OECD-DAC reaches compromise on concessional loans

Donor countries continued their drive “to modernize the statistical system underpinning development cooperation,” as they put it in an official statement, during last week’s high-level meeting of the Development Assistance Committee of the Organization for Economic Cooperation and Development in Paris, France.

Hailed as “historic,” the agreement that emerged from the meeting included a compromise to establish a grant equivalent calculation for concessional loans. The meeting also marked progress on two other high-profile initiatives. One is the creation of standards to measure private sector contributions to development. The other involves efforts to design a more expansive measurement for aid, known provisionally as Total Official Support for Sustainable Development. Donor countries also agreed to focus more resources on the least developed countries.

The most important deal was the pact on grant equivalents for concessional loans.

France, Germany and the European Union had been pushing for greater recognition of concessional loans as official development assistance. But other donors, including the United States and Nordic countries such as Sweden, had expressed concern that counting more loans as ODA could fuel yet another debt crisis cycle.

A compromise was finally reached at last week’s meeting. Under the final communique, “more concessional loans will earn greater ODA credit than less concessional loans.”

“Everyone is happy,” OECD-DAC Chair Erik Solheim told Devex. “Of course it was a compromise, but everyone is happy that we have an agreement.”

Presently, concessional loans could only be considered as ODA if grant components comprised at least 25 percent of the aid package, calculated using a 10 percent discount rate. Under the new system, the grant equivalent threshold will increase to 45 percent and discount rates will be adjusted to favor the poorest countries.

“That part is really technical, and I am not sure that I even understand it myself,” Solheim quipped. “But it is a huge step forward. … The new system is much better at crediting the grant value of a loan. And it means that the LDCs will receive more favorable conditions than before.”

The debate about grant equivalents has been closely monitored by advocacy groups, including by members of Concord, the European NGO Confederation for Relief and Development. These groups have been highly critical of what they call “inflated aid,” or padding ODA numbers to include debt relief, tied aid, spending on students and refugees in the donor country, and repayments of interest on concessional loans and future interest on canceled debt. But even Concord seems to view last week’s compromise on grant equivalents in a more positive light.

“The decision by the OECD-DAC to reform how loans are reported as aid is a critical step in restoring its credibility and ensuring that it is better adapted to a changing economic environment,” said Jeroen Kwakkenbos, Eurodad’s policy and advocacy manager and a member of Concord’s AidWatch project. “The proposed changes are far from perfect but ensure a degree of predictability in the short term. It remains to be seen if they will be relevant and fit for purpose for the next 40 years.”

The high-level meeting was preceded by a series of consultations with relevant stakeholders. The most recent was a session with representatives of civil society organizations from the “global south” that took place at the OECD headquarters in Paris about 10 days earlier. At that event, representatives of these CSOs raised three basic questions: Who is going to benefit from the proposed changes? How will they affect the volume of aid? How will they affect the quality of aid?

Perhaps because it is a new concept, TOSD received particular scrutiny.

“Is TOSD an opportunity or a threat?” Josephine Kamel Youssef of the African Economic Policy Network asked at the event. “Whose interest is it in? Who are the beneficiaries? What are the risks?”

OECD representatives have been consistent in their response, as they essentially view TOSD from a technical perspective.

“We want more transparency in the measurements,” noted Dorotea Groth, OECD-DAC’s co-facilitator from Germany.

While not everyone may be convinced, Solheim told Devex that in his view, there is only one reason to overhaul the statistics: “If the poor people of the world are not going to benefit, there is no reason to do this. The idea is to provide more financing and to provide better financing.”

The results of last week’s meeting marked the culmination of a two-year effort by the OECD-DAC to adapt the decades-old measures of development assistance to what donors call a new landscape for international cooperation. The new instruments will be further refined in the run-up to the third International Conference on Financing for Development, which will be held July 2015 in Addis Ababa, Ethiopia.

Solheim seems to be looking forward to the process.

“There has never been a global process without surprises,” he told Devex. “But surprises can also be positive.”

Join the Devex community and access more in-depth analysis, breaking news and business advice — and a host of other services — on international development, humanitarian aid and global health.