Tuesday, November 21, 2017

Definition of aid. Takeaways from OECD donor gathering in Paris

At a ministerial meeting in Paris 30 donors agreed on new common rules for reporting domestic refugee costs as Official Development Assistance (ODA) and paved the way for some Caribbean island states hit by Hurricane Irma to become aid eligible again.

However, the donors failed to solve a long-lasting dispute about how to report private sector aid.
 
The OECD’s aid watchdog, the Development Assistance Committee (DAC), facilitates the negotiations about how to define aid and decisions are reached by consensus.
 
The negotiations during the two-day long meeting focused on how to modernise ODA, an on-going reform process launched five years ago. The most concrete outcomes were consensus about clearer rules for how to report domestic refugee costs as ODA.
 
Domestic refugee costs, often referred to as in-donor refugee costs, skyrocketed during the European migration crisis two years ago. Donors have previously been allowed to report as ODA costs related to the first year that asylum seekers and other refugees are in the donor country. But reporting methods have varied from country to country and this has made comparison among donors difficult. 

According to the new rules, donors are permitted to report as ODA direct expenses for temporary sustenance, like food, shelter and training. This includes primary and secondary education for children, but not vocational training. A range of other costs are also eligible, but the idea is that they must have a temporary nature.
 
Certain administrative costs can be counted as ODA, but only for personnel directly involved in the execution of the temporary services mentioned above.
 
Expenses related to integrating refugees into the society, like tertiary education and job programmes are not ODA-eligible. Neither are the costs of building accommodation centres for refugees, processing of asylum applications, voluntary repatriation after 12 months and forced repatriation. 
 
Donors are reluctant to comment on the consequences of the rules.
 
Swedish State Secretary Ulrika Modéer describes the new rules as a “clarification” of current reporting standards, while DAC Chair Charlotte Petri Gornitzka says the new rules for reporting in-donor refugee costs will “increase transparency.”

According to a spokesperson at the Foreign Ministry in Oslo, the changes will be incorporated in Norway’s aid budget for 2019.
 
While the negotiators hail the agreement on refugee costs as a success, a tough conflict over how to define private sector aid remains unsolved.

In 2016, donors had agreed on principles regarding private sector aid. The purpose of the new guidelines was to encourage donors to use aid strategically to stimulate more private sector investments in line with the SDG agenda. However, implementation was put on hold due to strong disagreements about how to calculate support to private sector actors as ODA.  Some donors, including Sweden, feared that a new regime could erode the poverty focus of aid.

Modéer says donors must eventually reach an agreement about private sector aid which represents an increasing share of total ODA. She says that Sweden believes aid can be used to mobilise private capital. “But for us basic principles like the focus on poverty eradication, untied and effective aid and transparency are extremely important,” she tells Development Today.

International NGOs have been critical. Oxfam International Executive Director Winnie Byanyima, who attended the meeting, says she is “worried that governments are diluting the fight against poverty.” She recognises that business has a vital role to play in ending poverty, but adds that “we need rich countries to put rules and safeguards in place to ensure that companies fully respect human rights and environmental standards. Development aid should never be used to promote rich countries’ own commercial interests at the expense of poor people’s lives,” she says.
 
Donors have pledged to use ODA to mobilise private capital to invest in developing countries using so-called private sector instruments (PSIs). Often such investments are made through development finance institutions (DFIs) like Swedfund, Finnfund, Danish IFU and Norfund. These institutions can provide equity, loans or guarantees to encouraged businesses to invest in poor countries.
 
Such efforts are very different from traditional aid. There is no grant element as the investments are made on commercial terms. There is less openness, because companies would like to keep business secrets confidential and as, Byanyima points out, there are concerns about quality and safeguards related to projects funded through such schemes.
 
The role of PSIs has also caused a clash between DFIs and export credit agencies.  For the latter, there is a strict OECD notification and monitor system in place to avoid illegal subsidies and secure a level playing field for exporters. No such system is in place for the DFIs. Some fear that DFIs can be used to promote donor countries’ industries, thereby distorting the market.
 
The key questions are how to calculate such private sector instruments as ODA and to prevent PSIs from inflating aid.
 
In this minefield of conflicts, the DAC high-level meeting recognised that it was not possible to reach an agreement.
 
“We note that at this stage we were not able to conclude in the spirit of consensus our negotiation,” the communiqué from the meeting states.
 
However, the 30 DAC donors made a change that is significant. Two years ago, the DAC members agreed on a temporary reporting system, where donors could choose between two different ways of reporting: the “institutional” and the “instrument” method.
 
For donors like the United Kingdom, which uses “institutional” reporting, the entire capital injection to DFIs can in principle be reported as ODA the year the money is transferred to the entity. If a DFI in the future pays dividends to the state coffers these are reported as negative ODA.
 
Meanwhile, in the “instrument” approach, each transaction is reported as ODA. For instance, donors can report loans as ODA, but only the grant element is counted.
 
Countries must choose one of these two methods to report their ODA. The OECD monitors how the two reporting methods play out, and donors must provide data for both.

This double reporting system expires at the end of the year. Prior to the Paris meeting, the DAC Secretariat had sent a letter to donors that use the institutional method, informing them that such reporting would not be approved as ODA from next year.

However, in Paris, the ministers agreed to continue the double reporting system, and this time no expiry date was set. This means there is no deadline for a new agreement about private sector aid.

The United Kingdom has been a key player in the DAC negotiations and has hinted that it might abandon the ODA reporting regime in OECD. A few days before the negotiations in Paris, however, British Development Minister Priti Patel backed down on this threat.

In the wake of Hurricane Irma, the United Kingdom wanted to open for some of its overseas territories like Anguilla, Caicos and British Virgin Islands to become eligible for receiving ODA even though they have graduated from the DAC list of countries and territories eligible for ODA.

The high-level DAC meeting recognised that such countries, hit by natural disasters or humanitarian crises, face unique vulnerabilities, but there currently exists no mechanism to allow them to receive aid. The members accepted that such countries require tailored development financing and agreed that the secretariat in Paris should develop new mechanisms for reinstating ODA eligibility for countries and territories in such circumstances.
 
The DAC also opened for using “existing short-term financing mechanisms available to respond to catastrophic humanitarian crises in countries that recently graduated from ODA.” Patel told the BBC that the agreement “is a real step forward, and we welcome the clear support from the head of the OECD for our efforts.”
 
Participants at the meeting Development Today has spoken to conclude that the DAC has strengthened its role as the key forum for defining ODA during the gathering. The members, which include 29 countries and the EU, agreed to endorse a new mandate for the DAC to ensure it is fit for purpose in the era of the 2030 Agenda. “The DAC will continue to define and measure development co-operation [and] be the guardian of the ODA definition and monitor its flows,” according to a statement from the meeting.