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Concern Over Using Aid To Promote Rich Countries' Commercial Interests

Added 23 Jan 2018

This article was originally published in In Depth News.


BUSSELS (IDN) – At first glance, the latest figures on Official Development Assistance (ODA) – or aid – make encouraging reading. According to the OECD’s Development Assistance Committee (DAC), which compiles the data and sets the rules on what counts as aid, global ODA increased by more than ten percent to $145 billion in 2016. But dig behind the headline figure and the picture is less rosy, with only six of the DAC’s 30 member countries meeting the UN target of 0.7 per cent of gross national income. The average is less than half that.

Meanwhile, the DAC’s measure of aid that does actually reach developing countries shows a dramatic decline from $117 billion to $103 billion in 2015 (latest available figures). This corresponded with a significant increase in the proportion of aid spent in donor countries, particularly for in-donor refugee costs, which now account for 11 percent of total aid.

Aid has played an important contribution to funding public investments in the poorest countries, particularly in health and education. But much larger, much better transfers are needed if we are really to ‘leave no one behind’ in the push to achieve the Sustainable Development Goals.

Sadly, many donor governments are increasingly trying to downplay the importance of aid as a source of public investment, arguing that private finance is the silver bullet for development. Critics counter that increased use of aid to subsidise private investments risks undermining both the amount and impact of aid.

At the DAC, Private Sector Instruments (PSIs) are flavour of the month. PSIs involve using aid to subsidise private companies through aid-supported loans or guarantees, or by using aid to buy equity in private enterprises operating in developing countries. PSIs are not new, but until now their use has been constrained by the rules governing what can count as ODA.

However, the DAC is now discussing whether to relax these rules, with the first stage of their discussions resulting in a potentially damaging fudge. Donors have been granted significant leeway to decide for themselves what to count as PSI, but with no corresponding agreement on how to avoid adverse impacts. Several donors, including two of the biggest – the UK and the European Commission – are very keen to substantially increase the use of PSIs: this fudge opens the door for them to do so within the rules, and could significantly damage the quality of aid.

Eurodad has identified four principle concerns over the increased use of PSIs. Firstly, the DAC has not yet agreed how it will guard against risks associated with PSIs, such as lack of transparency, adverse impacts on human rights and the environment, and increased tied aid. Tied aid – where aid subsidises firms from the donor company – is bad for development outcomes because a) it’s more expensive (estimates vary from 15-30 percent higher) and b) it excludes companies in the global south from tenders, thus tilting the playing field against the private sector in developing countries in favour of multinationals.

Secondly, insufficient efforts have been made to measure the true impact of PSIs. For example, as the DAC’s own analysis has pointed out, there is no shared understanding among donors on how to estimate what is known as ‘additionality’ (the likelihood that additional private investment would not have happened without an aid subsidy). A recent review for Oxfam International and Eurodad found that “donors too easily assume additionality,” and there is little evidence that PSIs won’t be used to subsidise private investments that would have happened anyway.

The third concern is that the rule changes risk incentivising PSI over other types of aid, regardless of the development impact. This is particularly worrying given that, as PSIs require a commercially profitable outcome, they are not well suited to reaching the poorest countries and most marginalised populations, asa recent Eurodad paper has detailed.

Finally, the argument that PSIs are needed to support private sector investment is not well founded, given that many studies of investor motivation emphasise the importance of, for example, a healthy and educated workforce: outcomes that are delivered by public investment. Economists call this a problem of ‘opportunity costs’ – in the absence of an overall increase in ODA, every dollar of aid spent through PSIs means one dollar less that could be used for public investment. Given the lack of transparency and weak evidence of PSIs’ development impact, this is particularly worrying.

Recent DAC agreements have opened a Pandora’s Box. The uncritical promotion of PSIs by some donors risks damaging both the credibility of ODA and the principle that aid should be focused on development, not used to promote donors’ own commercial interests.

Additional safeguards, including an end to tied aid and measures to give people in poverty a meaningful say in whether PSIs best meet their priorities, must be introduced urgently to guard against the risks and opportunity costs. Otherwise, far from helping deliver the SDGs, PSIs risk entrenching inequalities further. [IDN-InDepthNews – 17 January 2018]

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IDN is flagship agency of the International Press Syndicate.