Steve Cutts: 3rd Letter to DAC Chair, July 2022
Updated: 1 hour ago
About this letter
On 5 July 2022, Stephen J. Cutts wrote for a third time to Susanna Moorehead, Chair of the OECD Development Assistance Committee (DAC), seeking a substantive response to his concerns about Official Development Assistance (ODA) accounting.
The letter responds to the public debate following his Financial Times opinion piece and refers to his Brookings article. It sets out five concerns covering loan discount rates, double-counting of credit risk, export credit debt relief, equity investments and surplus Covid vaccine donations, and calls for an independent statistical review.
Editorial note: This is historical correspondence dated 5 July 2022. The claims, criticisms and descriptions below are those expressed by Steve in the original letter. Its wording, figures and references are preserved in that context.
Read the preceding letter: https://www.odareform.org/post/2nd-letter-to-dac-chair-march-2022
Read the original paper: https://www.odareform.org/post/credit-where-credit-s-due
LETTER TO THE CHAIR OF THE OECD DEVELOPMENT ASSISTANCE COMMITTEE MS SUSANNA MOOREHEAD
Giving Credit Where Credit’s Due – Addressing Flaws in the Calculation of Official Development Assistance (ODA)
Dear Ms. Moorehead,
I am writing further to my letters of 18 February and 25 March 2022 to which I have as yet received no response. As you know, I attended a meeting with members of the DAC Working Party on Development Finance Statistics (WP-STAT) and the DAC Secretariat on 21 May[1], on the explicit understanding that I would receive a formal substantive written response to the serious issues I had raised about the counting of ODA.
While you have not responded to my letters to you, you did send a letter to the Financial Times after the publication on 15 June of my opinion piece, “Overseas aid statistics are not credible”. However, rather than addressing the substance of the serious flaws in the OECD’s methodology, your letter attacked me personally, accusing me of being “stuck in the past”. This charge is unfounded. As I explained in the first paper I sent to you, I never supported the previous “cashflow” methodology and I first advocated for reform of aid accounting 20 years ago. Indeed, I devoted the first annex to my paper to pointing out the serious flaws with the old system (https://www.publishwhatyoufund.org/download/giving-credit-where-credits-due-annexes/).
The “modernisation” of ODA that you champion is actually based on the grant equivalent methodology that I had recommended in 2002. The problem, as I and others have pointed out, is that though the DAC claimed that its new method would fairly value the “donor effort” in loans, in fact it significantly exaggerates this effort by using misguidedly fixed and excessive discount rates that generate inflated and unrealistic “grant equivalents” for these loans.
During the meeting on 21 May, I was assured that the discount rates being applied represented a fair measure of donor effort. But one need only refer to an official budget document France released a few months ago, admitting that it has been reporting more than 5 euros of ODA for each euro of donor effort in its loans, to see that this is untrue: https://www.budget.gouv.fr/documentation/file-download/13582 (page 11). And massive overcounting is taking place with other DAC lenders, as my earlier papers and independent research by the Center for Global Development have shown.
Your letter also implied that I am opposed to loans. Again, this is false. Indeed, a major reason for my opposition to the DAC’s previous approach of measuring net capital flows was because it undervalued the ODA in loans by 100% (as every loan, regardless of the concessionality of its terms, counted for zero ODA once repaid). However, the system you seek to defend has, according to the French Government’s own calculations, exaggerated the ODA in its loans by more than 400%. This is a huge “over-correction” and provides a massive incentive for donors to switch away from grants.
As my Brookings article (https://www.brookings.edu/blog/future-development/2022/04/13/give-credit-where-credits-due-development-assistance-in-loans-should-reflect-donor-effort/) makes clear, I believe that both loans and grants must be counted fairly so that ODA figures reflect real donor effort in each case. I believe that donors should decide which instrument – a grant or a loan – is appropriate based on the borrower’s financial capacity and the nature of the project supported, rather than being driven by the perverse budgetary incentives in favour of loans that the new rules provide.
Against this background, I am writing once again to ask you to respond substantively to the serious flaws in the DAC’s ODA accounting rules, especially:
1. That the discount rates applied by the DAC (based on Dollar CIRRs dating back to 2003 and the addition of margins for credit risk) massively exaggerate the donor effort of most DAC members providing loans. In addition, they discriminate against non-DAC donors who may have a far higher cost of funds.
