Private sector concessional loans as ODA — why not?

As the global development community prepares its positions for the upcoming third International Conference on Financing for Development in Addis Ababa, Ethiopia, one item high on the agenda is how official development assistance will fit into post-2015 development finance strategies.

ODA is not yet dead, but for many that is the ultimate goal, according to James Mackie, senior adviser on EU development policy with the European Center for Development Policy Management.

“I think what [the EU and other donors] will be seeking is to get people to shift away from a narrow focus on ODA,” he said during an interview with Devex on the sidelines of the launch of the European Report on Development 2015 in Brussels, Belgium — adding that redefining ODA to include concessional loans from the private sector can only be “a good thing.”

“What the OECD has said is that a certain proportion of the concessional loans would be allowed, but not the whole amount and it must be truly concessional in terms of the rate you're borrowing and lending at,” Mackie explained. “But if you conceive of ODA as trying to catalyze other forms of aid, then you should be willing to give some loans as well.”

A member of the research consortium that authored the report, Mackie also told Devex that it was “crucial” to address financing and other means of implementation in the post-2015 context in order to bring the post-2015 finance and goal setting processes together.

Below are more highlights from our conversation:

What does the report mean for development implementers, advocacy professionals and aid workers? What’s the direction of travel here?

In the development sector, and among governments of the least developed countries as a group, there is a strong focus on ODA and this report tends to jar with that. Now we're not saying that ODA becomes unimportant, but rather that ODA is actually quite short term. If you look at the trends in ODA, and which countries get them and where countries want to go to, they have managed to move certain things and managed to make certain structural transformations. The role of ODA is important but it is not always key.

Actually, what they are really relying on more and more is on tax revenues. That, I think, is something that people working in the development sector, who are so focused on ODA, don't always appreciate. But if you think it through, it makes perfect sense to look at the longer-term picture and how you get there. That means the role of ODA can actually be used to facilitate that direction of travel. That you can say, “Fine, what is it that will get this country to the place it wants to be and how can ODA get them there?”

A catalytic effect?

Exactly, a catalytic effect now to get the health system working, get the education system working, and so on. But you should also be thinking about how to make those inputs sustainable, by helping governments to upgrade their own tax revenues, and so on. You can use ODA to pay for technical assistance, to pay for things that will help them upgrade their systems.

And this is where the implementers come in?

Yes, indeed. Of course it takes a particular type of implementer to help you upgrade your tax system. It is not often that NGOs will do that, although it may well be that there are NGOs [that] would focus on quality and finance and so on. So it’s not impossible, but your average health care NGO is not going to have a role in that.

On the other hand, what they can do is think in terms of what comes next. It’s the old LRRD thing — Linking Relief Rehabilitation and Development. In a sense, you need to add another stage to that in order to link relief, rehabilitation, development and then sustainable development.

What makes the type of program you run sustainable? One key issue is ensuring a sustainable sort of finance. Of course, people in the development sector are well aware of that — sustainability has been talked about for quite a while now, after all — but what I would hope the report does is actually illustrate how certain countries have done it and help people to think it through in practical terms.

The other big change of course with the [sustainable development goals] is that they are universal, so you do need to start engaging the dialogue internally in Europe about what produces change improvement development here. And some development organizations already do that.

In that sense are we set for a radical shift toward donors making money available to fund advocacy efforts for changes required within Europe’s borders?

Well, I'm not expecting that. There are already cases of donors making money available for changing the international rules of the system and chasing after corruption with legal systems and so on. There was an example I came across the other day, where the [U.K. Department for International Development] was paying for Scotland Yard to prosecute international corruption cases, which to them were not important; they didn't have an endless budget so they didn't prioritize that. But DfID said that it was worth development money being invested because they didn’t want the money that they put in to country X being siphoned off and they needed that to be prosecuted.

It’s an unusual example, but I suppose it’s an example of policy coherence for development in action?

Exactly. The SDGs are very much about integrated approaches and coherence. So there's a lot of advocacy work there, but I think there is also a lot about consumption patterns and so on. I’m not saying the international development sector necessarily has to do the work in Europe, but to help the dialogue between developing and developed countries on that, they have the bridges and the links which you could use for that sort of dialogue.

The report described a need for a completely new approach to development. European Commissioner for International Cooperation and Development Neven Mimica described this period as a “critical juncture in the development universe,” particularly as it concerns financing. But what does this look like in practice? Are there some key takeaways here on how EU partners, in particular, will seek to shift the mindset of some other partners?

Well, I think what they will be seeking is to get people to shift away from a narrow focus on ODA. And to say that we have to look at all types of finance. I think we're all spending quite a bit of energy on that. What I think they're scared of is that everybody says that you must deliver, you haven't delivered and until that happens we're not going to commit to anything. Because then you're stuck.

[EuropeAid Director-General] Fernando Frutuoso de Melo was saying he wants the EU member states to recommit to 0.7 percent of [gross national income]. He's not saying, “I want them to deliver this year,” but he says we have to recommit. If they didn't recommit to that it would be a real setback.

But if the definition of ODA changes and if it was to change to include loans with a concessional character, or even to include military assistance in a humanitarian context, most countries in Europe would quite easily reach the 0.7 percent target, wouldn’t they?

Well, I'm not sure how easily they would. I think clearly encouraging the private sector to come in by providing concessional loans is a good thing. What the [Organization for Economic Cooperation and Development] has said is that a certain proportion of the concessional loans would be allowed, but not the whole amount and it must be truly concessional in terms of the rate you're borrowing and lending at. But if you conceive of ODA as trying to catalyze other forms of aid, then you should be willing to give some loans as well.

While grants are a serious problem for countries with poor financial stability, in due course you would expect any country government to manage loans. So moving in that direction is not a bad thing. It’s how you package it with the right governance assurances and the technical know-how to make sure that people know what they are doing in terms of public finance management, and so on.

There’s the example of lending to local authorities, because actually it’s the big cities’ municipal governments that have to confront many of the problems of the SDGs. They are the ones who are actually at the front line of services, and they also need to borrow — but they need to know how to borrow, and then people need to give them the creditworthiness to borrow and the central government has to support them in that. So I think developing credit lines — at national level, at local level — is important in terms of getting the economy moving.

And so if loans are considered a valid part of the 0.7 percent target and EU member states take up that option and deliver large chunks of their commitments in the form of loans, I suppose we're then going to see a lot more localization of aid work?

Well, I think that is what you're going to get anyway. I think the development sector based in Europe knows that, down the line, their whole objective is to do themselves out of the job. While it may not be encouraging news for European aid professionals, I think we all know that.

If you had to name one key “ask” of global development actors to really push on with over the next few months towards Addis, what would it be?

Well I think the “policy also matters” slogan [from the report] is actually quite important. If you're looking at finance, that doesn't work on its own, you have to combine policy and finance and take a broad view of the types of finance, not just one. I think it’s helpful to contextualize it in the broader financing picture and think about the policies.

I think the EU is going in with a reasonably good position, I think Africa is moving in a similar direction, and my hope is that it doesn't all descend back into talking about ODA. The wild cards in this, of course, are the emerging countries: China, India and Brazil. If you could get the EU to agree with the Africans and the Chinese, then the conference really would go places.

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