Unclassified DCD/DAC/STAT(2016)1 DCD/DAC/STAT(2016)1 Unclassified Organisation de Coopération et de Développement Économiques Organisation for Economic Co-operation and Development 11-Mar-2016 English text only Development Co-operation Directorate Development Assistance Committee DAC Working Party on Development Finance Statistics IMPLEMENTATION OF THE PRINCIPLES OF ODA MODERNISATION ON PRIVATE-SECTOR INSTRUMENTS Template for the ODA-eligibility assessment of DFIs and other vehicles and definition and reporting on additionality 22-23 March 2016 This note presents a proposal for implementing the principles relating to the procedure and criteria for assessing the ODA eligibility of PSI. It is presented for discussion at the WP-STAT meeting on 22-23 March 2016. Members are invited to comment on the proposals in paragraphs 5, 7 and 11. Ms. Julia Benn (julia.benn@oecd.org); Ms. Cécile Sangaré (cecile.sangare@oecd.org) JT03391838 English text only Complete document available on OLIS in its original format This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.
IMPLEMENTATION OF THE PRINCIPLES OF ODA MODERNISATION ON PRIVATE- SECTOR INSTRUMENTS Template for the ODA-eligibility assessment of DFIs and other vehicles and definition and reporting on additionality Introduction 1. At the February 2016 DAC High Level Meeting (HLM), members agreed on the principles to better reflect, in ODA, the donor effort involved in the use of private sector instruments (PSI). 1 The Working Party on Development Finance Statistics (WP-STAT) was mandated to develop proposals for the implementation details of these principles for decision by the October 2016 Senior Level Meeting. 2. This note presents a proposal for implementing the principles relating to the procedure and criteria for assessing the ODA eligibility of PSI. Building on the work carried out by the Group of Friends of the ODA modernisation led by Dorothea Groth (Germany) in the lead-up to the HLM, the note proposes a draft template for the ODA-eligibility assessment of DFIs and other vehicles (section I), a draft definition of additionality in the context of PSI and a number of criteria to be included in a drop-down menu to report on additionality at the activity level in the CRS (section II). 3. The note is presented for discussion at the WP-STAT meeting on 22-23 March 2016. Members are invited to comment on the proposals in paragraphs 5, 7 and 11. I. Template for ODA-eligibility assessment of DFIs and other vehicles Principle ix. The ODA-eligibility assessment will be carried out for all bilateral DFIs and, upon request, for other vehicles, using a common template. The Secretariat will undertake the necessary analysis and present a recommendation on ODA eligibility for consideration by the DAC or a body designated by the DAC. HLM follow-up: elaborate a proposal for the template. 4. A draft template for assessing the ODA eligibility of DFIs and other PSI vehicles is shown below. It is based on discussions in the Group of Friends on proposals originally made by Spain and Japan. The draft was presented at the 20 January 2016 informal DAC meeting on PSI. The feedback was generally positive; a few members stated that they would provide the Secretariat with drafting suggestions but so far no specific comments have been received. 5. As agreed by the HLM, the objective is now to elaborate a final proposal for the template for consideration by the DAC. Members are therefore invited to review the template, indicate if they can in principle agree with the proposal and, if necessary, make suggestions for improving it. 1. See Annex 1 of the HLM communique. 2
Draft template for the assessment of ODA eligibility of bilateral DFIs and other PSI vehicles (For completion by a DAC member) Full official name of the institution in English: Mandate/mission: in French: Official abbreviation in English: in French: Proposing DAC Member: Year the institution was created: Please describe the institution s statute, mandate or mission statement. Does the institution have a stated development goal? Does the mandate address the additionality of PSI provided by the institution? Please describe. Shareholders and budget: Please describe the institution s shareholder and decision-making structures. What is the institution s total budget? What is the share of public capital in the total budget? Please specify the modalities of the public contributions (grants, loans, equities, other). Project portfolio: Please describe the institution s activities (e.g. financial instruments, modalities) and the rationale for qualifying them as developmental. In which sectors, themes and partnerships is the institution active? In which countries is the institution active? Investment strategy: Please describe the investment strategy of the institution and how this strategy promotes the economic development and welfare of developing countries as a main or substantial objective. Does the institution set key Performance Indicators in relation to development objectives for each operation/project in its portfolio [e.g. Corporate Policy Project Rating (GPR), Development Outcome Tracking System (DOTS)]? If not, how does the institution demonstrate evidence of development impact? Please describe the evaluation and reporting structures. Does the institution distribute profits to its shareholders? What share of profits is reinvested in development activities? Please specify if the institution has an explicit mandate to also promote national investment or exports. If so, what safeguards are applied to ensure compliance with international trade agreements (e.g. WTO rules, OECD Arrangement on officially supported export credits)? Due diligence mechanisms: Please describe the institution's methodology to assess the additionality of its operations with the private sector and to evaluate the commercial sustainability of its operations (e.g. viability of the client). Also describe the institution s governance, environmental and social standards (e.g. human rights, gender equality, CSR) and the mechanisms in place to prevent tax dodging when supporting the private sector. Web references: Please provide URLs to: the DFI s statute, mandate or mission statement; annual reports with details on geographical breakdown of the institution s portfolio; financial statements; any other useful information. 3
