Some questions about ODA and PSI
In 2018, for the first time, the Official Development Assistance statistics, published by OECD/DAC, included aid spending through Private Sector Instruments (PSI), blurring the boundary between ODA and commercial transactions. Having in mind the inclusion of PSI in ODA statistics and the emerging TOSSD measure, what do you foresee as the role of Official Development Assistance in the future?
This question addresses two different but interconnected issues, which are the reporting of private sector instruments in ODA statistics and the emerging TOSSD measure. Both have to be framed in the context of the evolving nature of development finance and the ODA modernisation process.
ODA has a crucial role to play in tackling the impacts of the current crisis and supporting a recovery centred on human rights, gender equality and a just transition, as well as meeting international goals such as the Agenda 2030 and the Sustainable Development Goals.
In recent years, the mainstream narrative has been arguing that ODA, and public finance more broadly, will be insufficient to meet the huge funding gaps that remain to be filled if the SDGs are to be achieved. This goes hand in hand with the narrative that places ‘the private sector’ at the heart of resource mobilisation efforts. In this context, blended finance has come to dominate the development finance discourse. In line with this trend, development finance institutions have been shifting towards the direct mobilisation of private finance for development, increasingly using concessional finance from donors as leverage. However, the evidence required to confirm and justify this narrative as the key path to financing and achieving the SDGs is lagging far behind.
Within this context, the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) launched a process in 2012 to modernise “the measuring and monitoring of external development finance provided by its members”, and to review the ODA concept. This included a commitment to better reflect, in ODA, donor efforts to catalyse private sector investment in development and the related use of private sector instruments (PSIs). These include loans, equity investments, mezzanine finance provided to private sector enterprises, and guarantees extended to financers who back them. New (though provisional) reporting arrangements for PSIs were then agreed in 2018.
Latest Eurodad report on PSIs highlights several issues that the donor community should take into consideration:
These can be grouped into three broad categories:
- issues related to the fundamental nature and role of ODA;
- transparency and accountability issues; and
- statistical issues, threatening the quality and integrity of ODA as a statistical measure.
As this report shows, there are key issues at stake with regards to the implications for the quantity and quality of ODA. The main implications include: the dilution of the distinctive role and value of ODA compared to other types of development finance; a potentially weaker evidence base on which decision-making on ODA allocation would be based; and compromised transparency and accountability standards. Additionally, depending on the outcome of the pending decisions around how to calculate the grant equivalent of PSIs, there is a risk of diverting scarce ODA resources away from uses for which evidence of impact exists and which ODA is better placed to serve, towards others for which such evidence is still elusive. For example, by supporting domestic governments to strengthen those sectors that are proven to tackle inequality – such as public health, education, social protection – or by supporting developing countries in raising taxes progressively and spending them in an accountable manner.
Some would say aggregate PSI levels may seem small, but their scale is significant compared to allocations to specific purposes or sectors. Gross PSI ODA in 2018 and 2019 (US$ 4.6 billion) was above the amount of gross bilateral ODA that DAC members spent on basic health (US$ 4.3 billion) in 2018 and just equal in 2019; it equalled almost twice the amount spent on primary education in 2018 and 2019 (US$ 2.5 billion and US$ 2.4 billion respectively); it represented almost three times the amount spent on general budget support in 2018 and 2019 (US$ 1.8 billion and US$ 1.9 billion respectively); and approximately five times the DAC bilateral ODA spent in 2018 and 2019 on social protection (US$ 934 million and US$ 891 million respectively).
Last but not least, the global narrative stressing the need to fill the SDG funding gap with private sector resources shall likely encourage the increased use of ODA in direct support of private sector engagement. Thus, in the years to come, it can be expected that PSI will further increase – some donors have already stated their ambition to allocate additional resources to PSIs.
Going forward, CSOs have a critical role to play in this process in terms of protecting the quantity and quality of ODA and in ensuring that ODA responds to its core mandate of eradicating poverty and inequalities, including agreed international commitments to ‘leave no one behind’.
For further information about the topic and CSOs recommendations, please check the latest Eurodad report on PSIs: Time for action: How private sector instruments are undermining aid budgets.
With regards to the TOSSD measure, and the role of TOSSD in the future, this answer draws from this publication. TOSSD is intended to provide a comprehensive picture of global, official and officially supported resource flows to promote and support sustainable development in developing countries.
CSOs have been closely following (and influencing) the development of TOSSD, with mixed reactions and perspectives. While not mutually exclusive, views include the following:
- Broadly supportive. Some CSOs see the value of TOSSD as a metric for promoting the broad transparency of public financing for SDGs for developing-country partners, while acknowledging some limitations, which can be addressed and revised as annual data are reviewed.
- Sceptical but with conditional support. Some CSOs are sceptical about the credibility of the metric as set out so far and are concerned about donors’ political purposes in light of stagnant levels of ODA but see value in the metric for both improving the transparency of financing for the SDGs in developing countries and tracking resources otherwise not covered by ODA.
- TOSSD not legitimate/not needed. Other CSOs consider the process, which has to date taken place largely outside the United Nations, to be an illegitimate expression of the Addis Ababa Action Agenda call for wide consultation in the development of an agreement on TOSSD metric.
There is a tension between the TOSSD metric and the ODA metric, on the possibility of the TOSSD metric replacing commitments to ODA. And the preamble to the Reporting Instructions of TOSSD is clear that ‘TOSSD aggregates by provider will not by any means replace ODA as a measure of donor effort, nor will they undermine some providers’ commitment to reach the UN ODA/GNI target of 0.7%’ [para 6]. This commitment has been reiterated repeatedly by the Task Force in consultations and in communications over the past three years. ODA is about accountability for provider/donor effort (for most donors tied to the UN 0.7% GNI target), while TOSSD is about transparency and scope of resources from a recipient perspective made available for the SDGs (for which there is no target).
Yet, despite these assurances, a strong political incentive may exist for providers to draw attention to non-ODA and non-concessional financial instruments and flows that they see as important contributions towards their SDG commitments (especially, amongst those far from meeting the 0.7% commitment).
Many CSOs remain deeply concerned about the future of ODA as a crucial metric for provider accountability and are committed to its growth as a concessional resource for reducing poverty and inequality in least-developed and middle-income countries. Although there are no provider targets in TOSSD, these concerns will grow if TOSSD evolves into an annual aggregate figure for each provider, not replacing but rather masking donors’ accountability for their ODA performance (further information on CSOs concerns here). That said there is also support for TOSSD among some CSOs based on an expressed need for developing countries and the global community to better understand flows beyond ODA and their links to SDGs at the country and global level. Some suggest that TOSSD could return to its original purpose as mainly a recipient-based measurement, documenting the different flows at the activity level, without any requirement for aggregation into a total TOSSD figure (which may in any case lack credibility given some issues raised below).