INASIA

Weekly Insights and Analysis

A New Era of Development Finance

February 11, 2015

By Anthea Mulakala

The global development landscape has changed dramatically in the last 15 years. In 2000, bilateral Development Assistance Committee (DAC) donors (UK, U.S., Japan, France) and multilateral institutions like the World Bank dominated the provision of aid. Today, the face of aid is increasingly Asian. On February 12-13 in Canberra, I will join over 200 researchers, academics, and private and government aid practitioners from across Australia, the Pacific, and Asia, to discuss this new aid landscape at the 2015 Australasian Aid Conference, co-hosted by The Asia Foundation and the Development Policy Centre at the Australian National University (ANU).

For new, non-traditional providers, aid is becoming one of the more important tools in the foreign policy toolbox, and while this is increasingly true of traditional donors, non-traditional providers make it more explicit. Conservative estimates indicate that the percentage of total development assistance coming from non-traditional providers increased tenfold, from 8.1 percent in 2000 to 30.7 percent in 2009 ($5.3 billion to $53.3 billion).

This changing aid landscape has enormous implications both for provider and recipient countries. In 2013, the Overseas Development Institute conducted a new research study, “The Age of Choice,” that explores what the new aid landscape means from partner country perspectives, and how countries can evolve their approaches to aid management to make the best use of these new actors and new sources of finance. The research – completed in 10 countries so far, including Cambodia and Timor-Leste, and most recently Vietnam – is revealing in understanding non-traditional development assistance flows. Research found that Cambodia’s budget is about 30-40 percent dependent on external development finance, and about 25 percent of this comes from non-traditional sources. Timor-Leste has seen a dramatic shift in aid dependency – in 2002, the country was heavily aid dependent with grants comprising 86 percent of the budget. In 2012, this dependency declined to 12 percent, largely attributed to the influx of oil revenues. Aid from non-traditional donors has remained fairly low, accounting for about 3.5 percent between 2010 and 2012. 2013 figures (not yet released) are expected to be higher as concessional lending was a factor.

Timor Leste ferry

Timor-Leste has seen a dramatic shift in aid dependency – in 2002, the country was heavily aid dependent with grants comprising 86 percent of the budget. In 2012, this dependency declined to 12 percent. Photo/Conor Ashleigh

This month, The Asia Foundation held seminars in Cambodia and Timor-Leste to discuss ODI’s findings. Government officials, development partners, civil society organizations, and representatives from the private sector debated the opportunities and challenges of this new era of development finance for their countries’ future.

Some of the main takeaways were:

  • Countries welcome choice: The benefits of more funding options outweigh the challenges for the countries ODI studied. In Cambodia as traditional DAC aid has steadily declined, non-traditional assistance, especially from China has risen. In Timor-Leste, China is the country’s 6th largest provider, with the potential to grow. Cuba and Brazil are also emerging actors.
  • Infrastructure is a priority: The need for infrastructure investment in Asia is paramount. The ADB estimates that about $750 billion is required annually between 2010 and 2020 to meet this need. Participants from Cambodia and Timor-Leste underscored the infrastructure imperative for their countries. Rather than feeling threatened by increased competition, World Bank and ADB participants welcomed the extra infrastructure financing from the largely Asian-led financial institutions like the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (BRICS Bank). However some concern was expressed that limited technical assistance or minimal safeguards from non-traditional partners on large infrastructure projects, may pose investment risk.
  • Speed matters: While speedy delivery is not a principle in the 2005 Paris Declaration, which lays out principles of good “donorship,” participants at the Timor-Leste roundtable noted that it should be. Partner countries appreciate the less red tape and speedy delivery of their non-traditional providers.
  • Challenges for civil society: Non-traditional assistance, particularly from non-DAC providers, is increasingly delivered through concessional loans. In Cambodia, the loan to grant ratio has steadily increased over the last decade, with loans comprising about 40 percent of the country’s assistance portfolio today. While this is favorable for the Cambodian government, according to civil society representatives in the seminar, 95 percent of Cambodia’s civil society relies on grant aid from traditional donors. Therefore, as some participants argued, declines in traditional grant aid could threaten their sustainability. In Timor-Leste and Cambodia NGOs worry about the transparency and accountability of new forms of finance and to what extent human rights may be comprised for speed.
  • Coordination is more an issue for traditional donors than partner countries: Non-DAC providers tend not to participate in donor-led meetings. They prefer to coordinate and negotiate directly with partner governments. This situation is acceptable for most partner governments, though it tends to irk traditional donors who often struggle to navigate the activities of non-traditional actors. In one particularly clear illustration of this, general-secretary of the g7+ Secretariat, Dr. Helder da Costa from Timor-Leste, commented that if you ask for a coordination meeting with China, they will ask you to come to the construction site.
  • Evolving role for traditional aid: Though it may appear that traditional DAC aid is being squeezed out by new forms of development finance from new actors, there is still a critical role to be played by traditional aid. Within this new landscape, traditional aid is still needed to support governments to create a favorable business climate for private investment, to assist governments to navigate, negotiate, make informed choices, and manage risk in a complex landscape with multiple financing options, and to support civil society to ensure transparency, accountability, and safeguards.

Despite the challenges, partner countries are excited by the opportunities offered by the evolution in development finance. In this “age of choice” they are more firmly in the driver’s seat than ever before.

For updates on the conference, follow #AAC2015 on Twitter, or watch the livestream here.

Anthea Mulakala is The Asia Foundation’s director for International Development Cooperation, based in Malaysia. She can be reached at anthea.mulakala@asiafoundation.org. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

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