Development Assistance Committee (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 Official Development Assistance (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.
The new statistical framework:
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.
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”.
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.
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. The DAC reached a consensus on the treatment of debt relief on a grant equivalent basis in 2020, thus two years after the implementation of the grant equivalent as the standard for measuring ODA, noting that no major debt reorganisation occurred in 2018 and 2019. The agreement is an important step towards completing the modernisation of ODA.
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 (PSI), such as loans to the private sector, equities, guarantees and mezzanine finance instruments. However, despite efforts by all parties, members only agreed on a provisional arrangement that maintained the rules used prior to ODA modernisation, including cash flow measurement and only partial eligibility of individual PSI activities. In this context, ODA can be measured at two distinct points:
Since 2022, the DAC has engaged in a review of these provisional directives with a view of improving them to the extent possible, and to bring them more in line with the principles agreed upon in 2016. The review is organised in two parts, starting with key stakeholder consultations to inform subsequent methodological deliberations of the DAC members.
In April 2023, the DAC approved revised reporting methods for loans to the private sector and credit guarantees, as well as the ODA-eligibility assessment, effective in 2024 reporting on 2023 ODA. The modified rules introduce a measurement of donor effort in providing PSI loans and guarantees on a grant equivalent basis and build ODA integrity through strengthened transparency and accountability. Work is on-going on the treatment of equity investments, mezzanine finance and other private sector instruments, as well as safeguards to ensure ODA integrity and related monitoring mechanisms and other provisions. The review is expected to conclude in the summer of 2023.
The total ODA figure
Beyond ODA: Total Official Support for Sustainable Development (TOSSD)
Total Official Support for Sustainable Development (TOSSD) measures the full array of resources to promote sustainable development in developing countries. It is designed to monitor all official resources flowing into developing countries for their sustainable development, but also private resources mobilised through official means. It also measures contributions to International Public Goods.
TOSSD complements ODA by increasing transparency and monitoring important new trends that are shaping the international development finance landscape.