Chapter 2. Financing for development in small island developing states: A focus on concessional finance

To what extent does financing for development address the specific needs and challenges identified in the previous chapter that are associated with the vulnerability of small island developing states (SIDS)? This chapter attempts to answer this question. It illustrates the financing for development landscape for SIDS: it analyses the composition and evolution of the full range of external financial flows (e.g. remittances, foreign direct investments, private grants, as well as concessional finance) and highlights some of the challenges relating to domestic resource mobilisation and debt sustainability. The chapter then focuses on concessional finance from the international community. It explores the scope and nature of flows and approaches to SIDS: the array of development partners involved, the articulation between bilateral and multilateral concessional sources, the sectoral focus and the prevailing co-operation modalities in different SIDS contexts. The analysis in the chapter capitalises on the wealth of OECD Development Assistance Committee (DAC) statistics and on new statistical sources.

  

2.1. The big picture: elements of the “financing for development” landscape

The international community identified, through the Addis Ababa Action Agenda of the Third International Conference on Financing for Development (UN, 2015), a comprehensive and integrated global framework to support sustainable development around the world. This framework includes both domestic and international resources, both public and private finance. This section analyses these flows, and key policy issues in relation to them, in the context of small island developing states.

SIDS tend to have small and erratic domestic revenues, which combined with high costs for providing public services and the fiscal impacts of natural disasters, often result in limited fiscal space for development investments. The debt situation of the five SIDS that benefitted from the Heavily Indebted Poor Countries (HIPC) Initiative has drastically improved in the past 15 years, but the remaining SIDS have seen on average an increase in their debt to gross national income (GNI) ratios, which, at 57%, is currently above the average for other developing countries (47%). Foreign direct investments and other private finance flows are highly volatile and on average contribute little to SIDS’ external sources of financing: only 12% in 2012-15. Owing to large diasporas, remittances represent the largest flow of external finance for SIDS: 52% in 2012-15. Concessional finance (i.e. grants and concessional loans from bilateral and multilateral providers) is the second largest flow of external finance on aggregate, and the largest for 22 out of 35 individual SIDS. For this reason the second part of this chapter focuses squarely on concessional finance to examine its sources and destinations, its modalities and reach.

2.1.1. Domestic resources

Erratic domestic revenues and the high unit cost of public services contribute to precarious fiscal positions for many SIDS. Domestic revenues can be volatile in SIDS given the relatively narrow productive bases concentrated in sectors that are exposed to external fluctuations. SIDS that rely on natural resource rents or tourism as their primary export sectors are especially prone to fluctuating domestic and tax revenues. In Timor-Leste, for example, tax revenues accounted for 103% of gross domestic product (GDP) in 2010, rising to 133% in 2012 before falling to 40% in 2015.

Besides limited domestic revenue generation, the high unit costs of services have a significant effect on public finances, leading to larger public sector expenditures than in other developing countries. This is especially true in Pacific SIDS, where small populations are often scattered across a multitude of islands, compared to developing countries of a similar income level (see, for example, Horscroft, 2014). Government expenses accounted for 29% of GDP in SIDS, compared to 22% in other developing countries in 2014. Compared to other countries, a larger share of public expenditure is also current expenditure and not capital investment.

Severe climate events and natural disasters tend to have heavy fiscal impacts (OECD-World Bank, 2016; World Bank, 2016a): financing humanitarian responses, recovery and reconstruction can divert scarce public resources from essential social and economic development investments, compromising the pace and scope of future growth and development. Grenada, located on the southern tip of the Caribbean hurricane belt, was hit by hurricanes Ivan in 2004 and Emily in 2005. The hurricanes damaged or destroyed 90% of the country’s housing stock, and devastated its nutmeg and tourism industries, as well as much of its coastal infrastructure. The cost of the hurricanes was estimated at 200% of Grenada’s GDP. In their aftermath, the country experienced a sharp economic downturn, making it impossible to service its debt. The global financial crisis compounded Grenada’s already acute debt situation: lost income from lower tourism receipts spurred low growth, resulting in insufficient government revenues and an inability to keep up debt servicing costs. Even after tourists returned and income rebounded, the Government of Grenada was unable to reduce its fiscal deficit (World Bank, 2015). In 2015, the country embarked on a debt restructuring programme and obtained debt relief from its Paris Club creditors, as well as from some of its non-Paris Club bilateral creditors. However, fiscal deficits and public debt accumulation remain an issue, together with the limited fiscal space for development investments resulting from the austerity imposed by Grenada’s 2015 Fiscal Responsibility Act.

High levels of public debt remain a challenge for many SIDS, especially in the Caribbean

High levels of debt reduce the fiscal space for governments to make critical investments for development. A country’s total debt and its ability to repay a loan also impact on creditworthiness, affecting access to capital markets. Besides commercial loans, even concessional borrowing is affected by a country’s debt sustainability: the outcomes of the Debt Sustainability Analysis (DSA) directly affect the cost of concessional borrowing from the International Development Association (IDA) (with improving external debt sustainability translating into hardening terms). Given the large fiscal impacts that natural disasters can have in SIDS, it is positive that DSA increasingly integrate natural disaster risks, therefore accounting for some of the vulnerabilities of SIDS. DSA that consider natural disaster risks include the 2015 DSA of Haiti and the 2016 DSA of the Solomon Islands.

According to the International Monetary Fund (IMF, 2017), 20 of the 35 SIDS considered in this report are assessed as being at “moderate” risk, “high” risk or “in debt distress” in 20171: 1 country (Grenada) is currently in debt distress, 11 are at high risk, 8 are at moderate risk. Only one SIDS (Papua New Guinea) is considered at low risk of debt distress. Since 2016, three SIDS – Cabo Verde, Haiti and Samoa – moved from a moderate to a high-risk level of debt distress.

SIDS have, on average, higher ratios of external debt to GNI than other developing countries, 57% compared to 47% in 2015. Debt-to-GNI ratios are particularly high in upper middle-income countries and lower middle-income countries, largely in the Caribbean. The largest debt-to-GNI ratio is found in Mauritius, where debt stood at 128% of GNI in 2015 (and annual servicing costs represented 29% of GNI), followed by: Jamaica (103%), Cabo Verde (98%), Belize (82%), Grenada (73%), Dominica (63%) and Samoa (60%).

Some SIDS, especially least developed countries, have been supported by the international community to bring down debt, but further measures are not forthcoming

Five SIDS – Comoros, Haiti, Guinea Bissau, Guyana, and Sao Tome and Principe – benefitted from the HIPC Initiative, which contributed to bring down their debt from an average of 196% of GNI in 2000 to 35% in 2015. Debt-to-GNI ratios for the remaining SIDS, are instead on the rise, having reached 62% in 2015, up from 44% in 2000. The HIPC Initiative was designed to support only the poorest and most indebted countries, and other SIDS are instead called upon to reduce expenditures, raise taxes and work with individual creditors to address debt issues, despite their numerous calls to the international community for broader support to alleviate their debt burdens and create fiscal space. Chapter 3 discusses successful and innovative approaches (such as debt-for-nature swaps) that may contribute to address debt issues in SIDS.

Figure 2.1. Impressive reductions in the level of debt in the small island developing states that benefitted from the Heavily Indebted Poor Countries Initiative
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Source: Adapted from World Bank (n.d.), World Development Indicators, https://data.worldbank.org/data-catalog/world-development-indicators.

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Debt-servicing costs account for a high share of public expenditure in many SIDS

The composition of the debt portfolios of SIDS – specifically the extent of concessional debt and the repayment schedules – dictates their debt servicing levels. Borrowing countries incur debt at different conditions depending on whether they borrow from private, official, bilateral or multilateral sources. Private credit entails higher and volatile interest rates, pro-cyclicality and shorter repayment schedules. By contrast, concessional debt owed to official bilateral or multilateral creditors usually involves longer and less expensive repayment schedules. Lower income SIDS, which have access to concessional finance from bilateral and multilateral sources, tend to have a greater share of concessional debt. Middle-income countries, instead, have more developed domestic credit markets and greater access to international capital markets and, as a result, a larger share of debt from private creditors and higher debt-servicing costs. Figure 2.2 shows that the highest level of commercial debt was in Jamaica, weighing in at 50% of its public debt in 2014. Reliance on commercial debt was also significant for other upper middle-income SIDS in the Caribbean – Belize (40%), Dominican Republic (35%), Grenada (34%), Saint Lucia (23%), and for one upper middle-income country in the Pacific, Fiji (29%).

