The dilution of development aid?

Article AS news
Development aid is being redefined. Before the new UN Development Goals (Post-2015 Agenda) can be determined, the industrialized countries of the OECD wish to redefine which financial flows count as development aid.

The Development Assistance Committee (DAC) of the OECD has been measuring financial flows from its members to developing countries since the 1960s. The data, compiled every year, provides information about which donor country invests how much in which developing country and in what development sector. In essence, all grants (see glossary below) and concessional loans that go towards the economic and social development are recognized as Official Development Assistance (ODA). In 1970, the United Nations General Assembly agreed for the first time that industrialized countries would earmark 0.7% of their annual gross national income as ODA. This goal has been repeatedly reaffirmed, but so far has been attained by just five of the 28 DAC donor countries (Denmark, Luxembourg, Norway, Sweden and the United Kingdom).

The DAC statistics have been criticized for many years now as allowing Governments considerable leeway to declare, at their own discretion, the most wide-ranging financial flows as development aid. NGOs like Alliance Sud have voiced the criticism that the standard allows non-aid such as asylum-related costs or scholarships to be counted. The EU complains because DAC loans from the European Bank for Reconstruction and Development (EBRD), which contain too small a grant element, are not accepted as ODA. Other Governments are demanding that ODA should also reflect contributions to military peace-keeping operations, export credits or complex financially risky investments, such as guarantees or leveraging.

By December 2014, the statisticians of DAC Member Countries wish to table a new ODA standard. This is expected to unify eligibility criteria and encourage «new donor countries» to adopt the standard. The declared long-term goal is to ensure the credibility of the DAC and the relevance of its monitoring exercises for the UN Post-2015 Agenda. Russia, Turkey and the Arab Emirates are already voluntarily reporting in accordance with the DAC standard. Mexico and – rumour has it – also China are expected to come on board later this year. This is more than welcome news at the OECD, as it will strengthen the global legitimacy of the DAC.

NGO criticism of the new measurement method could well be ignored. And it is already clear today that at the end of the negotiations, it is the interests of major donors and not those of developing countries that will have held sway. The latter countries have been invited to the negotiations as mere decoration – without a vote. Every country would like to compute its own mix of funds as «aid» and thereby reach the target of 0.7% of GNI, as far as possible without additional budget funds. This is why a compromise is being sought that would have advantages for everyone.

Three proposals on the table

Two of the three original proposals are now no longer being seriously pursued:

  • Focussed ODA is in fact no longer on the table. It would recognize only grants and contributions to development banks. Concessional loans and shares in funds, contributions to scholarships, first-year asylum costs and in-donor awareness-raising work could no longer be computed. This proposal would have come closest to NGO demands that only «real help» be computed. It would have forced many Governments to revise their ODA statistics downwards. Switzerland would be amongst those affected, as a country that imputes much higher costs for accommodating and repatriating asylum seekers than all other DAC Member Countries.
  • Updated ODA also has very little support. It would take into account the gross amount of all development lending, less annual interest and amortization costs. In addition, it recognizes at face value all forms of public participation in financially risky investments that help mobilize private investments. This proposal creates incentives for complex financial products, puts classic grants at a disadvantage, and in the long run would massively inflate and distort DAC statistics.
  • The so-called new ODA is being negotiated in detail. This proposal rests on a compromise in the dispute over concessional loans. It raises the currently valid 25% grant element threshold for the eligibility of loans. This makes it impossible to declare as subsidized, interest rates that are higher than the real market rate in a donor country. New ODA recognizes a grant equivalent calculated from the difference between the interest rate and capital costs, including a risk premium, but not the face value of the loan. The new method would accommodate the EU in particular, which would like to classify EBRD loans as ODA, these being just below the market interest rate. Moreover, new ODA recognizes public, financially risky investments. Projections are that this proposal is generating an automatic ODA increase of some 3-6%.

The form determines the content

One particular cause for concern is the fact that this new ODA creates incentives for market-based financial instruments and works against countries that provide aid in the form of grants.

