Policy Brief July 2001 Untying to the Least Developed Countries What is official and how much is untied? Why do donors tie Introduction their aid?

What are the benefits The DAC High Level Meeting in April 2001 adopted a Recommenda- of untied aid? tion on untying aid to the least developed countries1. This Policy What do stakeholders Brief sets out the background to this agreement. think? Since its creation in 1961, the OECD Development Assistance What are donors Committee (DAC) has discussed ways to improve the effective- currently doing? ness of its Members’ aid efforts. One major issue has been whether aid should be freely available to buy goods and services Early attempts at from all countries (that is, “untied aid”), or whether aid should untying aid be restricted to the procurement of goods and services from the The 1998 mandate to untie donor country (that is, “tied aid”). Over the years, the issue has been discussed in the DAC, culminating in agreement by Devel- aid to the least opment Co-operation Ministers and Heads of Aid Agencies on a developed countries Recommendation to untie official development assistance to the The 2001 DAC least developed countries at the DAC High Level Meeting in Recommendation to untie April 2001. I aid to the least developed countries Coverage Effort-sharing 1. As at 1 May 2001, the list of countries classified as “least developed” is: Transparency and Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Cape Verde, Central African Republic, Chad, Comoros, Congo monitoring Dem.Rep., Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Laos, Lesotho, Liberia, Madagascar, Malawi, Implementing the Maldives, Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Recommendation Samoa, Sao Tome and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, Sudan, Tanzania, Togo, Tuvalu, Uganda, Vanuatu, Yemen and For further reading Zambia.

© OECD 2001 Organisation for Economic Co-operation and Development 2 Policy Brief Untying Aid to the Least Developed Countries

What is official their balance of payments may projects that require capital inten- wish to offset these outflows by sive imports or donor-based tech- development aid seeking to increase exports nical expertise rather than smaller and how much through aid tying. At the enter- and more -focused pro- prise level, some firms in donor grammes. This bias could lead to is untied? countries may see tied aid as a the provision of goods, technol- way to help them win contracts ogy and advice that do not con- Donors assist developing coun- for exports to aid recipients – form to the priorities and tries in their economic develop- such tying of aid implies a subsidy specifications of the recipient ment, especially in implementing to enterprises in donor countries. country. In short, tied aid may be strategies at From a political perspective, some construed as a costly way of sub- the country level which are now donor governments have argued sidising jobs in donor countries – the foundation for both bilateral that tying aid strengthens public a form of protectionism that runs and multilateral development co- and business support for the aid counter to the overall OECD operation. When official donor effort. Untying aid, in turn, could commitment to open markets. agencies give assistance with a then negatively influence already According to OECD Secretary- grant element1 of at least 25%, squeezed aid budgets. Further- General Donald Johnston in his this aid is classified as Official more, development assistance speech to the 1999 WTO Seattle Development Assistance (ODA). extends beyond a mere economic Conference: ”Untying aid, by In 2000, DAC Members gave US$ exchange. It is seen as an expres- restoring choice to impoverished 53 billion in ODA to developing sion of donors’ values and willing- recipient countries would increase countries – approximately two- ness to cooperate on a personal the value of aid, remove a distor- thirds was given bilaterally, the level with the citizens of develop- tion to world commerce and remainder was disbursed through ing countries. To emphasise these enhance the dignity of the aid pro- multilateral development banks, links, many donors want their aid cess that has been sullied by the such as the World Bank. Bilat- efforts to be clearly visible. Tying mercantilist attitudes of some in the I eral aid can either be tied or aid to the purchase of goods and developed world.” untied. Total bilateral aid to the services of the donor country can I least developed countries stands provide such visibility. at around $8 billion (some 17% What do stakeholders of total bilateral aid); about half of this is tied. I What are the think? benefits of untied aid? The practice of tying aid now Why do donors appears out of line with the new thinking on development co- tie their aid? Proponents of untied aid empha- operation, as set out in the 1996 sise that it is a more efficient way DAC strategy Shaping the 21st The reasons for keeping aid tied to deliver development assis- Century: The Contribution of to the purchase of goods and ser- tance. It has been estimated that Development Co-operation. This vices in the donor country are of tied aid raises the cost of many strategy commits donors to both an economic and political goods and services by between 15 working in partnership with nature. From a macroeconomic to 30%. Further, tied aid developing countries towards perspective, aid is a financial out- increases the administrative bur- internationally agreed develop- flow from the donor country. dens on both recipients and ment goals. Aid untying figures Governments concerned with donors, and also tends to favour prominently in major interna-

1. The grant element is the difference between the face value and the present value of a loan calculated at a rate of discount of 10%. 3 Policy Brief Untying Aid to the Least Developed Countries

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 by the Third United Nations coalition of over 900 NGOs based gave important amounts of tied Conference on the least devel- 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 I 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. I 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 aid in a multilateral framework 20 with credible provisions for trans- Untied 15 parency and monitoring. Compet- billion) $ (US 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 PB-Untying.fm Page 4 Wednesday, February 20, 2002 11:07 AM

4 Policy Brief Untying Aid to the Least Developed Countries

Average Untied Aid Ratio* 1995–1999

Over 90% 50%-90% 25%-50% Under 25% No data

Japan Canada Spain Belgium Italy United States Greece Ireland United Kingdoma Luxembourg New Zealand Denmark Austria

a. Recently, the has announced that it will untie all its bilateral aid, which will bring it into the group of leading untied aid donors together with , Sweden and Switzerland. * Untied bilateral ODA as percentage of total bilateral ODA Source: OECD

