Good investments create impact and jobs: A response to Simon Scott

In an opinion article in Development Today published in December 2023, OECD DAC Chair Carsten Staur and Chair of the DAC Working Party on Development Finance Statistics Katrine Heggedal presented the new ODA reporting rules for private sector investments. Simon Scott, a former head of the Statistics on Development Finance Division of the OECD, responded to their article last week, arguing that the new rules are illogical, allowing donors to count commercially viable investments by development financing institutions as aid. Now Staur and Heggedal comment on Scott’s criticisms.

The modernization of ODA was initiated by DAC Members at their High-Level Meeting in 2014, with the agreement to count ODA for concessional loans on a grant equivalent basis. At the same time, the communique from the meeting recognized the importance of strengthening private sector engagement in development and encouraged the use of ODA to mobilize additional private sector resources for development.

The world urgently needs more public and private investments in developing countries. International ODA is a scarce resource to be used effectively and in a way that encourages further investment in development. It is also a consistent message from partner countries that, while ODA is still necessary, investments are a key element in delivering transformative sustainable development.

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

One way that the public sector of developed countries contributes to these efforts is through mobilizing private sector investments, especially in countries where available private financing is limited, mostly due to high risk, both perceived and real/observed. If private sector investments supported by ODA are increasingly channeled to the least risky countries and markets, then one may argue that we have failed, and adjustments may have to be implemented. But if we achieve our goal of mobilizing private sector investments in the countries most in need of such investments, the effect will be an important contribution to the development impact toolkit.

Private sector instruments have already contributed to economic growth in partner countries, creating hundreds of thousands - if not millions - of jobs, clean energy, increased tax revenue, and indirectly contributing to increased social welfare. Yet, there are different opinions about whether private sector instruments should count towards ODA. Some say financing that generates a potential positive yield should be excluded altogether; some argue that only private sector investments that fail should yield ODA. A counterargument to the latter would be that one would then be incentivizing the wrong kind of investments. DAC members want to incentivize investments that are sustainable over time.

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

Contrary to what Simon Scott seems to imply, good investment does not mean bad development, rather it means development impact, such as creating jobs and contributing to positive growth in economic activity.

Simon Scott is not alone in arguing that ODA should only be counted for concessional finance and grants. We share the concern about blurring the ODA boundaries and inflating ODA figures. These issues have been carefully considered and debated in the DAC both before and after its first decision back in 2014 to make rules that encourage the use of ODA to mobilize additional private finance. The agreement reached last October by the DAC and the Working Party on Development Finance Statistics is a reasonable compromise arising from past decisions of development ministers. Mobilizing private sector investments using de-risking and co-financing mechanisms has played an important role in ODA for years and will continue to do so in the future. What the new set of directives brings to bear is clearer rules and increased transparency, laying the foundation for a fundamental improvement of ODA reporting on private sector instruments. They put in place diligent monitoring of private sector instruments and draw a clear line between these investments and the more traditional ODA flows. Moreover, donor effort will now be counted in a more transparent and comparable way. The new rules therefore mean that we will be much better equipped to follow the evolution of ODA as a concept, to criticize where critique is prudent, and, potentially, to adjust the system and the methodology.

Simon Scott insists that the aid community should start looking beyond ODA for a measure of aid performance. We disagree. ODA has served development cooperation well, setting boundaries for what can be counted against the UN target of 0.7% of GNI, and it is the only measurement which aligns with this target. ODA therefore still very much makes sense. However, we welcome Scott’s critique as a reminder that the members of the DAC, and the broader donor community, could be well advised to continuously discuss how to preserve and further enhance ODA as measure of support for developing countries in the years to come.

Let us also be clear: Low and middle-income countries are facing immense global challenges and financing needs and these are not met with sufficient additional financial support beyond our already scarce and very crucial ODA financing. To meet these challenges, solutions must be found outside ODA, but in some cases ODA funding may help to pave the way, as is the case for private sector engagement.

Overall, counterarguments for many of Scott’s points can be found in the new rules themselves, although we agree the rules are multifaceted and call upon complex concepts that might need some deciphering for the general public. We will work on communicating these aspects going forward. The key issue here, however, is not detailed discussions on aid statistics. We need more impactful international initiatives and fora to discuss and agree on how to finance and organize the necessary and critical global efforts and financing – beyond ODA, but also, where feasible, with ODA catalyzing these efforts. We need to pull in the same direction.

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Carsten Staur, Chair of the OECD Development Assistance Committee (DAC)

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