Donors agree to new rules on untied aid and eligibility

Flags at the main entrance of the Organisation for Economic Co-operation and Development’s conference center. Photo by: OECD

BRUSSELS — Leading aid donors set new rules Thursday making it possible for countries to become re-eligible for official development assistance if their income levels fall back below the threshold. Donors also agreed to expand the number of places where aid should be “untied” — that is, where they should not reserve aid contracts for their own companies.

The rule changes were reached in Paris, France, at a delegate-level meeting of the Organisation for Economic Co-operation and Development’s Development Assistance Committee, a group of 30 leading donor countries that set the international rules for ODA.

It comes as the United Kingdom pushes for the right to spend ODA on wealthy but climate-vulnerable islands if they are hit by major storms, after several Caribbean islands, including some of the U.K.’s overseas territories, were severely damaged by hurricanes last year. The DAC had a preliminary discussion of that issue Thursday, a source familiar with the negotiations told Devex, with OECD aid experts presenting data to members, but it is unclear if or when a final decision will be reached.

However, the U.K.’s campaign sparked a debate about what happens when countries that have graduated from the list of those eligible for ODA face a disaster that pushes their income levels down again. Donors have now agreed that a country will qualify for readmittance to the ODA list if its per capita income falls below the World Bank’s high-income threshold of $12,055 for one year. The country must also consent to being put back on the ODA list in a process dubbed “reverse graduation.” Should that happen, OECD will then analyse the situation after one year and report back to members. Until now, there have been no rules governing whether a country can undergo reverse graduation.

“This agreement responds to the need for new ways of thinking to meet today’s development challenges and humanitarian crises,” said OECD development cooperation director, Jorge Moreira da Silva. “It’s a major step forward by the DAC in making sure the rules governing foreign aid stay relevant to realities on the ground and serve those people most in need. It has been great to see the DAC members come together and hash out a consensus on this in good time.”

A separate decision on untied aid will see 10 countries added to the list of places where donors must ensure open competition for goods and services under their aid contracts. The recommendation acts as an incentive to countries to untie aid, which OECD and NGOs argue increases local ownership and makes spending more efficient. However, tied aid can still be counted toward ODA. The recommendation now covers 65 countries.

The agreement was delayed from last month after Japan expressed opposition, arguing that tied aid can increase the overall amount of development spending. Tokyo did not block the changes, which will be factored into OECD aid reporting next year, but reserves the right to continue providing tied aid to the newly covered countries: Kosovo, Kyrgyzstan, the Maldives, Marshall Islands, Micronesia, Samoa, Syria, Tajikistan, Tonga, and Zimbabwe.

DAC members also opted to keep Cameroon, Bolivia, and the Republic of Congo on the untied list, though an earlier draft would have seen them drop off due to a new definition. After initial discussions, the Democratic People's Republic of Korea was not included due to a lack of per capita income data. The DAC agreed to reassess this should the information become available.

A report last month by Eurodad, the European Network on Debt and Development, estimated that tied aid, which prevents countries in the global south from shopping around for the best price, cost them between $1.95 billion and $5.43 billion in 2016.

“This decision to extend the DAC’s rules on untying development aid to 10 more countries should increase the amount of aid that is free of conditions tying it to donor country companies by an average of $3.5 billion a year,” Moreira da Silva said. “This is a fantastic achievement and in line with our commitment to making foreign aid as effective as possible.”

Polly Meeks, senior policy and advocacy officer at Eurodad, called the expansion of untied aid “a very positive step from the DAC”.

But, she said, “this is just a first step,” adding that many countries and sectors remain outside the scope of the recommendation and that even when aid is reported as untied, “the lion's share of spending flows back to firms in the donor country.”

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    Vince Chadwick

    Vince Chadwick is the Brussels Correspondent for Devex. He covers the EU institutions, member states, and European civil society. A law graduate from Melbourne, Australia, he was social affairs reporter for The Age newspaper, before moving to Europe in 2013. He covered breaking news, the arts and public policy across the continent, including as a reporter and editor at POLITICO Europe.