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The price of fragmentation – New European Commission report unveils the costs of aid ineffectiveness

04 November 2009

Three to six billion Euros of European ODA is wasted each year due to the lac k of implementation of existing aid effectiveness commitments. This is the main finding of the new report “Aid Effectiveness Agenda. Benefits of a European Approach” which has been released by the European Commission at the European Development Days in Stockholm. The report investigates the costs of five dimensions of aid ineffectiveness: the lack of division of labour, tied aid, volatility and unpredictability, and finally the cost incurred when recipient country public financial systems are not used and government ownership is weak.

Proliferation of aid agencies is seen as the most important cost component in which savings can and should be implemented. The study points to estimates that EU donors approved roughly  22.000 new projects in 2007. That means that the average project size is just EUR 0.7 to 1mn. Each of these individual projects has estimated overhead costs for design, formulation, appraisal and approval of EUR 90.000 to 140.000 – most of which is money spent on bureaucracies and consultants in the North.  Consequently, the authors calculate that a substantial amount of money could be saved and used if more ODA would be disbursed in larger amounts through leaner aid modalities such as sectoral or general budget support.

Tied aid is also increasing the costs by 15 to 30 percent when goods, works and services are contracted. The waste can amount 40 percent when it comes to food aid. Under the assumption that about 10 percent of EU ODA is still tied, EU donors’ continuous tying of aid thus costs EUR 500mn annually. This is money which in practice boosts the profits of European businesses and consultants rather than the well-being of the poor.  Volatility and unpredictability of aid lead to more inefficiencies and waste since it forces country governments to budget conservatively, and also leads to a poor allocation of resources and macroeconomic instability.

Throughout the study, the authors obviously struggled to obtain the accurate data needed to calculate the real cost savings of implementing the current aid effectiveness agenda. Even the most basic data on office costs or staff time is either not available or not disclosed by aid agencies which have reason to be reluctant to open up to scrutiny. Another challenge for the researchers was that they had to find the right microdata to match an aggregate figure which was disclosed by the European Commission earlier. Back in April, the EC stated in its Monterrey Communication Package that the cost-savings of implementing the aid effectiveness agenda would amount to EUR 5-7bn. Since this figure had been quoted by high-level officers such as ex-Commissioner Louis Michel several times, the contracted consultants were obviously under pressure to find the corresponding reasoning.   

A probably unintended effect is that the report also sheds a light on the misleading way in which EU donors report their ODA to the DAC. Many countries regularly underreport administrative expenses and overhead costs, for example by reporting only the costs at headquarters level while accounting those on other levels as project expenses. Thus they are leaving the wrong impression about the real amount of ODA which flows to the South, while in fact a large share finances just the bureaucracies in ministries, headquarters and country offices who are kept busy by an inefficient aid architecture.