Chairman

DEVELOPMENT Assistance Committee

2, rue André-Pascal www.oecd.org 75775 Paris Cedex 16, France Erik.Solheim@oecd.org

ES(2013)67 Paris, 10 January 2014

To DAC Ministers and Heads of Agency

Modernising Development Finance

The development finance landscape has been transformed. The world has witnessed development progress at an

unprecedented scale and pace over the last decades. Poverty has fallen rapidly. Trade and investment flows,

domestic resource mobilisation and private finance continue to increase in a growing number of developing

countries. Many of those countries are themselves becoming important donors. These are great development

successes, and development cooperation has played a central role in bringing them about.

Against this background, the Development Assistance Committee received a ministerial mandate to modernise

the measurements for development finance. This will culminate on 15-16 December 2014, when Ministers and

Heads of Agency will be asked to decide on the way development cooperation will be measured in the future.

Taking this agenda to a successful conclusion in December 2014 will require permanent engagement by capitals.

Your personal commitment and that of fellow ministers and heads of agency is essential to enable the preparation

of decisions on key parameters over the next twelve months, including:

- The modernisation of the Official Development Assistance (ODA) measurement.

- The possible establishment of a wider concept of development finance.

- The connection between development and climate finance, as well as other global public goods.

- The representation of recipient benefit and a stronger focus on results.

- Addressing concerns of emerging economies about ODA to measure South-South Cooperation.

The decisions we will take must ensure that our measurements remain relevant in today’s world. They must

respond to the need for modernisation while safeguarding the credibility of our commitments. Both are essential

for our field of policy. ODA remains an essential development resource, especially in Low Income Countries,

where it still accounts for 40 percent of fiscal revenues and 70 percent of external financing. But its role is

changing, as catalysing other resources and enhancing their development impact becomes ever more important.

The definition of official development finance has an impact on how we can work towards development goals.

The preparation of a new global development framework for the Post-2015 period provides a unique window of

opportunity to modernise development and to raise the global profile and impact of our work. The Annex sets out

the process by which we aim to reach the decision point in December 2014.

The key determinant for the outcome will be political leadership. I invite you to engage actively in shaping this

work, to flag contributions you may wish to make on particular issues, and to call on OECD to contribute to

domestic discussions you may undertake. I will be at your disposal for a personal discussion or participation in

events.

Yours sincerely,

Erik Solheim

1

Annex

Modernising Development Finance Roadmap to the DAC High Level Meeting, 15-16 December 2014

Context

The DAC High Level Meeting of December 2012 provided a comprehensive mandate for work on

new ways to measure development finance, acknowledging the need to modernise development

finance in light of the profound changes of the development and economic landscape. This work

should ensure the continued relevance and credibility of key measurements of development finance.

As appropriate, new measures might be introduced, and existing ones, notably Official Development

Assistance (ODA), modernised.

The international community is working towards a new development framework to be agreed at a

United Nations Summit in 2015. The context for financing for development has changed dramatically

since the Millennium Development Goals were agreed. ODA continues to be an essential resource for

development, but many countries, especially in the middle income group, have access to a much more

diverse range of sources of finance – domestic and international, public and private. New actors are

ever more active, and the financing of development challenges with global dimensions must be

addressed.

Engagement and coordination with UN preparations for a post-2015 resource framework

UN offices working on the preparation of post-2015 development goals are looking to the DAC, as the

traditional keeper and guardian of ODA statistics, to contribute to the process through its work on

modernising external development finance. The DAC needs to finalise its work by the end of 2014 so

that the outcome of this work can be taken into account by the relevant UN processes on the

development agenda of the future. Any changes in measurement would be understood to take effect

for flows from 2016 onward.

The DAC Secretariat advances work on modernising the measurement of external development

finance in close coordination with the relevant UN processes. It is also engaging with developing

countries, civil society and other international organisations to understand their priorities and concerns

in relation to this issue. DAC and other OECD Members are encouraged to take active part in this

effort.

Key events and decision-making process in the DAC

At the High Level Meeting on 15-16 December 2014, DAC Ministers and Heads of Agency are

expected to reach final agreement on the modernisation of ODA and on the creation of a new measure,

including all corollary policy issues. Two Senior Level Meetings on 3-4 March and 7-8 October

2014 are key milestones to advance towards this decision point. DAC meetings are scheduled

throughout the period until December 2014 at roughly monthly intervals to prepare the final

agreement. Key dimensions and expected evolution of their treatment in preparation of the DAC High

Level Meeting are outlined below:

1.Modernising Official Development Assistance (ODA)

The two main concerns the process has to address in relation to ODA are: 1) the need to maintain the

credibility of ODA, and thereby development co-operation; 2) the criticism that ODA currently fails to

capture some development-related efforts that are relevant to developing countries, such as

investments generated through guarantees or related to peace-keeping; while including expenditures

that would not be relevant to their capacity to develop, in particular those incurred in donor countries,

e.g. refugee costs or imputed student costs.

Moreover, specific issues include the eligibility of countries to receive ODA, which is based on their

income level and considered against the background of many rapidly growing middle income

countries; lack of agreement among DAC members on a uniform interpretation of concessionality;

and perceived disincentives in the measurement system of instruments that mobilise private

investment or help generate successful business models for development, such as development

guarantees or equity investments and seed capital.

