As the UK Government announced the unilateral untying of its development assistance programme, Louise Hilditch looks at the slow progress towards global untying.

In the mid 1990s, aid totalling 300 million yen (£1.9 million) was given to Malawi for the purchase of Argentinean maize by two Japanese companies. Only 79 million yen (£0.5 million) was spent on maize; the rest went towards transport and insurance costs. So just 3,000 metric tonnes of maize was actually delivered. Yet if Malawi had been able to buy the maize within the southern Africa region, the same money could have bought more than three times as much – 10,000 tonnes of maize.

This is just one example of the gross inefficiency and waste that results from tied aid. Aid tying is the practice of granting development assistance on condition that the beneficiary country uses the money to buy goods and services in the country granting that aid.

But what is really the problem with tied aid? Firstly, it can skew development projects towards commercial considerations. Secondly, it can exclude the apparent beneficiaries – whose participation and support is essential for the eventual success of a development project – from the decision-making process for which the aid is granted. Thirdly, it favours capital-intensive over smaller, more poverty focused projects, and fourthly, it can lead to the provision of inappropriate goods, services and advice.

Moreover, aid tying is inefficient. It can increase the costs of goods and services by up to 30%, as there is often no or little competition for contracts.

It discourages donor co-ordination by encouraging a culture of competition among fellow donors, and it represents an ineffective and costly means of subsidising firms in the donor country.

UK initiative

The UK Government’s announcement earlier this year that all its aid would be untied from 1 April 2001 is therefore very welcome. This represents an important step towards ensuring that British development assistance achieves its full potential. As the first major donor to fully untie, the UK Government’s move sends a strong signal to others to reconsider their tied aid practices, and adds much-needed momentum to efforts to reach international agreement to end untying.

Discussions about aid untying have been on going in the Development Assistance Committee (DAC) of the OECD since 1963. And on 25 April 2001, the High Level Meeting of the DAC endorsed a recommendation on untying aid to the Least Developed Countries. This is the first international agreement on untying and is an important first step towards ending the practice. However, it excludes technical co-operation and food aid and, as such, represents only a fraction of development spending.

As the OECD negotiations illustrate, tied aid is a highly contentious issue, with some governments arguing doggedly that it is only through ensuring benefits domestically as well as in developing countries that their electorates are willing to support high levels of development aid at all. This is the argument put forward by the Danish Government, whose development aid, at around 1% of GNP, makes it the world’s most generous donor. Their argument does not, of course, take into consideration the development opportunities lost and financial resources wasted because the aid is tied.

Although tied aid’s most vociferous supporters rarely challenge the ‘pro-development’ arguments, the slow progress on aid untying in the OECD led the UK-based development organisation ActionAid to consider other routes. We commissioned a report that found that aid tying by EU member states breaches European Community (EC) law because it inhibits the free movement of goods and services within the EU and because it is an unjustifiable and undeclared state aid.

The legal challenge

ActionAid’s case rests on two arguments:

• Tying aid stops firms in other Member States from tendering for contracts, so breaching internal market rules which state that the EU is one market rather than 15, and that each should have equal access to all.
• Tied aid is a form of state aid because it grants advantages to national companies in the competitive process and is thus subject to EC competition rules. Granting advantages to companies in donor countries discriminates against firms in member states other than the donor country. Furthermore, since the Commission considers tied aid contracts to be a form of state aid, by not notifying the Commission when they award tied aid contracts, member states are in breach of EC rules that stipulate that all state aids must be reported.
  

ActionAid launched the legal challenge in September 1999 with the support of over 900 NGOs throughout the EU, and the European Commission is currently investigating the complaint.

The Commission sent out the questionnaires on the procurement practices of member states last summer, with a two month deadline. Only six of the 15 member states have yet replied. On the basis of the responses, the Commission will either judge that the member state in question complies with all the relevant rules and close the case, or else issue a ‘formal notice’ to notify the member state concerned that the Commission believes that it has infringed EC rules. If the member state fails to act on these findings, then the whole process could come before the European Court of Justice which can force a change of its rules and impose fines. However, the apparent unwillingness of more than half the member states to supply the necessary evidence clearly delays the Commission’s progress on the case.

The success of this legal complaint will be crucial in galvanising the international donor community to use resources more honestly and more explicitly as a tool for development. Tied aid is an outdated, inefficient and protectionist practice and its end is long overdue.

With thanks to Jeffery Chinnock

Louise Hilditch, EU Policy Adviser, ActionAid

DAC Agreement

Under the terms of the OECD’s Development Assistance Committee (DAC) recommendation, aid loans and grants covering a wide range of financial and project support (such as capital equipment, sector assistance and import support) will be open to international competition and no longer reserved to suppliers in the donor country. Total bilateral aid to the Least Developed Countries (LDCs) stands at around $8 billion – the recommendation means that around $5 billion of that will now be provided as untied aid. DAC members are invited to continue to provide untied aid in areas not covered by the recommendation where they already do so, and to study the possibilities of extending untied aid in other areas and to other developing countries.

This agreement aims to improve the effectiveness of aid in various ways. It should realise better value for money (for taxpayers in donor countries, and for recipient countries). Tied aid is estimated to cost on average between 20-25% more than if the goods or services in question were procured through international competition. It will give recipient countries greater ownership of their development process and create the possibility to shape more efficient and rational public procurement capacities. In the context of the recommendation, there are provisions to promote and assess progress towards balanced effort-sharing among donors.

www.oecd.org