More overseas aid should be given in loans rather than handouts, with grants restricted to the poorest countries or for emergencies, MPs have recommended.
The Government should consider setting up a new UK development bank to manage aid investment, a cross-party report said.
The International Development Select Committee also suggested that loans should be used to finance infrastructure projects in some of the world’s poorest countries, but acknowledged that finance would have to be carefully managed to avoid burdening them with unmanageable debt.
The MPs backed the Government’s commitment to continue meeting the international target of spending 0.7 per cent of gross national income (GNI) on overseas aid. But the Government should focus grants on low income countries with more developed countries receiving assistance through loans.
The committee’s Liberal Democrat chairman Sir Malcolm Bruce said: “We believe the overwhelming drive in UK aid should continue to focus on lifting people out of poverty and meeting post-2015 development objectives.
“The UK should continue to fund the development and delivery of key services to the very poorest people in low income countries through a system of grants.
“We should also continue to channel 0.7 per cent of GNI into development co-operation. But, to support structural transformation in lower middle income countries we suggest that a significant proportion of future UK development finance should also be delivered via a system of concessional loans and other financial instruments.”
The committee’s report said: “Development aid in the form of grants is very limited and precious and it is getting increasingly difficult to make the case for giving aid in the form of grants to middle income countries.”
The UK has already decided to end grant aid to India, but the committee suggested that loans could be provided to particularly poor regions.
Work with the Indian Government was hailed as a model switching from a grant aid-based relationship to one of mutual co-operation on trade and economic development.