Making nonsense of aid measurement

Staur and Heggedal are promoting new DAC rules that score official development assistance (ODA) for “private sector instruments” (Heggedal and Staur, Opinion in Development Today, 8 December 2023). They say these rules “add to the ODA toolbox”. It would be more correct to just say that they “add to ODA”. For “private sector instruments” (PSI) are simply the non-concessional flows that ODA always left out as they involved no wealth transfer to developing countries.

But how is it even possible to score ODA on transactions that make money rather than cost money? Doesn’t the UN ODA target of 0.7% of donors’ national income have to be measured net, so that money-making transactions would score negative ODA?

The explanation is to be found in a failed attempt at reform. 

In 2014, the DAC changed the way it calculated the “net ODA” on loans. Instead of deducting actual repayments of loan capital as they came in, they decided to deduct the value of all expected returns – capital and interest – upfront. This is known as a “grant equivalent” calculation. In theory it gives a better estimate of how much a loan is really giving away than a “capital flow” calculation, since it takes the interest rate into account. As the DAC observed, the result should be that “more concessional loans will earn greater ODA credit than less concessional loans”.

However, only 14 months later, the DAC turned this idea on its head. It abandoned the idea that all ODA transactions must be concessional, and proposed to score grant equivalents for non-concessional PSI, including equity investments, guarantees and other instruments. Nearly eight years on, it has agreed on 89 pages of rules to do this – which is what Heggedal and Staur are announcing.

Now it is a logical contradiction to score a grant equivalent for a non-concessional transaction. As the 2014 DAC meeting recognized, the whole point of grant equivalent measurement is to score concessionality more accurately. So how can non-concessional – and in fact profitable – transactions have any “grant equivalents”?

The trick here has been to “over-discount” the transactions’ expected returns. Grant equivalent calculations require the use of a discount rate to bring future returns back to their value in the present, and the DAC has decreed various arbitrary, high discount rates to minimize the apparent value of those returns.

For example, the DAC’s discount rate on an equity investment in China is 9.1%. This means that any investment in China that yields less than 9.1% a year will score ODA.  And to make doubly sure of avoiding negative figures, the DAC has banned reporting them. There can be no “negative net ODA” on any equity investment, no matter how lucrative it turns out to be.

The same applies to all other PSI. The DAC’s discount rates are so high that almost every conceivable loan or guarantee, no matter how profitable, will score positive ODA – but if by chance returns will be even higher than these discount rates, “0% thresholds” apply to all PSI reporting. The thresholds mean scoring all positive grant equivalents, however tiny, but no negative grant equivalents.

The result is what might be called an “Andrews Sisters” approach to aid measurement – Accentuate the positive/Eliminate the negative.

In practice it will allow donors’ “development finance institutions” to score ODA for their commercially viable investments. As an example, the new rules will let Norway score hundreds of millions of kroner a year for the operations of Norfund, even though Norfund’s rate of profit is neck-and-neck with that of the country’s Oil Fund.

It is difficult to believe that such nonsense can survive for long. ODA is supposed to be a statistic measuring real fiscal effort. The DAC’s new rules on PSI will not measure anything. They will just produce arbitrary numbers with a dollar sign in front of them. The vast majority of the transactions behind the numbers will involve no net transfer of resources to developing countries, and many will produce a substantial net return to the “donor” country.

Heggedal and Staur claim the new rules should stimulate private sector investment in developing countries. Whether that happens or not, the aid community is going to have to start looking beyond the DAC for an objective measure of aid performance.

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Simon Scott is a former head of the Statistics on Development Finance Division of the OECD