Figure 2.2. Commercial debt represents a significant share of public debt for some upper middle-income small island developing states
Composition of public debt in 2014
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Source: Adapted from World Bank (2017), International Debt Statistics (database), https://data.worldbank.org/data-catalog/international-debt-statistics.

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2.1.2. External flows for development

Several external financial flows reach SIDS. These flows include: (i) remittances, (ii) private flows at market terms (e.g. foreign direct investments, and total bank and non-bank purchases of bonds and other securities, including equities), (iii) private grants, (iv) non-concessional flows from bilateral and multilateral providers (i.e. official flows that do not meet the ODA definition) and (v) concessional finance from bilateral and multilateral providers (gross bilateral ODA and concessional flows from multilateral organisations meeting the ODA definition). This section examines the composition and evolution of these flows in SIDS.

Remittances account for the largest share of external finance to SIDS

Remittances are the largest external financial flow to SIDS, accounting for 52% (i.e. a total of USD 36.1 billion) of external finance in 2012-15 (Figure 2.3). New international anti-money laundering/combating the financing of terrorism (AML/FCT) regulations, however, could have a significant impact on vital remittance flows in the future. Over the 2012-15 period, remittances represented over 50% of total external financial flows for seven SIDS: Grenada (50%), Fiji (56%), Belize (59%), Tonga (60%), Dominican Republic (75%), Jamaica (90%), and Antigua and Barbuda (126%, due to negative net private flows at market terms). Significant data gaps on remittances for some of the smallest SIDS could mean that the real figure could be much higher. Remittances also make for a large share of GDP in many SIDS (World Bank, 2016b): Cabo Verde (10%), Tuvalu (11%), Marshall Islands (14%), Jamaica (16%), Samoa (18%), Comoros (20%), and Haiti (23%).

Figure 2.3. Remittances account for the bulk of external financing to small island developing states
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Note: Composition of external flows to SIDS, 2000-15 (constant prices).

Source: OECD DAC Statistics, and IMF and World Bank data.

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Non-concessional official flows2 are less significant (USD 5.8 billion in 2012-15, i.e. 8% of the total). Across SIDS, these flows are highly concentrated, as they are primarily channelled to more developed or larger markets: in 2012-15, three SIDS – the Dominican Republic, Papua New Guinea and Jamaica – received over 70% of total non-concessional finance, and represented more than 20% of total external finance only in four SIDS: Antigua and Barbuda (116%), Suriname (41%), Papua New Guinea (21%) and Cook Islands (20%). Concentration is strong also on the provider side, with three providers accounting for over 70% in 2012-15: the Inter-American Development Bank (38%), United States (21%), and the International Bank for Reconstruction and Development (13%).

Private flows at market terms can be very volatile: in 2007 they represented 49% of total external flows but became recently negative (years 2013 and 2014). The volatility of market-term flows became particularly visible after the global financial crisis, with several extreme peaks and troughs. In 2012-15, these flows represented on average 12% of the external financial flows reaching SIDS and less than 20% for 18 individual SIDS out of 35. In addition, private finance re-flows exceeded the inflows in nine SIDS, resulting in negative net private flows in this period.

Concessional finance from bilateral and multilateral providers represents the second-largest external flow for SIDS as a whole, at 27% of total external financing in 2012-15 (USD 18.8 billion). However, they represent the largest external financial flow for most individual SIDS: for 22 out of 35 in 2012-15 (Figure 2.4).

Figure 2.4. Concessional finance is the largest flow of external finance for three out of five small island developing states, 2012-15
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Source: OECD DAC Statistics, and IMF and World Bank data.

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The composition of external financial flows to SIDS is quite distinct from that in other developing countries, and flows are more erratic

As Figure 2.5 illustrates, external finance to other developing countries displays much less volatility than in SIDS. Even private flows at market terms, which fluctuated over the full period in other developing countries, still exhibit a less erratic pattern than for SIDS.

Figure 2.5. External finance is less volatile, and the weight of remittances is smaller, for other developing countries than for small island developing states
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Source: OECD DAC Statistics, and IMF and World Bank data.

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In terms of the relative weight of different flows of external finance, SIDS tend to face, more than other ODA-eligible developing countries, significant challenges in attracting a significant and more stable flows of private finance: in 2012-15, these flows weighed only 12% in the total of external finance to SIDS, compared to a much larger 35% in other ODA-eligible developing countries. Compared to other developing countries (27% in 2012-15), SIDS are on average also more reliant on remittances (54%). Non-concessional flows have a similar weight in the external financing of SIDS (8%) and in that of other developing countries on average (9%). Concessional finance represents a slightly larger share of external finance for SIDS (27%) than for other developing countries on average (23%).

Philanthropy is becoming a relevant resource for development

The OECD has recently started to collect statistical data on philanthropy for development, through the 2016 OECD DAC Survey on Global Private Philanthropy for Development, which covers financing from the most active and influential philanthropic foundations3, trusts and corporations in the years 2013-15. These are generally cross-border (i.e. external) flows, although the survey also covers foundations based in developing countries, in which case the activities captured do not necessarily represent cross-border flows.

According to data from this survey, 30 out of 35 SIDS were beneficiaries of support from private foundations, with a total of USD 161 million allocated to the benefit of SIDS. The bulk of support was concentrated on a few countries, with Haiti receiving nearly half of the total (48%) and Cuba the second-largest share (13%). All other SIDS received much smaller amounts: less than 6% of the total each. Around 5% of the total was allocated to regional initiatives in the Caribbean or the Pacific. Three foundations provided half of the total: the Bill and Melinda Gates Foundation (25%), the W.K. Kellogg Foundation (16%) and Atlantic Philanthropies (9%). Philanthropic giving primarily targeted health (42%), partly owing to the weight of the Bill and Melinda Gates Foundation and its strong focus on this sector. The next largest sectors benefitting from philanthropic giving were the environment (18%), agriculture (11%) and education (9%) (Figure 2.6).

Figure 2.6. The bulk of the philanthropic resources supporting SIDS targeted health interventions, and over half was allocated to Haiti
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Source: OECD DAC (2016), Survey on Global Private Philanthropy for Development data, www.oecd.org/development/beyond-oda-foundations.htm.

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2.2. Zooming in on concessional finance: the scope and nature of development co-operation in small island developing states

Concessional finance4 provided by the international community as part of international development co-operation remains a vital source of financing for development in SIDS. In aggregate, it accounted for 27% of total external flows reaching SIDS in 2012-15, and represents the largest flow of external finance for three out of five SIDS. On average, concessional finance represents only 2.1% of the GNI of SIDS, but over 10% of GNI in 13 individual SIDS. In Tuvalu, it accounts for as much as 90% of GNI5. In some SIDS, concessional finance makes for a considerable part of public budgets, contributing significantly to the financing of public functions and public services. Concessional finance often targets vital sectors – such as health, education, water and sanitation – where investments have large net social returns, yet domestic resources may be insufficient.

Concessional finance is particularly important for the financing of resilience to climate and natural disasters. This stems from the high cost of coping with natural disasters and building resilient economies, which largely exceeds national resources of SIDS. It also derives from the general recognition that SIDS are bearing the brunt of the impacts of climate change, and that their limited fiscal space may prevent them from using domestic resources or borrowing to meet the additional costs of investing in climate and disaster resilience (OECD-World Bank, 2016).

