Opinion: New OECD private sector rules threaten future of aid

The future of official development assistance was dealt another blow last week when new rules on private-sector investment were approved. Members of the OECD Development Assistance Committee — a group of donor countries that monitor and report on their own aid commitments — finally adopted updated rules on how they report private sector instruments, or PSIs, following two years of debate. Close examination reveals that these rules will divert increasing levels of aid from much-needed basic public services across the global south, such as social protection, education, and health, and will result in more private sector-oriented operations. Since 2018, wealthy countries have been permitted to include in their ODA figures funding used to make direct investments in private enterprises in low- and middle-income countries, or through development finance institutions and investment funds. Last week’s update to this previous agreement expands the rules to cover guarantees or mezzanines — a hybrid form of debt for equity financing for companies in case of default. The update also moves further away from the logic that aid should be offered at much better terms than commercial credit. It provides a wider berth for high-income countries to calculate the grant equivalents, or value of the implicit subsidy of loans provided. In doing so it provides even more incentives for these high-income countries to expand a private sector-oriented development agenda. “It is particularly disappointing that no safeguards have been set to prevent the inflation of ODA when it comes to the profits generated by the [private sector instruments] operations.” --— Civil society organizations have always been critical of the inclusion of PSIs in the reporting of aid, questioning the ability of these instruments to reach those most in need, while diverting scarce ODA resources from where they have the most impact. At Eurodad, we have also raised concerns over the lack of transparency when it comes to how ODA resources are used once allocated to private sector financing instruments, for example into wealthy country-owned Development Finance Institutions. The potential for the inflation of ODA has been a constant concern, with the inclusion of activities that may fail to meet its objectives for which the rules were developed more than 50 years ago. What the new private sector instruments rules mean for ODA The fact is that several consequences are likely to unfold following this updated agreement. First, it could generate a stampede of donor countries jumping into “profit-generating” ODA, at the cost of diminishing grant aid flows targeting projects and programs that promote publicly funded and delivered services. Yet, evidence of development impacts has so far been inconclusive. Furthermore, these new rules blur the lines between development- and commercial-oriented activities and could bring increasing levels of formal and informal tied aid or commercially motivated transactions. Second, this agreement is the first formal step toward using the principle of additionality — i.e., the added value of using aid to attract private finance — instead of concessionality, or the assertion that ODA resources channeled to development cooperation must offer more generous terms than those from the market. This comes at a tremendously difficult moment when what countries across the global south need the most is concessional development finance. Third, despite some positive steps toward establishing a set of safeguards and reporting mechanisms, it is particularly disappointing that no safeguards have been set to prevent the inflation of ODA when it comes to the profits generated by the PSI operations. Under the current rules, these profits could be reinvested and reported as ODA, even if the donor is not putting any fresh finance in. For countries such as the United Kingdom or Sweden, whose aid budgets are capped by law, this could result in less aid in the form of grants to directly address poverty and inequalities. Last but not least, stronger safeguards and reinforced reporting requirements for PSI can only be meaningful if DAC members take them seriously and implement them accordingly. Additionality is now supposed to be the most important criterion for PSI operations to be considered ODA-eligible. Sadly, our analysis, which will be published next week, tells us the reporting of this is often not happening. For example, for the total PSI ODA reported between 2018 and 2021, 30% did not include any information on the type of additionality pursued. And, only around 50% of the reported PSI ODA included some explanation that could justify the added value of these operations. Furthermore, only around 53% included some vague information on the development impact expected out of these operations. In the coming years, DAC members will have some homework to do, which must also prove the comparative advantage of these types of operations compared to other approaches such as budget support. Where does the ODA modernization process go from here? The bigger picture is that the expansion of the ODA concept through the modernization process has slowly translated into an erosion of its objectives and a decrease in the aid directly reaching countries in the global south. This new agreement on private sector instruments is supposed to be the last step, yet there are rumors that may not be it: DAC members couldn’t agree, for example, on the reporting of bonds — a mechanism that generates debt. In 2024, DAC members should seriously consider carrying out an external independent review of the whole ODA modernization process, notably its impact on the quantity and quality of ODA. Rather than continuing to erode the capacity of limited ODA resources to address poverty, inequalities, and the achievement of sustainable development goals, DAC members must ensure greater levels of concessional finance are available. They must also honor their commitment toward the 0.7% gross national income target with aid resources reaching the global south.