OECD - Untying Aid to the least Developed Countries (July 2001)

Policy Brief

Untying Aid to the  Least Developed Countries

What is official development aid and how much is untied?

Why do donors tie their aid?

What are the benefits of untied aid?

What do stakeholders think?

What are donors currently doing?

Early attempts at untying aid

The 1998 mandate to untie aid to the least

developed countries

The 2001 DAC Recommendation to untie aid to the least developed countries

Coverage Effort-sharing

Transparency and monitoring

Implementing the Recommendation

For further reading

Introduction

The DAC High Level Meeting in April 2001 adopted a Recommenda- tion on untying aid to the least developed countries1. This Policy

Brief sets out the background to this agreement.

Since its creation in 1961, the OECD Development Assistance Committee (DAC) has discussed ways to improve the effective- ness of its Members aid efforts. One major issue has been whether aid should be freely available to buy goods and services from all countries (that is, untied aid ), or whether aid should be restricted to the procurement of goods and services from the donor country (that is, tied aid ). Over the years, the issue has been discussed in the DAC, culminating in agreement by Devel- opment Co-operation Ministers and Heads of Aid Agencies on a Recommendation to untie official development assistance to the least developed countries at the DAC High Level Meeting in April 2001.

1. As at 1 May 2001, the list of countries classified as  least developed is: Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Cape Verde, Central African Republic, Chad, Comoros, Congo Dem.Rep., Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Laos, Lesotho, Liberia, Madagascar, Malawi, Maldives, Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Samoa, Sao Tome and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, Sudan, Tanzania, Togo, Tuvalu, Uganda, Vanuatu, Yemen and Zambia.

© OECD 2001 Organisation for Economic Co-operation and Development

What is official development aid and how much is untied?

Donors assist developing coun- tries in their economic develop- ment, especially in implementing poverty reduction strategies at the country level which are now the foundation for both bilateral and multilateral development co- operation. When official donor agencies give assistance with a grant element of at least 25%, this aid is classified as Official Development Assistance (ODA). In 2000, DAC Members gave US$ 53 billion in ODA to developing countries approximately two- thirds was given bilaterally, the remainder was disbursed through multilateral development banks, such as the World Bank. Bilat- eral aid can either be tied or untied. Total bilateral aid to the least developed countries stands at around $8 billion (some 17% of total bilateral aid); about half of this is tied.

Why do donors tie their aid?

The reasons for keeping aid tied to the purchase of goods and ser- vices in the donor country are of both an economic and political nature. From a macroeconomic perspective, aid is a financial out- flow from the donor country. Governments concerned with

their balance of payments may wish to offset these outflows by seeking to increase exports through aid tying. At the enter- prise level, some firms in donor countries may see tied aid as a way to help them win contracts for exports to aid recipients such tying of aid implies a subsidy to enterprises in donor countries. From a political perspective, some donor governments have argued that tying aid strengthens public and business support for the aid effort. Untying aid, in turn, could then negatively influence already squeezed aid budgets. Further- more, development assistance extends beyond a mere economic exchange. It is seen as an expres- sion of donors values and willing- ness to cooperate on a personal level with the citizens of develop- ing countries. To emphasise these links, many donors want their aid efforts to be clearly visible. Tying aid to the purchase of goods and services of the donor country can provide such visibility.

What are the benefits of untied aid?

Proponents of untied aid empha- sise that it is a more efficient way to deliver development assis- tance. It has been estimated that tied aid raises the cost of many goods and services by between 15 to 30%. Further, tied aid increases the administrative bur- dens on both recipients and donors, and also tends to favour

projects that require capital inten- sive imports or donor-based tech- nical expertise rather than smaller and more poverty-focused pro- grammes. This bias could lead to the provision of goods, technol- ogy and advice that do not con- form to the priorities and specifications of the recipient country. In short, tied aid may be construed as a costly way of sub- sidising jobs in donor countries

a form of protectionism that runs counter to the overall OECD commitment to open markets. According to OECD Secretary- General Donald Johnston in his speech to the 1999 WTO Seattle Conference:  Untying aid, by restoring choice to impoverished recipient countries would increase the value of aid, remove a distor- tion to world commerce and enhance the dignity of the aid pro- cess that has been sullied by the mercantilist attitudes of some in the developed world.

What do stakeholders think?