II. Definition of additionality and activity-level reporting in the CRS Principle x. The assessment will be based on an examination of the DFI s mandate, project portfolio, investment strategy and due diligence mechanisms. It will consider the extent to which the institution allocates its finance to ODAeligible countries, promoting the economic development and welfare of developing countries as its main objective. If necessary, i.e. if the institution is active also in non ODA-eligible countries and/or activity areas, the share of ODAeligible activities in the institution s total portfolio will be estimated, to establish a coefficient for ODA reporting. Information on the institution s investment strategy and d due diligence mechanisms will serve to assess additionality of the finance. HLM follow-up: develop a proposal for the assessment criteria. Principle xi. In their ODA reporting on PSI all members will provide, in addition to the standard CRS data items, information on the developmental objectives and additionality at the activity level in the CRS. The compliance of data reported with the principles hereby agreed, regardless of whether a member reports under the institutional or instrument-specific approach, will be assessed by the DAC through peer reviews and the regular (biennial) report on PSI. This will secure transparency and allow for peer learning among members (see principles xiv and xv). HLM followup: work on a definition of additionality; elaborate a drop-down menu to report on additionality in the CRS. 6. The reporting on PSI as ODA will be subject to a specific procedure which will include the assessment of the extent to which the vehicle providing PSI i) has the economic development and welfare of developing countries as the main and primary objective (developmental criterion of ODA); and ii) provides finance which is additional (characteristic of operations for PSI to be in line with the concessional in character criterion of ODA). 2 Principle xi. further clarifies that, in their ODA reporting on PSI, all members will be requested to provide information on the developmental objectives and additionality at the activity level in the CRS. The development criterion of ODA is well defined in the Directives, but no definition exists on additionality. 7. Based on preliminary work carried out by the Group of Friends, it is proposed to define additionality of PSI as finance extended to companies in countries and regions where the private sector would not invest in developmental projects without official support. Such finance addresses market failures in the recipient country which could result from limited access to local or international capital markets, perception of high risk by private investors or potential gaps between private and social returns. Members comments are invited. 8. In a recent meeting of the Participants of the OECD Arrangement, a number of representatives of export credit agencies (ECAs) highlighted that their operations were also additional in the sense that ECAs are not allowed to operate in countries with well-functioning capital markets. They raised the question of whether in their analyses of additionality DFIs take into account companies access to export credits. Moreover, they noted there are cases where ECAs and DFIs support the same projects and, given their respective roles in the financial set-up, the ECAs, while considering development as a side-effect of their activity, have the main responsibility for some developmental outcomes (e.g. environmental standards). 9. The draft definition in paragraph 7 only reflects the financial dimension of additionality, while in the literature the criteria for assessing additionality cover other aspects too. For example, the issues brief titled Additionality and leveraging private finance characterises additionality as consisting of two components: i) financial additionality (the most common way to determine additionality); and ii) operational and institutional additionality. Without financial additionality, instead of leveraging private finance, the public institution is simply subsidising private financiers and companies, or competing with them. Operational and institutional additionality is demonstrated through, for example, better alignment of the investment with the aims of the public institution backing it or better environmental or social 2. See Annex 1 of the Communiqué, principle iii. 4
performance of the investment as a result of the public institution s involvement. 3 The Donor Committee of Enterprise Development (DCED) has drawn attention to the challenges in demonstrating additionality ex-ante and suggested a number of criteria and principles for assessing additionality that could be considered. 4 10. As agreed in principle xi, additionality will constitute a key criterion to assess the ODA eligibility of PSI. At the 20 January 2016 informal DAC meeting, the Secretariat proposed to introduce in the CRS a new field to report on the additionality of PSI at the activity level. The field will provide, regardless of the approach followed, a description on why the transaction is considered additional. The reporting of this information at the activity-level will be critical to secure transparency and allow peer learning among members. 11. A drop-down menu has been developed to enable members to report and assess the additionality of their PSI operations according to three main criteria (see Table below). Members are invited to provide feedback on the proposed drop-down menu and, based on discussion in paragraphs 8 and 9, suggest any additional criteria to be included in the drop-down menu for CRS reporting. Proposed drop-down menu for the new CRS field on additionality Capital failure market Project, sector or country deemed too risky Gap between private and social returns of the project Although the project is considered commercially viable, it encounters difficulties to attract private investors due to limited or no access to local and international capital markets. - The risk analysis of the project shows that there is no sound market for the product or service provided by the project, or - The activity would not be undertaken because of their relative novelty, high perceived risk, or high initial cost of an undemonstrated market behaviour, currently adverse or as of yet still untested regulatory framework, or untested technology, or - Although the project is considered commercially viable, the political risks in the country deter private investors. The benefits expected from the positive externalities of the projects (i.e. public goods, such as emissions reductions, enhancing biological diversity, research and development and deployment of innovative technologies, or affordable provision of basic infrastructure services) may not be fully monetized by investors immediately. This could make the private financial internal rate of return lower than the true economic rate of return for society. An element of concessionality (explicit or implicit in the financial terms) could be envisaged in such cases to bridge the gap between private and social returns and make the project happen. 3. Cf. Friends of the Earth, Issues brief, http://libcloud.s3.amazonaws.com/93/10/f/2832/3-13_berlin_mtg_issue_brief_gcf_addltyleveraging_priv_fin_foe_us.pdf. 4. See DCED 2014 report on demonstrating additionality in private sector development initiatives. The report notes that there is no exact measurement or certainty of additionality and that any ex-ante assessment will be to some extent a case-by-case judgement (see graphic 1, page 8 of the report). 5