New reforms in development assistance behind closed doors

Discussions are currently underway within the OECD's Development Assistance Committee DAC on what can be counted as development assistance. Today, 9 March, the Committee will take a position on new types of instruments aimed at increasing private sector participation in development assistance. This reform can have very major consequences for development aid and therefore requires in-depth discussion. Otherwise, there is a risk that the reform thumbs up on important principles for aid effectiveness, writes Penny Davies, policy adviser in development financing at Diakonia.

The private sector has a very important role to play in combating poverty and promoting development by contributing both to the objectives of development assistance and to the Global Goals for Sustainable Development, Agenda 2030. Private companies contribute best by paying taxes and by being cutting edge in environmental and social responsibility. But it is not obvious what role companies should play as partners in development aid.

Donor countries within the DAC must act to ensure that the assistance that involves the private sector in various ways contributes to poverty reduction and sustainable development. There are both opportunities in the form of innovative collaborations, but also risks when commercial interests are mixed with development assistance.

Today, 9 March, the OECD's Development Assistance Committee (DAC) decides on how new types of private sector instruments should be included in development assistance. In short, it is about assistance in the form of investments, loans and various types of guarantees to private companies. Civil society organizations has raised several concerns with the new instruments and also had views that the DAC process itself took place at a fast pace and with some transparency. Three things are important in the future to avoid pitfalls:

Enables more actors to participate

First, the DAC should extend the process and invite more actors to comment. As the reforms are very comprehensive and technical, and require an in-depth discussion, representatives from both the recipient countries and civil society organizations and the private sector should be allowed to participate. The timetable should also include evaluations of the private sector instruments already used by donor countries in developing countries, which are currently reported to the DAC as "other official flows". There is a lack of sufficient information on the effects of this type of effort on development and poverty reduction.

2. Aid shall not be tied to companies in donor countries

Secondly, it is important to uphold the principle that development assistance should be unbound, ie that development assistance should not be tied to companies in donor countries. The DAC should insist that this principle applies even now when new types of private sector instruments are discussed. It should be clarified, for example, that export credits, which through loans and guarantees are to support domestic companies in the donor countries, must not be counted as aid.

Ensuring that aid is not tied to companies in donor countries is part of the commitments that the international community has made time and time again in the agenda for aid and development efficiency. Restricted assistance also entails significant additional costs for the recipients - around 15-30 percent, according to DAC. There is now a risk that donor countries will thwart previous agreements and channel aid through their own country's companies instead of starting from the recipients' perspective on what type of aid is needed to achieve development goals. A company in the donor country can of course play an important role through, for example, capacity development of actors in the recipient country, but it can also be the case that the best results are achieved in other ways. The point is that it is the recipients' needs and priorities, based on democratically developed plans, that should guide development assistance efforts - not commercial interests in the donor countries.

In this context, it is also important to discuss measures to access the so-called "informally tied aid", ie the fact that the contracts largely go to large companies in rich OECD countries rather than companies in developing countries, something that our Brussels network Eurodad has analyzed. It is about reviewing how contracts are designed and announced so that it becomes possible for small and medium-sized companies in developing countries to become partners in development cooperation.

Ensure the principle of the added value of development assistance

Thirdly, several measures should be taken to ensure that aid is used in a smart and efficient way. For example, there is a great risk that development assistance will go to projects that would still have been carried out by private companies, without development assistance money. Then the aid has no added value, so-called additional effect, but rather becomes a subsidy of private interests which can also have a disruptive effect on the market. Donor countries must ensure that development assistance enables something that would not otherwise have been possible.

There are many technical details in the proposals that the DAC decides on today; proposals that could have major consequences for future aid. Here it is important to navigate correctly. It is important that decisions are based on evaluations of what works, that the process becomes more transparent and that more actors are given the opportunity to contribute.

Penny Davies

This is a debate article. The author is responsible for analysis and opinions in the text.

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