OECD-DAC members unable to reach a consensus on private sector instruments

LONDON — After four years of negotiations, the world’s top donors have been unable to agree a set of permanent rules on how to count aid money spent through private channels as official development assistance.

The Organisation for Economic Co-operation and Development’s Development Assistance Committee — the body tasked with setting the rules around ODA for its members — released a statement on Wednesday revealing that despite years of talks, members could not reach a comprehensive set of rules on how to report aid spent through private sector instruments such as loans, guarantees, and equity.

Instead, DAC member countries — including 30 of the world’s richest countries which collectively account for about 80 percent of global aid spending — did agree to a set of five provisional reporting arrangements. These will be reviewed in 2021 unless permanent rules are agreed in the meantime, according to the statement.

The news comes on the heels of other disagreements within DAC, including over tied aid, a decision on which was delayed by Japan, and threats from the United Kingdom that it could break with DAC rules over several issues this year.

The private sector instrument negotiations are part of a broader reform process started in 2012 to update the concept of ODA and incorporate new flows, activities, and instruments into the official aid reporting systems. The work to develop private sector instrument rules, which started in earnest in 2014, was intended to incentivize donors to use ODA funds to crowd-in additional private finance for development.

But civil society groups have long warned that without strict rules, ODA could be used to subsidize private sector investments and lead to a decrease in overall aid effectiveness.

They described the just-published provisional agreement as a “weak stop-gap arrangement” which could leave the door open for donors to report their private sector instrument spending however they want.

“Donors have an obligation to make sure that every single euro spent on development aid achieves maximum impact in the fight against poverty and inequality. Scarce aid funds must not be diverted into private schemes, and away from where they are needed most,” Polly Meeks, senior policy and advocacy officer at Eurodad, told Devex.

Meeks also said that tighter rules are needed to avoid ODA funds becoming a “back-door subsidy for companies in donor countries,” and a way of “tying” aid.

However, not everyone was critical of the stopgap agreement. Officials speaking to the media on the condition of anonymity, said that it was better than nothing in the short term and the fact that donors agreed to additional steps on “transparency, additionality, and reporting” was positive. These will give DAC more detailed information about how donors are using private sector instruments and this data can be used to help build an evidence base to inform future negotiations on reporting private sector instruments, they said.

The fact that the total amount of private sector instruments will now be shown separately in ODA statistics is another positive step, according to Julie Seghers, OECD policy and advocacy adviser at Oxfam.

One of the major problems with the new provisions is that they allow for two different ways of counting loans, Samantha Attridge, a senior research fellow at the Overseas Development Institute, told Devex.

Under the just-published interim guidelines, loans and equities made to commercial entities will be counted on a cash-flow basis, but sovereign loans will be reported on a grant-equivalent basis. This inconsistency could create “perverse incentives,” Attridge said, and potentially lead to more aid going to support the private sector over public sector programs. It could also lead to more ODA money being spent in middle-income countries, where it is easier to invest, she said.

Attridge also warned that the proposed way of measuring the development impact of money spent through development finance institutions to determine eligibility is too simplistic since it looks only at the countries in which the investments are made and not at the quality and impact of those investments.

“All combined, this risks undermining the very concept of ODA itself. We are likely to see a shift with more ODA being spent to mobilize the private sector … more subsidies to the private sector and ... less aid money going to the public and social sectors,” Attridge said.

But aid experts are also concerned about what the DAC provisional guidelines do not say. No mention is made about how to report guarantees and there is also nothing on a lock-in period or other safeguards intended to prevent donors from switching accounting methods and potentially double counting their ODA contributions.

Civil society organizations now say they want DAC members to reopen the negotiations and put tighter rules in place.

“The effective use of aid money is too important to let slide. Donor countries must get back to the negotiating table and work with developing countries and civil society to put strongest possible safeguards in place,” Oxfam’s Seghers said.

The OECD-DAC had no comment.