Tied aid: an end to ‘Europe’s shame’?, November 2002

Sixty percent of the aid from the European Union to developing countries is given on condition that they use it to purchase goods and services from suppliers based in the donor countries. The system is claimed to cost the recipient countries 20% of the value of the aid received - a situation described by ActionAid as 'Europe's shame'.

The problem has been recognised by a number of organisations, including the World Bank and the Organisation for Economic Co-operation and Development. In 2001 the OECD's Development Assistance Committee agreed to that official development assistance (ODA) to the Least Developed Countries should be 'untied' in order to:

• foster co-ordinated, efficient and effective partnerships with developing countries

• strengthen the ownership and responsibility of partner countries in the development process

• demonstrate responsiveness to the requests from partner countries and others to increase the use of untied aid in order to promote aid effectiveness

• contribute to broader efforts with partner countries to promote their integration into the global economy

In its Communication 'Untying: Enhancing the effectiveness of aid', issued on 19 November 2002, the European Commission proposes going further than the OECD agreement. There is expected to be significant opposition from some Member States but, if adopted, the proposal would completely untie Community aid. Recipients would therefore be free to purchase goods and services on the open market, rather than from a particular EU Member State.

Announcing the initiative, which was discussed at the General Affairs and External Relations Council on 18-19 November, EU Commissioner for Development and Humanitarian Aid, Poul Nielson, said 'The debate on untying aid has long been at the centre of discussions on development policy. It is generally accepted that untying of aid is an important factor in improving both the effectiveness and coherence of pro-poor development policy.'

To illustrate the nature of the problem, ActionAid highlights the case of the Danish Government cancelling US$45 million of tied aid to Bangladesh in 2001. The money was to have been used to repair four ferries, but Danish companies reportedly wanted to charge four times as much for the work as local Bangladeshi firms. Denmark stopped the aid when Bangladesh decided to look elsewhere for contractors. (The practice of tying aid appears to be in breach of EU competition law and the European Commission has initiated infringement proceedings against Denmark and Italy).

BBC News Online made a similar point: 'Companies in the donor country are shielded from foreign competition. They can charge higher prices.' The BBC also noted the additional problem of tied aid encouraging donors 'to focus on projects that provide commercial opportunities rather than those that are most effective at reducing poverty.'

The EU - the world's largest aid donor - expects its initiative to be mirrored by other countries. There will certainly be concern that contracts provided by European companies under tied aid could in future be won by competitors from the United States and Japan.

Writing to the Financial Times in support of the proposal, a group of MEPs said 'we urge the European Council to include proposals alongside these that will proactively support contractors in developing countries to take advantage of the business opportunities that aid flows represent. Without this, there is little chance of long-term, sustainable development.'

Links:

European Commission:
	19.11.02: Commission adopts proposals to further untie Community aid [IP/02/1700]
	DG Development: Index
ActionAid:
	'Untie aid' plea for poor
	Making a case for untying European aid
BBC News Online:
	19.11.02:	EU to shake-up development aid
European Sources Online: Financial Times:
	18.11.02:	Brussels presses to end tied aid
	19.11.02:	Letters to the Editor: Untied aid would have more value
Organisation for Economic Co-operation and Development:
	DAC Recommendation on Untying Official Development Assistance to the Least Developed Countries
UK government: Department for International Development:
	Background briefing: Untying aid
European Sources Online: Topic Guides:
	EU-ACP relations
	The external trade policy of the European Union
European Sources Online: In Focus:
	EU-ACP countries sign new Partnership Agreement ('Cotonou Agreement'), Benin, June 2000
	EU to negotiate Economic Partnership Agreements with ACP countries, June 2002
	In Focus: More help for developing countries

Eric Davies
KnowEurope Researcher
Compiled: Wednesday, 20 November 2002

In a Communication 'Untying: Enhancing the effectiveness of aid', issued on 19 November 2002, the European Commission proposes 'untying' aid to developing countries from conditions that they use it to purchase goods and services from suppliers based in the donor countries.