The OECD’s Development Assistance Committee (DAC) - a group of donor countries that monitor and report on their own aid commitments - will meet this week. They will try to  reach an agreement on new rules for reporting loans and credit guarantees in the hope that this will encourage greater private investment in developing countries. For both instruments, the working documents (loans, credit guarantees) present generous methodologies that donor countries could use to calculate the aid levels that they would be able to claim in the future, when using these types of operations.  

There is a lot to be concerned about. Firstly, these new rules would add to already inflated aid numbers, while the original definition of official development assistance (ODA) would be eroded even further. Secondly, the safeguards included in the working documents to ensure these operations are development-oriented and address poverty and inequalities look rather weak.

Loans and guarantees to the private sector are part of  an initial package of measures that sit within a broader negotiation process, which aims to update the current agreement on reporting private sector instruments (PSI) as aid by July 2023. The next package will focus on equities, mezzanines (a debt and equity financing hybrid) and other private sector instruments. DAC donors are leaving the discussion on safeguards and the definition of additionality – both crucial discussions in the context of PSI – to last. But considering that every package will have a separate agreement process, by the time DAC donors finally discuss safeguards and additionality, incentives to  ensure they are strong are likely to be low. Eurodad has been calling on donors not to agree to anything until every part is ready and there is a complete vision of the full agreement and its  implications for the integrity of aid. 

Why should the development community worry?

Between 2018 and 2021, PSI ODA represented an average of three per cent of total ODA, with the UK, the EU institutions, Germany and France accounting for almost 80 per cent (equivalent to US$ 15.5 billion) of the total reported for those years. Although PSI ODA seems to be small compared with total ODA, compared to other sectors it has a significantly higher allocation The average PSI ODA for 2018 to 2021 was US$ 4.9 billion, which is almost twice the average amount spent on primary education over the same period (US$ 2.5) and almost three times the average amount spent on general budget support (US$ 1.7 billion). 

Furthermore, the prevailing  rhetoric continues to be that public sources of finance are insufficient, while channelling aid through PSIs is the silver bullet for catalysing private finance to cover the Sustainable Development Goals financing gap. Thus, it stands to reason that PSI ODA will only increase in the years to come, and the outcome of the current round of negotiations will make it even easier. For example, the agreement on credit guarantees could allow the EU to report an increased number of operations of its European Fund for Sustainable Development+ (the EU's investment framework for external investment, with up to €40 billion in guarantees) as aid. Its predecessor, EFSD, previously received criticism from civil society organisations - from questions related to the added value of the tool compared to other development cooperation instruments, to the threat of deepening the indebtedness of developing countries .

But this is not just about numbers. An agreement on PSI loans and credit guarantees as they currently stand (see the working papers above) would be the first formal step towards the erosion of concessionality (the principle that ODA resources channelled to development cooperation must offer more generous terms than those from the market). This is the bedrock of aid. It could be replaced with “additionality”, which some studies have found impossible to measure. It would mean that if PSI operations can prove value or financial additionality they will no longer need to be concessional. This risks blurring the lines between development and commercially-oriented activities, and the current safeguards in place will not help with this. Furthermore, such a move would help to divert already scarce aid resources from their core mandate of eradicating poverty and reducing inequalities, as well as from the essential importance of strengthening and growing public sector investment for these purposes. And  if the terms of PSI operation are not better than those provided by the market, and thus, are not concessional, why should they be called aid at all? 

What Eurodad would like to see this week 

The world is at a critical juncture. Many countries across the global south are at risk of being left behind. An estimated 100 million people have fallen into extreme poverty as a result of the Covid-19 pandemic, and about 40 million more will follow due to the war in Ukraine.  Recent estimations from the World Bank announce that climate change and related extreme weather could thrust up to 132 million more people into extreme poverty by 2030.  The mobilisation of predictable, concessional, conditionality-free financial resources for countries in the global south, aligned to their own development strategies, is more essential than ever.

Thus, firstly, DAC members should not take any further steps towards the erosion of concessionality – which is the best safeguard for preserving the purpose and comparative advantage of aid in the development finance landscape. Secondly, non-compliance with the transparency and accountability standards set should conclude in non-reportable aid. Last but not least, to avoid DAC donors “creating” aid out of their PSI operations, and inflating their ODA figures, the amount reportable as aid must be capped at the original capital investment.

The role of DAC and its members in upholding the integrity of ODA has been attracting increasing criticism. This week's negotiations are an opportunity for DAC members to show they take their financial commitments towards the global south seriously and that doing the right thing is their priority.