. It must be managed and targeted to do so.

“Redefining aid unilaterally will never be the way to maintain leadership. Widening it to include commercial investments would be an unacceptable dilution of its purpose – which is to support the poorest people in the world.”

Christine Allen, director of policy and public affairs at Christian Aid, said the proposal to include investment profits in measures of aid were “wrong”.

She said: “It is also dangerous, as it risks increasing debt levels in many developing countries and leaving vulnerable communities at the mercy of global markets, and is less likely to ensure that money is spent in a way that tackles climate change.

“Aid has been marred for years by donor countries putting their own priorities, and those of private sector actors, ahead of the needs of the countries and people who should benefit from that aid. This distorts the purpose of aid and while there may be some areas of overlapping interests, progress does not always involve ‘win-wins’.

She added: “It would be wrong to play politics with aid in a way that harms the poorest. Any attempts to do so will raise questions about how aid policy is being developed and in whose interests. The UK’s contribution to fighting inequality must be rooted in global solidarity and the principle of self-determination, not be a renewed form of imperialism.”

Labour said the move was an “outrageous distortion” of aid priorities.

Kate Osamor, the shadow international development secretary, said: “This is an outrageous distortion of the country’s overseas development programme. Suggesting that global poverty can be turned into an investment opportunity proves the Tories have run out of serious ideas and can no longer be trusted with the aid budget.

“The Tories’ plans to rewrite the international rules on aid and slash billions of pounds of public money will do nothing to end global poverty or reduce inequality. Poverty is not a commodity, and today’s announcement will do nothing but make the rich richer and entrench both poverty and inequality across the world.”