As development finance has evolved over time, variability in donor interpretations regarding the meaning of "concessional in character" has led to reported figures not being endorsed by all the members, with regards to loans extended from funds raised on capital markets without any official public sector direct subsidy. The DAC is committed to updating and refining its statistical reporting directives by 2015 to ensure consistency in the application of "concessional in character" in the reporting of ODA.
In the meantime, the DAC agreed in April 2013 that, to ensure transparency, it would present this annex explaining the different views on concessionality. As provided for in that agreement, the rationales of three members, which were noted by the DAC, are shown below. For other members, the practice of ODA reporting remains that loans made from market-raised funds are only reported as concessional if they include an explicit subsidy.
The agreement specifically took note of the rationale presented by the EU, concerning the European Investment Bank (EIB) loans since 2008. It was also agreed that there would be no retroactive changes to loans extended before 2011, and that the DAC agreement would only apply to ODA data from 2011 to 2014. The combined effect of these decisions is that for the period 2008-10, the data on concessional flows shown for EU Institutions relate to grants only, EIB loans appearing as non-concessional; whereas a significant part of EIB loans appears as concessional flows from 2011.
Rationale of the EU’s development loans
EIB loans comply with the ODA-eligibility requirements set out in the DAC Statistical Reporting Directives which are applicable to all DAC Members equally. In addition, they are in line with the principles agreed at the HLM in December 2012 and notably with the five criteria mentioned in paragraph 18 of the HLM Communiqué:
Regarding development purpose and additionality: The EIB fosters sustainable development outside the EU under the ACP-EU Cotonou Agreement for ACP countries and on the basis of an explicit mandate by the Council of the EU and the European Parliament (the so-called External Lending Mandate) for the other external regions.
The EU via the EIB provides external financing in areas where long-term capital is lacking either because markets are not active or because they are not yet functioning sufficiently well. Documentation of the additionality of the EIB loans is part of the internal project appraisal. Maturities might reach up to 20 or 25 years, for example in the case of infrastructure projects where they are essential to make these projects viable.
Regarding the donor effort: Given that recipient countries outside the EU are not EIB shareholders, lending to these countries generally involves a higher degree of risk in EIB operations. This is the reason why the EU budget provides a sovereign risk guarantee (for public sector coverage of commercial and political risk, for private sector full coverage of political risk). The EU guarantee involves a direct budgetary effort, since its costs are borne by the EU budget. It enables the EIB to lend to developing countries on terms it would otherwise not be able to offer in terms of maturities, grace period, interest rate and other contractual obligations. This amounts to the sovereign/political risk being borne entirely by the EU. Some of the loans also benefit from direct grants and technical assistance.
Regarding not-for-profit: The EIB operates on a non-profit basis (ref. 309 TEU) as a policydriven public Bank owned by the EU Member States. The EIB’s lending operations outside the EU are not conducted with a commercial or profit purpose. In line with the EIB policies, interest rates on loans are set in such a way that the income therefrom enables the Bank to meet its obligations, to cover its expenses and risks, and to operate on a sustainable basis. The loans provided by the EIB are priced in such a way that these statutory provisions are satisfied.
French rationale on ODA loans
All French loans declared as ODA are concessional in character and they fully respect the principles agreed at the HLM:
1. All loans granted by the French Development Agency bring a major contribution to development objectives.
All loans granted by AFD and declared as ODA are part of the French development strategy.
These loans offer to the beneficiaries (i) a source of financing when alternatives are not always available (in particular in the case of non-sovereign financing) and (ii) much better financial conditions (interest rate, duration, grace period, credit risk tolerance) compared to those prevailing on local markets.
2. ODA loans are offered at preferential interest rates including a donor effort, and are not designed to make profit.
AFD ODA loans are not designed along a profit-oriented banking model. They systematically include a French Government subsidy, either explicitly through a grant to lower the interest rate, or implicitly, because the interest rates offered to the beneficiaries do not reflect the full costs of the loans, and are therefore much lower for the beneficiaries. In particular:
- The pricing of the loans does not include any return on AFD equity: the equity, required for the loans’ commitments is brought by the French Government;
- The pricing of both sovereign and non-sovereign loans declared as ODA is established without any profit margin. In addition, the cost of credit risk is not included in the rate offered to partner Government: it is borne by the French Government.
3. Net earnings contribute to reinvesting in development activities.
AFD end-of-the-year net earnings are mostly the result of activities not declared as ODA (activities in French overseas territories and activities linked to Proparco, AFD private sector development subsidiary). Net earnings are used in particular to increase AFD equity and therefore contribute to increase its abilities to supply development loans.
Rationale of German Development Loans
German development loans are concessional in character and ODA-eligible, because they are in line with the HLM principles and comply with the ODA reporting directives:
1. The loans incorporate an effort by the German government either by means of an explicit subsidy element (grant) or an implicit one in form of a guarantee. In the latter case the German government guarantees for the default of loans. This guarantee can be statutory or transaction specific and lowers the funding costs and the risk margins for the executing development bank (KfW). The full costs of subsidies and guarantees are defrayed by the German government. Thus, the interest rate does not reflect the full costs of the loan, which are lowered considerably for partner countries. Subsidies and guarantees are part of the annual federal budget which is approved by parliament.
2. The loans are attested development relevant. Each loan is mandated by the Government according to German development cooperation rules and strategies. The loans are part of the official government negotiations with partner countries and they provide benefits to the recipients being extended at softer terms and longer maturities and grace periods than other sources of financing. They provide additional financing for MICs, so liberating ODA- funds for LDCs, in sectors in which financing through credits is developmentally sound.
3. The loans do not earn any profits for Germany as the beneficial owner of KfW development bank. Its interest rates depend on maturity, grace period, currency and initial risk of the partner country. Any reduction in the interest rate through a Federal guarantee or a direct subsidy (grant) as well as better refinancing rates of the development bank are passed on to the borrowing partner country in full. The German development bank does not distribute any earnings to its shareholders. Instead all revenues are reinvested for development purposes.