Unlocking more private sector investments

More private sector investments are needed if countries are to achieve their development and climate targets for 2030 and beyond. Official Development Assistance (ODA) from the 32 members of the OECD Development Assistance Committee (DAC) – last year all in all amounting to more than USD 200 billion – can help facilitate such investments, but the rules for Private Sector Instruments (PSI) have until now been somewhat ambiguous.

In October, the DAC agreed on a set of new rules. This represented the last leg of a decade-long process aimed at modernising and clarifying the ODA reporting directives, ensuring a robust framework to address the evolving needs of developing countries.

With the agreement, DAC members have committed to a new way of treating private sector instruments in DAC statistics. This will open the way for increased engagement with the private sector, allowing for a more diverse range of official sector investment tools, and catalysing private finance for sustainable development.

In an era marked by global crises and the urgent call to combat poverty, clear rules for ODA are critical.

(Photo of Katrine Heggedal, Chair of the DAC Working Party on Development Finance Statistics)

Enhanced transparency and integrity

A significant aspect of the new rules is the increased transparency provisions for ODA investments in the private sector. The DAC’s new reporting rules set stricter criteria for data reporting, promising regular and accessible reports on DAC members’ PSI data and financing. While the statistical perfection of the rules may be subject to debate, they undoubtedly mark a considerable improvement over the insufficient and temporary reporting regime on PSI that has been in place since 2018.

The new rules offer a more transparent and accountable framework for development financing. The DAC agreement commits to review these rules in a few years’ time when we have the data and evidence needed to assess whether they work in practice or need adjustment.

The journey and the challenges

Some might ask what took us so long, and why we succeeded now. ODA for private sector investment has been a contested subject within and outside the DAC. Both civil society organisations and member countries have feared and warned about a system that incentivises non-grant instruments over grants and increases private sector engagement at the cost of cooperating with governments and civil society of the countries that need it the most.

As Chairs we are grateful for the vigilance and attention to these challenges. Development aid is a precious resource. The definition and the technical details of the directives must be guarded carefully. Still, in a rapidly changing world with escalating global crises, competing needs, and the demand for investments in development and poverty reduction as urgent as ever, the time is now ripe to have more involvement in development from the private sector. That is why DAC members originally committed to a process of ODA modernisation, navigating the intricacies of political compromise to create a more transparent base for increased financial flows to developing countries – and, as a final step of this modernisation, getting PSI done.

We call on the private sector to take action 

The ball is now firmly in the hands of governments in DAC member states to develop or enhance their private sector instruments. The emphasis should shift to making smart and necessary investments for development. We call upon the private sector to harness the range of financial solutions offered by DAC members’ development finance institutions (DFIs) and similar funds or programmes, and to direct investments where the needs are greatest, aligning with the broader goals of sustainable development.

As ODA makes up a large part of international climate finance, the new rules on private sector instruments carry significant implications for the global commitment to environmental sustainability.

(Photo of Carsten Staur, Chair of the OECD DAC)

With COP28 and the imperative to mobilise private finance for green transitions in mind, the DAC’s decision aligns with the call to allocate and mobilise finance for more climate-related development action in line with the Paris Agreement. We are particularly hoping to see more private sector investments in adaptation measures. Despite the need and ambitions to increase climate finance for adaptation, the amounts mobilised from the private sector to date are small compared to those mobilised for mitigation.  

The new DAC rules on private sector investments add to the ODA toolbox and enhance the transparency of financial flows for development, and the accountability of DAC members’ private sector strategies. The data will tell whether the global development community now rises to the occasion and provides more and better financing to partner countries.

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Katrine Heggedal, Chair of the DAC Working Party on Development Finance Statistics (WP-STAT)
Carsten Staur, Chair of the OECD Development Assistance Committee (DAC)