What lessons can we learn from international development for levelling up in the UK?October 2022 | Dr Jonathan Mitchell
Western donors spent US$179bn on international aid in 2021 and have transferred between 0.25% and 0.5% of their Gross National Income (GNI) into aid for decades. The UK Government cut its aid budget to £11.4bn in 2021 – over double the £4.8bn allocated to the second round of the Levelling Up Fund (LUF2). We highlight lessons from international aid for LUF2 and visa-versa. It draws from my 30 years working in international aid and, with genecon, on LUF2 applications in 2022.
What does a transformative international development project look like?
Only about 15% of total international aid flows are spent on economic development – most is spent on sectors less relevant to LUF2. The effectiveness of UK economic development aid has been questioned (see ICAI 2014). However, there have been some spectacularly successful aid projects which are useful to examine success to identify ‘what works’.
In 2005, the Department for International Development (DFID) invested a £1m challenge fund grant to support Safaricom (a mobile phone operator whose owner, Vodacom, co-invested £1m) to pilot a mobile money system in Kenya. This enables storing money on a mobile phone SIM card and sending money to other people’s phones. This investment allowed the launch of M-Pesa (‘M’ for mobile and ‘pesa’ is Swahili for money) that rapidly transformed financial services in East Africa and beyond. In 2006 only 25% of Kenyans had access to formal financial services (i.e. bank accounts) and 38% had no access to any financial services. By 2021, there were more mobile money accounts than people in Kenya, so ubiquitous access, and well over half Kenya’s Gross Domestic Product (GDP) passes through mobile phones.
Ingredients for M-Pesa success
M-Pesa was successful because:
- It addressed a pressing need. Before M-Pesa, three-quarters of the population did not have access to formal financial services and commercial bank branches do not serve low-income, rural areas. Urban workers could not safely send money to their rural families. Unlike banks, mobile phones are ubiquitous in Africa, and mobile network operators noticed that customers were already transferring pre-paid airtime between accounts as a proxy for payments to distant family and friends.
- Strong private sector partner – mobile network operators realised that they could disrupt the banking sector using fin-tech in an open regulatory environment (regulators only fully realised mobile money is a banking service after the launch and growth of M-Pesa) and had a very viable business model. In 2021, Safaricom made US$620m profit in Kenya, its stock represents 40% of the value of the Nairobi Securities Exchange. The team that developed M-Pesa in Safaricom are extremely competent and innovative tech entrepreneurs, who pioneered an adaptive and customer centric approach to the design process.
- Systems thinking – M-Pesa is a great example of bringing innovation to tackle a long-established development constraint – poor access to financial services. In 2005, many thought the obvious solution to financial inclusion was to set up a microfinance system, but Safaricom noticed that customers did not want microfinance loans – they wanted to transfer money. This allowed Safaricom to find an innovative and disruptive solution to meet customers’ real needs.
Lessons for, and learning from, the Levelling Up Fund (LUF)
Comparing M-Pesa with the LUF2 funding round reveals several important learnings.
First, there were sound reasons for the M-Pesa pilot maintaining a distant relationship with regulators and public entities. However often international aid is unresponsive to the needs of governments and the end users and is seen by many recipients as being patronising. By contrast, the LUF application process is driven by local government and often has a high degree of ‘buy-in’ from local officials and politicians – an example from which international development could learn.
Second, the corollary to this is that many LUF proposals are very ‘statist’ with a circumscribed role for the private sector. This can be mitigated in places where local business works closely with local government and, in the case of Rossendale, where the LUF Board is chaired by a businessperson. But the limited role of the private sector – beyond a source of match-funding – is striking. This reduces the chances of LUF proposals being transformative, innovative, sustainable and scaleable.
Third, the LUF application process was highly compressed, expensive and generated projects with mixed transformation potential. Nearly 400 UK local authorities had to prepare proposals to RIBA stage 3 levels of detail in three months, each with large teams of professionals – each with access to £125,000 of funding. This squeezed the time to diagnose local economies and identify the binding constraints to shared growth as a foundation for identifying transformative projects. In Rossendale, genecon started work with the LUF Board in late 2021 and so was able to generate sound projects – but this was atypical. Challenge Fund modalities often have a series of windows for applications and use a two-step process (i.e. brief Concept Note to explain the project rationale and only approved Concept Notes are invited to develop full proposals) to reduce the expense of developing aesthetically-pleasing proposals on a shaky project rationale.
Finally, LUF2 could only fund capex on infrastructure. Whilst many priority LUF areas have infrastructure gaps, closing them is often beyond the £20m LUF ceiling. More fundamentally, the binding constraints on economic development are often not infrastructural.
 The Financial Sector Deepening Fund was funded by the UK Government and managed by Coffey International Development, my former employer
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