OECD pushes fix on untied aid, Japan pushes back

The Organisation for Economic Co-operation and Development headquarters in Paris, France. Photo by: Andrew Wheeler / OECD

BRUSSELS — The debate over tied aid is heating up at the Organisation for Economic Co-operation and Development, with top donors yet to agree changes to the rules almost three weeks after they were expected to reach a deal.

OECD has circulated a revised version of its proposal to increase the number of places where contracts for development work must be open to firms outside the donor country. The organization cited members’ concerns that the initial proposal for untying aid didn’t go far enough — yet one member state, Japan, told Devex it believes the proposal went too far.

An OECD official, authorized to speak to the media anonymously, said the Development Assistance Committee — which sets the international rules for aid spending — was expected to agree to its updated policy on untying aid at delegate-level talks in Paris on Sept. 27, but the meeting ended without the necessary consensus.

OECD issued its first recommendation on where and in which sectors donors must ensure open competition for the procurement of goods and services funded by official development assistance in 2001. Initially, only least-developed countries were covered, with heavily indebted poor countries added in 2008. This year’s recommendation proposes eliminating the HIPC test. Instead, it would cover LDCs and poor nations that are eligible for resources from the World Bank’s International Development Association, plus the Democratic People’s Republic of Korea and Zimbabwe — two other low-income countries not included in the LDC or IDA-only groups.

In total, that would mean 11 countries are added to the list: Kosovo, Kyrgyzstan, the Maldives, Marshall Islands, Micronesia, DPRK, Samoa, Syria, Tajikistan, Tonga, and Zimbabwe. But Cameroon, Bolivia, and the Republic of Congo would drop off.

Failure to reach an agreement on Sept. 27 triggered negotiations with national capitals of the 30 DAC members, who represent most of the world’s richest aid donors, culminating in a new draft being circulated. An OECD official told Devex the delay was due to members’ concerns that the initial proposal did not go far enough in untying aid, which an OECD report this year found “increases aid effectiveness by reducing transaction costs and improving recipient countries ownership.”

The new draft seeks to address these concerns, the official said, by keeping Bolivia, Cameroon, and the Republic of Congo on the list of countries where tied aid ought not to be used.

However, Japan’s foreign ministry told Devex in a statement that the “effect of tied aid in mobilizing funds should be considered in a more positive light.” Tokyo argued that “tied aid is more likely to receive public support in donor countries ... which in turn helps us increase the support of public funds towards development.”

Second, it said that the use of concessional loans for tied aid allows countries to borrow at a reduced rate and alleviate their debt burden. It added that “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.”

Japan opted out of covering non-LDC HIPCs in 2013, and is considering something similar this time. If it doesn’t agree to the new proposal, which is now under a written procedure and open for amendments until Oct. 22, then Tokyo can reserve its position, meaning it would continue using untied aid with LDCs only.

It is not clear if other DAC members also opposed the proposal.

Polly Meeks, senior policy and advocacy officer at the European Network on Debt and Development, or Eurodad, rejected Japan’s arguments. She used a blog post earlier this month to decry the “self-interested ambitions of a minority of donors from the global north” impeding efforts to expand untied coverage.

A report last month by Eurodad found Japan gave more tied ODA loans than any other DAC donor in 2016, amounting to $2.4 billion. Drawing on existing literature, the NGO estimated that being unable to shop around for the best price cost countries in the “global south” between $1.95 billion and $5.43 billion in 2016.

“Tying aid may benefit a few individual firms, but it doesn’t do much for the donor’s economy at large,” Meeks said in response to Japan’s statement. “In fact, the inefficiencies associated with tying aid risk eroding public support for development over the long term.”

Tied aid can still count toward ODA, but the recommendation acts as an incentive. Some 88.3 percent of ODA to sectors and recipients covered by the existing recommendation was reported as untied by DAC members in 2016, compared to 80 percent of ODA overall. The recommendation does not include technical assistance and makes untying food aid optional.

But even when a contract is open to firms in developing countries, Eurodad found that several factors — including large contract sizes and a lack of tenders published in local languages — continue to favor competitors from the donor country. Australia and the United Kingdom both reported all of their ODA as untied in 2016, though 93 percent and 90 percent of the value of their contracts respectively went to their own firms.

About the author

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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.