Former UN Assistant Secretary-General Kul Gautam called the UK a “multilateralist soft power,” attributing much of this to British aid. Moreover, the Foreign Office believes that better humanitarian responses can reduce irregular migration to Europe. A worthy aspiration. Yet, amidst a challenging funding context, government simply cannot deliver it alone. Private sector solutions, ideally featuring a commercial development bank, are needed more than ever.

Recently, the COVID pandemic, mounting geopolitical tensions and successive global crises have hugely increased demand for development aid whilst simultaneously leading the Government to direct aid funds elsewhere – especially to defence. As a consequence, in February 2025, the Chancellor, Rachel Reeves, announced that the UK would cut its spending on international aid to 0.3% of GDP by 2027, a fall of up to £6.1 billion annually. With such a reduction in capital, one cannot help but wonder how the Government is going to support all the development causes it pledged to. Anneliese Dodds certainly did, resigning as International Development Minister after the news.

Yet excessive pessimism is no help to this situation. These cuts may be regrettable, but it is now essential to adapt to the new reality resourcefully. And what could be better than the private sector to ensure the continuation of existing projects and to help poorer countries meaningfully develop in the long term? In the past twenty years, there has been growing acceptance of the private sector’s ability to be a force for good in international development. However, there is still much untapped potential, for, as of 2021, just 12-14% of UK aid was delivered via the private sector. From this low baseline, there can only be room for improvement.

Traditionally, the private sector has been instrumental to longer-term development, independently investing to foster lasting economic growth. As Nobel Prize-winning researchers Daron Acemoglu and James Robinson argue, open political institutions lead to open economic institutions which in turn fuel economic prosperity. Whilst private investment cannot magically transform the political institutions, it can take advantage of reformed ones to help deliver significant growth. Indeed, an influx of private capital is likely to stimulate economic growth and create new jobs, providing a secure future for a developing country.

Yet, unsurprisingly, this approach to development is not without sceptics. As recently as 2019, a UN panel raised major concerns over private sector investment resulting in unfair profit at the expense of sustainable development. Such concerns are not baseless, but there are numerous examples of the private sector delivering effective development. Take the European Business and Trade Centre in India, a clear case of private investment having a positive economic and social impact in developing nations.

This programme’s mission is to connect European and Indian enterprises, offering funding and advice to foster collaboration in sustainable technologies. Given India’s difficult, albeit slowly improving, business environment, European firms would be more reluctant to invest in India without this lifeline. In turn, mutually beneficial cooperation would just not happen, leaving India less well equipped to tackle the climate crisis. Right now, UK Export Finance will underwrite companies seeking to expand to new markets, but the Government could establish more initiatives promoting cooperation with developing nations. Such efforts would generate lasting advantages for host countries and, ultimately, the UK.

What, though, could be a bolder use of the private sector? It might just be another development bank. Currently, the UK operates one development bank, British International Investment (BII), which offers loans to companies in Asia, Africa and the Caribbean, so as to secure long-term development in poorer nations. In 2024, it did so to the tune of £1.75 billion. Operationally independent but state-owned, it combines “private sector skills with a public-spirited mission.” However, it focuses on long-term development and, as the cuts are likely to hit short-term relief programmes hardest, a sustainable solution for their continued funding is necessary.

Were another UK development bank to be founded, it could operate on a different model to the BII, but with similar private sector strategies. Essentially, a proportion of each year’s aid budget could be channelled to this bank, which would retain independence from central government and act like a merchant bank. Its mission would be to invest in British companies with strong mid-term return potential that are seeking to expand their operations in the Global South. This would both augment the aid budget and increase capital for British firms. For instance, Norway’s sovereign wealth fund, the Government Pension Fund of Norway (GPFG), whilst less independently-run, had a 13.1% rate of return in 2024. Admittedly, start-up capital equivalent to at least several years’ budget would be needed to allow the fund to profit from better medium-term rates, but this is more than justified by the increased value for money it would offer. Ultimately, this would be a longer-term project, but a highly effective one.

Of course, moral considerations must play a part here. Oil companies may be lucrative, but they have a devastating effect on the very communities this National Aid Bank would seek to help. Furthermore, there are no guarantees of profit. However, with sufficient accountability measures, such as parliamentary scrutiny, it would be forced to make ethical and responsible choices, accumulating a diverse portfolio to mitigate risk. If the GPFG divests from firms with low ESG scores, so too can an arms-length British bank with careful oversight.

With government aid funding falling short, development programmes must utilise the private sector more if they are to thrive. It is no magic bullet, and the Government’s long-term ambition must be to return to an aid budget of at least 0.7% of GDP. In the interim, though, the UK has little other choice but to seek further private sector involvement in its development strategy if it wants to secure its place as a soft power giant and fulfil its ethical obligations.

Alexander Corbould is a Member of Bright Blue. The views expressed in this article do not necessarily reflect the views of Bright Blue.