Why ‘modernizing’ development assistance doesn’t make it more effective

An increasing reliance on private investment for international development makes evaluating government contributions trickier, write Matt Gouett and Rachael Calleja.

By: , /
April 18, 2019
Ukraine farmer
Ukrainian farmers pack bags with hay outside Donetsk. Canada's official development assistance includes bilateral aid to Ukraine to help facilitate financing for small and medium-scale farms. REUTERS/Michael Buholzer

There were two pieces of news in the past few weeks that may have people in Canada’s international development community feeling good about the current state of affairs.

The first was the results of a recently released report by the Overseas Development Institute which looked at Development Assistance Committee (DAC) donors — a group of Organization for Economic Cooperation and Development (OECD) members that counts all major economies, except China, among its members or participants. The institute report ranked donors on a Principled Aid Index — a new tool that measures how donors prioritize development objectives over self-interest and short-term “wins” — and placed Canada 6th out of 29 DAC donors.

Canada’s performance as one of the DAC’s most “principled” donors, due to its use of aid to promote global cooperation and support vulnerable populations, is particularly impressive given that the grouping includes all major donors and acts as the standard-setter for development practice.

The second was the DAC’s own release of its preliminary data on 2018 official development assistance (ODA), which showed an increase in Canada’s ODA to 0.28 percent of gross national income (GNI) in 2018 from 0.26 percent in 2017.

Both, on the surface, put Canada’s aid efforts in a positive light. However, a deeper look suggests that this increase may not be indicative of Canada doing “more” or “better” international development, but rather that new DAC reporting rules have provided incentives which may see the Canadian government rely on private investors and send less international assistance to the world’s most vulnerable populations.

Changing the way donors are measured

There are two significant changes in the 2018 DAC development assistance data that make comparing Canada’s previous ODA/GNI ratios to its 2018 figures problematic.

In 2012, the DAC set out to modernize its ODA accounting to improve its accuracy, reflect the expanding role of new international assistance providers, and capture the increasing usage of different financial instruments to provide assistance. During negotiations between the DAC and its member countries, members agreed to modify both how they count ODA loans and to add funding spent via private sector instruments. The inclusion of private sector instruments in ODA accounting, which includes contributions to development finance institutions (DFIs) and loans and equities made directly to private sector entities, was viewed as a way to better capture donor effort.

While changes to ODA loan accounting are unlikely to make a big difference to Canada’s 2018 ODA figures — no grant-equivalent loans were included in Canada’s 2018 preliminary data — the bigger question for Canada is around the implications of new private-sector accounting. In particular, how will these changes affect the composition of Canada’s ODA reporting and what will this mean for Canada as a “principled” donor?

The DAC’s new reporting guidance allows donors to report on private sector instruments in two ways. First, the institutional approach counts the face value of contributions to the DFI, so long as the DFI is active in countries eligible to receive ODA; and second, the instrumental approach asks donors to report on loans and equity investments made directly in private sector entities.

Obviously, the level of transparency among the two approaches differs significantly: the instrumental approach will require donors to report project-level detail of their investments whereas the institutional approach only counts the contribution in the year it is made, without detailed accounting regarding where the contribution was invested. For Canadians wanting to know that their international assistance is being spent effectively, the new ODA accounting could increase what is counted as ODA without necessarily delivering on expected development impact.

What does the data show?

In 2018, Canada reported spending US$334 million as private sector instrument ODA, US$77 million of which was counted under the institutional approach. Presumably, the US$77 million represents funding allocated to FinDev Canada and will be reported as such once it releases its first annual report. Yet in 2018, FinDev reported investing less than half of that value (US$30 million). The remainder was counted as ODA but was not actually invested to create development impact. This USD$47million of uninvested ODA is more than Canada sent in bilateral ODA to Nigeria, Ukraine or the Democratic Republic of Congo in 2017.

Moreover, according to FinDev’s corporate plan, it projects to have CAD$54 million in unallocated funds by the end of 2019 after it receives its second CAD$100 million tranche of its announced CAD$300 million capitalization. While there is good reason for FinDev to be prudent in its investment strategy during its first year of operations, the new DAC reporting system obfuscates how much money Canada actually spent on ODA in 2018.

Why does it matter?

In the Canadian context, the new DAC reporting rules give two reasons to remain skeptical.

First, there is evidence that low-income countries receive a small share of blended finance investments (like those allocated through DFIs), with investors preferring to concentrate resources in safer, more stable developing countries. Even FinDev Canada’s first investment was in a well-established, well-funded solar power provider headquartered in Nairobi. While it is clear that this investment will impact the lives of Kenyans by supporting greater access to clean, stable electricity, it is less clear whether such funding will have the same development impact as traditional ODA programming. The logic for spending through DFIs is that it catalyzes additional investment from the private sector — a fact repeated by Global Affairs Canada, which cites estimates that $1 invested by a DFI leverages an additional $12 in private sector investment. Recent reports estimate the figure to actually be $0.75 in private sector investment leveraged for every $1 of public funds, with little comparable evidence as to whether this blended funding commands an equivalent development impact as traditional international assistance.

Second, there is a risk that the new DAC reporting will incentivize greater investments through private sector instruments — after all, these instruments promise returns to investing agencies. To the degree that increased usage of private sector instruments occurs at the expense of traditional ODA volumes, there is a risk that potential reductions in grant-based ODA would disproportionately impact low-income countries.

For instance, the Canadian government has committed to sending 50 percent of its bilateral aid to Sub-Saharan Africa, but if private sector instruments are included in this target, then will it reach Africa’s poorest and most vulnerable? Will Canada’s increased usage of these instruments undermine its “principled” aid by leaving the neediest behind?

As Canada has yet to clearly communicate a strategy whereby its private sector engagement complements traditional forms of ODA, it is unclear whether the US$334 million will have more or less impact than if it were spent via traditional modalities of ODA. What is clear is that if the $334 million reported under private sector instruments were stripped from Canada’s ODA/GNI calculation, Canada’s 2018 ODA/GNI ratio would actually be 0.2599 percent, down from 0.264 percent in 2017; a fact that is not good news for anyone who cares about international development.