Japan leads surge in tied aid

BRUSSELS — The world’s major donors reserved almost $21 billion of their bilateral aid for suppliers from their own countries in 2018, official figures show — $4.7 billion more than the year before.

But it was one donor — Japan — that was largely responsible for the leap.

The figures, released by the Organisation for Economic Co-operation and Development this month, sparked concern from aid advocates who say that tied aid — where procurement is available primarily to companies from the donor country — raises transaction costs and jeopardizes local ownership.

Jan Van de Poel, policy and advocacy manager at the NGO network Eurodad, told Devex that the increase in tied aid in 2018 represented “a remarkable surge in the amount of aid that puts donors’ commercial priorities before the priorities of people living in poverty.”

In 2018, donors tied 19.4% of bilateral aid, up from 15.4% the year before and 14.3% in 2012, when $13.5 billion of aid was tied.

The main donors tying aid in 2018 were the U.S. with almost $11 billion tied, or 39.8% of its total bilateral aid; Japan with $4.2 billion, or 22.4%; Germany with $3.1 billion, or 14.9%; and South Korea with $1.3 billion, or 48.2%.

But it was Japan that accounted for most of the increase in 2018, tying $3.3 billion more than the year before. Tokyo also continued its policy of not reporting the tying status of technical cooperation — for which it reported an additional $1.9 billion in 2018 — though most other donors do.

Following a 2018 debate within the OECD’s Development Assistance Committee, donors tightened the rules on tied aid, adding more countries to the list of places where procurement must be open to local firms.

Donors can skirt this recommendation, however, by tying aid given to wealthier countries. In 2018, for instance, Japan allocated more than $2 billion in tied aid for a high-speed rail link between Mumbai and Ahmedabad in India.

During the 2018 debate, Japan was also the most vocal supporter of tied aid, arguing that citizens were more likely to support high aid budgets if companies in the donor country benefitted.

“A limited degree of donor tied provision allows us to increase the absolute amount of capital whilst still providing opportunities for companies other than those from donor countries to participate,” the Japanese government told Devex in a statement at the time.

Aid advocates disagree.

“Donors have agreed tying aid makes development cooperation less effective and undermines value for money,” Van de Poel said. “If donors are really committed to maximizing the catalytic impact of aid for development in poor countries ... action to untie all aid is urgently needed.”

Even where donors report aid as untied, however, Eurodad points out that many contracts still go to companies from the donor country.

Jeroen Kwakkenbos, senior aid policy and development finance adviser at Oxfam EU, told Devex that the “spike” in overall tied aid in 2018 was concerning — but even more troubling was the sectors where it was used.

“We are used to governments tying grants for food aid or student scholarships, but now we are seeing large loans for infrastructure projects,” Kwakkenbos said. “This is more similar to export credits than to development cooperation.”

Should other donors start tying “their development cooperation to their own economic interests,” Kwakkenbos said, the effectiveness of development would be undermined.

“Instead of fighting inequality and eradicating poverty, governments will use aid to subsidize their own firms,” he said.