Report by the Comptroller and Auditor General

NATIONAL AUDIT OFFICE Report by the Comptroller and Auditor General Overseas Development Administration: Accountability for Overseas Aid Ordered by the House of Commons to beprinted 22 February 1985 LONDON HER MAJESTY S STATIONERY OFFICE E2.10net 238

This report is presented to the House of Commons in accordance with Section 9 of the National Audit Act, 1983. Gordon Downey Comptroller and Auditor General National Audit Office 21 February 1985

Contents Overseas Development Administration: Accountability for Overseas Aid Pages Report The AidFramework Multilateral aid Bilateral aid Overseas Development Administration relationship with the Crown Agentsoncapitalaid Conclusions 1-5

Overseas Development Administration: Accountability for Overseas Aid Report 1. The United Kingdom s Overseas Aid Programme is administered by the Overseas Development Administration (ODA). Aid is given bilaterally (direct from government to government and through a range of British organisations) and multilaterally in the form of contributions to recognised international agencies which provide technical and financial assistance to developing countries. In 1983-84, ODA spent some f602 million on bilateral aid and about f403 million on multilaterial aid. 2. This report reviews the extent of the accountability to Parliament for the use of Overseas Aid funds administered by ODA and suggests areas where accountability needs to be improved. The Aid Framework 3. The amounts which the government proposes to allocate to Overseas Aid for each of the next three years are decided in the annual Public Expenditure Survey. Following these decisions, which are announced in the annual White Paper on Public Expenditure, ODA prepare a plan, known as the Aid Framework, for the apportionment of the next three years aid totals between multilateral and bilateral aid, and between geographical regions and between each major recipient - country, institution or special programme. The Aid Framework is submitted for the approval of Ministers, and ODA subsequently control authorisation of support for individual aid proposals to conform with the pattern of the approved Aid Framework. 4. Parliament is not provided with the Aid Framework but is asked to vote the necessary funds on the basis of annual Supply Estimates which show ODA s planned disbursements against existing grant, grant in aid and loan commitments, for which a firm estimating basis exists, together with an unallocated amount, which represented in 1983-84 about 20 per cent, and in 1984-85 about 10 per cent, of the total aid Estimate. This unallocated amount is allocated to specific subheads during the course of the financial year as new commitments mature or existing ones change and Parliamentary authority for these allocations is subsequently sought by means of token Supplementary Estimates. No spending is brought to account under the unallocated subhead. ODA told me that in their view the annual Estimates and Supplementary Estimates are the vehicle for conveying to Parliament most of the information contained in the Aid Framework for thecomingyear. Estimate provisions, with theexception of government to government bilateral aid, correspond with ODA planning figures. For 1985-86 onwards, the Estimate is being aligned more closely with the presentation and categories of the Aid Framework, and subhead narratives are to include (at the request of the Foreign Affairs Committee) planning totals for bilateral capital aid grants and loans and for the provision (aid trade) to support 1

developmental projects of particular commercial or industrial interest to the United Kingdom. Successive ODA Ministers have declined to let the Foreign Affairs Committee (and its predecessors) see figures in the Aid Framework, even in confidence, on the grounds that it was based on intentions and assumptions which might not be realised, and that disclosure of departures from it could lead to awkwardness in Her Majesty s Government s relations with some overseas governments. Multilateral aid Bilateral aid 5. The international institutions and agencies through which the United Kingdom contributes to multilateral aid have their own governing bodies, to which their secretariats are accountable for the use of their resources by means of reports, accounts and independent external audits. The United Kingdom is represented on the governing bodies of the organisations to which it contributes. For regular programmes ODA are directly accountable to Parliament only for ensuring that their payments of contributions are in accordance with the relevant rules of the organisations and decisions of the governing bodies. However, ODA review the evidence available to the governing bodies of how the organisations resources have been used, and they seek to influence the effectiveness of the organisations work through the United Kingdom representatives. Separate audited statements are obtained for contributions (amounting to some f6-7 million a year) to supplementary programmes (for example refugee appeals). 6. Bilateral aid falls into two principal categories: technical co-operation, mainly manpower aid, which is designed to equip the recipient with specialist knowledge and skills; and capital or financial aid which is normally provided as grants or loans in support of projects or programmes in the recipient country. In 1983-84ODAspentaboutf210millionontechnicalco-operationandaboutf370 million on capital aid. (i) Technical co-operation 7. About f 135 million of the technical co-operation aid in 1983-84 represented the cost of providing skilled personnel and services. Of this, about f7omillion was accounted for directly by ODA; f59 million was spent on an agency basis by the British Council, to whose books and records I have access because I audit their accounts; and about f6 million was spent by the Crown Agents, as agents of ODA who provide me with the supporting documentation necessary for my audit. 8. The other f75 million of technical co-operation aid represented ODA grants to United Kingdom based organisations, including the British Council, in support of work and research in developing countries. The grants were based on ODA s assessment of the value of the organisations work and their need for support. The issue of funds is conditional upon satisfactory accounting arrangements. The accounting instructions require the submission to ODA of audited statements of account of the organisation or of the project supported by ODA funds; only when these forms of discharge are unavailable do ODA require the organisation to submit receipts and other detailed supporting documentation. Where the organisations concerned are not by statute subject to National Audit Office, (NAO) audit, the accounting instructions provide for rights of access by the NAO and by officers of ODA such as internal audit staff. (ii) Capital aid 9. Bilateral capital aid is provided under agreements between the United Kingdom and developing countries in the form of an Exchange of Notes or a Memorandum of Understanding. The agreements normally require the recipient country to comply with a Procedures and Practices document setting out the