The practice of tying aid now appears out of line with the new thinking on development co- operation, as set out in the 1996

DAC strategy Shaping the 21st Century: The Contribution of Development Co-operation. This

strategy commits donors to working in partnership with developing countries towards internationally agreed develop- ment goals. Aid untying figures prominently in major interna-

tional conferences on develop- in a multilateral context will align ments in favour of untied aid, ment issues: the aid business with the free many donors have been increas- trade principles of the WTO ing over time the relative impor-

  In  the  UNCTAD  X  Plan  of Agreement on Government Pro- tance of untied aid in their

Action, developing countries curement. As such, it will consti- programmes.

identified the issue of untying tute an important step towards

aid as a key test of the coherence creating a level playing field for Despite this positive trend during and credibility of donors  procurement. The Non-Govern- the 1990s, the growing share of

policies towards them. mental Organisation (NGO) com- untied aid in total bilateral aid has   The DAC  agreement  was wel- munity has long been an active leveled off since 1997. This is due

comed as a major  deliverable  advocate for aid untying. In fact, a to the fact that some large donors coalition of over 900 NGOs based gave important amounts of tied

bCyo nthfeer eTnhceir donUtnhiet eledasNt adteiovenls- in Europe has urged the European technical assistance in 1998 and oped countries in May of this Commission to abolish tied aid 1999. Four categories of donors

year; programmes. are identified in the table below on the basis of their ratio of

  Preparations  for  the  United untied aid to total bilateral ODA Nations Financing for Develop- What are donors  commitments to developing

ment Conference in March currently doing? countries.

2002 emphasise the contribu-

tion of untied aid to greater aid

effectiveness. One cannot say that all tied aid is

bad and that all untied aid is

Tying practices are seen as good . But, in light of the argu-

incompatible with effective part-

nerships. Liberalising aid pro-

curement is a tangible step

towards increased involvement of

developing countries in the Bilateral ODA commitments to developing countries selection, design and implemen- 45

tation of aid programmes and 40

projects.

35 Total

The business community has also 30

expressed its interest for untying 25

awiidthi ncraedmibulel tpilraotveirsaiol nfsr afmoretwraonrsk- 20 Untied

parency and monitoring. Compet- 15

itive firms will benefit more from 10

access to a combined pool of 5

untied aid than from reserved 0

access to more limited national 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

tied aid funds. Moreover, untying

Average Untied Aid Ratio* 1995 1999

a. Recently, the United Kingdom has announced that it will untie all its bilateral aid, which will bring it into the group of leading untied aid donors together with Japan, Sweden and Switzerland.

* Untied bilateral ODA as percentage of total bilateral ODA

Source:  OECD

Early attempts at untying aid

As far back as 1969, a first attempt did not reach agreement on untying bilateral aid. The con- clusion of the discussions was reflected in the DAC Communi- quØ as follows: "For the first time, a large majority of Mem- bers declared themselves pre- pared to adhere to an agreement to untie their bilateral financial development loans. Other Mem- bers were not in a position to commit themselves on the prin- ciple or on the urgency of such a scheme. While they were pre- pared to participate in further discussions concerning the estab- lishment of such an agreement, they stressed that any such scheme should take into account their special circumstances and their aid composition."

A second attempt was made in 1974, when 10 donors joined in a Memorandum of Understand- ing for the reciprocal untying

their bilateral development loans. But the agreement never became fully operational as the oil crises diverted attention to more pressing issues.

The 1998 mandate to untie aid to the least developed countries

Having reached agreement in 1992 on a set of disciplines to

guide the use of tied aid *, the attention of the DAC subse-

quently returned to exploring ways to liberalise aid procure- ment. Following a detailed inves- tigation of options and targets for a possible initiative, the DAC s 1998 High Level Meeting man- dated work on a Recommenda- tion to untie aid to the least developed countries. The initia- tive was targeted to this category of countries because of their rela- tively greater dependence on aid. Since the least developed coun-

tries face the greatest challenges in achieving the Millenium Develop- ment Goals, they can ill afford to bear the additional costs and ineffi- ciencies associated with tied aid.

The 2001 DAC Recommendation to untie aid to

the least developed countries

After intensive discussions, the DAC at its High Level Meeting in May 2001 reached agreement on a Recommendation to untie ODA to the least developed countries. The objectives of the Recommen- dation are to:

  untie  ODA  to  the  least

developed countries to the greatest extent possible;

  promote  and  ensure  ade-

quate ODA flows, in partic- ular to the least developed countries;

* The disciplines were primarily negotiated in the OECD under the auspices of the Participants to the OECD Arrangement on Officially Supported Export Credits.

achieve balanced efforts

among DAC Members in untying aid.

The Recommendation also recog- nises that reinforcing partner country responsibility for pro- curement and the ability of the private sector to compete for aid funded contracts are required in order for the Recommendation to deliver its full benefits.

Coverage

By 1 January 2002, ODA to the least developed countries will be untied in the following areas: balance of payments and struc- tural adjustment support; debt forgiveness; sector and multi- sector programmes assistance; investment project aid; import and commodity support; com- mercial services contracts, and ODA to NGOs for procurement related activities. In addition, the Recommendation acknowledges that different approaches are required for different categories of ODA and that actions to implement the Recommendation might vary between donors in terms of coverage and timing. Simply put, there are some activi- ties (notably technical co-opera- tion and food aid) where it is recognised that untying would pose more delicate problems for some donors than for others. The Recommendation therefore strikes a balance between main- taining a sense of national involvement in donor countries development co-operation poli-

cies alongside the objective to procure more goods and services in partner countries. Thus, with respect to technical co-operation and food aid, donors can opt to keep their aid programmes tied. Overall, it is expected that approximately US$5.5 billion or about 70% of all bilateral ODA to the least developed countries will be untied as of January 2002.