The first Senior Level Meeting on 3-4 March 2014 should reach a basic understanding on the scope

and priorities for modernising the ODA measure and its relation to any new measure(s) so as to

provide guidance on the focus of further technical work. This should cover: the approach to

defining/treatment of concessionality; agreement in principle on whether or not to adjust recipient

eligibility criteria for ODA; and agreement on the principle to adjust the existing definitions so as

to incentivise resource mobilisation and avoid accounting methods that imply disincentives for

economically successful interventions.

At the second Senior Level Meeting on 7-8 October 2014, the DAC should reach a more

comprehensive understanding on all key parameters for modernisation of ODA, including the

specific relation to and concrete boundaries with any new measure(s). To the extent necessary, this

understanding should resolve any final questions regarding concessionality; establish a clear

approach to limiting or differentiating eligibility for different country groups; and cover specific

adjustments to the ODA measure to incentivise resources mobilisation and avoid disincentives for

economically successful interventions.

2. New Measure(s)

The mandate to elaborate a proposal for a new measure of total official support for development was

agreed in recognition of ODA as a core development resource that remains essential for many

countries. The mandate asks to ensure that ODA be directed where it is most needed or can best

leverage other resources. The idea of recipient benefit has been a guiding theme in this regard, with a

view to account better for the actual resources that are transferred to developing countries to support

their development process.

A central concern of the wider measure is then to capture flows that are relevant for development

irrespective of direct budgetary effort involved, in particular those mobilised with the help of official

interventions, such as less concessional development loans. Moreover, the question needs to be

addressed of whether and how to include, count and differentiate, flows that may not have a primary

development objective, but are important resources for development, such as private foreign

investments.

The first Senior Level Meeting on 3-4 March 2014 should reach a basic understanding: on the

scope, preferences and priorities for a new measure; the basic approach to recipient benefit/receipts

that addresses major considerations of measuring and monitoring development finance from the

recipient perspective.

At the second Senior Level Meeting on 7-8 October 2014, the DAC should reach a more

comprehensive understanding on: the key parameters of a new measure, including major technical

aspects and questions related to the accounting of different flows; key parameters for addressing

the recipient benefit dimension; the specific relation of the new measure to ODA.

3. Climate Finance

The post-2015 development framework is expected to bring together development cooperation and

sustainable development/climate change finance into one global framework. DAC statistics monitor

climate-related and other environmental aid through its “Rio markers” and the environmental policy

marker, capturing information on every aid activity. Work is underway to further improve the quality

and coverage of the reporting and to extend the tracking of climate change and other environmental

finance beyond ODA.

3

The DAC reporting system provides information on the actual flows that are taking place to address

climate change. Continued refining of the methodology allows capturing an increasing range of flows

beyond ODA, providing a real-world picture of the sources, destinations and trends of different flows

of climate-change related finance. This makes these data essential to focus attention on the concrete

action that is taking place, and what can be done to leverage required resources, without prejudice to

ongoing discussions at UN Framework Convention on Climate Change on nominal targets.

The first Senior Level Meeting on 3-4 March 2014 should aim to reach a basic understanding on

how climate and environment-related official development finance, (as defined with the Rio and

Environment markers, adjusted as appropriate), can form the basis fora future measurement

system.

At the second Senior Level Meeting on 7-8 October 2014, the DAC should be in a position to

suggest inputs to a methodology for the UN Framework Convention on Climate Change for

assessing climate-related flows, and possibly also for the Convention on Biodiversity, in order to

avoid duplication and ensure compatibility between new and existing tracking systems and

processes where appropriate.

4. Global Public Policies

For both modernising ODA and for elaborating a new measure, it will be important to consider the

treatment of expenses related to developing countries but that involve issues broader than

development, such as in-donor refugee expenditures or peace and security commitments in developing

countries. While arrangements for their treatment in ODA exist, there have been regular requests or

concerns to clarify or adjust the eligibility of these activities.

The first Senior Level Meeting on 3-4 March 2014 should reach a general understanding on the

need to adjust current treatment of these flows in ODA, and the scope of their coverage in a new

measure.

The second Senior Level Meeting on 7-8 October 2014 should yield an understanding on any

specific adjustments of the ODA treatment of such flows, and the specific extent to which these

would be covered by a new measure.

5. Emerging Providers, including South-South Co-operation

An increasing number of non-DAC countries report their development efforts to the DAC. However,

there are reservations among many emerging providers about the ODA measure. Decisions of non-

DAC providers to report to the DAC are and will remain voluntary. Political considerations on the part

of non-members are an important factor. However, concerns have also been raised that ODA tends to

underrepresent South-South Co-operation in the way it is reported. These concerns must be addressed

credibly.

The first Senior Level Meeting on 3-4 March 2014 should agree to address concerns of emerging

and South-South Cooperation providers in relation to technical aspects of ODA as an adequate

measure to represent their efforts.

At the second Senior Level Meeting on 7-8 October 2014, the DAC should reach an understanding

on the specific adjustments to address emerging provider concerns.