Under pressure: How private sector instruments are threatening the untying of aid

The Covid-19 pandemic is much more than a health crisis. And although it has affected all populations around the world, the consequences in richer versus poorer countries differ substantially. Official Development Assistance (ODA), or aid, has a fundamental role to play. It is the largest source of external financing for Least Developing Countries (LDCs) and a vital resource for supporting key sectors that promote the reduction of poverty and address inequalities. With ODA levels stagnant, it is critical that these resources are used effectively.

In December 2018, members of the Organisation for Economic Cooperation and Development’s Development Assistance Committee (OECD DAC) agreed provisional reporting arrangements for private sector instruments (PSIs). The reporting of PSIs as ODA risks undermining both the quantity and quality of aid, and could erode the fundamental criteria of concessionality.

Currently, members of the DAC are reviewing the arrangement for PSIs. Ahead of this review and related discussions, Eurodad is launching “Under pressure: How private sector instruments are threatening the untying of aid”. This report demonstrates that recent developments in the use and reporting of PSIs pose serious threats of an increase in tied aid - i.e. ODA, which is restricted to the procurement of goods and services of the country providing the assistance through different channels,and other forms of commercially motivated ODA. This could affect the definition of ODA, as well as its availability.

In our November 2021 analysis on tied ODA, “Strings still attached: Unmet commitments on tied aid” we estimated that in 2018 the total level of formally and informally tied aid  –, was at a minimum US$32.3 billion. Our findings estimated that the related direct short-term costs of tying were at least US$2 billion and potentially as much as $7 billion for 2018, which was the most recent data available.

Our report identifies and unpacks three overlapping sets of risks that threaten to inflate tied aid levels in the years to come. They are summarised as follows:

  1. Risks linked to the way that PSI spending is managed, with some key stakeholders – particularly some DFIs – facing a potential tension between the objective of contributing to the economic development of countries in the Global South, versus the objective of supporting the expansion of firms from their DAC member country, which affects the governance and ownership of development projects;
  2. Transparency risks, which make it hard to get a complete picture of tied ODA or other forms of commercially motivated ODA within PSI spending from the available data sources alone, and make some of the existing safeguards against tied ODA less meaningful in a PSI context;
  3. Definitional risks related to potential changes in the rules for reporting PSI, which could bring further tied aid or commercially motivated transactions into the scope of ODA.

We highlight crucial roles that CSOs must take to tackle the risk of increased tying. We also give a list of recommendations for DAC members going forward. We invite you to explore further in the report.