SIDS receive the bulk of concessional finance by bilateral providers (79%), mainly influenced by proximity and geopolitical ties, and often in connection to emergency responses or one-off interventions. Five providers accounted for 58% of all concessional finance to SIDS in 2012-15, although providers totalled 72, signalling that several providers spread themselves thinly across SIDS and projects. The bulk of allocations tend to be concentrated on a few SIDS, with Haiti alone still receiving 25% of the total and the top seven recipients 64%. The use of budget support, which has been declining globally, has increased in SIDS, especially in the Pacific and in 2012-15 it represented more than 20% of concessional finance for 11 SIDS. Otherwise, however, a proliferation of small project-type interventions prevails, with 70% of transactions in SIDS accounting for 2% of the total value of concessional finance. In terms of targeting of resources, while the broad nature of development needs in several SIDS can make prioritisation difficult, some areas and sectors that would seem vital – and even appear as prerequisites – to promoting sustainable development in SIDS receive relatively little support, including climate, energy, infrastructures, and debt.

Owing to their specific circumstances and development challenges, breaking dependence on international official assistance will not be easy for some SIDS; for others, it will remain a critical resource to meet specific development needs. In both cases, as they embark on a path of sustainable development, SIDS will need to mobilise more financing from a broader array of both public and private sources. Concessional funds will need to play a significant role in leveraging and catalysing those flows.

2.2.1. Recent trends in concessional finance

Concessional finance to SIDS is largely driven by allocations to a few countries and in response to emergences and one-off interventions

Since 2000, in aggregate terms, concessional finance has represented for SIDS a fairly stable source of financing for development, increasing at an average rate of 9%. This aggregate trend, however, has been largely driven by temporary increases to few countries: concessional finance to SIDS reached an historical peak in 2010 in response to the devastating earthquake in Haiti, and it increased again in 2015 and peaked in 2016 (at USD 7.07 billion, in 2015 prices) mostly due to debt relief to Cuba (Figure 2.7). When the increase to Cuba is excluded, the 2016 figure represents a 4% decline compared to the 2015 level, continuing to fall short of the 2009 pre-“Haiti” peak level. In between these two peaks instead, concessional finance declined at an average rate of 13% per year.

Figure 2.7. Concessional finance to small island developing states peaked in 2010 and 2016 in response to emergencies in Haiti and Cuba
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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SIDS receive a fairly stable share of global concessional finance

In 2012-15, concessional finance to SIDS accounted for 3.1% of concessional finance to all developing countries6. Although SIDS receive just a fraction of the total volume of concessional finance to developing countries, allocations to SIDS are fairly higher in per capita terms compared to other developing countries (USD 96 per capita on average compared to USD 25 per capita in 2012-15). These high per capita levels of concessional finance stem from the dis-economies of scale associated with providing development assistance to a small country – the so called “small country bias” (OECD, 2013), which in SIDS is exacerbated by the challenges and additional costs of delivering assistance to remote and dispersed populations. Hence, any consideration of per capita allocations to SIDS should take into account the higher per capita costs of assistance in this context: transaction costs for development activities are an estimated 4.7 times higher in SIDS than in other developing countries (IFAD, 2014).

DAC members account for the bulk of concessional finance to SIDS

In 2012-15, 72 providers7 extended concessional finance to SIDS, of which 42 bilateral and 30 multilateral. The bilateral sources comprised all DAC members, as well as other high-income economies (such as Russian Federation (“Russia”), United Arab Emirates and Kuwait), some South-South providers (such as Thailand, Kazakhstan and Azerbaijan) and even Timor-Leste8. Multilateral providers included regional and global multilateral development banks, United Nations agencies and funds, and global funds such as the Global Environment Facility; the Global Fund to Fight AIDS, Tuberculosis and Malaria, and the Adaptation Fund.

Over 2012-15, DAC members accounted for the bulk of concessional financing to SIDS (77%), extending an average annual amount of USD 3.6 billion, for a total of USD 14.4 billion in the period (Figure 2.8). When including all other bilateral providers, this figure reaches 79% of total concessional finance to SIDS.

Figure 2.8. Bilateral providers account for the bulk of concessional financing to small island developing states
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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Concessional finance from bilateral sources increased by 4% between 2012 and 2015, mainly due to considerable increases by Spain (+USD 100 million), Japan (+ USD 63 million), New Zealand (+USD 35 million), Korea (+USD 20 million) and the United Kingdom (+ USD 20 million). The overall increase between 2012 and 2015 was recorded despite significant temporary decreases in 2013 and 2014 by some large providers, such as Australia, Canada and the United States.

Multilateral providers are stepping up support to SIDS

Multilateral providers accounted, in 2012-15, for a smaller share of total financing to SIDS: 21%, extending a yearly average of nearly USD 1 billion (for a total of USD 3.9 billion). However, financial support to SIDS from multilateral sources has increased faster than support from bilateral sources, rising by 22% from 2012 to 2015. While several multilateral organisations increased their support, the largest increase by far came from the International Development Association (IDA, + USD 47 million), which accounts for 23% of multilateral concessional finance to SIDS and is therefore the largest multilateral provider. IDA allocations to SIDS are expected to increase even further in light of the outcomes of the IDA 18 Replenishment, but not all SIDS will benefit. IDA will almost quadruple the resources allocated to SIDS, including because of the increase in the base allocation for small states from Special Drawing Rights (SDR) 4 million (SDR) in IDA 17 to SDR 15 million in IDA 189. Only the IDA-eligible SIDS, 21 out of the 35 considered here, will benefit from this increase.

The global funds10 have played an increasingly important role in the development finance landscape of SIDS. In 2012-15, they collectively accounted for about 19% of multilateral financing to SIDS (for a total of USD 731million in 2012-15). Although the overall volume of their contributions fluctuated, it grew by 11% over this period.

The importance of development finance from the People’s Republic of China and other sovereign states beyond “traditional donors” is growing

The People’s Republic of China (“China”) and other emerging providers11 – including Chinese Taipei, India, Indonesia, Malaysia, Morocco, Russia, United Arab Emirates and Venezuela – are becoming key partners for SIDS. Resources from a larger number of providers can mean more financing options for SIDS, as well as greater and more varied opportunities for mutual learning and partnerships. In the future, as SIDS graduate from ODA, the importance of concessional finance from these providers – whose financing allocations do not rely on ODA criteria – could further increase.

The Lowry Institute estimates that China provided USD 1.8 billion12 to Pacific SIDS in 2006-14, becoming an important provider of development finance in the region (UNDP, 2017a). For some Pacific SIDS, China is estimated to be already a larger provider of development finance than some important “traditional” providers. It is estimated that China’s largest share of financing in the Pacific went to Papua New Guinea, which received USD 632 million in 2006-14. China is an active development partner in several other Pacific SIDS, including the Cook Islands, Fiji, Papua New Guinea, Samoa, Timor-Leste, Tonga and Vanuatu (Dornan and Brant, 2014). The main focus of Chinese financing in this period was infrastructure, accounting for 42% of the total; followed by governance (13%) and education (9%). Chinese support has also focused on addressing capacity constraints in the region: the China-Pacific Islands Countries Economic Development Cooperation Forum, established in 2006, helped train over 2 500 SIDS officials by 2012 (UNDP, 2017a).

Twelve non-DAC providers13 that report their ODA spending to the OECD Creditor Reporting System allocated concessional finance to SIDS in 2012-15, including two South-South providers: Thailand and Timor-Leste. Concessional finance from these providers averaged USD 121 million a year, totalling USD 483 million in 2012-15, and representing 2.6% of all financing to SIDS over the period. Similarly to financing from DAC members and multilateral providers, concessional finance from non-DAC providers dropped in 2011-14 and picked up again in 2015, largely due to large debt relief Russia provided to Cuba (USD 351 million). Russia accounted for 74% of total concessional finance to SIDS from non-DAC providers over 2012-15, although, besides Cuba, it only provided concessional finance to Vanuatu (USD 2.6 million) in 2015. The second largest provider was the United Arab Emirates (USD 85 million to 27 SIDS, or18% of total financing by non-DAC providers in 2012-15), which extended the largest contributions to the Seychelles (26%), Comoros (15%) and the Maldives (12%). Among the South-South providers, Thailand extended a total of just under USD 1 million in 2012-15 to 18 SIDS, mainly Timor-Leste (25%), the Maldives (20%), Fiji, Tonga and Vanuatu (10% each). Timor-Leste extended a total of USD 1.5 million across Cabo Verde, Guinea Bissau, Tonga and Vanuatu, mainly as humanitarian support.

