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Why does Britain score consistently well in its approach to aid? At a recent Center for Global Development in Europe event, Sir Tim Lankester, a former British civil servant, shed some light on this.  His new book, The Politics and Economics of Britain’s Foreign Aid: The Pergau Dam Affair, sets out the story of a decisive moment in British development policy. It is a story of misguided policy, the interplay of public and commercial interests, the weight of pure politics over sound cost-benefit analysis, and most importantly of emerging from failure with stronger institutions for the future.

As an American learning about Pergau Dam for the first time, I came to grasp what a debacle it was and what a profound effect it has had on the way that the British foreign aid system works today.

Pergau Dam was the most controversial incident in the history of British aid. In short, the British government under Margaret Thatcher committed aid to fund a costly dam in Malaysia in exchange for a major arms deal.  Several years and hundreds of millions of pounds later, the High Court ruled that the agreement was unlawful, setting the tone for tighter scrutiny of British aid programs.

As Sir Tim explains, the story started with then Secretary of State for Defense George Younger’s agreement with the government of Malaysia in 1988 that Britain would provide aid in the amount of 20% the value of arms sales from Britain to Malaysia. This aid would come in the form of a dam project, despite a subsequent assessment from economists and engineers of the Overseas Development Administration (ODA - the UK’s development arm at the time, which reported to the Foreign Secretary) who found that the dam would not be a cost-efficient way to increase the production of electricity.  In 1991, then Foreign Secretary, Douglas Hurd, authorized the expenditure of £234 million from the aid budget anyway, to maintain a deal made by the defense secretary and approved by Prime Minister Margaret Thatcher, and later John Major.  The World Development Movement called for a judicial review of the funding of Pergau Dam on the grounds of a law which states that aid can only be used for “promoting the development or maintaining the economy of a country….or the welfare of its people”.  The British High Court ruled in 1994 that the project was not of economic benefit to the Malaysian people; the deal linked aid directly to commercial contracts and was unlawful.

Sir Tim Lankester was Permanent Secretary of the Overseas Development Administration from 1989 to 1994. At the event and in his book, he gives a first-hand account of the Pergau Dam Affair, stating that it merited a critical account of what happened and why. He was joined by Sir Simon Jenkins, a journalist who covered the Pergau Dam story, and CGD’s own Owen Barder, who was working at the UK Treasury at the time.

Here is the full video of the event, hosted by CGD in Europe and the Institute for Government:

Simon Jenkins described the whole affair as “the story of an attempt by the machine to justify a bad decision”; it was a deal that started with the wrong intentions and a saga that unfolded as some government officials attempted to justify the decision or cover it up, instead of attempting to reverse it.  Owen Barder spoke of the legacy of Pergau Dam on British foreign aid: for one thing, it enforced the idea that tying aid is damaging and that the objective of UK aid is to reduce poverty. The International Development Act passed in 2002 makes it illegal to use aid resources for purposes other than poverty reduction. Furthermore, it affected government administration; the Labor Party’s decision to create a separate government department responsible for development in 1997 was reinforced by the Pergau Dam saga. The ODA had been flatly against the deal that linked aid with arms trade, but was too politically weak while in the Foreign Office to get the deal reversed.   The current structure in the UK - an independent Department for International Development, headed by a cabinet minister- is unusual, and gives the Department powers in making policy and managing its budget that other development agencies don’t have.  (See also Owen’s paper: Reforming Development Assistance: Lessons from the UK Experience.)

Sir Tim pointed out that greater transparency when the deal was being made would have stopped it in its tracks; today NGOs and the media have easier access to information that can strengthen a system of checks and balances between branches of government. And today, the UK Department for International Department is in fact ranked the most transparent donor in the world; it’s impossible to measure the full impact of Pergau Dam but DFID’s openness to the public relative to other development organizations is likely also an example of its lingering effects.

In the short term, the publicity around the Pergau Dam case in the early ‘90s had a devastating effect - ODA’s reputation was damaged and the aid budget was cut – but in the longer term it has been a powerful lesson with several positive effects on the British aid system.  Pergau Dam was a good example of how policies and institutions can improve from failure. Don’t take it from me though – it’s worth watching the whole story from Sir Tim and the event panelists.