Falsifying aid records: A prize example

stevecutts

Jun 6, 2024

6 min read

Updated: 4 days ago

About this paper

Simon Scott examines one of the OECD's own examples of how to report ODA on equity investments. He shows that it embodies multiple mathematical and logical errors, including adding and subtracting present value figures from different years, attributing dividend receipts to incorrect years, discounting receipts for the non-existent risk that they did not occur, reporting grant equivalents against years other than their base year, and inventing fictitious entries to zero out any apparent profits that would reduce reportable ODA.

Stephen Cutts adds that he was so staggered by the apparent falsifications in the OECD's method that he sent Scott's analysis to OECD/DAC senior management for any necessary corrections, but received none.

Editorial note: The original text follows in its historical context. References to rules, proposals, figures and future events reflect the source document, rather than an update to the present day.

Click twice on the link below to see the original pdf:

Falsifying aid records: A prize example

by Simon Scott

Here is an example of what the DAC’s new ODA rules mean in practice.

It is taken from the DAC’s instructions here on how to report ODA on three equity investments, viz.:

• Equity A, bought in 2020 for $20m., yielding $5m. in dividends, and sold in 2028 for $45m.

• Equity B, bought in 2021 for $15m., yielding $2m. in dividends, and sold in 2028 for $8m. and

• Equity C, bought in 2023 for $5m., yielding $1m. in dividends, and sold in 2028 for $10m.

In total, these equity purchases cost $40m. They yield $8m. in dividends and $63m. in sale proceeds, for a total return of $71m. – a $31m. profit within an 8-year period.

The DAC instructions mandate ODA reporting of these events as follows:

Original reporting example, USD million

Year	Equity A	Equity B	Equity C
2020	20
2021		15
2022
2023			5
(...)
2028	-22.49*	-4.97	-6.68

As you can see, the amounts invested are reported correctly against the correct years. But no negative entries appear in any year until 2028, the year of sale, even though all three investments pay dividends during their lifetime. Also, strangely precise negative figures appear in 2028 which are far lower than the actual returns on the investments. These entries total only $34.14m. Since $40m. was invested, this effectively reports an overall $5.86m. loss, scored as net ODA over the period.

How is it possible to report a $31m. profit as a $5.86m. loss? The clue is in that little asterisk against the figure for Equity A in 2028, which leads to this footnote:

* Calculated as (45+5) / (1+0.105)^8

Well, sure enough, 50 divided by 1.105^8 equals 22.49, but why is that figure being reported in 2028 as the first and final receipt of returns on Equity A?

What the DAC is doing here is the following. It is taking the sale proceeds received in 2028 ($45m.), adding in the dividends received during the life of the investment ($5m.), then discounting the total ($50m.) by 10.5% a year for each of the eight years the investment existed. As the DAC itself puts it:

Upon exit, a negative entry is introduced in the grant equivalent field, corresponding to the cumulative reflows (sum of sales and dividends over the equity lifetime), counted with a discount factor for the year of exit.

The effect of this procedure is to assume nothing is received until 2028, and then to discount total receipts to 2020 values, as if annual inflation was 10.5%. If you think this is absurd, you are right. You cannot discount an amount received to its value in another year, and still report it in the year of receipt. If you receive $45m. in 2028, the only amount you can report as receiving in 2028 is $45m. Any other figure is a fabrication. And the actual dividends must be reported in the years they are received, not shoved forward to 2028 and then discounted back to 2020 values. The discount rate itself is also arbitrary, and far too high given actual inflation in DAC countries in recent decades.

The DAC offers no justification for its method, other than that it is implementing “general principle xii” adopted by its High Level Meeting of 2016, which arbitrarily decreed that equity investments

are counted on a grant equivalent basis ex post, i.e. they are initially counted at face value and their reflows discounted ex post, upon exit. The reflows will be discounted using differentiated discount rates by income group, applying a cap on reflows corresponding to the original investment.

That “cap on reflows” has also been implemented. What it means is that if profits are so large that even the DAC’s excessive discounting fails to wipe them out, a special adjustment will be made to wipe them out anyway. The document shows this by a modified example:

Modified reporting example, USD million

Year	Equity A	Equity B	Equity C	Adjustment
2020	20
2021		15
2022
2023			5
(...)
2028	-30.59*	-4.97	-6.68	+2.24

Here, Equity A has sold not for $45m. but for $53m., and its dividends total $15m. not $5m. So it returns a total of $68m. on $20m. invested. The DAC again applies its procedure, first transferring all the dividends to 2028, and then discounting the $68m. total return by 10.5% a year for 8 years. This brings it down to $30.59m. Next, it adds this amount to the similarly discounted returns on Equities B and C, also sold in 2028. The total comes to $42.24m., which is more than the $40m. total invested and already reported as ODA. To avoid admitting to an overall profit of even $2.24m., the DAC at this point injects a fictitious “adjustment” of +$2.24m., in effect knocking the returns down to $40m.

The DAC advances no statistical argument for these multiple distortions. The true story in its modified example was that the “donor” country invested a total of $40m. between 2020 and 2023, and got $89m. back by 2028 – $68m. on Equity A and a total of $21m. on Equities B and C. To report that it only got back a total of $40m., representing no profit at all, is a lie.

By the way, the 10.5% discount rate comes from the middle column of the DAC document here:

Table 1. Discount rates for equities

Component	LDCs and other LICs	LMICs	UMICs
Base factor	5%	5%	5%
Risk-adjustment factor	4%	2%	1%
Equity surcharge	4%	3.5%	3.1%
Discount rate	13%	10.5%	9.1%

The DAC does not justify these rates. Their three components are arbitrary. The “base factor” of 5% is the only element with any link to real-world market rates, and this link is extremely tenuous, and already includes risk margins. The other elements are both for risk, and of the DAC’s own invention. To adjust for risk when discounting actual returns in which risk is already manifest is absurd; but as already noted, all discounting to the values of a year other than the reporting year is absurd anyway.

This example is not an aberration. It is typical. The DAC’s new rules deliberately overestimate the value of every type of non-grant transaction with developing countries, including loans, equities, guarantees, debt relief and a range of other operations. They do this by perverting grant equivalent methodology through the application of one or more of the following distortions:

• deliberately under-valuing receipts by applying excessive discount rates

• discounting actual, known receipts for the risk that they might not have existed

• allowing multiple points of measurement of the same risk

• replacing true returns in the reporting year with figures discounted to another year’s values

• banning negative overall figures and inserting fraudulent adjustments to zero them out.

As a result, the DAC’s ODA figures on all non-grant transactions are nonsense.

As a taxpayer, I object to official bodies, on my dime, inventing ways to lie to me about the amount of foreign aid. The DAC’s lies are also shortchanging developing countries, and destroying researchers’ ability to assess the cost-benefit of aid activities, and thereby improve their quality and effectiveness. All of us have a right to true, factual, data on foreign aid – but it is not what we are getting.

Note by Stephen J. Cutts: Simon’s note draws attention to what seems such a blatant falsification of ODA numbers that I wanted to be sure that his account of what the DAC was doing was correct. Accordingly, I sent his note to the DAC Chair, with the Director of its Secretariat on copy, and gave them a week to flag any necessary corrections. I received neither a reply nor even an acknowledgement.