2.2.2. Recipients

Caribbean SIDS receive the largest share of concessional finance in volume terms

Over 2012-15, SIDS in the Caribbean received the largest share of concessional flows to SIDS: 44% of the total, or USD 8.4 billion. A similar share reached SIDS in the Pacific: 42% (or USD 7.9 billion), while SIDS in the Africa, Indian Ocean, Mediterranean and South China Sea (AIMS) region received 14% (USD 2.6 billion), the smallest share (Figure 2.9). While these shares have not fluctuated much over time, Caribbean SIDS received a larger share in 2015 (48%) while SIDS in the AIMS region saw a progressive decrease in concessional financing over 2012-15.

Figure 2.9. Caribbean SIDS received the largest share of concessional finance, followed by SIDS in the Pacific, 2012-15
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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However, regional allocations hide important trends

Regional aggregations can hide important differences in the distribution of concessional finance across SIDS. In fact, while the Caribbean as a region receives the largest shares overall, several of the SIDS in the region are actually among the smallest recipients. The strong concentration of concessional financing in the region is greatly affected by large allocations to Haiti and the Dominican Republic, which together account for 64% of total allocations to the Caribbean.

While the Caribbean and Pacific regions receive similar shares of total concessional financing, per capita allocations are much higher in the Pacific, given the smaller populations in this region. Per capita allocations to Pacific SIDS average USD 186, compared to USD 66 in the Caribbean, and USD 111 in the AIMS region, and USD 96 for SIDS overall. Niue, the SIDS with the smallest population (around 1 190 inhabitants), received the largest per capita amounts of concessional finance (USD 12 135) in 2015, together with other microstates (Figure 2.10). Several of the microstates retain a special constitutional relationship with advanced economies, which may also influence these allocations.

Figure 2.10. Concessional finance is strongly concentrated in a few small island developing states
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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Overall, the largest volumes were directed to seven SIDS which collectively accounted for 64% of the total concessional finance allocated to SIDS over 2012-15. Haiti alone accounted for more than 48% of total concessional finance to SIDS in the 2010 peak year. Although its weight in total concessional finance has since decreased, it still accounted for over 20% of the total in 2015, and for 25% of all concessional finance to SIDS in 2012-15. The remaining top six SIDS recipients were: Papua New Guinea (13% of the total in 2012-15, or USD 2.3 billion), the Dominican Republic (6%, or USD 1.1 billion), Timor-Leste (5%, or USD 882 million) Cabo Verde (5%, or USD 869 million), Solomon Islands (5%, or USD 842 million) and Cuba (5%, or USD 815 million).

These top five recipients of concessional finance are spread across regions and income groups. Two are located in the Caribbean, Haiti and Dominican Republic; two in the Pacific, Papua New Guinea and Timor-Leste; and one in the AIMS region, Cabo Verde. Two, Haiti and Timor-Leste, are least developed countries; two, Papua New Guinea and Cabo Verde, are lower middle-income countries and one, the Dominican Republic, is an upper middle-income country.

The remaining 30 SIDS collectively received 46% of concessional finance over 2012-15 (USD 7.9 billion), with the bottom 10 SIDS together accounting for only 4%. The smallest volumes mainly targeted upper middle-income SIDS, largely in the Caribbean region: Suriname, Grenada, Cook Islands, Saint Lucia, Seychelles, Dominica, Palau, Niue, Saint Vincent and the Grenadines, and Antigua and Barbuda (Figure 2.10).

2.2.3. Providers

Five providers account for over half of the concessional finance to SIDS

Of the 72 bilateral and multilateral providers extending concessional finance to SIDS in 2012-15, the five largest in volume terms were Australia, United States, the European Union, France and the IDA (Figure 2.11), together accounting for 58% of the total (i.e. nearly USD 11 billion over the period, or an average of USD 2.7 billion per year). Allocations from Australia and the United States were particularly significant, amounting to nearly four times the volume of the fifth-largest provider, IDA; this is largely due to Australia’s development co-operation focus on the Indo-Pacific region, and to the massive interventions of the United States in Haiti following the 2010 earthquake. Contributions from several other providers were particularly small and scattered, with the smallest 40 providers accounting for less than 1% of total financing.

Figure 2.11. Top 25 providers of concessional finance, 2012-15
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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The geographic spread of concessional finance from bilateral providers is largely influenced by proximity and geopolitical ties

Geographical and historical connections, as well as political, strategic and economic interest, and the provider’s comparative advantage, dictate focus. Australia concentrates 96% of its support on the Pacific region, as does New Zealand (99%). Canada focuses 97% of its support, and the United States 71% of its support, in the Caribbean. The European Union splits its resources between the Pacific, 20%, the AIMS region, 21% and the Caribbean, 58%. Japan, for its part, directs 65% of its support to the Pacific, 15% to the AIMS region and 21% to the Caribbean. Multilateral providers’ geographic allocation is largely determined by each organisation’s mandate and allocation models. IDA for example works globally, supporting eligible SIDS across all regions. The IMF, which has the same membership, supported three AIMS, four Caribbean and three Pacific SIDS. The multilateral development banks work along regional lines, while the UN agencies and the global funds all support SIDS from each region quite equally.

Only a few bilateral providers prioritise SIDS in their global portfolios

Relatively smaller bilateral providers with strong historical ties and geographical proximity with SIDS display the strongest focus on these countries, to which they allocate a significant share of their global concessional finance. In 2012-15, concessional finance to SIDS represented 53% of New Zealand’s ODA, 48% of Portugal’s and 24% of Australia’s. Some larger bilateral providers – such as the United States, the European Union, France and Japan – extended considerable volumes of concessional financing to SIDS that still amounted to only a tiny fraction of their total ODA portfolios. For instance, allocations to SIDS represented only 1% of Japan’s ODA portfolio, and only 3% of the ODA portfolios of the United States and the European Union.

With the exception of the Caribbean Development Bank (100%) and the Adaptation Fund (30%), financing to SIDS represents a small share (up to 15%) of most multilateral providers’ overall concessional portfolio. No significant differences in terms of SIDS prioritisation can be found between regional organisations and institutions with a universal mandate. Among the ten largest multilateral providers to SIDS in volume terms, the weight of allocations was largest for the IDB (which allocated 11% of its concessional flows to SIDS), the Organization of the Petroleum Exporting Countries Fund for International Development (OPEC Fund) (9%) and the Global Environment Facility (7%). IDA allocated 2% of its 2012-15 disbursements to SIDS (Figure 2.12).

Figure 2.12. The concessional finance portfolio of just a few providers has a strong focus on small island developing states, 2012-15
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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SIDS feature in the development narratives of most bilateral providers, but donors do not have specific resource allocation targets or strategies to engage with SIDS

Most DAC members mention SIDS in their development co-operation policies or development narratives.14 Some refer to them in their overarching development strategies, identifying SIDS as an explicit focus group for their co-operation efforts (e.g. Australia, New Zealand, Portugal, etc.). Others acknowledge SIDS more broadly, or in the context of their climate engagements: for instance, the United States Agency for International Development cites SIDS as a category of vulnerable countries in its Climate and Development Strategy. Others do not acknowledge SIDS as a specific group in their development policies, but do have instruments and policies in place benefitting SIDS. For instance, while the European Union does not explicitly refer to SIDS as a grouping in its development co-operation strategy, all SIDS benefit from its development co-operation instruments, either through the bilateral programmes, the regional programmes (Pacific, Caribbean or intra-African, Caribbean, and Pacific Group) or the thematic programmes. The European Union also considers the special situation and vulnerability of SIDS in the context of the EU Budget Support Guidelines.

However, even those DAC members whose development policies explicitly refer to SIDS as a distinct group of countries do not have specific policies for engaging with them, or tailored instruments to partner with them. Most DAC members adopt a case-by-case approach. Given a lack of field presence in SIDS, several DAC members mainly channel support through regional initiatives and institutions, or partnerships with other (especially multilateral) providers (see section on “approaches and modalities” in this chapter).

Collectively, DAC members are committed to “allocate more of total ODA to “countries most in need”, such as least developed countries (LDCs), low-income countries, small island developing states (SIDS), land-locked developing countries and fragile and conflict-affected states” (OECD DAC, 2014a). While there is an international target of allocating 0.15-20% of ODA/GNI to least developed countries, no similar international target exists for SIDS or for “countries most in need” as a whole. Moreover, while some DAC members have adopted specific internal targets for allocating concessional resources to fragile states or other groups of countries, none have a target for SIDS.

