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Development finance standards

Modernisation of the DAC statistical system

 

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In 2012, the DAC launched the modernisation of its statistical system in order to improve its accuracy while reflecting the changes in the development co-operation sector, such as the growing importance of other providers – non-DAC providers or philanthropic foundations -, the diversification of financial instruments for development, or the increasing overlap of development co-operation policy objectives with those of other sectors such as migration and security.

The modernisation of ODA

In the process, the DAC took a series of decisions at its High Level Meetings (HLM) in 2014, 2016 and 2017 with regard to the measurement of concessional loans to the public sector, private sector instruments (PSI), peace and security expenditures, and in-donor refugee costs.

  • Over 2016-2018, a number of clarifications of eligibility rules for peace and security as well as in-donor refugee costs became effective.
  • In 2019, the grant equivalent system became the standard for measuring ODA. Although data on the grant equivalent measure were collected and published during a transition priod from 2016 to 2018, in 2019 it became the standard: in April that year, ODA headline figures applying this new standard were published for the first time, when the preliminary 2018 ODA statistics were released. Data on actual flows (i.e. disbursements and loan repayments) continue to be collected and published to ensure transparency.
  • Beyond 2019, the DAC will continue to adjust its statistical systems to new realities and needs. Work will continue to make the reporting of private sector instruments and debt relief consistent with the new grant equivalent method. Work is also ongoing in relation to the methodology for updating the DAC List of ODA Recipients (e.g. on reinstating countries or territories on the List in case of catastrophic humanitarian crisis) and the methods for measuring the SDG focus of development co-operation (purpose codes, policy markers) in view of keeping the statistical classifications relevant and fit-for-purpose with the 2030 agenda.

The new statistical framework:

  • measures ODA loans more accurately and credibly, ensuring comparability of data across providers,
  • encourages more and better allocation of concessional resources to implement the SDGs,
  • promotes greater transparency and heightened accountability, helping to ensure that ODA goes where it is most needed and has the greatest development impact.

Clarification of eligibility rules

Ambiguities in reporting rules led to inconsistent interpretation and reporting by DAC members on both peace and security-related expenditures, and on in-donor refugee costs.

Peace and security efforts

In 2016, the DAC agreed on updated rules for the eligibility of peace and security expenditures. This was to better recognise the marginal, but actual developmental role that military actors sometimes play, notably in conflict situations, while clearly delineating it from their main peace and security function.

  • The changes clarify ambiguities to ensure uniform, consistent statistical reporting, but also to approve the ODA-eligibility of development-related training for partner country military staff in limited topics.

Since then, the DAC has:

  • implemented the updated ODA rules on peace and security in the reporting,
  • issued a revised ODA Casebook on Conflict, Peace and Security Activities, and
  • complemented the technical review of the ODA coefficient applied to UN peacekeeping operations.

Read more

In-Donor refugee costs

In 2017, the DAC agreed to clarify the reporting directives for assessing what may be included or not in ODA – and provide its members with a blueprint to use when accounting for the costs of assisting refugees in donor countries.

The changes aim to improve the consistency, comparability and transparency of DAC members reporting of ODA-eligible in-donor refugee costs.

Introducing the “Grant equivalent”

A fairer method to record ODA

OECD Official Development Assistance (ODA) Statistics: Introducing the grant equivalent

ODA can take the form of (i) grants, where financial resources are provided to developing countries free of interest and with no provision for repayment, or (ii) soft loans, which have to be repaid with interest, albeit at a significantly lower rate than if developing countries borrowed from commercial banks.

Until recently, grants and loans were valued in the same way: by recording the flows of cash that were granted, or the face value of loans that were lent to developing countries, deducting any repayments on the loans. This “cash basis” or “flow basis” method, has been used to produce ODA headline figures until 2018 (reporting on 2017 ODA spending).

The method was simple, but it did not reflect actual efforts by donor countries: a grant represents a bigger effort than a loan; and a loan with a very low interest rate and a long repayment period represents a bigger effort than a loan with a higher interest rate and a short repayment period.

That is why DAC members decided, at their 2014 High-Level Meeting, to introduce a new way of measuring aid loans, so as to better reflect the actual effort by donor countries – and their taxpayers: only the “grant equivalent” of loans would now be recorded as ODA. The more generous the loan, the higher the ODA value.

Instead of recording the actual flows of cash between lender and borrower, the headline measure of ODA is based on the loans’ “grant equivalents”.

This provides:

  • a more realistic comparison of loans and grants
  • stronger incentives to use grants and highly concessional loans, which will continue to play a key role in mobilising resources to support the Sustainable Development Goals (SDGs).

