Modernising official development assistance (ODA)

Until 2018, ODA statistics valued grants and loans in the same way: by recording the flows of cash that were granted, or the face value of loans to developing countries, deducting repayments.  

That did not accurately reflect the efforts of donor countries: a grant represents a bigger donor effort than a loan; a loan with a very low interest rate and a long repayment period represents a bigger donor effort than one with a high interest rate and a short repayment period. The net ODA measure on a flow basis did also not reflect a government’s aid efforts in a given year as repayments on old loans were deducted. 

To fix this, the DAC in 2014 decided to record only the “grant equivalent” of loans as ODA. 

The DAC also differentiated between low- and middle-income countries, promoting greater concessionality for low-income countries.

Instead of recording flows of cash between lender and borrower, the headline measure of ODA is now based on the loans’ “grant equivalents”: the more generous the loan, the higher the ODA credit.

The grant equivalent system is now the standard and is what the OECD publishes as its annual headline ODA figures. However, ODA is still collected and published in parallel on a flow basis for the sake of transparency and comparability.

The OECD closely monitors the impact of introducing the new accounting methodology and produces an annual report since 2020.

Money today is worth more than the prospect of the same amount in future.  Any comparison of money now and in the future must take account of the rate at which money loses value. A sum of money in the future can be reduced to its value today by applying a discount rate. A discount rate is an interest rate applied in reverse: it applies tomorrow’s value to today’s money. Grant element calculations use discount rates to reduce the expected future reflows from a financial transaction to the value they would have today. If the value of expected future reflows in today’s money is lower than the amount extended today, then the difference represents a “gift”. This gift portion is called a grant equivalent if expressed as a monetary value, and a grant element if expressed as a percentage of the amount now extended. 

For example, grants have a grant element of 100% as they are fully provided as “gifts”.  By contrast, a loan offered at market terms has a grant element of 0%. However, this becomes a positive percentage if the lender adds an element of generosity.  The grant element measure of aid provides a more accurate estimate of the donor’s effort. 

In short, the grant equivalent is an estimate, at today’s value of money, of how much is being given away over the life of a financial transaction, compared with a transaction at market terms.  The grant equivalent is the grant element multiplied by the amount of money extended.

The DAC determined that changing the ODA measurement system from net flows to a risk-adjusted grant equivalent system would also change the basis on which debt relief of ODA loans was reported. 

The DAC reached a consensus on the treatment of debt relief on a grant equivalent basis in 2020.

In 2023, the DAC revised methods for treating private-sector instruments (PSI) in ODA. The new rules cover methods for measuring donor effort in:

• Capital increases of donor institutions and vehicles that extend PSI, such as development finance institutions (DFIs),
• Individual activities of such vehicles:
  • loans to the private sector,
  • equities,
  • guarantees,
  • mezzanine finance instruments, and
  • reimbursable grants.

The new rules strengthen transparency and accountability provisions, reporting requirements, the additionality framework, ODA-integrity safeguards, and monitoring and review mechanisms for PSI.

Until their full implementation, ODA in relation to certain PSI activities will continue being measured on cash-flow basis, i.e.:

• Loans to the private sector that convey a grant element of at least 25% calculated using a discount rate of 10%,
• equities, applying a cap on sales corresponding to the original investment, and 
• flows resulting from activated guarantees.

Until the full implementation of the new PSI rules, total ODA and the ODA/GNI ratio are calculated by summing up grants, grant equivalents for sovereign and multilateral loans and for debt relief, and net disbursements for certain private sector instruments. As private sector instruments only represent around 1-3% of total ODA in 2018-23, this is deemed an acceptable practical solution for the time being.

Each revision is a process of research, analysis, dialogue, debate, and negotiation. DAC members have differing views, and technical solutions, while based on evidence, require consensus – this is the very nature of the work in a multilateral organisation. The 2014 DAC decisions on the “grant equivalent” system and ODA loans, for example, were the result of such a process. It was fully transparent – all papers were circulated as “unclassified” documents – and inclusive, involving many technical experts, policy makers, and other key stakeholders from DAC member countries, civil society organisations (CSOs), and beyond.