Are member states of the Organization for Economic Cooperation and Development “getting away with murder” by reporting loans as development aid?
That was the conclusion drawn by former OECD Development Assistance Committee Chair Richard Manning in April last year, in a strongly worded letter to the current chair — Devex guest blogger Erik Solheim. OECD-DAC states were, Manning asserted, “seeking to massage reported aid upward at minimum cost.”
Assessing the veracity of the claims, a recent report by the European Network on Debt and Development finds that all loans meeting the minimum 25 percent grant element requirement — whether 26 or 99 percent — are treated equally in aid statistics, which record the full value of the loan and not only the concessional elements.
The report said the current system is “ambiguous and open to abuse,” and urged OECD-DAC to implement new reporting rules to “incentivize” donors to offer loans with a higher degree of concessionality, counting only the concessional element as ODA.
“The only component that is explicit is based on an interest rate benchmark of 10 percent, which does not reflect current market conditions,” Jeroen Kwakkenbos, policy and advocacy officer at Eurodad, told Devex. “The lack of clarity behind the ‘concessional in character’ requirement has allowed some countries to report hard loans as ODA.”
Indeed, according to Kwakkenbos, some European member state governments are interpreting the vague aid rules as a licence to “scale up profit-making loans” under the guise of development cooperation.
Kwakkenbos was at pains to point out that the findings of the Eurodad report are based entirely on figures found in documents of public record: “There’s nothing in here that doesn’t come either from the donors or from the OECD-DAC … There’s nothing that we fudged or made up.”
It is widely known that there has been a broad divergence of opinion on the issue of ODA reporting among donors.
Kwakkenbos cited the example of some donors wanting to include costs relating to student scholarships and the intake of refugees, while others would prefer to exclude these costs from ODA figures as they do not represent an actual monetary flow to partner countries. Meanwhile some donors would like to see more incentives for issuing loans, while others would prefer to focus on grant-based financing.
Developing countries face interest repayments of almost 600 million euros a year, of which 90 percent came from the EU institutions, France and Germany.
“Among the dissenting voices, on one side of the argument, the most vocal are the ones who engage in this kind of cooperation, — the Germans, the French and the EU investment bank, as well as other donors, like Japan which has benefited immensely from a return of concessional loan interest rates,” Kwakkenbos argued.
He added: “Dissent comes from [us] and from smaller donors that engage primarily in grant-based aid, who have achieved their commitments and are acting in good faith with actual budgetary effort, actual fiscal support. They are being punished in their report statistics in terms of meeting their commitments.”
Moving toward solutions
In the report, Eurodad issued a number of recommendations to OECD-DAC and its member states in order to “fix” the current situation:
Include civil society and partner country governments in ongoing discussions.
Deduct interest repayments from aid figures.
Report only the grant element of a loan as aid.
Take steps to ensure that the main incentive of aid is poverty reduction.
Replace the 10 percent reference rate with another benchmark.
Specify that loans include an official subsidy to qualify as “concessional” in character.
“If current reporting practices continue and other bilateral donors start counting similar loans, ODA could be potentially inflated by up to $20 billion — roughly 15 billion euros — without any substantial increase in budgetary efforts,” Kwakkenbos argued. “The recommendations in our report might decrease net ODA figures by 3 billion euros, but would not massively distort figures. Options for reporting and their impact are currently being assessed by the OECD-DAC and we should see some figures soon on the different options.”
Back in December 2012, at the OECD-DAC’s annual high-level meeting it was determined that the ODA concept should be revisited in order to assess development finance flows and to conduct a quantitative assessment of the term “concessional in character.”
Kwakkenbos explained: “There have been ongoing discussions and proposals during meetings … on development finance statistics and at formal OECD-DAC meetings. This work has been accompanied by the input of a newly created Experts Reference Group on external development finance, mainly composed of think tanks and officials from multilateral development banks.”
Conclusions will be presented in December, with reforms requiring consensus from all member state donors. But the official remained cautious, explaining that civil society organizations and recipient countries have not been invited to officially present their views.
In response to the Eurodad findings and asked what he expects the core changes to look like, Solheim told Devex: “It is most needed that civil society and media take a hard look at these matters. We have started a broad discussion about development finance, including the definition of ODA, which we intend to conclude in December 2014 and all matters brought up by Eurodad will be covered by that debate.”
“We aim to have one definition of ODA for donors and an additional measure of wider development flows. Maybe there will be minor changes on the definition of ODA, but the most important thing is to have a way of including all tools such as commercial loans, investments, different sorts of guarantees and other market-based instruments. It could also potentially include peacekeeping operations and other financial flows that are very useful for developing nations, but that are not grant based. There is no doubt that commercial loans play an important role in development finance — the issue is what should be covered as ODA,” he added.
In these circumstances of review then, perhaps “kill or cure” is more apt an idiom than “getting away with murder.” Only time will tell.
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