Making grants and loans comparable: calculating the grant element and the grant equivalent

Money today is worth more than the prospect of the same amount in future.  Any comparison of money now and in the future must take account of the rate at which money loses value. A sum of money in the future can be reduced to its value today by applying a discount rate. A discount rate is an interest rate applied in reverse: it applies tomorrow’s value to today’s money. Grant element calculations use discount rates to reduce the expected future reflows from a financial transaction to the value they would have today. If the value of expected future reflows in today’s money is lower than the amount extended today, then the difference represents a “gift”. This gift portion is called a grant equivalent if expressed as a monetary value, and a grant element if expressed as a percentage of the amount now extended.

For example, grants have a grant element of 100% as they are fully provided as “gifts”.  By contrast, a loan offered at market terms has a grant element of 0%. However, this becomes a positive percentage if the lender adds an element of generosity.  The grant element measure of aid provides a more accurate estimate of the donor’s effort.

In short, the grant equivalent is an estimate, at today’s value of money, of how much is being given away over the life of a financial transaction, compared with a transaction at market terms.  The grant equivalent is the grant element multiplied by the amount of money extended.

Learn more:

The question of private sector instruments

At the February 2016 DAC High Level Meeting, members agreed on the principles to better reflect, in ODA, the donor effort involved in the use of private sector instruments. However, despite efforts by all parties, the implementation rules to report private sector instruments in ODA have not yet been agreed, primarily due to disagreement over the discount rates to be used in calculating the grant equivalent of loans to private sector companies (PSI loans), equity investments, mezzanine finance and guarantees.  

Therefore, DAC members have agreed on how to report their 2018 private sector instrument flows in ODA (based on prior years’ decisions and procedures), by applying either the institutional or instrument approach (until such time as the details of all decisions on private sector instruments are agreed):

 

a | Institutional contributions:

  • Any capital contributions to Development Finance Institutions (DFIs) or other private sector instrument vehicles made in 2018 is included in ODA at their face value. If necessary, i.e. if the institution is active also in non ODA-eligible countries and/or activity areas, the share of ODA-eligible activities in the institution’s total portfolio is estimated, to establish a coefficient for ODA reporting.  
  • Any reflows (including profits) from private sector vehicles to the government are counted as negative ODA.

b | Individual loans to private sector entities in developing countries:

  • Loans committed or disbursed in 2018 are reported as ODA on a cash-flow basis (provided they have a grant element of at least 25% calculated using a discount rate of 10%).
  • Reflows from previous years’ private sector instruments count as negative ODA (provided that the underlying transactions have initially been counted as ODA).

c | Individual equity investments to private sector entities in developing countries continue to be reported on a cash-flow basis:

  • Positive ODA is be recorded at the time of investment and the proceeds of sales are reportable as negative ODA applying a cap on reflows corresponding to the original investment. To be ODA-eligible, equities need to comply with the ODA definition i.e. have the economic development and welfare of developing countries as their primary purpose and be in line with the ODA rules.  
  • Contributions to investment funds may be ODA-eligible if in accordance with the existing Directives.

d | Due to the lack of agreement on the details of accounting for ODA-eligibility of mezzanine finance and guarantees, such instruments are not be included in ODA, except to the extent that guarantees are invoked and payments made in which case existing processes specify these payments are measured on a cash flow basis.

Work on the implementation details is ongoing and the DAC is committed to reach a conclusion by consensus on this topic.

The question of debt relief

At the 2014 High Level Meeting it was agreed that changing the ODA measurement system from net flows to a risk-adjusted grant equivalent system would also change the basis on which debt relief of ODA loans was reported. It  concluded that the existing rules for reporting debt relief should expire with the reporting of 2017 flows, and be replaced by new rules, in time for the reporting of 2018 data when the new grant equivalent system became the standard.

However, despite efforts by all parties, the implementation rules to report debt relief have not yet been agreed. Work on the implementation details is ongoing and the DAC is committed to reach a consensus on this topic, noting that no major debt reorganisation occurred in 2018, and none is foreseen by the Paris Club for the coming months.

Definition of ODA

The ODA grant equivalent is a measure of donor effort. Grants, loans and other flows entering the calculation of the ODA grant equivalent measure are referred to as ODA flows.

The total ODA figure in 2019 on 2018 data

As explained above, members have yet to agree on the method for calculating the grant equivalent of private sector instruments and debt relief. Total ODA and the ODA/GNI ratio on 2018 data are calculated by summing up grant equivalents for sovereign and multilateral loans, and net disbursements for private sector instruments and debt relief. As these elements only represent 1.6% of total ODA in 2018, this was deemed an acceptable practical solution.

Beyond ODA: Total Official Support for Sustainable Development (TOSSD)

The measurement, total official support for sustainable development (TOSSD), is developed to promote greater transparency over the full array of officially supported development finance provided in support of the 2030 Agenda for Sustainable Development – including resources provided through South‑South co-operation, triangular co-operation, multilateral institutions and emerging and traditional donors.

TOSSD aims to complement ODA by increasing transparency and monitoring important new trends that are shaping the international development finance landscape.