Providers, especially bilateral ones, can spread themselves thinly

Bilateral providers tend to have a broader reach than multilateral providers. The largest 25 bilateral providers extended concessional finance to an average of 22 SIDS in 2012-15, with only Portugal, Netherlands, and Ireland providing financing to fewer SIDS (6 or 7). While the top five bilateral providers – i.e. Australia, United States, the European Union, France and New Zealand – were still able to extend significant volumes of concessional finance to each SIDS they support (above an annual average of USD 7 million per country), for smaller providers this wide reach resulted, for the most part, in small allocations per country (less than USD 1 million per year on average in each of the SIDS where they were operating).

The breadth and reach of concessional finance from multilateral organisations is more varied, largely hinging on the scope of these organisations’ memberships and mandates. With their (quasi) universal membership and reach, several UN agencies and funds provide the widest coverage of SIDS among multilateral organisations (e.g. in 2012-15, the United Nations Development Programme covered 34 SIDS; the Food and Agricultural Organization 32 SIDS; and the International Labour Organization 30 SIDS). These organisations often provide capacity building and policy advice services, which translate into small dollar amounts (an average of slightly over USD 2 million per year for the United Nations Development Programme; and below USD 1 million per year for the International Labour Organization, and Food and Agricultural Organization). Among global funds, the reach of concessional finance ranges from 30 SIDS for the Global Environment Facility to 17 for the Global Fund, 13 for the Caribbean Investment Facility and 6 for the Adaptation Fund. The average volume allocated per country also varies, from a high annual average of USD 25 million (Global Fund) to a low of USD 0.5 million (Climate Investment Fund) in 2012-15. Multilateral development banks tend to allocate larger volumes per country – USD 149 million (Inter-American Development Bank) on average per year, USD 43 million (IDA) and USD 31 million (Asian Development Bank) – well above the volumes extended by bilateral providers. IDA has the largest coverage (21 SIDS), while Inter-American Development Bank and Asian Development Bank’s memberships restrict the scope of their interventions to 6 and 16 SIDS, respectively.

No correlation exists between the total volumes allocated to SIDS and the number of SIDS with which they engage (Figure 2.13) and financing is often spread thinly across SIDS. The last section in this chapter explores the consequences of such an allocation pattern, which gives rise to a significant fragmentation of efforts in SIDS.

Figure 2.13. No strong correlation exists between the total volumes a provider allocates to small island developing states and with how many it engages
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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The nature and focus of providers’ development support for SIDS differ greatly

As for other developing countries, bilateral providers primarily extend concessional finance to SIDS in the form of grant financing15 and project interventions, largely prioritising social sectors. Unlike in other developing countries, providers have revived the use of budget support in SIDS, especially in the Pacific region, as a way to address institutional challenges and strengthen public governance. Among the bilateral providers to SIDS, France, Japan and Portugal direct significant grant financing towards social sectors, but also make extensive use of concessional loans, largely for infrastructure development and technical support. Overall, eight bilateral providers used concessional loans in SIDS in 2012-15: these represented 6-15% of concessional financing to SIDS by the European Union, United Arab Emirates, Japan and Korea, and a much higher share for Portugal (64%), France (60%) and Kuwait (89%). Spain also used concessional loans (10% of total allocations), but the greatest share of its support was in the form of debt relief (47%).

The sectoral focus of concessional finance by the largest bilateral providers resembles the allocation focus to other developing countries, suggesting that providers’ development co-operation with SIDS broadly reflects their comparative advantages and sectoral specialisation. For instance, some DAC members focus on the following sectors in both SIDS and other developing countries: Japan in infrastructure and energy; France in education and infrastructure; the United States in health and governance; and New Zealand in education and governance. The European Union engages in slightly different sectors than in other developing countries (where it mainly supports banking and financial services), targeting instead general budget support (19%), agriculture (13%) and governance (12%) (Figure 2.14).

Figure 2.14. Several providers prioritise the same areas of intervention in small island developing states and other developing countries
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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Multilateral providers’ development support has fairly distinct forms and focuses. Multilateral development banks mainly invest in infrastructure. Concessional loans represent over 60% of financing to SIDS by most multilateral providers (e.g. the International Monetary Fund, the Islamic Development Bank, the Caribbean Development Bank and the Asian Development Bank). Only the International Fund for Agriculture and Development (47%), the International Development Association (55%) and the Inter-American Development Bank (83%) extend a larger share of financing to SIDS as grants. The IDA consistently allocated resources to all 21 IDA-eligible SIDS in 2012-15, although amounts vary year on year, partly due to large one-off payments for infrastructure projects.

Global funds and United Nations agencies, on the other hand, exclusively extended grant financing, with the exception of the Climate Investment Fund, which provided the bulk (62%) of its concessional financing to SIDS as loans. Global funds have specialised areas of intervention, while UN agencies supported SIDS in a wider array of sectors. Multilateral funders differ from bilateral donors in that the vast majority of the activities financed are project type interventions; 75% of IDA and 100% of the Global Environment Facility and Global Fund resources. Nevertheless, both the Global Environment Facility and the Global Fund provided support quite consistently year on year to SIDS partners.

2.2.4. Looking at allocations through a sectoral lens

Allocations concentrate on governance, health and infrastructures, with some differences between bilateral and multilateral providers

In 2012-15, concessional finance from bilateral and multilateral sources targeted 29 different sectors, with the largest volumes channelled to governance and civil society (16%), the health sector (15%) and infrastructure (10%) (Figure 2.15). This breakdown largely reflects allocations in the largest SIDS recipients (e.g. Haiti, Papua New Guinea, Timor-Leste). As described in the previous section, sectoral allocations of bilateral and multilateral providers display some differences: bilateral providers, for example, focus on improving governance and institutions (18%), whereas multilateral providers only channelled 7% to this sector in 2012-15. Multilateral concessional finance targets infrastructure development (21%), compared to 7% from bilateral providers. A large share of both bilateral (13%) and multilateral (18%) sectoral allocations targets health initiatives, mainly stemming from the focus of the global health funds and the United States on this sector (see also Box 2.1).

Figure 2.15. Concessional finance mainly targets governance, health and infrastructures (2012-15)
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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Box 2.1. The Global Partnership for Education and small island developing states

The Global Partnership for Education was launched in 2002 as the Education For All – Fast Track Initiative (FTI). It is a multi-stakeholder partnership of bilateral and multilateral donors, developing countries, civil society and the private sector. Its goal is to provide quality basic education to all children.

Since 2002, it has mobilised USD 4.7 billion in grants to partner countries, including 18 SIDS. Pacific Island countries have a regional allocation of USD 5.4 million in implementation grants as follows: Federated States of Micronesia (USD 0.4 million), Kiribati (USD 0.4 million), Marshall Islands (USD 0.4 million), Samoa (USD 0.48 million), Solomon Islands (USD 1.3 million), Tonga (USD 0.4 million), Tuvalu (USD 0.4 million) and Vanuatu (USD 0.6 million).

From 2018, it will implement a new financing and funding framework that includes range of funding options to meet the diverse range of needs in its partner countries. It allocates its funding to countries using a needs-based formula. Its funding model incentivises results, with 70% of its financing to a country being conditional on meeting requirements regarding domestic resource mobilisation and other standards, and the remaining 30% on the achievement of demonstrated results.

Source: Adapted from the Global Partnership for Education website.

Different sectoral prioritisations prevail in the Pacific, Caribbean and AIMS regions

Sectoral allocations16 across geographic regions vary, with the distribution in the Pacific, in particular, fairly different than in the other two regions. The prioritisation of governance and civil society is strongest in the Pacific, where this sector received 21% of total 2012-15 financing, compared to 13% in the Caribbean and 7% in the AIMS region. In the Pacific there is also a stronger focus on infrastructure development, which received 13% of total concessional finance, compared to 9-10% in the other regions. In the Caribbean and AIMS regions, the largest share of support is to the health sector (16% and 11%, respectively). A greater concentration of concessional finance on the top-five sectors exists in the Pacific (74%) as compared to the Caribbean (53%) and the AIMS region (51%), even though all 29 sectors received some support in 2012-1517.