procedures to be adopted for project approval, procurement of goods and services in the United Kingdom or overseas, the drawing of aid funds and shipment of goods. Further requirements for individual projects covered by the agreements are set out in Project Memoranda. 10. Proposals for projects to be aided under the agreements are submitted by the recipient countries and subjected to an appraisal and approval procedure within ODA. ODA normally require recipient countries to appoint the Crown Agents to open and manage an account for each aid agreement, into which ODA make payments as required and from which approved project expenditure is met. Legally, aid funds become the property of the recipient government immediately upon being credited to the loan and grant accounts, that is, before any expenditure is incurred. 11. The Crown Agents act as agents for both the recipient countries and ODA, though not in relation to the same functions. On behalf of the recipient countries they draw funds from ODA, procure goods and services either direct or through other agencies, remit funds for local expenditure in the recipient country, and account to the recipients for the balances in their aid accounts. On behalf of ODA, they are responsible for checking the eligibility for aid of recipients requirements (except for expenditure incurred locally overseas, in which case ODA receive annual audited statements) and ensuring that the relevant aid conditions, for example as to procurement in the United Kingdom, are satisfied. 12. ODA record under each agreement the aid approved and the amounts advanced in response to the Crown Agents funding requests, which refer only to the covering agreement and not to specific projects. ODA charge the advances against the Overseas Aid Vote at the time of issue, and subsequently receive from the Crown Agents returns of expenditure met from recipients aid accounts. Although there is no written guidance, ODA tell me that once or twice a year, they check whether expenditure shown on these returns is in line with their own accounting records of sums advanced to the Crown Agents. I have, however, been unable to establish from the records how extensive or how valid this check is. I have no right to direct access to Crown Agents records. However, on those aspects of the transactions where ODA is their principal, the Crown Agents make additional documentation available from their records in connection with my certification audit of the Overseas Aid appropriation account. 13. The aid agreements with recipient countries provide for authorised persons from the United Kingdom government to visit aided projects and to be furnished with such information as they may require. ODA use this right of access to enable field staff and advisers to monitor and report on the progress of projects, although they do not regard themselves as entitled to examine the recipient governments accounting records. For all projects and programmes costing more thanf0.5million(&0.25millioninthecaribbean)arrangementsforphysicalmonitoring must be agreed with the recipient government and the executing agency at the planning stage and written into the project description. Smaller projects must also be monitored, provided that the costs of administration are not disproportionate to the cost of the project. In addition ODA s Evaluation Department carries out ex-post evaluation of a selection of completed projects and programmes every year. ODA s Geographical Departments are required by their instructions to keep all aided projects under review to check that Aid funds are used for the purposes intended; that they are being properly and economically spent; that expenditure is in line with the Aid Framework; and that implementation problems and cost overruns are identified at an early stage. Geographical Depart- 3

