Hôpital de Chagoua, N’Djaména © Pierre Salignon 2014
Hôpital de Chagoua, N’Djaména © Pierre Salignon 2014

Despite the marked decline in French Official Development Assistance (ODA) [1] , France has shown its determination to modernize its public action in various sectors of global development – the health sector, for example – and to do so by making the most effective use of the different financial tools that are available to French Development Agency  (mainly loans). At the same time, the UK, a donor that is held up as an example for development in terms of volumes, is, conversely, considering gradually introducing loans in aid that is currently almost exclusively made up of grants. While the complementarity between loans and grants is underlined here, the British example provides a timely reminder that grants are essential for promoting development in the most fragile countries, and that they should be ringfenced and not reduced, under the guise of budgetary restraint.

 

The UK, an exemplary development donor

About ten years ago, the UK decided to increase its ODA in an extremely proactive manner. In 2013, it exceeded 0.7% of its GNI (a net ODA volume of almost USD 18bn) [2] , thus meeting the longstanding objective that most DAC member countries (including France) have pledged to meet, without doing so. This is a first for a G7 country and this is the result of an almost seamless national political consensus, with a targeted geographical allocation, a recognized international influence, and an unparalleled crisis response mechanism. Her Majesty’s Government ranks second among DAC donor countries, just behind the USA (USD 31.55bn).

DFID, the British Government’s Department for International Development, manages both bilateral and multilateral action, and accounts for 90% of the UK’s ODA (against 30% of French ODA for Agence Française de Développement). The remaining 10% is achieved by CDC, which makes equity investments, and by the British Council. In all this system, there are no loans, no costs related to the reception of refugees, no student costs, and no debt relief. It is a fairly coherent and effective management tool.

 

Towards a mini “revolution” in the UK’s development policy?

Despite general satisfaction, a recent British Parliament report is seriously considering overhauling the British development assistance policy by 2030. The reason for this is that it is not easy to maintain the current budgetary effort, as the economic conditions in the UK are just as grim as they are in France. Hence the option of introducing a small portion of loans, while mainly continuing the current policy that focuses on grants. This would certainly mark a change of course, as British aid has not allocated an ODA loan for over 20 years.

For the British Parliament’s rapporteurs, “Development aid in the form of grants is very limited and precious, and it is getting increasingly difficult to make the case for giving aid in the form of grants to MICs (middle-income countries)”. Consequently, a differentiated approach depending on the capacities of States is being considered… “We believe that DFID should also develop the capacity to distribute aid in the form of concessional and non-concessional loans either ‘in house’ or by establishing a UK development bank”. While attention is drawn to the importance of grants for the most fragile States, the report goes further by considering, under certain conditions, loans in low-income countries… “There may also be circumstances where loan finance would be appropriate, for example to finance infrastructure, such as power generation, which will generate a return on investment, but care should be taken not to re-burden least developed countries with unmanageable debt”. The rapporteurs specify: “We believe that grants should continue to be used for financing access to basic minimum needs in LICs like health, education, sanitation and water… and for global public goods which cannot be funded in other ways”.

The suggested reform is far from being approved. The British Secretary of State initially remained cautious: “We do not have any plans to do any concessional loans directly to governments bilaterally. Our sense is that a more sensible route is to work with multilateral agencies”. She has apparently since simply ruled out the idea of a policy change. The affair has, however, received a lot of publicity and has undoubtedly prepared the ground for the next phase…

 

Striking a balance between loans and grants in emerging and least developed countries

It should be noted that the changes envisaged by the British Parliament echo what AFD has been professing for a long time: loans and grants are complementary and should not be set in opposition to each other. But the fact remains that the initial positions of AFD and DFID are diametrically opposed. AFD now only implements grants worth a few hundred million euros, which is hardly anything on the scale of ODA. The bulk of its activity is conducted via loans, meaning it is mainly oriented towards middle-income countries, which accept its products. Conversely, the volume of grants that can be mobilized by DFID, which bears no comparison with the volume mobilized by France, allows it to operate in fragile or low-income countries that reflect its diplomatic choices, but also its economic choices, when appropriate. Paradoxically, the UK’s problem is that certain countries in its priority area (South Asia, East and English-speaking Africa), particularly India, have now qualified to join the classification of middle-income country. Consequently, grants are no longer the best tools for operations in these countries.