2. That the rules double-count credit risk by first including a risk margin in the discount rate, but then also providing for additional ODA reporting if risks materialize and debt relief is granted. The attempts to justify this which I heard on 21 May regrettably lacked merit, amounting to little more than sophistry and obfuscation. Indeed, the points made were the same as those used by the Secretariat in its paper from 2020: https://www.oecd.org/dac/financing-sustainable-development/development-finance-standards/Reporting-Debt-Relief-In-Grant-Equivalent-System.pdf, which I comprehensively discredited in Annex 2 to my original paper (https://www.publishwhatyoufund.org/download/giving-credit-where-credits-due-annexes/).
3. That debt relief of non-concessional loans, including official export credits, typically entails no donor effort as risk-related premiums/spreads have been charged to fund such losses; and that scoring of such relief as ODA should therefore cease. The Secretariat has not sought to defend this practice in my meetings with them, but rather to blame the Paris Club. However, as you know, these are OECD/DAC statistics; they are not the responsibility of the Paris Club.
4. That the scoring of equity investment has become unfairly one-sided. When donors buy shares in financing structures for developing countries, they count their purchase as positive ODA, but when they sell them, the new rules tell donors only to deduct their full receipts if they make a loss. As a result, no equity investment, however profitable to the investing donor country, will ever show “negative” ODA overall: the losses are counted in full; the profits are ignored. This will consistently overstate net donor effort in investments.
5. That the scoring of aid contributions for the donation of surplus Covid vaccines in 2021 at a flat $6.72 per dose (plus the logistical costs of delivery) allows DAC members to claim that amount in ODA even when they bought the vaccines brand new for far less.
Since I sent you my first letter, I have learned that these and other accounting flaws are now well-known among independent experts and that it has become an open secret in the aid community that the DAC’s ODA figures are, as a result, exaggerated and distorted.
Your claim in your letter to the FT that these erroneous and unethical accounting practices are somehow necessary to respond to global crises is unsustainable. On the contrary, I would contend that the serious flaws in the DAC’s methodology, far from helping the Committee focus on the major development issues of our time, comprise statistical fraud perpetrated on developing countries, and enable OECD countries to cut their real aid expenditure by stealth. The new rules certainly incentivise loans where grants would be more appropriate and risk increasing the debt stress that many developing countries are already suffering.
I have not responded in kind to your personal attacks, as I know you are in a difficult position chairing a Committee comprising donors, who are often acting under pressure from their finance ministries keen to minimise the budgetary cost of the ODA they provide. However, I do feel the time has come when, at the very least, you as Chair must show the necessary leadership and call for a fully independent statistical review of ODA accounting, rather than continuing to defend the indefensible.
I am copying the OECD Chief Statistician whom I met virtually in May and who I believe has a responsibility to ensure the integrity of statistics published under the Secretary-General’s authority, and their compliance with the “Twelve Key Recommendations to Ensure the Quality of Statistics”[2] approved by the OECD Council. The ODA statistical rules as they now stand are in clear breach of several of these Recommendations.
I also (again) copy the Secretary-General and his office on this letter as, in the absence of a substantive response in the next couple of weeks, I will have to assume that only a major campaign, bringing in the numerous experts in national and international organisations and think-tanks who are aware of the problems in ODA accounting, will suffice to put an end to these frankly dishonest practices. This will inevitably do damage to the reputation of the OECD more broadly, which I would find personally regrettable given the respect and personal affection I have for the Organisation.
Yours sincerely,
Stephen J. Cutts 5 July 2022
CC OECD Secretary-General OECD Deputy Secretary-General (for the Development Cluster) OECD Chief of Staff OECD Chief Statistician OECD Director of the Environment Directorate DAC Delegates
Source notes and references
[1] Without making a big deal of this, the meeting was poorly handled. I was not informed of a change of venue for the meeting, so arrived late and incurred further personal costs (having self-funded my trip to Paris). Moreover, while I had requested a document in advance setting out any factual errors in my papers, the response I had received comprised largely misplaced value judgements. The one supposed error identified (in my Q&A) was in fact a misreading by the Secretariat.
[2] From the Recommendation on Good Statistical Practice adopted by the OECD Council on 23 November 2015: https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0417
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