Innovative financing series: How DFIs are transforming ODA for sustainable development

Introduction

Global development finance is in the midst of significant change. As governments look for new ways to close the US$4.2 trillion funding gap for the SDGs, including mobilizing private capital, bilateral DFIs are becoming increasingly prominent. The shift away from traditional grant-based assistance raises questions about how development priorities are targeted through private sector instruments and what challenges the instruments are best placed to address.

At the same time, recent updates to OECD DAC reporting standards have broadened what DFI activities can be counted as ODA. While the changes offer opportunities for donors to better reflect their efforts in innovative financing, they also introduce greater complexity, raising debates about transparency and the concessionality of ODA.

This Donor Tracker Commentary analyzes the growing prominence of DFIs and unpacks the complexities of the OECD's new reporting standards. The article provides insights into the mechanics of DFI-backed ODA, draws on initial 2023 data to highlight emerging trends in donor behavior, and identifies key areas to continue monitoring in upcoming months and years.

DFI mandate: catalyzing private sector investment

DFIs are specialized financial institutions that are typically established, owned, and capitalized either wholly or in combination with private actors, by national governments. Their mandate is to foster development by engaging with the private sector. Unlike traditional development agencies, DFIs provide loans, equity, guarantees, and other financial instruments to businesses and projects in developing countries, often in situations that are considered too risky or long-term for commercial investors. DFIs are at the forefront of innovative financing as they blend public and private capital, seeking both financial returns and measurable development impact, and they are often tasked with mobilizing additional private investment. Their work focuses on sectors where private sector involvement can drive sustainable growth, such as infrastructure, financial services, agriculture, manufacturing, and increasingly, climate action. In recent years, many donor governments have responded to the growing interest in innovative development finance by expanding and modernizing their DFIs, leading to a growth in assets under management. Notably, the portfolio size of the 15 DFIs part of the Association of European Development Finance Institutions (EDFI) grew by over 40% between 2016 to 2023, from EUR36.8 billion to EUR52.6 billion.

New OECD rules for private sector instruments

Historically, most DFI activities did not count as ODA under OECD DAC rules, which focused on grants and highly concessional loans. As donors increased their use of DFIs and other PSIs the DAC gradually modernized its approach to better capture donor effort for promoting sustainable development through PSIs. Since 2018, donors have been able to report a broader range of DFI-backed financial instruments, including equity investments, guarantees, and mezzanine finance, as ODA.

In 2023, the DAC introduced further revisions, including clearer ODA-eligibility criteria and a DAC Secretariat-led ODA-eligibility assessment process for PSI vehicles. For funding to be ODA-eligible it must:

• Be allocated to countries or territories on the DAC list of ODA recipients;
• Be administered with the promotion of economic development and welfare of developing countries as their main objective; and
• Demonstrate financial and/or value additionality, together with development additionality.

Most DFIs assessed during the first round of assessment in 2024 were found to be almost fully ODA-eligible. However, for all instruments other than grants, only the grant equivalent of the respective value is reported as ‘ ODA donor effort’. The grant equivalent represents the financial ‘gift’ embedded in an investment, measuring the net cost to the donor for taking on risks or accepting returns that a purely commercial investor would not. How much is counted as grant equivalent depends on the type of finance and recipient countries. For example, for PSI loans, discount rates between 10% (LICs) and 6.1% (UMICs) are applied to the value of future repayments to determine the grant equivalent.

As the new reporting standard allows donors to count more of their funding channeled through DFIs as ODA, concerns emerge. Critics argue that expanding ODA eligibility risks diluting the core purpose of ODA, since funds may increasingly flow to commercially viable projects rather than those targeting the poorest and most marginalized. There are also concerns that donors’ headline ODA figures may be artificially inflated, without a corresponding increase in real development impact. Furthermore, gaps in transparency and inconsistent reporting practices make it challenging to assess whether DFI-backed investments are genuinely additional and delivering transformative results. Civil society organizations have called for rigorous implementation of the new OECD DAC rules to improve transparency and accountability, ensuring that the evolution of ODA reporting keeps development effectiveness at its heart.

What is initial data revealing?

The 2023 data offers a preliminary look at how donors are reporting PSI ODA channeled to or through their DFIs under new OECD standards. However, a complete analysis is challenging due to several limitations. First, with a transition period until 2026, not all donors have yet adopted the new reporting methodology. Second, the new rules do not require donors to disclose the name of the DFI, meaning that identifying these specific flows requires a keyword search analysis of project descriptions, if the DFI itself is not the reporting agency. Finally, donors can report DFI-related ODA in two different ways: the institutional approach and the instrument approach. Under the institutional approach, donors report capital flows between the government and the DFI itself, such as capital increases or dividends, as ODA. Under the instrument approach, donors report individual transactions made by DFIs, such as loans or equity investments in specific projects, as ODA. The two approaches can affect both the timing and the visibility of PSI ODA channeled to or through DFIs in the data, and can make cross-country comparisons more challenging.

While Germany and the UK are the largest contributors in absolute terms, the data shows different strategic priorities among donors. Austria channels the highest share of its bilateral ODA through its DFI, indicating a stronger strategic focus on leveraging its DFI. For most other donors, however, PSI ODA channeled through or to DFIs still represents a small fraction of their bilateral ODA, suggesting they rather have a supplementary role so far.

Capital increases to DFIs are, by their nature, reported as "unspecified" or "multisector" because the funds are not yet allocated to specific projects or countries at the time of reporting. ODA-eligible DFI investments focus on economic sectors, primarily financial services and energy, which aligns with their mandate to support private sector growth. Geographically, Africa is a key recipient region for ODA-eligible DFI investments. However, investments are also directed toward large emerging markets, fueling the debate on whether DFI funding is reaching the countries most in need or favoring markets with more commercial potential. In 2023, DFIs mostly relied on equity-like instruments, such as collective investment vehicles, which allow DFIs to pool funding to invest in a portfolio of companies or projects.

Conclusion

Looking ahead: monitoring transparency and impact

The growing role of DFIs marks a significant evolution in development finance. The shift offers the potential to mobilize substantial private capital, yet it also highlights the importance of safeguarding ODA's core focus on poverty and inequality. The rigorous and consistent implementation of the new OECD DAC reporting standards is key to ensuring transparency. Without transparency, assessing whether DFI investments deliver additional impact that cannot be achieved through other channels, rather than simply inflating ODA figures, becomes a significant challenge. In addition, more and better reporting on how DFI's are leveraging their risk profiles to mobilize private sector investments will be needed to hold them to account to fulling their mandates.

As the 2026 transition deadline approaches, the Donor Tracker will continue to monitor these financial flows and reporting practices to support advocacy organizations and policymakers in their efforts to ensure the evolution in development finance serves its ultimate goal of sustainable development.