Corporate report

Government response to the Independent Commission on Aid Impact’s review 'UK aid to India', March 2023

Published 25 April 2023

The Government has considered ICAI’s review of UK’s development cooperation with India since 2016. We accept 3 of the recommendations and partially accept 2, which are in line with our own priorities and intent for our work on development with India. For the reasons set out below however, we remain confident that our portfolio does have a strong development rationale. We welcome ICAI’s recognition of an “emerging success story” in climate finance and green infrastructure. The design of this work reflects our development rationale for the portfolio as a whole, while the progress underlines the benefit of taking a broad and deep approach to development partnership with India, including the good use our partners are able to make of our support across the different areas in the portfolio.

Our current approach, which has evolved over the period of this ICAI review, is shaped by the 2030 India-UK Roadmap agreed by both Prime Ministers in 2021, which sets out a wide range of issues on which we intend to collaborate, and the 2023 Integrated Review Refresh (IRR) the Government recently published. The IRR states that the UK will prioritise the Indo-Pacific, a region critical to the UK’s economy and security, and underlines our interest in an open and stable international order. It recognises that developments in this region will have disproportionate influence on the global economy, supply chains, stability and norms of state behaviour, and that it is therefore in our strategic interest to pursue patient, long-term partnerships tailored to the needs of the countries we work with. It notes that we will use our Official Development Assistance (ODA) offer as one of a wide range of UK strengths and expertise.

As the Review notes, the Government decided in 2015 to end direct bilateral financial assistance to the Indian government. This continues to be the position. The decision recognised that India has made substantial development gains and was increasingly able to invest in its own development. Since then, we have concentrated on investments to help secure sustainable private sector growth and to tackle climate change, reflecting the importance of continued economic growth to meet the Sustainable Development Goals in India (average income per head is less than $2,500), and that India is one of a handful of countries whose development choices will determine global climate outcomes.

The bulk of our bilateral offer is investment with the dual objective of development impact and preserving our capital. This is complemented by sharing expertise on specific issues and working in partnership with India on research and innovation, harnessing the best UK and Indian capability to tackle development problems as we did in the development and manufacture of COVID vaccines. During the review period, the World Bank and Asian Development Bank finance has also evolved, and they have stopped providing concessional loans and India instead borrows on the same terms as other emerging economies. We are providing a guarantee to the World Bank to enable them to provide an additional $1 billion of climate finance to India.

In the latter part of the review period, we have increasingly worked with India on international development, both to share Indian development solutions with other developing countries, and on international climate initiatives: the International Solar Alliance and the Coalition on Disaster Resilient Infrastructure (CDRI). The CDRI organisation is taking forward a joint commitment made at COP26 in Glasgow by the UK, India and a number of other countries to assist Small Island Developing States to invest in climate-resilient infrastructure. This is an important part of our evolving development partnership with India.

Recommendation 1

The UK should focus its aid to India on a limited number of areas where UK aid can help make India’s economic growth more inclusive and pro-poor, with clear theories of change to guide the design of aid programming and development diplomacy.

Response: partially accept

Our funding is increasingly focused on assisting India to pursue sustainable economic growth, providing targeted support alongside India’s own very substantial investments in these areas. We remain committed to driving improvements in the coherence of our efforts, drawing on the UK strengths and expertise present in India and in the UK. We agree on the value of Theories of Change, and intend to make more use of them, not only for our aid funding but as a framework to deploy all the tools at our disposal to achieve our objectives, including those shared objectives set out in the India-UK 2030 Roadmap.

We welcome the positive assessments in the review about the effectiveness of UK aid and programme delivery, and the quality of the relationship with the Indian government. Throughout the period we have sought to achieve the best possible impact with our funding and our staff, despite the unprecedented challenges of COVID and of budget reductions and uncertainties.

We note, but do not accept ICAI’s view that there is lack of explicit rationale on poverty reduction. The review also recognises however that it is economic growth that has driven the reduction in poverty in India, both by providing more opportunities for poor people to increase their incomes and by government being able to invest more in infrastructure and services. Failure to meet global climate change targets will also force many people into poverty, both in India and across the globe. For all these reasons we are clear that our work in India has a clear development rationale; promoting sustainable, clean growth as a means to reducing poverty.

Recommendation 2

The UK should build on its emerging success story in climate finance and green infrastructure, looking for opportunities to combine technical assistance, research partnerships, development investments and multilateral partnerships for greater impact and value for money.

Response: accept

We welcome the positive assessment of our efforts on climate change and agree that this is a good example of harnessing our collective efforts to achieve more impact on a key strategic priority for the UK. We are committed to continue to improve the coherence and coordination of our activities, across multiple strands of activity and funding streams, to deliver our priority objectives.