Humanitarian aid has not driven allocations of concessional finance to SIDS on aggregate

Humanitarian aid to SIDS recorded a peak in 2010 (USD 1.6 billion, or 21% of the total) as a consequence of the international response to the Haiti earthquake. On the longer run, however, humanitarian aid has not been a key driver of allocations of concessional finance to SIDS, averaging at 6% in the 2012-15 period and at 5% before the 2010 peak (Figure 2.16). In 2012-15, the weight of humanitarian aid in total concessional finance was highest for the SIDS hit by hurricanes and other natural disasters in the period: Saint Vincent and the Grenadines (24%), Vanuatu (19%), Grenada (12%), Samoa (6%), Fiji (6%), Tonga (6%). Humanitarian aid represented 4% or less for the remaining 28 SIDS.

Figure 2.16. Humanitarian aid peaked in 2010 but has not driven allocations of concessional finance
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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Providers increasingly mainstream gender equality in their interventions

Gender equality and empowerment is either a significant (22%) or principal (2%) component of concessional finance allocated to SIDS between 2012 and 201518, increasing by 5% on average per year over the period. Given the large gender inequalities prevailing in many SIDS, this is an important area of future focus for development partners.

Among the larger providers, Australia (51% of whose financing activities included a gender component), New Zealand (56%) and Canada (68%) have made the greatest progress in this area, while the multilateral development banks in particular have not reported a significant focus on gender equality. Partly as a result of Australia and New Zealand’s involvement, the share of concessional finance with a gender component is highest in the Pacific SIDS (36% in 2012-15) compared to 12% in AIMS SIDS and 16% in Caribbean SIDS. Papua New Guinea received the highest gender prioritisation (49% of activities with a gender component in 2012-15), followed by a 44% in Fiji and 43% each in Timor-Leste and Vanuatu.

As Figure 2.17 shows, a little over one quarter of activities in the governance and civil society sector include either a significant or primary gender component, compared to 33% in the health sector and 51% in the education sector.

Figure 2.17. Gender mainstreaming of development activities in the health and education sectors is promising, but providers need to consider it in all areas, 2012-15
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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Some sectors and areas may be receiving insufficient international attention

As is widely acknowledged internationally, SIDS face a number of specific challenges, including strong vulnerability to the impacts of climate change and natural disasters, high debt levels and reliance on a handful of sectors as the main drivers of their economies (OECD-World Bank, 2016; UNDP, 2017b; UNDP and UNOHRLLS, 2015) – see Chapter 1. While the broad nature of development needs in several SIDS can make prioritisation difficult, some areas and sectors that would seem vital – and even appear as prerequisites – to promoting sustainable development in SIDS receive relatively little support.

For instance, concessional finance to foster development that is resilient to the impacts of climate change and natural disasters only made up 14% of concessional finance to SIDS over 2011-14 (OECD-World Bank, 2016). Concessional finance from bilateral providers that includes a climate component decreased in 2014-15, to USD 1.08 billion, from USD 1.14 billion on average per year in 2012-13. Over the same period, the overall share of climate action in bilateral ODA decreased from 15.3% to 14.5%. Likewise, high costs and limited access to energy constrain development in SIDS, yet the energy sector received less than 5% of the total concessional finance to SIDS in 2012-15.

Despite the considerable infrastructure gap faced by SIDS, only 11% of concessional finance targeted infrastructure. The natural resource-rich SIDS saw a slightly greater focus on infrastructure development (17%), as there is a clear economic case for developing infrastructures to allow exploiting resources. Conversely, only 7% of concessional finance to some of the smallest SIDS in the Pacific targeted infrastructure improvements, despite the considerable needs to improve connectivity in the smallest and most remote SIDS.

Tourism, although a key economic sector in many SIDS, received less than 1% of all concessional finance to SIDS, suggesting that private sector resources and non-concessional finance could be used to meet needs. Allocations supporting tourism were limited (1%) even in SIDS that mainly have service-oriented economies.

Despite persistent debt issues in several SIDS, only 4% (USD 857 million) of all ODA flows targeted action relating to debt relief over 2012-15. Together, Cuba (78%) and Comoros (18%) received 96% of the total support in this area.

2.2.5. Approaches and modalities in concessional finance

Concessional finance to SIDS is largely provided as grants

In 2012-15, grants accounted for 83% of concessional finance to SIDS, slightly more than in other developing countries (73%). Concessional loans accounted for 14%, and the remaining 3% was debt relief. Bilateral providers accounted for the majority of grants (83%), while they extended just over half of all concessional loans (Figure 2.18). Although grants represent the bulk of concessional financing to SIDS, their level has been stagnating overall as a result of declining bilateral grants (-5% per year on average in 2012-15). In 2015, growth in concessional finance was mainly driven by a rise in concessional loans and debt relief from bilateral providers (soaring from USD 9 million in 2014 to USD 476 million in 2015). Bilateral providers accounted for 60% of the increase in concessional loans, which was concentrated on the Dominican Republic.

Figure 2.18. The bulk of concessional finance to small island developing states is provided as grants
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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Across SIDS there are large differences in the relative weight of grants and for some there could be scope for increasing concessional loans

For individual countries, increasing the volume of concessional loans could present viable opportunities to expand financing, provided that loans are provided at an adequate level of concessionality. As Figure 2.19 shows, in 2012-15, four SIDS, in both the Pacific and the Caribbean, received no concessional loans, relying exclusively on grants. These are all upper middle-income countries, and include three microstates: Fiji, Nauru, Niue, and Antigua and Barbuda. For another 20 SIDS, concessional loans contributed less than 10% of the total concessional finance in 2012-15. Conversely, loans represented over 50% of the total concessional finance allocated in 2012-15 to four SIDS: Mauritius, Dominica, Cabo Verde and Grenada, reaching a high of 72% in the case of Grenada.

Figure 2.19. Concessional loans represented less than 10% of the concessional finance to most small island developing states, 2012-15
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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Budget support accounts for a small share of financing overall, but was highly prioritised in a number of SIDS

Globally, the rise of the aid effectiveness agenda popularised the use of programmatic approaches to development assistance in the 2000s, including a greater use of budget support. While several providers have since moved away from providing budget support, others have stepped up its use in SIDS in recent years, seeing it as a powerful tool for reducing transaction costs and increasing the level of co-ordination commonly lacking in project-based support.

Budget support has also been used to help reform public financial management, meet spending targets in specific sectors, or achieve overall economic reform (Dornan and Brant, 2017). In the Solomon Islands, for example, budget support is contingent on at least 22% of the domestically sourced government recurrent budget being spent on education, and 10% being spent on healthcare. As highlighted in Section 2.2.6, SIDS rely strongly on one or several providers for the bulk of their financing. Hence, while budget support can be a useful instrument to reduce administrative burdens, and foster a meaningful policy dialogue between the government and the international community, care should be taken to avoid the largest providers becoming overly influential in the policy choices of SIDS governments.

The use of budget support has increased especially in the Pacific, but in 2012-15 it represented more than 20% of concessional finance for 11 SIDS across all regions, mainly upper middle-income countries: Marshall Islands (63%), Micronesia (61%), Grenada (47%), Niue (46%), Mauritius (33%), Cook Islands (27%), Jamaica (26%) and Nauru (26%), Samoa (25%), Dominica (23%), Palau (21%) (Figure 2.20). No use of budget support was made in 2012-15 in seven SIDS: Antigua and Barbuda, Belize, Cuba, Fiji, Maldives, Saint Vincent and the Grenadines, and Suriname.

Figure 2.20. For 11 small island developing states budget support represents over 20% of concessional finance, 2012-15
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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Overall, 11% of total concessional finance to SIDS was either general or sector-specific budget support in 2012-15, compared to 7% as the global average in other developing countries. In total, SIDS received USD 2.0 billion in budget support, of which USD 0.9 billion went to general budget support and USD 1.1 billion was sector-specific budget support. General budget support increased in 2012-13, but its level more than halved in 2014-15; while the volume of sector-specific budget support in 2014-15 was 8% higher than its 2012-13 level.

