Strings still attached: Unmet commitments on tied aid
Official development assistance (ODA) plays a fundamental role in an increasingly complex and expanding development finance landscape and is uniquely placed to support the needs of people experiencing the most extreme poverty and inequalities. In the midst of the current Covid-19 pandemic and interconnected crisis, the need for ODA has been thrown into even sharper relief, as these crises are pushing millions of people back into poverty and reversing the gains made towards achieving the Sustainable Development Goals (SDGs) in many countries in the global south.
Today, it is more than ever crucial that scarce aid resources are directed where they have most impact. Yet, our latest report on aid tying finds that in 2018, members of the Organisation for Economic Cooperation and Development’s Development Assistance Committee (OECD DAC) reported some US$26.9 billion of tied ODA, also known as tied aid - this is aid where donors require that such aid is used to procure goods and services from suppliers in the country providing that aid. In other words 21 per cent, or more than one in every five dollars, of bilateral and EU aid was reported as tied.
And this is just the most visible part of a wider problem. Even where DAC members do not formally tie their ODA, procurement processes - the purchasing of goods and services by governments to implement public projects or provide public services - can still create informal barriers that make it difficult for suppliers outside the DAC member country to access contract opportunities. A key way to detect informally tied ODA is to follow where contracts are actually awarded in practice. Our report also looked at data on the value of contracts awarded in 2018 (the most recent year for which this data is available). We found that 52 per cent of all untied contract awards reported to the DAC were awarded to suppliers in the DAC member’s own country. For nine DAC members, the share was over 80 per cent. In contrast, only 11 per cent of reported untied contract awards went to suppliers in Least Developed Countries and Heavily Indebted Poor Countries.
Drawing on this data, we estimate that the total level of formally and informally tied ODA in 2018 was at a minimum US$32.3 billion (potentially up to US$37.9 billion depending on the assumptions used). Zooming out to look at trends over the last decade, the data offers little evidence that DAC members have made any sustained progress towards their longstanding commitments on untying ODA.
These findings translate into very real costs for people in the global south. The longer-term costs of tying are hard to quantify, but even focusing just on the direct short-term cost of not being free to shop around for the best price, we estimate that in 2018 alone, the direct short-term cost of tying was at least US$2 billion and potentially as much as US$7 billion.
In the midst of the Covid-19 pandemic and the interrelated crisis, the need to tackle tied ODA is even more urgent than when we last reported, so that how ODA is used is optimised.
Recommendations for DAC members
1. Align all procurement with the principle of democratic ownership of development priorities by people in the global south, including by favouring support to local budgets, and the use of local procurement systems for all aid modalities.
Where DAC members are unable or unwilling to use country systems as the default option in the short term, they should as a minimum:
1. Untie all ODA to all countries and all sectors, both formally and informally.
2. Ensure that procurement activities uphold obligations and commitments on human rights, decent work, environmental sustainability and responsible tax behaviour.
3. Giving local suppliers in the global south, especially smaller suppliers, a fair chance of winning ODA procurement contracts, including by tackling known barriers that prevent such suppliers in the global south having an equal chance of winning contracts, such as large tender sizes, a lack of information in local media, and a lack of communication in local languages (including minority languages).
Recommendations for international decision-making and norm-setting bodies
1. United Nations Member States from both the global north and global south should put forward an ambitious proposal for the steps that governments need to take to put an end to informally tied ODA, with exacting timescales for action.
2. Members of the DAC collectively should:
- Widen the scope of the Recommendation on Untying ODA, to include all countries and all sectors, and to cover informal as well as formal tying.
- Strengthen accountability over informal tying.
- Revisit the DAC’s approach to the reporting of private sector instruments (PSI) as ODA, paying attention – among many other important issues – to the specific tying risks associated with PSIs.
3. The Global Partnership for Effective Development Cooperation is currently reviewing its monitoring indicators. The GPEDC should take this opportunity to expand its monitoring on untying ODA, to capture more information on informal, as well as formal, tying.
Recommendation for Civil Society Organisations
1. CSOs have a fundamental role to play in making this agenda progress. CSOs should continue concerted pressure to persuade DAC members to take forward the untying agenda.
As our report sets out, the threat from both informal and formal tying is undiminished since we last reported (back in 2018), and may even be getting worse. The poorest countries and poorest people will pay the cost of the missed opportunity to make the best use of ODA. We gladly invite you to read the full report for more detail.