The trend is clear. Largely non-transparent calculation models are being used to create products that disguise financial flows. They help donors to save on promised expenditures and saddle developing countries with new debts. Against the credo of poverty alleviation, which up to now has inspired donors to provide grants, ever more Governments are now turning to development loans. Non-reimbursable funds do require donor Governments to make a genuine budget expenditure, whilst concessional loans represent a charge on the budget not exceeding the difference vis-à-vis the market interest rate. According to DAC statistics, this has led in recent years to a shift in financial flows from the poorest countries to emerging countries. Their steadily growing economies are attractive to industrialized countries. This is particularly so when debts are repaid with interest, the way is paved for foreign policy relations and on top of this a risk factor on loans can now be computed as ODA, thereby disguising the real budget expenditure.

The Least Developed Countries (LDCs) are much less able to service loans and are therefore hardly attractive to investments. They currently receive 70 to 90% of development funding as grants, which they do not have to repay. There is debate even in the DAC as to whether it is legitimate to use high risk premiums to create an incentive for switching to loans. High risk premiums could indeed incentivize donors to offer LDCs more loans and thereby better meet their capital needs. For developing countries, whose Government budgets have so far been largely funded by grants, concessional loans will generate new and high interest and amortization costs. This will push up the cost of Government services such as health and education, which clearly runs counter to the goal of poverty alleviation. At worst, development loans could even trigger a new spiral of over-indebtedness.

The very fundamental question is posed as to whether new, complex financial instruments and high-risk investments are not yet again simply flushing profits back into the pockets of donor countries and private investors and undermining ownership by developing countries instead of promoting equitable, low-resource and environment-friendly development.

TOSD launched in the shadow of new ODA

Because the new ODA discussed above does not encompass all flows that donor countries wish to report as aid, the DAC wishes to introduce as a bargaining chip a new instrument for measuring «other official financial flows that benefit development» (Total Official Support for Development, TOSD). The idea is to include all possible financial flows that could be of significance to the funding of the Post-2015 Agenda. That would also include those having little to do with poverty alleviation. It would almost seem as though an attempt were being made to create a strong argument for downgrading ODA as the benchmark for development aid.

Conclusion: The reform proposals being discussed in the DAC are threatening to disguise classic development aid – and at the same time the international obligations of donor countries. Alliance Sud supports the demand of the European NGO network Eurodad and the G77 countries that no precedent should be set before the UN decides on the funding of the Post-2015 Agenda. After all, it is precisely about sustainable development funding, which entails setting specific targets for donor countries, as well as the various target sectors.

Until the end of this year, the DAC should concentrate on working out a fair imputation method for concessional loans, showing only real budget expenditure by donor countries. In determining ODA-entitled recipient countries, donor countries should also ensure that from now on, at least 50% of ODA goes to the poorest countries.

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Glossary

Grant: Development contribution which must not be repaid by the recipient country. The 1978 DAC regulations require that each donor provides at least 86% of its development aid as grants.

Concessional loan: Subsidized development loan which up to now had to contain a grant element to qualify as ODA. With the grant equivalent, the new ODA introduces a new calculation method.

Grant element: Subsidized part of a development loan. Up to now a loan qualified as 100% ODA if it was discounted by 25%. The discount is calculated from the maturity, the repayment period and the difference between the interest rate and a standard interest rate of 10%. Owing to the low market rates, donors have been able, since 2008, to report as ODA loans that cost them less than the recipient country.

Grant equivalent: A donor's budget effort to discount a loan, which is to be imputed under new ODA. It is based on an annually determined reference interest rate (RI) for donor countries and a risk factor (RF) for recipient countries. Example: A loan at 2.5% interest with RI 4 and RF 5 is now deemed to be discounted by 6.5%. This forms the basis for calculating the amount a donor can declare as ODA. The face value of the loan is imputed as TOSD only.

Leveraging: The concept of using official development aid to create incentives for private development investments.

High-risk investments: To promote private investments, development agencies have developed several financial products for which they provide the security capital. In the event of insolvency, this capital is serviced after private claims have been met. In this way private investments are secured with ODA.
Total Official Support for Development (TOSD): New DAC statistic designed to show the totality of cash flows with real and supposed development benefits.