Early attempts at their bilateral development tries face the greatest challenges in loans. But the agreement never achieving the Millenium Develop- untying aid became fully operational as the ment Goals, they can ill afford to oil crises diverted attention to bear the additional costs and ineffi- As far back as 1969, a first more pressing issues. ■ ciencies associated with tied aid. ■ attempt did not reach agreement on untying bilateral aid. The con- clusion of the discussions was The 1998 mandate The 2001 DAC reflected in the DAC Communi- to untie aid to the qué as follows: "For the first Recommendation time, a large majority of Mem- least developed to untie aid to bers declared themselves pre- countries pared to adhere to an agreement the least developed to untie their bilateral financial countries Having reached agreement in development loans. Other Mem- 1992 on a set of disciplines to bers were not in a position to guide the use of tied aid*, the After intensive discussions, the commit themselves on the prin- attention of the DAC subse- DAC at its High Level Meeting in ciple or on the urgency of such a quently returned to exploring May 2001 reached agreement on scheme. While they were pre- ways to liberalise aid procure- a Recommendation to untie ODA pared to participate in further ment. Following a detailed inves- to the least developed countries. discussions concerning the estab- tigation of options and targets for The objectives of the Recommen- lishment of such an agreement, a possible initiative, the DAC’s dation are to: they stressed that any such 1998 High Level Meeting man- scheme should take into account • untie ODA to the least dated work on a Recommenda- their special circumstances and developed countries to the tion to untie aid to the least their aid composition." greatest extent possible; developed countries. The initia- A second attempt was made in tive was targeted to this category • promote and ensure ade- 1974, when 10 donors joined in of countries because of their rela- quate ODA flows, in partic- a Memorandum of Understand- tively greater dependence on aid. ular to the least developed ing for the reciprocal untying Since the least developed coun- countries;

* The disciplines were primarily negotiated in the OECD under the auspices of the Participants to the OECD Arrangement on Officially Supported Export Credits. 5 Policy Brief Untying Aid to the Least Developed Countries

• achieve balanced efforts cies alongside the objective to review progress towards more among DAC Members in procure more goods and services balanced sharing of their efforts untying aid. in partner countries. Thus, with towards the least developed respect to technical co-operation countries. Furthermore, they The Recommendation also recog- and food aid, donors can opt to expressed their intention that nises that reinforcing partner keep their aid programmes tied. their aid to the least responsibility for pro- Overall, it is expected that countries will not decline over curement and the ability of the approximately US$5.5 billion or time as a result of the implemen- private sector to compete for aid about 70% of all bilateral ODA to tation of the Recommendation. I funded contracts are required in the least developed countries will order for the Recommendation to be untied as of January 2002. I I deliver its full benefits. Transparency and Effort-sharing monitoring Coverage

Promoting a reasonable balance The Recommendation sets out By 1 January 2002, ODA to the among Members in their efforts strong transparency, implemen- least developed countries will be to implement the untying initia- tation and review procedures to untied in the following areas: tive is an integral part of the Rec- provide and maintain a level balance of payments and struc- ommendation. The issue of playing field, monitor compli- tural adjustment support; debt balanced effort-sharing arises ance with the Recommendation forgiveness; sector and multi- from the interplay of two factors and assess its effectiveness. For sector programmes assistance; – the coverage of the Recommen- instance, prior to the opening of investment project aid; import dation and the variations in vol- the bidding period donors will and commodity support; com- ume, structure and geographical notify the OECD Secretariat of mercial services contracts, and orientations of different aid untied aid offers covered by the ODA to NGOs for procurement programmes. As a result, the Recommendation. Subse- related activities. In addition, the implementation of the Recom- quently, the notification will be Recommendation acknowledges mendation will produce impor- made publicly available to that different approaches are tant differences between inform companies in donor and required for different categories individual donors both in the recipient countries to the possi- of ODA and that actions to amount of aid that is covered by bilities to bid for the contract. In implement the Recommendation the Recommendation and the general, bidding will take place might vary between donors in overall volume and share of aid according to the 1986 DAC terms of coverage and timing. that is untied. Therefore, the Good Procurement Practices for Simply put, there are some activi- Recommendation acknowledges ODA, which give guidance on ties (notably technical co-opera- that achieving a balance in effort- effective and competitive pro- tion and food aid) where it is sharing is a legitimate and curement. Donors will also recognised that untying would important concern for govern- inform the Secretariat about pose more delicate problems for ments, parliaments and the pub- the company that has been some donors than for others. lic at large. In that respect, awarded the contract. In addi- The Recommendation therefore Members have agreed to under- tion, an electronic information strikes a balance between main- take their best endeavours to exchange system will allow taining a sense of national identify and implement supple- Members to ask each other for involvement in donor countries’ mentary actions to promote additional information or to development co-operation poli- effort-sharing and to regularly clarify ambiguities. I 6 Policy Brief Untying Aid to the Least Developed Countries

Implementing the electronic bulletin board to • implementing the effort- advertise untied aid offers. sharing provisions of the Recommendation Beyond these immediate tasks, Recommendation to improve implementation will require the balance among Mem- much work in other areas to bers in respect of their The Recommendation becomes check that the Recommendation efforts towards the least operational on 1 January 2002. is meeting its objectives. This developed countries will Major efforts are now underway will include, for example: also be a major task. I to get in place for this and to put its provisions into practice. By • work to strengthen procure- the beginning of next year, Mem- ment capacities in developing bers will have to make whatever countries so that they can For further information adjustments are necessary to take greater responsibility for their policies and practices to this; untie agreed categories of aid. More information about the Equally, the OECD Secretariat • work to improve the com- Recommendation can be obtained will have to put monitoring and pleteness and comparabil- from Frans Lammersen review provisions into opera- ity of Members' reporting (email: [email protected]; tion, including the creation of an on tied and untied aid; tel: (33-1) 45 24 89 88). I 7 Policy Brief Untying Aid to the Least Developed Countries

For further reading

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

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

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