40
The OECD Development Assistance Committee does not apply its grant-element calculations to non-concessional
loans.
14
Views differed among members of the Advisory Group about whether and how to do such a calculation. Some
members suggested adapting the OECD Development Assistance Committee procedure in the following way:
In the context of a loan, the concessionality of the interest rate charged (R1) is calculated by comparing
it with a discount rate (R2). The discount rate used depends on which perspective is taken on the loan.
To the receiver, R2 is the interest that would have been due had a sovereign loan of the same size been
taken out in the international money markets. From the donor’s perspective, the grant equivalence is the
opportunity cost of the return that the lender could have expected from the next most protable means of
investing the capital at similar risk; hence, R2 is dened as the return of such an investment. Following
the OECD methodology, a standard discount rate of 10 per cent for R2 was adopted.
The grant equivalence is the value of this difference in the interest rates, which is approximately equal
to the principal multiplied by the difference between R2 and R1 [principal x (R2-R1)]. Since the benets
of reduced interest rates from public sector lending will almost always occur over time, grant equivalence
should be discounted in order to generate its net present value. In addition, the terms of repayment
(such as grace periods and long maturities) increase the grant element.
Based on this methodology suggested by some members, both the concessional loans (International Development
Assistance (IDA)-like) and non-concessional loans (International Bank for Reconstruction and Development (IBRD)-
like) that a multilateral development bank (MDB) or bilateral institution
15
can issue
16
were considered in calculating
a net multilateral development bank ow. While IDA-type lending has a grant element between 80 and 82 per
cent
17
, non-concessional lending, made up of both IBRD-type (with low degree of concessionality) and commercial,
International Finance Corporation (IFC)-type loans, has a weighted average grant equivalence of ~20 per cent
18
.
The net element of non-concessional multilateral development bank lending was therefore calculated only on IBRD-
type loans and not on commercial loans (IFC-type). This grant equivalence range is applied to loans described as
development bank-type loans in the main report. Further details on the calculation are described in section IV below.
IV. Methodology for the multilateral development bank multiplier
Multilateral development banks and bilateral institutions are treated as an instrument to channel primary sources
in order to generate additional ows
19
. As a secondary source, a portion of the public funds raised (or additional
14
See denition of “grant element” at http://www.oecd.org/glossary/: “The grant element concept is not applied to the market-based
lending operations of the multilateral development banks.”
15
Capital could be paid-in also to increase the capital base of a bilateral institution (e.g., KfW in Germany or CDC in England) which can
act like the multilateral development bank in issuing bonds to raise additional capital for loans. For simplicity only the multilateral
development banks are referenced in the text.
16
In the context of multilateral development banks, non-concessional loans are IBRD-type loans with limited concessionality, while
concessional loans are IDA-type loans with higher concessionality.
17
Methodology of the Organization for Economic Cooperation and Development. Includes both grants and loans at the regular credit/
grants/blends split for International Development Association scal years 2003 to 2011 (IDA13-IDA15). See “A review of IDA’s long-
term nancial capacity and nancial instruments”, available from http://siteresources.worldbank.org/IDA/Resources/Seminar%20
PDFs/73449-1271341193277/IDA16-Long_Term_Financing.pdf.
18
Methodology of the Organization for Economic Cooperation and Development. For the International Bank for Reconstruction and
Development (IBRD), assumes an average concessional rate for IBRD of historic London Interbank Offered Rate (LIBOR) plus 40 to
60 basis points, maturity of between 10 and 20 years and a three-year grace period, corresponding to between 27 and 40 per cent.
For the International Finance Corporation (IFC), assumes 0 per cent grant equivalent (commercial terms). A split between IBRD/IFC
lending of 67 per cent/33 per cent based on World Bank Group split is assumed.
19
Some might also consider the resources that could be generated via multilateral development banks using current balance sheet
headroom to raise additional money in the capital markets. These revenues were not included in the estimates for the sources at this
stage. For this source to be considered, there would need to be political will to access the headroom, and ows generated through this
source would require careful quantication. In addition, there would need to be careful determination of what could count towards
the US$100 billion, given that callable capital has already been allocated to the multilateral development banks and therefore could
not be classied as a “new and additional” source. The impact on the contingent liability of shareholders may be considered “new and
additional”, depending on the additional risk multilateral development banks would take on their balance sheets.