OECD Response

The OECD’s answer here is that moving to grant equivalents provides a better comparative measure of the concessionality in loans. That is true in principle, but it’s only true in practice if the grant equivalent calculation uses realistic discount rates. The DAC does not – and this is the whole point. Its discount rates massively undervalue the returns it gets on loans, so that even loans at full market rates appear to have grant equivalents, and other loans that are only slightly concessional are calculated to have huge grant equivalents.

On this the DAC claims that its “modernisation” was “fully transparent…and inclusive involving many technical experts, policy makers, and other key stakeholders from DAC member countries, civil society organisations (CSOs), and beyond”. This is untrue. The origin of the recommendations finally agreed at the 2014 DAC HLM was a "High Level working group" of eight senior DAC representatives under the chairmanship of the UK DFID’s Permanent Secretary at the time, Mark Lowcock. This group met and negotiated in secret. No records of its discussions have ever been published, though faint traces of its existence can be found on the web. The FAQ’s claim that, during this process “all papers were circulated as ‘unclassified’ documents” is also untrue. The Lowcock group circulated no papers at all, and two of the four earlier DAC papers to which the FAQ itself provides links (FAQ 6) are still stamped “Declassified”, showing that they were originally circulated as classified.

These are two very different questions. On the first question, the rest of this website shows how the measurement of ODA is flawed in multiple ways. The rules introduced in recent years score items that involve no real fiscal effort, over-score the fiscal effort in others, introduce alternative ways of scoring the same items, arbitrarily cap the reporting of return flows, etc. The rules are also over-complicated and contain internal contradictions. The FAQ dodges all these points and instead asserts that the new system is better because it corrects inconsistencies in interpretations of which loans score as ODA. But the problem is that the new “quantitative definition of concessionality” sets the bar far too low, so that consistency is achieved only by ODA scoring of many unsubsidised, non-concessional loans. On the second question, the new rules introduce perverse incentives by scoring loans higher than grants for the same fiscal effort, and never scoring any net negative amount for equity investment, even if huge profits are made. Over the longer term, the quality of aid is bound to decline as the DAC moves to over-score more and more non-concessional or marginally concessional items that allow donors to meet aid targets with minimal real outlay. On this issue, the FAQ just waffles, e.g. “the DAC encourages all donors and partners to adhere to the principles of country-led development, mutual accountability, inclusive partnerships, transparency, and a focus on results” – pretending that such “encouragement” is sufficient to counteract the force of the perverse incentives the DAC has itself deliberately created.

As explained elsewhere on this website, the correct answer to this question is clearly yes. The DAC Secretariat dodges it by referencing the DAC’s drawn-out negotiations on permanent rules for scoring this support and excusing the clear over-counting in its 2018 “provisional” rules by saying that the instruments involved “only represent 2-3% of total ODA”. But the point of the rule changes was precisely to provide incentives to increase the use of these instruments, and in any case, if scoring them as ODA is wrong, as it is, then changing the rules in order to score them is also wrong, regardless of the process by which this is done or the size of the resulting error.

Putting these two largely unrelated questions together is an attempt to make the reader think that if the “modernised” ODA grant equivalent figures aren’t much higher than its old “capital flow” figures, then loans are not being over counted. This is fallacious, because as loans currently comprise a small share of ODA (around 10-15%), even over-counting them by a lot will not make a big difference to total ODA in percentage terms. And in any case, under “modernisation”, the same low hurdle applies to both “cash-flow” and “grant-equivalent” measurement. Since both measures now count non-concessional loans, comparing the two figures is meaningless as a test of overcounting in either. In the long run, any grant equivalent system scoring only positive grant equivalents will record more ODA than a capital-flow system which deducts all loan principal payments until there is a zero balance overall. And the FAQ does at least have the decency to admit that “the introduction of the grant equivalent system will increase ODA figures in the long term”.

As the rest of this website and several other studies have shown, the DAC’s discount rates are way above major lenders’ cost of funds, and have thus massively inflated the grant equivalents of loans reported as ODA since 2018. The DAC’s more than 500-word answer on this question never actually denies this. Instead it tries a variety of unsatisfactory defences, including: • The DDRs “are not recognised as a universal benchmark” – Well, maybe not, but they are accepted by the same OECD countries as an accurate measure of concessionality of tied aid, and the DAC is purporting to measure the same thing. • “The 2014 agreement on concessionality was the result of transparent, in-depth discussions among technical experts, policy makers, CSOs and more stakeholders, who carefully examined all options” – Untrue, see FAQ 2 above. • Use of “volatile” rates would lead to “lack of predictability in ODA budgets”. This is not true either: in fact, the opposite is the case. If the DAC used current market rates, they would score predictable ODA credit for budgeted subsidies - ideally, they would score the exact amount of the subsidy. By contrast, the DAC's own fixed discount rates mean that any budgeted subsidy applied to a loan made later from funds raised later on the market will produce an unpredictable amount of ODA. • “The impact of the choice of discount rates on the valuation of loans is relatively low.” This is patently false. The choice of discount rates is precisely what determines the value of loans in a grant equivalent system. You can get any grant equivalent you like by just varying the discount rate.