Effort-sharing

Promoting a reasonable balance among Members in their efforts to implement the untying initia- tive is an integral part of the Rec- ommendation. The issue of balanced effort-sharing arises from the interplay of two factors the coverage of the Recommen- dation and the variations in vol- ume, structure and geographical orientations of different aid programmes. As a result, the implementation of the Recom- mendation will produce impor- tant differences between individual donors both in the amount of aid that is covered by the Recommendation and the overall volume and share of aid that is untied. Therefore, the Recommendation acknowledges that achieving a balance in effort- sharing is a legitimate and important concern for govern- ments, parliaments and the pub- lic at large. In that respect, Members have agreed to under- take their best endeavours to identify and implement supple- mentary actions to promote effort-sharing and to regularly

review progress towards more balanced sharing of their efforts towards the least developed countries. Furthermore, they expressed their intention that their aid to the least developed countries will not decline over time as a result of the implemen- tation of the Recommendation.

Transparency and monitoring

The Recommendation sets out strong transparency, implemen- tation and review procedures to provide and maintain a level playing field, monitor compli- ance with the Recommendation and assess its effectiveness. For instance, prior to the opening of the bidding period donors will notify the OECD Secretariat of untied aid offers covered by the Recommendation. Subse- quently, the notification will be made publicly available to inform companies in donor and recipient countries to the possi- bilities to bid for the contract. In general, bidding will take place according to the 1986 DAC Good Procurement Practices for ODA, which give guidance on effective and competitive pro- curement. Donors will also inform the Secretariat about the company that has been awarded the contract. In addi- tion, an electronic information exchange system will allow Members to ask each other for additional information or to clarify ambiguities.

Implementing the Recommendation

The Recommendation becomes operational on 1 January 2002. Major efforts are now underway to get in place for this and to put its provisions into practice. By the beginning of next year, Mem- bers will have to make whatever adjustments are necessary to their policies and practices to untie agreed categories of aid. Equally, the OECD Secretariat will have to put monitoring and review provisions into opera- tion, including the creation of an

electronic bulletin board to advertise untied aid offers. Beyond these immediate tasks, implementation will require much work in other areas to check that the Recommendation is meeting its objectives. This will include, for example:

work to strengthen procure-

ment capacities in developing countries so that they can take greater responsibility for this;

work to improve the com-

pleteness and comparabil- ity of Members' reporting on tied and untied aid;

implementing the effort-

sharing provisions of the Recommendation to improve the balance among Mem- bers in respect of their efforts towards the least developed countries will also be a major task.

For further information

More information about the Recommendation can be obtained from Frans Lammersen

(email: frans.lammersen@oecd.org; tel: (33-1) 45 24 89 88).

For further reading

Shaping the 21st Century: The Contribution of Development Co-operation, 1996

DAC Recommendation on Untying Official Development Assistance to the Least Developed Countries, May 2001 www.oecd.org/dac/htm/Untie.htm

OECD publications can be securely purchased from the OECD Online Bookshop www.oecd.org/bookshop

The OECD Policy Briefs are prepared by the Public Affairs Division, Public Affairs and Communications Directorate.

They are published under the responsibility of the Secretary-General.

Where to contact us?

FRANCE GERMANY JAPAN MEXICO UNITED STATES

OECD Headquarters OECD BERLIN Centre OECD TOKYO Centre OECD MEXICO Centre OECD WASHINGTON Center 2, rue André-Pascal Albrechtstrasse 9/10 Landic Akasaka Bldg Av. Presidente Mazaryk 526 2001 L Street N.W.,

75775 PARIS Cedex 16 D-10117 BERLIN 2-3-4 Akasaka, Minato-Ku  Colonia: Polanco Suite 650

Tel.: 33 (0) 1 45 24 81 81 Tel.: (49-30) 2888353 TOKYO 107 C.P. 11560 WASHINGTON D.C. 20036-4922 Fax: 33 (0) 1 45 24 19 50 Fax: (49-30) 28883545 Tel.: (81-3) 3586 2016 Mexico, D.F Tel.: (1-202) 785 6323

E-mail: sales@oecd.org E-mail:  Fax: (81-3) 3584 7929  Tel.: (00.52.5) 281 3810 Fax: (1-202) 785 0350 Internet: www.oecd.org berlin.contact@oecd.org E-mail: center@oecdtokyo.org Fax: (00.52.5) 280 0480 E-mail:

Internet: www.oecd.org/ Internet: www.oecdtokyo.org E-mail:  washington.contact@oecd.org deutschland mexico.contact@oecd.org Internet: www.oecdwash.org

Internet: www.rtn.net.mx/ocde Toll free: (1-800) 456 6323

The OECD Policy Briefs are available on the OECD's Internet site

www.oecd.org/publications/Pol_brief/