Exposing Tied Aid: Preventing donor countries from getting rich on their own aid


The OECD Development Assistance Committee (ODA) is conducting a review of its Recommendation on Untying ODA (Official Development Assistance, or aid). In this blog, our aid expert examines how wealthy countries are continuing to profit from both formal and informal tied aid. With one week to go until the publication of preliminary data from the OECD DAC outlining the ODA distributed by donor countries in 2023, this article shines a light on one of the practices that continues to call into question the integrity of aid. It also outlines five issues that must be addressed.

Imagine you’ve secured a low interest loan from a bank to build a house, only to learn after signing the contract that the bank won’t release the money unless you agree to a major caveat… All purchases related to the building of your new home, from design and materials to construction, have to be made with “friends” of the bank (i.e. private sector providers), regardless of whether you can find a cheaper, more convenient and higher quality alternative. On top of this, once the house is built the bank has the right, even if “unofficial”, to use your house to make extra money for itself and its friends, for instance, by privileged market access and commercial opportunities. This, in a nutshell, is tied aid–one of the most blatant examples of how rich countries use Official Development Assistance (ODA) to serve their own domestic interests. 

According to the OECD Development Assistance Committee OECD-(DAC), the body which oversees the rules that govern aid, ODA must be “administered with the promotion of the economic development and welfare of developing countries as its main objective.” As such, this would naturally include expanding and strengthening a country’s own systems and domestic economy to be able to compete, if only, to deliver a project being supported by ODA within its own borders. Tied Aid undermines this basic premise by strictly requiring or unofficially favouring a donor’s own economic sector to deliver a project.

The OECD-DAC has developed a fairly robust framework to dissuade its members from tying their aid, notably the Recommendation on Untying ODA. Yet, since 2012, upwards of 16 percent of DAC Countries’ ODA has been considered tied, on average, amounting to around US$175 billion. These are very significant volumes of ODA that have enriched rich countries at the expense of nations in the global south.

Bilateral vs Tied Bilateral Commitments (US$ millions, 2021)

Click to enlarge

As a result, the OECD-DAC is currently conducting a review of their own Recommendation to strengthen and update it to the current realities of ODA. 

Ultimately, it is high time that the practice of both formal and informal tied aid came to an end. Instead donors should align their procurements with the principle of democratic ownership, using budget support and local procurement systems and conducting tenders that give firms in the global south a fair chance.

Here are the five key issues that must be addressed in this year’s review:

  1. Expand the geographical coverage of recipient countries covered by the Recommendation. 
    Currently, only a select set of ODA eligible recipient countries based on income classifications— are covered, namely Least Developed Countries (LDCs), Heavily Indebted Poor Countries (HIPCs), Other Low-Income Countries (OLICs) and countries that qualify to receive support from the World Bank’s International Development Association-only (“IDA-only”). This means that sizeable portions of ODA are not subject to the recommendation or its contents. In order to adhere to the effectiveness principles, and in particular that of country ownership, all ODA should be covered, irrespective of income classification to ensure alignment with a country’s own national development priorities.
  2. Publish contracts that are awarded to companies to deliver ODA-funded programmes 
    Informal tying takes place when unofficial barriers are erected that give preferential treatment or access to a donor’s domestic suppliers, while reporting that such aid is near fully untied. In some of the most extreme examples within the last few years, 95 per cent of contract awards went to contractors from their own country. And while the OECD collects data down to the individual contract reward-level, it is not accessible to the public.  Making this data available and requiring donors to include succinct qualitative information detailing why a supplier was chosen, would go a long way to improving transparency and dispelling notions of aid being informally tied. 
  3. Enhance data availability on sub-contracting
    Occasionally, the initial contract award is just the first stop along a procurement chain, and it is not uncommon for sub-contracting to occur during the delivery of a project. Such practices are not necessarily accounted for in the Recommendation, leaving ODA exposed to possible tying at a step removed from the initial contract. Here, improvements to data collection and transparency on sub-contracting could help ensure compliance.
  4. Expose and identify ‘back-door’ tying and ‘beneficial ownership’ schemes 
    Contract awardees are not always who they say they are, and as such, resources generated from a contract can end up back in the global north through beneficial ownership. More complete data and transparency on contract awardees should be made available to combat back-door tying and tax avoidance. Donors should introduce public registers of beneficial ownership to ensure full transparency over who is really profiting from these contracts. They should also support and take part in the current negotiations for a UN tax framework convention. This would ensure one coherent global system where all countries take part on an equal footing.
  5. Update the Recommendation to cover Private Sector Instruments (PSI) This review is following the agreement of new rules on reporting for PSI. We have previously pointed out the potential risk of these new rules  generating more tied aid,  specifically:
    1. That most PSI goes to countries not covered by the Recommendation (i.e. Upper Middle- Income Countries and Lower Middle-Income Countries)
    2. That the transparency requirements of Development Finance Institutions (DFIs), the predominant PSI vehicle, are nowhere near as robust as strictly bilateral ODA, especially when using the ‘institutional’ approach, which measures the transfer towards the private sector instrument vehicle. As such, there is limited information along the "investment chain".

Given these risks, this review is an opportunity to expand the Recommendation’s coverage and to improve transparency related to PSI by requiring all DFIs, or other PSI vehicles, to report on procurement contracts awarded by themselves or by their direct intermediaries or investees.      

Next week, the OECD DAC will publish its latest preliminary data for 2023. Sadly, these statistics are increasingly becoming a less relevant and less legitimate measure to account for the resources that countries in the global south receive from rich countries. This, therefore, is an important opportunity for OECD-DAC Members to take an ambitious approach when updating the Recommendation on Untying. If taken, this review has the potential to improve transparency and strengthen the integrity of ODA statistics, and, by extension, help improve the quality and effectiveness of ODA itself.

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  • Mary Stokes
    published this page in Blog 2024-04-04 10:38:03 +0200