Assuming that grants are still the main instruments for aid to low-income countries, in terms of ODA, it should be recalled that while the least developed countries mainly benefit from grants, it is because since the late 1970s it has been considered that they generally do not fulfill sufficient governance conditions to be able to transform the economic profitability of investments into tax revenue, which would make it possible to repay them. In addition, these countries, which are “drip-fed” on international aid, have paradoxically found themselves cut off from capital market resources, or with access to the most expensive resources. This constitutes a covert dual penalty.

The overall share of loans in global ODA now stands at approximately 15% of gross ODA (it has fallen sharply since the inception of aid), and the share of LDCs in ODA loans is extremely low. Too low, according to certain observers, who think that borrowing opportunities should be increased, particularly to invest in infrastructure, which has been neglected since the 1990s to the benefit of social sectors (which are more suited to the exclusive use of grants). The aid model based on the combination of grants and social sectors is undoubtedly reaching its limits. Not only do low-income countries need infrastructure, but it will probably only be possible to create it via loans. Furthermore, the social sectors themselves are potentially the most economically profitable ones and could also, in certain cases, be financed with loans, provided that there are appropriate maturities and grace periods, and that the governance conditions allow this.

 

Ringfence grants

The debate launched by the British Parliament resonates with the recent discussions over ODA in France. How to reduce public deficits and support economic growth, while continuing to combat poverty? How to maintain France’s capacity to take action in the most fragile States? How can one expect to remain influential, especially in Sub-Saharan Africa, without ringfencing a significant volume of grants that can be mobilized in social sectors? How to build the capacities and good governance of States and civil society actors who are faced with multiple and repeated shocks (conflicts, economic crises, disasters…)? How can one also ensure that political action, under the guise of economic diplomacy, does not only focus on investments in the form of loans in emerging countries, to the detriment of the financial support provided to the weakest countries? In the current context of globalized economies and the explosion of inequality, this is one of the major concerns expressed in particular by the representatives of French NGOs, faced with the reduction of ODA and the grants that can be mobilized for the poorest countries.

While the rapid development of emerging countries carries solid opportunities to support green, sustainable and solidarity-based growth, in the form of concessional, non-concessional, sovereign or non-sovereign loans, despite the temptation to retrench behind our borders, a more balanced approach should also be taken that ringfences grants to the benefit of low-income States. In the absence of other room for maneuver, in France this certainly means relaxing the current earmarking of grants mainly for the Global Fund to Fight AIDS, Tuberculosis and Malaria (over EUR 1bn in 3 years). Indeed, without denying the results achieved and the treatments that have been made available to patients (this combat has not been totally won), it would be well worth reestablishing a degree of financial flexibility on other development issues, particularly in low-income countries. This also means mobilizing innovative financing, such as the tax on financial transactions, as has been made possible with the Solidarity and Health Initiative for the Sahel to promote financial access to healthcare for pregnant women and children under 5 in the Sahel region.

In France, the objective – which is still not respected – of mobilizing 0.7% of GNI for ODA is likely to remain so for a long time (the shortfall stands at approximately USD 6bn). Due to budgetary constraints, the grant budget allocated to “Program 209: Solidarity towards Developing Countries” is being drastically reduced.

Yet it is precisely because there is a crisis that we should show more solidarity “at home and abroad”. As Martin Hirsch, a former member of the Bachelet Committee, points out: “We must never lose sight of the fact that poverty in our countries is closely linked to the way in which poverty in poor countries is dealt with. It is not a question of choosing between two priorities at home and abroad, but of tackling head on the same subject!”. In addition, we must not forget that solidarity, just like openness to the world, “is also good for growth” [3] .

 

Strengthen financial cooperation among development donors

That is why, beyond the hope of solidarity efforts in times of crisis, which are also beneficial for France’s diplomatic and economic influence, it is worth regularly calling into question the tools and ways of doing things. There is no doubt that a more effective coordination among donors, particularly in the most fragile States, and strategic alliances between AFD and DFID, or AFD and other donors, are required. But it is certainly possible to go even further, firstly in terms of blending loans and grants (depending on their respective strengths and weaknesses) and, secondly, in terms of the use of certain types of loan in sectors and countries where, over the past few decades, grants only have been deemed suitable.

 

 

[1] 0.41% of GNI in 2013
[2] Against USD 11.38bn of net ODA for France (40% achieved by AFD, mainly via loans)
[3] http://humanitaire.revues.org/2918 (in French)

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