"Private Sector Instruments"
A Trick to Score Cost-Free ODA
PSI (“private sector instruments”) is the name under which the DAC is allowing non-concessional instruments to count as ODA. These include loans to the private sector, guarantees, equity investment and mezzanine finance.
Since its creation in 1969, “each transaction” of ODA has had to be “concessional in character”. The DAC presented its 2014 decision to switch to grant equivalent measurement of ODA loans as just a fairer measure of their concessionality.
Yet in 2016, the DAC agreed to score grant equivalents for “PSIs”, even while admitting that these were “non-concessional in nature”. It planned to do this by using excessive discount rates that deflated the return flows its members would receive on PSIs. Understating the value of returns in this way would allow non-concessional PSI transactions to score fictitious "grant equivalents".
The DAC offered no serious justification for the nonsense of adding non-concessional instruments to ODA using a method designed to measure concessionality. Instead, its rickety logic boiled down to the following propositions:
It’s important to encourage private sector participation in development
“Private sector instruments” can help, even when not directed to the private sector
Including PSIs in ODA will encourage their use
Therefore, ODA should include PSIs, as long as they are “additional”.
The DAC then baldly declared “additionality” to be the “characteristic of operations for PSI to be in line with the concessional in character criterion of ODA” – without in any way substantiating this claim – and started work on grant equivalent rules to score ODA for:
Loans to the private sector, even though its 2014 decision already implicitly covered them, and despite the fact that, if donors really made concessional loans to the private sector, they would distort markets and spoil competition.
Guarantees, using excessive discount rates that overstate the credit risk, and therefore overstate the donor effort and ODA.
Equity, where upfront grant equivalent calculations are nonsensical since future returns are unknown.
Mezzanine finance, combining 1 and 3 above.
The 2016 DAC HLM wanted draft reporting instructions to be ready for approval by the DAC Senior Level Meeting later that year. This deadline was missed and two further years of negotiations proved fruitless. At the end of 2018 the DAC agreed provisional rules allowing PSIs to be scored using flow figures instead of grant equivalents. As at April 2023 the DAC is still negotiating behind closed doors on how to score “grant equivalents” for PSIs.
If the DAC agrees to add factitious PSI “grant equivalents” to ODA as proposed, this will not only demolish concessionality as a definitional pillar of ODA but also introduce inconsistency in the underlying logic of measurement, since the proposed (weak) “additionality” tests are about recipient benefit, whereas ODA is supposed to measure donor effort.
Driving these machinations are some donors’ “development finance institutions”, which are under pressure from their parent finance ministries to score their activities as ODA to help reduce the budgetary cost of aid. The 2016 DAC decision includes instructions to consult with DFIs to agree reporting parameters.
The real point of the PSI exercise is to remove ODA’s concessionality requirement without making this too obvious.