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Solar panels at a carport in Nairobi, Kenya
Solar panels at a carport in Nairobi, Kenya. Private-sector finance tends to favour middle-income countries, primarily the energy, industry and banking sectors. Photograph: Simon Maina/AFP/Getty Images
Solar panels at a carport in Nairobi, Kenya. Private-sector finance tends to favour middle-income countries, primarily the energy, industry and banking sectors. Photograph: Simon Maina/AFP/Getty Images

Aid reforms could see big increase in private sector subsidies

This article is more than 7 years old

Leaked document shows OECD members discussing changes to official aid rules that would allow more funds to be invested in or loaned to private companies

Wealthy donor countries are debating the biggest changes to development aid in more than 40 years, in a closed-door meeting on Monday that could see a “massive increase” towards aid that supports the private sector.

According to a leaked official document seen by the Guardian, proposed reforms to official aid would allow a wide variety of “private-sector instruments” to be used as vehicles for development, meaning that aid could be used to invest in, or give loans to, private companies, or to underwrite those companies’ activities through guarantees.

Official development assistance (ODA), or foreign development aid, is defined and regulated by the development assistance committee (DAC) of the Organisation for Economic Cooperation and Development (OECD), whose members include the UK, Norway, Germany and Japan.

Although the OECD currently allows donors – in a limited manner – to use aid to subsidise private companies or investment, these reforms will essentially “liberalise the rules”, potentially resulting in “less money for health, education and public services”, warned Jesse Griffiths, director of the European Network on Debt and Development (Eurodad).

“This is a different way of seeing development. It’s a downplay of aid for health, education, water and sanitation, and saying what really matters is private-sector investment,” said Griffiths. “The obvious implication is that there could be a shift from the public to the private sector, and from lower- to middle-income countries. The institutions that invest this money obviously have to make a return, and that’s difficult in lower-income countries.”

OECD members have long been discussing how to “re-define” ODA, debating whether they should spend more aid money to support private foreign companies. Current regulations (which were drawn up in 1969) have allowed donor countries, such as the UK, to include as ODA such costs as £3m worth of pension payments to former colonial officers.

As ODA currently makes up more than two-thirds of external finance for the least-developed countries (LDCs), donor countries have long been keen to use ODA as a lever to generate private investment and domestic tax revenues.

In February, donor countries agreed at a high-level meeting in Paris to “better reflect” the way that ODA is spent, policed and reported, showcasing a greater focus on security issues like counter-terrorism and private-sector development in LDCs. Those terms – officially the “ODA modernisation of private-sector instruments implementation details” – are now being discussed in greater detail at high-level meetings this week in Paris.

In a statement to the Guardian, the OECD said that although some elements of the proposed reforms could be approved as early as December, a “formal agreement on the whole package” isn’t likely before late 2017.

“This two-day meeting covers various issues and includes the next round in a long series of discussions on possible ways to mobilise more private sector support for development,” the OECD spokesperson said. “What we are trying to do is to create the right mechanisms to allow developing countries to have easier access to finance.”

Development experts fear that the speed with which negotiations are occurring, and the lack of public scrutiny into the negotiations, could increase the risk of mistakes and unintended consequences. The proposal also lacks safeguards to stop the diversion of aid budgets towards subsidising multinational corporations, Eurodad warns.

“There has been so little discussion and so little debate, it’s just not acceptable for changes this important,” says Griffiths. “We’re not opposed to using aid in this way, but it would have to be used with a lot of safeguards – the main one being that you won’t be using aid for your own companies.”

Eurodad is calling for more time on the reforms to allow other stakeholders to be consulted and for key safeguards to be put in place.

Development aid totalled $131.6bn (£106bn) in 2015, according to OECD figures, a jump of 83% since 2000, when the millennium declaration, which heralded the introduction of the millennium development goals (MDGs), was signed.

But researchers say that private finance alone is not likely to meet all the sustainable development goals (SDGs), which were adopted last year and expand on the MDGs.

“There’s been much more talk about this than action, so there’s not a great base of data to say where [private-sector finance] is effective and where it isn’t,” says Rob Tew, of the Bristol-based transparency group Development Initiatives.

“But there is an indication it will leave out certain countries and certain sectors. It won’t fund all the SDGs, or the countries that really face the highest levels of poverty, or the lowest levels of income or resources. You might find energy infrastructure funded this way, but not rural schools.”

Official 2015 OECD data shows that $36.4bn was mobilised from the private sector between 2012 and 2014 through official development finance interventions in the form of guarantees, syndicated loans and shares in collective investment vehicles (development-related investment funds). Crucially, it was middle-income countries that received the largest share of finance, primarily in the energy, industry and banking sectors.

A report last year on ODA loans by Development Initiatives also found that half of all developing countries saw an increase in loans – rather than grants – between 2005 and 2013. Certain countries, including Egypt, Kenya and Myanmar, saw a 500% jump in ODA loans over that eight-year period.

  • This article was amended on 11 October 2016 to reflect that researchers say private finance alone is not likely to meet all the sustainable development goals.

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