ments act as headquarters managers and co-ordinators, relying upon advice from Development Divisions, in-house advisers and scientific units, staff in diplomatic posts, external consultants and field staff. They do not check procurement in the United Kingdom, which is undertaken by the overseas recipient governments agents or contractors, but they do monitor whether goods procured are suitable and whether they are delivered on time. In the case of programme aid (expenditure about f50 million a year), where the goods procured are often of a wide variety and widely dispersed within the recipient country, monitoring is limited. Although physical monitoring of the progress of projects and programmes provides some assurance, in my view it is difficult to see how ODA satisfy themselves adequately that bilateral aid funds are used entirely for the purposes intended and are being properly and economically spent. ODA consider that in the light of the legal position on aid funds (paragraph 10 above) and their limited staff resources, they are taking all reasonable steps to ensure that proper control is exercised and good value for money obtained. 14. Expenditure of recipient governments on local costs is subject to authorisation by ODA, who obtain annual statements of the expenditure, certified by approved auditors. In considering ODA s difficulties in obtaining some of these statements promptly, the Committee of Public Accounts concluded in their Seventh Report of 1982-83 that the statements were ODA s only assurance that the funds concerned had been properly used; and that any alterantive arrangements would have to provide adequate assurance that aid for local expenditure had been used for the purposes intended and that the local government s control arrangements ensured that none of it had been wasted or improperly directed. ODA relationship with the Crown Agents on capital aid 15. In 1982-83 some f324 million of bilateral capital aid passed through the Crown Agents. f53 million of this was spent directly by the Crown Agents on behalf of recipient governments. The remainder was spent on procurement by other agencies or contractors, though the Crown Agents approved and reimbursed this expenditure. As indicated in paragraph 12 above, ODA rely upon the Crown Agents to account for aid funds once ODA have issued the funds for credit to the recipients accounts. ODA consider that examination of the Crown Agents arrangements for ensuring compliance with the relevant conditions attaching to the aid is part of the duties of the Crown Agents internal and external auditors in connection with their audit of the Crown Agents annual financial statements. Although ODA have hitherto relied on the general assurance derived from these overall audit arrangements, I would not expect that a financial audit directed towards expressing an opinion on the Crown Agents annual financial statements as a whole would provide a sufficient assurance to ODA - and to Parliament - that terms and conditions of specific grants have been fully complied with. ODA now intend to arrange for specific checks to be carried out on their behalf in future. 16. It has been noted that, legally, aid funds become the property of the recipient governments immediately Crown Agents credit them to the loan and grant accounts. Given this legal position the ODA consider that a formal responsibility for confirming the propriety and efficacy of the Crown Agents procurement arrangements, or those of the recipient governments other agents in the United Kingdom does not rest on the Accounting Officer. But ODA regard it as one of their main functions to see that aid funds are used efficiently and effectively. Accordingly they consider procurement arrangements and specification of goods as part of the process of appraisal and approval of aid proposals and, in the course of monitoring their implementation, they check on prompt delivery and suitability of items procured. Moreover, following an efficiency scrutiny by

ODA of the procurement arrangements of the main agencies concerned, the Department decided in August 1984 to recruit a procurement adviser with private sector experience, who would monitor the performance of the agencies; develop a framework within which more United Kingdom private sector agencies could compete for procurement work; and review the conditions under which recipient governments and their agents carried out their procurement in the United Kingdom. 17. In my view, and notwithstanding the formal legal position, Parliament would expect the Accounting Officer to exercise full and effective responsibility for ensuring that procurement from aid funds is carried out economically and efficiently and with due propriety; see paragraph 18(d) below. Conclusions 18. It appears to me that there are the following weaknesses in the system of accountability to Parliament for Overseas Aid: (a) the Aid Framework is not made available to Parliament. ODA propose to introduce changes in the structure of the Estimates from 1985-86 which are designed to bring them more in line with the Aid Framework (paragraph 4). It is too early to say how effective these proposals will be in providing Parliament with the information they need on such matters as the pattern of aid and the balance and priorities of the Aid Programme for which they are being asked to approve funds. (b) Insufficient assurance is available to Parliament through ODA, or through records to which I have right of access, that sums issued to the Crown Agents and charged to the Overseas Aid Vote have been fully accounted for, either through use as authorised aid or by being credited back to ODA if unused. It is not yet clear to what extent the steps currently being taken, or proposed, by ODA to provide further assurance by receiving specific statements from the Crown Agents external auditors or by increased internal audit examination will work satisfactorily in practice (paragraphs 12 and 15). (c) ODA rely on the Crown Agents to ensure that recipient governments comply with the condition of aid agreements relating to payment arrangements and procurement; and they are not themselves in a position to give Parliament positive assurance on such matters or on Crown Agents exercise of their function. In my view, ODA should seek specific assurances that these conditions are being complied with by direct examination and/or through an appropriate assurance from the Crown Agents appointed auditors. (ODA are currently seeking such assurance, paragraph 15). (d) Notwithstanding the physical monitoring and ex-post evaluation of projects (paragraph 13), it seems to me that more is needed if ODA are to be in a position to give Parliament satisfactory assurances on procurement in the United Kingdom from aid funds. Although ODA s proposed arrangements to monitor and improve competition in procurement (paragraph 16 above) may produce some further assurances in due course, Parliament may wish to consider whether, notwithstanding the legal position described in paragraph 16, there are further steps which ODA could and should take to secure greater assurance to Parliament that the procurement of goods and services from aid funds in the United Kingdom is carried out for approved purposes and economically, efficiently and effectively, if need be by making necessary access a condition of aid. 5