India is a major partner for the UK on research and innovation, as reflected in the breadth of joint science and technology ambition set out in the 2030 Roadmap. Programmes are co-designed to ensure that objectives are relevant and to improve the uptake of findings. We agree on the importance of securing the full value of research, and we have already created some ways of doing this, such as through the Newton Prize and the Newton Fund Impact Scheme. Our open access policies for research publications require that publicly funded research articles are immediately available and freely accessible to all.

We do not agree however that all investment in research and innovation in India should necessarily support our specific India priorities in the Roadmap. In determining our approach to aid-funded research and innovation, we both identify priority themes and country and regional priorities. Our Ayrton Fund for example invests in clean technologies that have the potential to drive the fastest progress in developing countries, rather than multiple country-specific approaches. So while most, if not all, of our research and innovation contributes to the 2030 Roadmap objectives, we plan to continue to work with Indian institutions on issues that do not immediately and directly support our India development priorities where this delivers effective regional and global outcomes, in line with the IRR development priorities.

Recommendation 3

UK development investments should have a greater focus on mobilising private finance at scale to address climate change, particularly from large institutional investors based in the City of London.

Response: accept

Mobilising private capital remains an important objective across our investment interventions, recognising India’s need for large volumes of finance to meet its development and climate objectives.

As part of its new 5-year strategy, BII is adopting an enhanced approach to mobilisation, doing more to connect suitable investment opportunities with commercial investors, focusing on those with shared goals and aligned values. This includes continued work with institutional investors based in the UK as well as in BII’s market and other countries – such as Indian pension funds and insurance companies or sovereign wealth funds. A dedicated BII Investor team has been created to coordinate this activity.

Our development capital portfolio in India is also mobilising investment in 2 ways – through other investors contributing to the equity funds we establish and by helping investee companies grow so that they are able to raise private finance themselves. We recognise this takes time, given development capital is being invested at an early stage, where we take higher risk for development gains to help enterprises succeed.

We are looking at how we can create opportunities for them through the UK’s investment portfolio, our influence with industry bodies and through engaging Government of India on ways in which more UK investments can be unlocked. This includes sharing expertise with Indian decision makers to improve the investment climate for businesses, as well as to help inform the considerable investments India is making in its infrastructure, on which business relies.

Globally we are also working with G7 partners on ways to mobilise additional finance, particularly for climate change, energy transition and infrastructure. The agenda to reform the international finance institutions to better respond to current development challenges is a high priority for the Government, and we welcome the Government of India tabling discussions on this issue during its G20 Presidency.

Recommendation 4

British International Investment should reassess its approach to ensuring additionality in its India portfolio.

Response: partially accept

The profile of investments where development finance can be additional evolves over time as economies change and develop. While BII does not agree with ICAI’s broad statement that its India portfolio lacks additionality it accepts that ensuring additionality requires ongoing effort.

In late 2020, after the investments reviewed by ICAI were made, BII implemented a new development impact framework. This framework includes an approach to assessing contribution for each proposed investment across 3 aspects:

• financial additionality: would BII be providing capital that is not available in sufficient quantity or on suitable terms?
• value additionality: would BII be offering specialist expertise to investees in areas such as gender or climate?
• mobilisation: would BII be mobilising capital from others that would not otherwise be available?

The strength of BII’s contribution in each proposed transaction is rated on a 4-point scale and investments are rejected if the threshold for additionality is not reached. BII’s approach is aligned to the industry best practice Operating Principles for Impact Management. In 2022, an independent verification of BII’s alignment with The Principles conducted by BlueMark – a leading provider of verifications in this area – rated BII’s revised approach to Contribution as ‘advanced’ – the highest level possible and defined as ‘limited need for enhancement’.

Additionality, including financial additionality, is assessed at the time an investment is made. Several BII investments in India needed BII capital at the time of investment but would not necessarily need development finance today. This shows how investee companies can successfully graduate from initially needing development finance to attracting commercial capital into BII’s markets. We view this graduation as a measure of success for a development finance program.

While BII, as a development finance institution and public limited company, operates at arm’s length from Government (with FCDO as sole shareholder) we continue to work closely with BII in all these areas, including the areas noted under Recommendation 3.

Recommendation 5

The UK should look for opportunities to support coalitions of Indian research institutions and non-governmental organisations working on social issues, in support of the UK India Country Plan goal of championing open societies and democratic standards.

Response: accept

Promoting open societies and democratic standards is a key part of our work in India. Aid spending is not the only, or even the primary, tool to advance this agenda and as a result, the volume of ODA spent on open societies and democratic standards will remain relatively low as a proportion of total spend. We use diplomacy, campaigns, and institutional partnerships, as well as technical assistance. We also support research with civil society and academic institutions; for example we have supported research looking at cultural heritage, rapid urbanisation and urban transformation, and the impact of climate change on migration within India. Sensitive issues are raised in a constructive and honest manner including at ministerial level.

We intend to continue to support research institutions, think tanks and civil society organisations, and we are collaborating with key government ministries such as justice, civil service, sharing knowledge and expertise, and discussing policy and implementation.