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  • 25 September 2017

New private sector instruments seen by stakeholders as the most important change to ODA

Key questions and discussions from DI's webinar unpacking the modernisation of official development assistance

Written by Cordelia Lonsdale

The modernisation of official development assistance (ODA) comprises some of the biggest changes to official aid in decades. It’s also quite difficult to understand, full of technical jargon and acronyms. So last week, DI hosted a free webinar to unpack this process.

ODA modernisation – led by the Organisation for Economic Co-operation and Development’s (OECD’s) Development Assistance Committee (DAC) – is about updating the concept of ODA, and incorporating new flows, activities and instruments into the official aid reporting systems. This process affects all official aid provided by the 29 DAC donor governments, plus the EU. ODA is the resource flow measured for the UN’s ‘0.7% aid’ target.

We had two objectives for the webinar. Firstly, to support people who already work with aid data to understand the changes (ODA data is about to become a lot more complex). Secondly, we wanted to connect with a wider group of stakeholders to raise awareness and discuss the implications of the changes, including what impacts the changes will have on existing ‘traditional’ ODA (grants, very concessional loans and technical cooperation).

Attendees at the webinar encompassed a range of sectors and countries – CSOs, think tanks, governments, parliamentary researchers, private consultants and students. You can watch the recording of the presentation here. Key concerns voiced in the question and discussion session that followed the webinar are captured below.

Private sector instruments: the principal issue

During the webinar we carried out a poll asking participants which area of ODA modernisation they considered most important:

The overwhelming response was private sector instruments (PSIs), the market-like instruments that may soon be a part of official aid.

In fact, most of the questions from participants were on PSIs. The issue of whether ‘subsidies’ for the private sector should be allowed in development cooperation (when there are restrictions around this in trade and investment) was raised. This question is also on the table in official OECD discussions, and there is no easy answer.

How PSIs will be reported and how/when this data will be made available was another area that received attention. Those interested in tied/untied aid, for example, will know it’s important to be able to tell whether a private company receiving ODA is domiciled in the donor country or in the ‘host country’. The OECD is implementing a range of new channel codes as part of preparing datasets for PSI. These codes will enable donors to report more information about private-sector aid channels (assuming donors choose to use them).

Others wanted to know how the ‘private finance mobilised’ by PSI will be reported alongside the ODA numbers. ‘Amounts mobilised’ won’t count as ODA – but we understand they will be reported to the DAC annually. If the DAC makes this data publicly available, it will be possible to link additional funding mobilised from private-sector investors to specific ODA activities reported by donors. However, it will still not necessarily be possible to determine the extent to which this investment would have been made anyway without the donor funding. As PSIs are implemented, this concept (known as ‘additionality’) will be closely followed by those interested in the impacts and effectiveness of aid. PSIs are clearly an area requiring more clarity, and DI will produce further analysis as soon as more information is available. In the meantime, our recent work on blended finance gives a sense of the financing instruments under discussion.

Incentives, impacts on aid to LMICs, and South–South Cooperation

We also received questions about how providers of South–South Cooperation might interface with this OECD process, and with related work on the concept of ‘Total Official Support for Sustainable Development (TOSSD)’, which aims to engage these actors. Attendees also wanted clarity on the time frame for the rule changes and, finally, questions were raised about implications of the changes for some country groups, specifically low income countries (LICs). The new rules aim to provide incentives for donors to use PSI and ODA loans in these countries especially. To generalise, this will happen through awarding more ODA ‘credit’ to donors who provide ODA to LICs – the idea is that lending in these countries represents a greater risk on the part of the donor providing ODA, and this risk should be reflected in ODA data. Alongside these potentially positive incentives, which might direct much-needed financing to LICs, there may be knock-on effects on lower middle-income countries, which already face constraints on accessing concessional finance.

There are so many other factors at play in decision-making around aid that it’s hard to second-guess how ODA modernisation rule changes will affect donor behaviour. But it’s clear that rule changes can create political incentives, as well as providing increased opportunities (and possibly also constraints) for development cooperation. We’ll watch the process and data carefully and share our findings, so stay up to date by following us on social media or signing up for our newsletter’.

Learn more about ODA modernisation

Background paper and webinar recording: An introduction to ODA modernisation

Animated presentation: Changing the rules of aid: understanding ODA modernisation