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A Knotty Problem: Turning Words into Action on Tied Aid

Added 21 Feb 2018

This article was originally published in the Global Partnership for Effective Development Cooperation.

 

“Tied aid doesn’t work.” That was the verdict of the UK’s top development minister at a recent parliamentary hearing.

And the evidence bears the minister out. Tied aid – aid that can only be used to buy goods or services from the country providing the aid – is having a negative impact on the world’s poorest people.

Tied aid generally costs more than untied aid – an estimated 15 – 30 % more for many goods and services, and more still in the case of food aid. It also tends to deliver less, since it is less well suited to local contexts and preferences. This isn’t just a question of bean counting. Tied aid is used in sectors from emergency response to malaria control: bad value for money can cost lives and put basic rights in jeopardy.

Tied aid also holds back the long-term development of communities in the global south, because it goes against the fundamental principle that effective development should be led by local priorities, and channelled where possible through country systems. In particular, this type of aid makes it impossible to support local producers – even though doing so could bring a “double dividend”, delivering both project results and building up the local economy for the long term.

This is why untying aid has been high on the agenda in successive agreements on effective development cooperation(reinforced again in Nairobi in 2016) , and why donor governments have signed up to a (limited) agreement on aid untying.

Yet despite these promising commitments, tying persists. The latest data from the Organisation for Economic Co-operation and Development’s Development Assistance Committee (OECD DAC) reports a figure of around US $16.8 billion – more than the entire ODA budgets of Italy, the Netherlands and Norway combined.

That’s just the tip of the iceberg. Those US $16.8 billion relate to aid that is ‘formally’ tied – where the contract explicitly states that goods or services must be bought from the country providing the aid.

Even more worrying is the level of aid that is tied informally – where the contract doesn’t specify a particular supplier country, but in practice barriers in the procurement process stop companies from outside competing – for example, if tenders are only advertised in the donor country language.

It’s impossible to say exactly how much aid is tied informally, but the best available proxy is to look at data on which firms are actually winning aid contracts. This data paints an alarming picture. In 2014 (the most recent year for which data is available), donors reported to the OECD on some 15 billion US dollars’ worth of individual aid contracts. Of this, 46 percent  went to firms in the donor country and just 4 percent went to firms in the poorest countries.

In some donor countries the share of contract spending with domestic firms was higher still – even in countries reporting very low levels of aid as formally tied aid (Figure 1).

 

 

Source: Eurodad analysis of OECD DAC, 2017 Report on the DAC Untying Recommendation
Notes: this data covers bilateral aid within the scope of the DAC’s Recommendation on Untying ODA (and excludes administration costs and in-donor refugee costs). The completeness of reporting on contract awards varies among donors, and some (Czech Republic, Finland, the Netherlands, New Zealand, Norway, Poland, Slovak Republic, Slovenia and Sweden) did not report at all in 2014.

 

Most attempts to monitor donor progress on untying aid have only told half the story. The OECD DAC Development Cooperation Report; OECD DAC peer reviews; as well as a range of donor rankings produced by third parties all focus on formal tying. While the OECD DAC does report regularly on the distribution of contract awards, this is a technical document that attracts only limited attention beyond specialist circles.

However, the current review of the indicators for the Global Partnership for Effective Development Co-operation’s (GPEDC) monitoring report, offers hope that this pattern will change. Through its wide-ranging coverage and diverse global participation, the GPEDC monitoring exercise attracts worldwide attention. Indicator 10 deals with untying aid. Eurodad is calling for the indicator to include systematic reporting on the values of contracts awarded to companies in different countries, in addition to data on formal tying.

This could have a powerful influence on how donors approach untying. The more untying aid is seen to be about where the money actually goes, the more pressure there will be for donors to remove barriers that prevent companies in the global south from competing.

Getting a comprehensive picture of informal tying will take time. A complete view would require not only full data on contract awards, but also information on sub-contracts, on who really benefits from companies located in the global south (‘beneficial ownership’) and on the tied aid implications of more aid being channelled through so-called private sector instruments.

For now, basic data exists, and could in the short term be supplemented by case studies. In the longer term, the drive for better data on aid procurement could encourage the use of country procurement systems (part of GPEDC indicator 9b), and boost the drive for transparency of over beneficial ownership – potentially contributing to a virtuous circle for effective development cooperation.

It would be an exaggeration to say that better monitoring of informal tying is enough to cut the Gordian knot of tied aid. As a recent Eurodad briefing set out, a whole sequence of actions is needed – from stamping out formal tying, through changes in procurement procedures, to pro-active policies to procure in favour of the poorest. But an increase in emphasis on informal tying in the GPEDC monitoring report could tilt the balance towards a new way of approaching aid procurement – a way that does work, for the poorest people, not just for the commercial interests of multinationals in the global north.