Budget support is provided by both bilateral providers (80% of the total) and multilateral providers (20%). The European Union (31%), United States (25%) and Australia (12%) are the largest providers of combined general and sector-specific budget support. The largest multilateral provider is the World Bank (7%).

Regional initiatives account for a small part of the financing reaching SIDS

The relatively expensive nature of development co-operation in SIDS and the need to take advantage of regional economies of scale make regional projects and initiatives a sensible approach for extending concessional finance to SIDS. In 2012-15, however, only 8% of the concessional financing to SIDS reached these countries through regional initiatives (USD 1.5 billion), suggesting that there could be scope for making further use of such approaches19. The main contributors were bilateral providers, which channelled 10% of their concessional financing to SIDS through regional initiatives, compared to 3% for multilateral providers. Australia, United States and the European Union accounted for the bulk of the regional initiatives (53%).

Providers largely focus on governance and health both when partnering directly with individual SIDS and at the regional level. At the regional level they provide a greater share of concessional finance to environmental projects (12%, compared to 3% directly to SIDS in 2012-15), as well as banking and financial services (8%, compared to 2% in individual SIDS) (Figure 2.21). The World Bank has recently approved two projects for the eastern Caribbean countries of Saint Vincent and the Grenadines, and Grenada, for a total of USD 19 million, which aim to address key constraints in human development and agriculture sectors. The Human Development Service Delivery Project (USD 10.7 million) targets improved quality of primary and secondary education, a more efficient social protection system and improved access to skills training in Saint Vincent and the Grenadines. The OECS Regional Agriculture Competitiveness Project (USD 8.3 million) aims to increase market access and sales for farmers, fishers and agro-processors in both Saint Vincent and the Grenadines, and Grenada by linking them to larger markets for their products20.

Figure 2.21. Sectoral prioritisation varies between regional and country-specific allocations (2012-15)
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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Bilateral providers channelled 12% of their support through multilateral organisations

Of the total concessional finance extended to SIDS in 2012-15, 12% (USD 1.7 billion, amounting to USD 435 million on average per year) was channelled through multilateral organisations. This financing modality enables bilateral partners to enhance multilateral organisations’ presence in regions of interest (for example, Australia and New Zealand in the Pacific).21 It also allows providers without a strong field presence to still support individual SIDS or regional initiatives. For instance, several bilateral providers contributed in this manner to the international response supporting Haiti, which received 23% of these flows.

Twenty seven bilateral providers allocated earmarked funding to multilateral organisations in 2012-15, with three providers accounting for 68% of the total: Australia (USD 466 million, or 27%); the European Union (USD 418 million, or 24%) and Canada (USD 296 million, or 17%). Canada earmarked over 49% of its total concessional finance, Australia 13% and the European Union 19%.

This financing was channelled through 65 different multilateral organisations, including 22 UN agencies in 2012-15. UNDP received the largest share of this financing (USD 225 million, or 13%). Bilateral providers channelled financing through multilateral organisations to support governance and civil society activities (16%), general environment protection (11%) and health programmes (10%).

2.2.6. Reliance on a single or few sources of financing for the bulk of concessional finance and fragmentation

A previous report (OECD-World Bank, 2016) found that many SIDS rely on a handful of providers for the bulk of their financing for climate and disaster resilience while the remainder of this support is splintered across several small projects from various sources. This combination makes SIDS extremely vulnerable to shifts in the priorities of the dominant provider(s), while also burdening their limited administrative capacity. This finding is still valid when considering the full spectrum of concessional finance to SIDS. In aggregate, over half of concessional finance reaching SIDS was provided by just five providers (58% in 2012-15): Australia, United States, European Union, France, and IDA.22 Reliance on top providers is even more extreme for individual SIDS, which rely on average on a single provider for 46% of their concessional finance and on the top three providers for 74% thereof.

This phenomenon is particularly pronounced for microstates and for some of the SIDS in a Compact of Free Association with one of the DAC members. Montserrat exhibits the highest dependence, relying on the United Kingdom for 90% of its concessional finance.23 Overall, 12 SIDS relied on the top provider for 50% (or more) of the concessional finance they received in 2012-15. Dependence on the top three 3 providers is high across the board: over 2012-15, all but 2 SIDS24 relied on only 3 providers for over half of their concessional financing, while 20 SIDS relied on the top 3 providers for over 70% of their financing (Figure 2.22).

Figure 2.22. Eleven SIDS relied on a single provider for over half of their concessional finance in 2012-15
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Source: OECD (n.d.), Creditor Reporting System (database), https://stats.oecd.org/Index.aspx?DataSetCode=CRS1.

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SIDS generally depend on a bilateral provider as their primary provider. Australia is the top provider for ten SIDS in the Pacific, the European Union is the main finance supplier for six SIDS25 (four in the Caribbean and two in the AIMS region), and France and the United States are the main providers for four SIDS (mainly in the Caribbean). Other primary providers include Portugal and New Zealand, IDA, Japan, United Kingdom, Russia, the Inter-American Development Bank and the Asian Development Bank.

While the bulk of concessional finance is provided by a single provider, the remainder is spread across a myriad of small projects financed by multiple sources. Small, capacity-constrained administrations in SIDS struggle to meet the competing demands to programme and manage so many low volume transactions.

On aggregate, half of the providers extending concessional finance to SIDS collectively accounted for about 1% of total concessional finance to these countries in 2012-15, and 80% of providers accounted for 10% of the total. The figures also point to a proliferation of small activities. In 2012-15, the total volume of concessional finance reaching SIDS was committed26 through 21 212 transactions, and each SIDS managed 151 transactions27 per year on average. About 70% of transactions were fairly small (averaging USD 24 700) and accounted for only 2% of the total concessional finance, while the largest transactions, of USD 7.5 million on average, (the top 10%, or 10th decile) made up 87% of total concessional finance. Bilateral and multilateral providers display a similar pattern, with an aggregated average transaction amount of USD 1.0 million for multilateral providers and USD 0.9 million for bilateral providers.

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IFAD (2014), IFAD’s approach in Small Island Developing States: A global response to island voices for food security, United Nations International Fund for Agricultural Development, Rome, www.ifad.org/documents/10180/127f9ca4-420f-41c9-a21d-5f511d6d01d0.

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OECD (2013), Identification and Monitoring of Potentially Under-Aided Countries, OECD, Paris, www.oecd.org/dac/financing-sustainable-development/Identification%20and%20Monitoring%20of%20Potentially%20Under-Aided%20Countries.pdf.

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OECD (no date b), International Development Statistics (database), OECD Paris, www.oecd.org/dac/financing-sustainable-development/development-finance-data.

OECD DAC (2014a), DAC High Level Meeting Communiqué from the DAC High Level Meeting, 16 December 2014, OECD, Paris, www.oecd.org/dac/OECD%20DAC%20HLM%20Communique.PDF.

OECD DAC (2014b), DAC List of ODA Recipients, OECD, Paris www.oecd.org/dac/financing-sustainable-development/development-finance-standards/daclist.htm.

OECD-World Bank (2016), Climate and Disaster Resilience Financing in Small Island Developing States, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264266919-en.

UN (2015), Addis Ababa Action Agenda, from the Third International Conference on Financing for Development, 27 July 2015, United Nations, New York, http://undocs.org/A/RES/69/313.

UNDP (2017a), China’s South-South Cooperation with Pacific Island Countries in the Context of the 2030 Agenda for Sustainable Development, United Nations Development Programme, New York, www.cn.undp.org/content/china/en/home/library/south-south-cooperation/1--china_s-south-south-cooperation-with-pacific-island-countries.html.

UNDP (2017b), Financing the SDGs in the Pacific Islands: Opportunities, Challenges and Ways Forward, United Nations Development Programme, New York, www.undp.org/content/undp/en/home/librarypage/poverty-reduction/financing-the-sdgs-in-the-pacific-islands--opportunities--challe.html.