The correct answer is yes. By including a risk margin in the discount rate used to calculate the “grant equivalent” of the original loan, a donor claims ODA upfront for effectively insuring each loan against default. It assumes in its reporting of EVERY original loan that some will not be repaid in full, and it “banks” ODA in advance for the additional concessionality it may have to offer by way of relief on those that go bad. So claiming more ODA on those that do go bad and require debt relief is clearly double counting. The FAQ attempts to obscure this point, claiming that “There is no double-counting: only additional concessionality involved in debt restructuring is counted as ODA.” The basis of this claim is that the DAC nets out the original ODA claimed upfront for assuming risk when it scores ODA for debt restructuring. But it only deducts this “original ODA” for restructured loans; it leaves in place all the ODA it has scored on other loans where the risk did not materialise. To illustrate the point, one can use a simple analogy of a property insurer that has a portfolio of 100 houses dotted around the country. Let’s say that by the end of the year, the insurer expects to have claims amounting to no more than 2% of the total value of the property insured. On that basis, the insurance company can reasonably charge a 2% premium on each policy to cover the overall risk and ensure its own commercial viability. What the insurance company cannot then do is to visit a householder the morning after their house burns down and claim that overnight the risk increased because their house caught fire, and that therefore the householder has to pay an additional insurance premium to cover the other 98% of the value of the property. Yet this is what the DAC is doing in claiming ODA for the “additional concessionality” (i.e. the value of relief) associated with a loan default. The donor has already booked ODA credit for effectively self-insuring its whole portfolio of loans, so it cannot claim additional ODA just for those loans that are not repaid in full. That is clearly “double-counting” the risk. Looked at another way, donors could only justify scoring extra ODA for the “additional concessionality” in relief if they were also to score negative ODA for all the loans that were repaid without problems and where the extra ODA scored upfront for risk therefore turned out to be unwarranted….but in that case it would be a far neater solution to just score ODA for relief when it occurred and remove the credit margin in the upfront discount rate used to calculate the ODA grant equivalent of every loan. (Incidentally, the ceilings on counting such additional ODA credit for relief that are cited in the FAQ as “strong safeguards” would, in the analogy of the property insurer, only limit and not eliminate the double-counting, by capping the amount demanded after the fire to the full original value of the house minus premia previously paid.) When the DAC decided to introduce grant equivalent reporting on loans in 2014 it promised that “Given that the new system would value upfront the risk of default on ODA loans, the eventual forgiveness of these loans would no longer be reportable as a new aid effort.” The FAQ fails to mention this promise or give any valid reason for breaking it.

Given the very low interest rates in major currencies in 2018-21 – far lower than the DAC discount rates – the system has been scoring non-concessional loans as ODA and massively inflating ODA for loans that are only marginally or modestly concessional, and so has given donors a big new incentive to provide loans rather than grants, thereby increasing recipients’ debt burdens. The FAQ’s defence is “At present, analysis reveals no sign of major changes in donor behaviour: grants continue to represent around 80% of total ODA.” But donors take time to alter their programmes, and even if the loan share was not rising, it would not prove there was no incentive to do so, only that the incentive had not yet had much effect. However, 2022 figures show a big increase in loans which had already risen since the new rules came into effect, largely negating the FAQ’s argument.

The FAQ starts out by claiming that “Climate finance figures are largely unrelated to the grant equivalent system adopted by the DAC” but this has not been true since the UNFCCC has started to collect grant equivalent figures on climate finance. The FAQ also tries to pretend that climate finance is mainly grants by focusing only on “bilateral concessional climate finance” which is only a small share of the total. It repeats the line that “The introduction of the grant equivalent system in DAC statistics has not induced an increase in the share of loans in ODA”, which as noted above is belied by the 2022 data. But bilateral donors are in a unique position to provide the grants that all parties agree are desperately needed, as too much climate finance is currently being extended in the form of loans. Yet the proportion of grants is significantly lower for climate finance than for other bilateral aid. And the DAC’s exaggeration of donor effort in loans over grants provides a powerful incentive against changing this. Moreover, the terms of the ODA loans being extended are barely concessional (when the grant equivalents are calculated using robust discount rates).

Again, the correct answer to this question is Yes. The OECD FAQ again evades the question, this time by noting that the practice of counting ODA for debt relief for non-ODA loans was not introduced by the 2014 “modernisation”. No one has claimed otherwise. However, this counting had been criticised on numerous occasions in the old “capital flow” system for ODA, and it is indefensible in a “grant equivalent” system that lacks reverse-flow entries for the cancellation of loans, and that explicitly claims to represent real donor effort. It was therefore incumbent on the DAC, when it introduced the grant equivalent system, to examine whether there was any real effort in relief on non-ODA debt. Instead, the DAC Secretariat simply asserted in its new instructions that since no grant equivalents would previously have been reported for a non-ODA loan, its forgiveness should be recorded as a new grant equivalent, and that the amount of this grant equivalent should be the total amount forgiven. The instructions thus completely ignored the question of whether there was any real donor effort. The FAQ now tries a different justification. It points out that debt relief for export credits provides a benefit for developing countries. But this is beside the point. The DAC has defined grant equivalent ODA as a measure of donor effort, not recipient benefit. Only real donor effort could justify scoring grant equivalent ODA for relief of non-ODA loans. But there is no donor effort involved in debt relief for export credit debt (or similar loans) where risk-related premium fees or loan margins have been levied from developing country borrowers (or commercial exporters) to cover those same costs, as is required under WTO rules.

Here, even the question contains an error. Equity sale proceeds are deducted; it is just that the amount deducted is capped at the original purchase price, so that ODA figures hide any profit that has been made and thus overstate net financial effort. This does indeed increase aid figures unduly, since loss-making shares in financial structures score ODA, while profit-making shares can never score negative ODA, no matter how much money the “donor” makes.

The FAQ’s answer effectively concedes that unused second-hand vaccines were passed on to developing countries and scored as ODA, though it points out that “Expired doses are not eligible”. However, the controversial question here has rather been whether donors have scored more ODA for donating vaccines than they actually paid. On this, there is still a lack of full transparency. See our detailed paper on this.