4. This was the background to the IFF, which underpinned all other blocks. There was no benefit from trade without the basic capacity and infrastructure for trade. Aid had to increase significantly. Initiatives like the Tobin Tax or SDRs, unless universally applied, wouldn't work. In the long term, the only solution was to increase aid to meet 0.7% ODA to GNI (Gross National Income). Fiscal pressures in the UK and the G7 meant that this wouldn't happen in the near future. If two or three of the biggest countries don't reach 0.7%, it doesn't matter if the smaller do. So the IFF was mainly a front-loading mechanism to meet the immediate need of MDGs. It was not an alternative to 0.7%, but a complement to it. Donors had to make a series of annual year-long commitments; this would leverage the anticipated income in the international capital markets each year, which would provide it with a pool of funds for immediate deployment. It was not intended to be an aid agency or a disbursement mechanism, but simply a financing mechanism.

5. The primary source of income was these long-term commitments, made by a flow of annual payments by the donors to the IFF. Pledges would be say four or five times over a fifteen year period. So each year there would be one pledge for fifteen years for a set of annual payments. The donors would be legally bound to make these payments subject to one or two very high level financing conditions in order to deal with the market. That conditioning was very important for bond-holders to understand - it would be capable of objective determination. These were financing conditions for the pledges, not to be confused with the conditions on the disbursement. The IFF was a completely different set of conditionalities. IFF would then go to the capital markets, and, on the back of the legally committed stream of income, it would issue bonds, securitising each of these pledges, taking a proportion of the future income and frontloading it for immediate use. A triple-A rating of these bonds was anticipated because of the pledge of donors who were triple-A themselves.

6. The IFF would have a limited life of 30 years. For the first 15, the bulk would be for disbursement. The next 15 would be repayment of the bonds. There was a clear economic and moral case for the frontloading model: aid effectiveness rates are much higher than the cost of borrowing. The central scenario was that you leverage 70% of these pledges, so you can convert the $16 billion commitment that was made at Monterrey (yet to be realised) into $50 billion.

7. It must be very clear that this is not a disbursement agency. The disbursement would be done through bilateral and multilateral mechanisms such as DFID or the Global Health Fund. Donors would have some veto over their funds relating to their commitment. There were overarching principal for donors to sign up to: the funds must be untied; they must be targeted for poverty reduction; they must be disbursed in either grant-form or debt relief; they must be in a predictable multi-year programme.

8. The IFF was bringing forward aid to 2015, providing a scale using Monterrey as a base and locking in the commitment of donors to increase long-term aid. The Treasury had been working with partners over the previous twelve months, towards 2005. This would be a great opportunity and a critical year: it would be when the first MDG for gender equality in education would be missed. It would be ten years until 2015 and the last year to do anything serious. After that, credibility would be lost. The UK would hold the presidency of the G8 and the EU. Events had been held to try and take the fund forward: conferences with the IMF and World Bank, who would produce reports for their spring and annual meetings; commitments to consult with emerging markets; engagement with civil society, faith groups and NGOs; support from the Vatican etc.

9. Fail to meet the MDGs is failing ourselves. But it is an enormous long-term commitment. The UK is prepared to do it, but cannot do it alone. It needs others' support and the critical mass of the G7. The obstacle is political will, created through public and civil society support: donors only act if pressured. International organisations, NGOs, trades unions, faith groups need to understand their power in forcing governments to act. It has been done before on debt relief and it will take the power of collective action to succeed now.

Vadera: the issue of conditionality is fraught: we have a fiduciary responsibility to our taxpayers to use funding effectively and accountably. We are trying to streamline conditionality through the IMF and World Bank, giving a sense of ownership. If we can make PRSPs more effective, country ownership is the way to square the circle of conditionality. The IFF is just a financing mechanism.

Randel: a dilemma for the IFF is that it is set up as a simple mechanism, not to solve the problems of the aid system. The question is whether it will make things worse for the aid system by reinforcing some of the problems. There are two areas for optimism. First, the IFF may provide a capacity to give budget support for countries that currently find it difficult. The conditions of the IFF are that it must go to IDA-eligible low-income countries and be geared to the MDGs, thus it goes to a good investment. Secondly, the IFF can increase transparency in the aid architecture, by publishing its transactions. This decrease in corruption can make the system transparent.

Vadera: One IFF technical aspect is that there are some high-level financing conditions which allow the donor not to pay for that particular country. For that risk to be acceptable to bond holders, the funding has to be spread among different countries. This can be done by the IDA system, or by having a 5% cap on one country receiving funds. Who gets funding has to be publicly available for bond holders and credit ratings agencies. It has to be public for funding to go for it. This makes transparency inherent. So regarding the capacity of countries which can absorb more funding, the mechanism requires a degree of distribution that won't permit more given to certain countries.

Regarding IDA and debt relief, giving funding to IDA can only be directly from our budget. IDA could become an IFF, but capitalising IDA must be done through aid budgets. We expect that a significant portion of the IFF would go to organisations geared up to dispersing, like IDA. We can't give more to debt relief because it is not free. IFF would like to give debt relief, but the outstanding debt is not bilateral debt - it is IMF/World Bank debt. So we have to fund these institutions to give debt relief from our aid budget.

Randel: On absorptive capacity, why don't we do it all? The IFF can be used to lever up all sorts of things. Tony Blair said that international poverty reduction should be based on the same method as our domestic objectives, i.e. we borrow to pay for it. What is the counterfactual for absorptive capacity? If you don't spend money, what is the consequence, and who bears the risk? This question is not being taken sufficiently into account. We set up frameworks which make it impossible for us to spend money. Britain is committed to primary education so it hasn't spent money on secondary education, although higher education in developing countries is in dire need of investment. Lastly, because aid doesn't perform to the optimum, we say that we should give less to it. We should look at how we can spend effectively, not take away the funding.

Vadera: 0.7% does not yet have a timeframe, but the Chancellor feels that he is on track. This is a tactical issue regarding whether the UK goes to 0.7 will get G7 on board or not. In reaching our percentage, people are interested in this if you can get them interested: it was a swing factor in the last election for new voters. We need to create political space for the public to act, not concentrating on the negative agenda. We can then mobilise young people and faith groups.

We are committed to all countries working on the same rules, and this will increase not decrease the amount of debt relief for Nigeria, for example. France and the UK are those who are at present supporting this. Developing countries which are not going to be recipients of IFF are also supporting it, including Brazil, China, South Africa and India. For donors, the position is that this isn't a priority, and they ask why they should bother themselves striving to do something that nobody is asking them to do. We must mobilise civil societies to put pressure on governments to support the IFF.

Roo Griffiths
1 February 2004