UNDP and UNOHRLLS (2015), “Financing for Development and Small Island Developing States: A Snapshot and Ways Forward” UNDP & UN-OHRLLS Discussion Paper, June 2015, United Nations Development Programme, New York, https://sustainabledevelopment.un.org/content/documents/2181(UNDP%20&%20OHRLLS%202015)%20Financing%20for%20development%20and%20SIDS%20A%20snapshot%20and%20ways%20forward.pdf.

World Bank (2017), International Debt Statistics (database), World Bank Group, Washington D.C., https://data.worldbank.org/data-catalog/international-debt-statistics.

World Bank (2016a), Engagement with Small States: Taking Stock, World Bank, Washington D.C. www.worldbank.org/en/country/smallstates/publication/engagement-with-small-states-taking-stock.

World Bank (2016b), Migration and Remittances Factbook, World Bank Group, Washington, D.C., https://openknowledge.worldbank.org/bitstream/handle/10986/23743/9781464803192.pdf?sequence=3.

World Bank (2015), Grenada: A Nation Rebuilding. An assessment of reconstruction and economic recovery one year after Hurricane Ivan, World Bank Group, Washington, D.C., http://siteresources.worldbank.org/INTDISMGMT/Resources/grenanda_rebuilding.pdf.

World Bank (n.d.), World Development Indicators (database), World Bank Group, Washington D.C., https://data.worldbank.org/data-catalog/world-development-indicators.

Further reading

IMF (2013), Caribbean Small States: Challenges of High Debt and Low Growth, International Monetary Fund, Washington D.C., https://www.imf.org/external/np/pp/eng/2013/022013b.pdf.

Khor, H., R. Kronenberg, & P. Tumbarello (2016), Resilience and Growth in the Small States of the Pacific, USA, International Monetary Fund, Washington D.C., http://dx.doi.org/10.5089/9781513507521.071.

Laframboise, N., and B. Loko (2012), “Natural Disasters: Mitigating Impact, Managing Risks” IMF Western Hemisphere Department Working Paper, Washington D.C., https://www.imf.org/external/pubs/ft/wp/2012/wp12245.pdf.

PIFS (2016), Developing a “Regional Finance Facility” for the Pacific: From Concept to Design, Pacific Islands Forum Secretariat, Suva, www.forumsec.org/resources/uploads/attachments/documents/Developing_a_Regional_Finance_Facility_for_the_Pacific_(Report)_webCopy.pdf.

PIFS (2015), Five Years of Improving Development Effectiveness,Pacific Islands Forum Secretariat, Suva, www.forumsec.org/resources/uploads/memberdocs/Final_2015_tracking.pdf.

PIFS (2009), The Cairns Compact, Pacific Islands Forum Secretariat, Suva, www.forumsec.org/pages.cfm/strategic-partnerships-coordination/pacific-principles-on-aid-effectiveness/forum-compact/cairns-compact-1.html?printerfriendly=true.

World Bank (2017), Small States: A Roadmap for World Bank Group Engagement, World Bank Group, Washington, D.C., http://pubdocs.worldbank.org/en/982421496935264348/Small-States-Roadmap.pdf#zoom=70.

Notes

← 1. Papua New Guinea is assessed at a “low” risk of debt distress; Comoros, Guinea-Bissau, Guyana, Solomon Islands, Saint Lucia, Timor-Leste, Tonga and Vanuatu are assessed at a “moderate” risk of debt distress; Cabo Verde, Dominica, Haiti, Kiribati, Maldives, Marshall Islands, Micronesia, Samoa, Sao Tome and Principe, Saint Vincent and the Grenadines and Tuvalu are assessed at a “high” risk of debt distress and Grenada is currently “in debt distress”.

← 2. These are non-concessional flows to developing countries that include export credits and have a primarily commercial motive.

← 3. To date, the survey includes more than 110 private philanthropic foundations. www.oecd.org/dac/stats/beyond-oda-foundations.htm.

← 4. In line with OECD Development Assistance Committee statistics, concessional finance is defined as grants and concessional loans from both bilateral providers and multilateral providers that meet the ODA definition.

← 5. This is calculated using the 2015 GNI figures from the World Bank for the 32 SIDS for which data are available. The Cook Islands, Montserrat and Niue are therefore excluded. Where 2015 GNI figures are not available, the most recent year is substituted. 2011 data were used for Cuba, and 2014 data were used for Papua New Guinea and Vanuatu. Concessional finance figures are from the Credit Reporting System in 2015 prices.

← 6. “All developing countries” refers to all official development assistance (ODA)-eligible countries, as per the DAC List of ODA Recipients (OECD DAC, 2014b). For more details, please refer to: www.oecd.org/dac/stats/daclist.htm.

← 7. This figure only includes providers of concessional finance that report data to the OECD Creditor Reporting System (OECD, no date a). It excludes amounts from important providers to SIDS, such as China, Venezuela and Chinese Taipei, for which comparable statistical data are not available.

← 8. Timor-Leste provided financing to Cabo Verde, Guinea-Bissau and Vanuatu in this period.

← 9. For more information, please refer to the Small States Roadmap: http://pubdocs.worldbank.org/en/982421496935264348/Small-States-Roadmap.pdf#zoom=70.

← 10. The following eight global funds are considered here: the Adaptation Fund, the Climate Investment Funds, the Global Alliance for Vaccines and Immunization, the Global Environment Facility, the Global Fund, the Global Green Growth Institute, the Green Climate Fund and the UN Peacebuilding Fund.

← 11. While these providers are referred to as ‘emerging’, many of them have a long tradition providing support to other countries.

← 12. Please note that the comparability of these figures with ODA figures has not been verified. Therefore, the level of concessionality and the developmental nature of this financing may be different than those required to meet the ODA definition.

← 13. Azerbaijan, Estonia, Israel, Kazakhstan, Kuwait, Lithuania, Romania, Russia, Thailand, Timor-Leste, Turkey and United Arab Emirates.

← 14. In other words, 10 out of the 16 DAC members that replied to the Survey questionnaire regarding OECD DAC members’ policies and practices supporting SIDS conducted in 2016.

← 15. Concessional finance includes three main types of finance: grants and equity, loans, or debt relief.

← 16. General budget support is excluded from the analysis in this section, which only considers sector-specific support.

← 17. Another indication of this comes from more evenly distributed support across activities in the Caribbean SIDS (1.86% median share to each sector) and AIMS SIDS (1.87% to each sector), compared to 0.74% in the Pacific SIDS.

← 18. When providers report their activities in the Creditor Reporting System database, they use gender markers, indicating whether an activity had a primary or significant gender component, or no gender component at all. For the methodology, please refer to: www.oecd.org/dac/gender-development/dac-gender-equality-marker.htm.

← 19. This comprises concessional finance allocated to regional projects in the Caribbean and the Pacific only.

← 20. These two projects were approved in 2017 and do not appear in the OECD Creditor Reporting System database yet.

← 21. 2013 OECD DAC Survey on Multilateral Allocations. For a broader discussion on the opportunities and costs of earmarked funding, please refer to OECD (2015).

← 22. For reference, the top five providers of concessional finance for climate and disaster resilience accounted for a similar, yet slightly larger share: 61% (OECD-World Bank, 2016).

← 23. Monserrat is a British Overseas Territory.

← 24. These are Maldives and Guinea-Bissau, where the top three providers accounted for 43% and 45% of total 2012-15 financing.

← 25. Fiji, Kiribati, Nauru, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu and Vanuatu.

← 26. The analysis throughout this report is based on disbursed amounts. This section on fragmentation, however, uses amounts committed based on the consideration that committing funds is more transaction-heavy than disbursements, which often do not require further negotiation and transactions. The concessional finance committed to SIDS in 2012-15 was slightly higher (USD 19.8 billion) than disbursements.

← 27. There are some differences in the way providers structure their aid commitments and in the number of transactions they report to the OECD Creditor Reporting System. Therefore, for most providers the number of transactions was identified through the “project identification number”. For other donors it was identified through the long or short “project description” (i.e. Caribbean Development Bank, Global Green Growth Institute, OPEC Fund, UNAIDS, UNFPA, UNHCR and WHO). The transactions considered here exclude all donor costs (“imputed student costs”, “refugee in donor countries”, “administrative costs” and “development awareness”), “debt relief” and “scholarships”.