Why tied aid is a disaster

Sen. Ralph Recto has warned against “tied loans” from countries like China where foreigners take over the jobs of Filipinos. He proposes that foreign loan agreements should carry a “hire local policy” instead of privileging “preferences by the funder.”

The issue is crucial, given that many overseas workers are returning home and a recent Social Weather Stations survey shows that 10 million Filipinos are jobless.

Recto raises a valid issue, but his concern is but the tip of the iceberg. Tied loans are part of official development assistance (ODA) from donor countries to less developed nations. ODA could refer to loans and grants, and both are infected with the virus of “tied aid.”

The Organization for Economic Cooperation and Development (OECD), an intergovernmental group of 36 advanced economies, defines tied aid as loans or grants which are offered “on the condition that it be used to procure goods or services from the provider of the aid.” The OECD’s Development Assistance Committee (DAC) has been advocating for the untying of aid since 2001.

The OECD DAC says that “tied aid can increase the costs of a development project by as much as 15 to 30 percent,” thus preventing “recipient countries from receiving good value for money for services, goods, or works” while unfairly setting “legal and regulatory barriers to open competition for aid-funded procurement.”

The DAC argues that “untying aid, on the other hand, increases aid effectiveness by reducing and avoiding unnecessary transaction costs, gives the recipient the freedom to procure goods and services” and therefore “improves the ability of recipient countries to set their own course.” The DAC reports that the “proportion of ODA… that was untied increased from 41 percent in 1999-2001 to 79 percent in 2018.” It also claimed that, “in terms of individual country performance, most (OECD) members have now untied almost all of their ODA.”

The civil-society-led European Network on Debt and Development (Eurodad), however, disputes the OECD DAC findings on the current global status of tied aid. In a September 2018 Report, the group notes that while donor governments in 2015 spent “an estimated US$55 billion — or 44 percent of ODA — on the procurement of goods and services,” this failed to benefit local economies, as tied aid “puts the commercial priorities of firms based in rich countries before development impact” in recipient countries.

Eurodad calculates that, at the minimum, “the immediate cost of tying — that is, the cost of being unable to shop around for the best price — was between $1.95 billion and $5.43 billion in 2016.” The group reports that, “in 2016, some $25 billion of ODA was reported as formally tied” — almost 20 percent of the total. But this picture is incomplete, since “ODA that is reported as untied can still be tied ‘informally’ through procedural restrictions that give companies from the donor country an unfair advantage.”

ODA contract awards show that, due to the informal tying of aid, “more than half of all reported contracts in 2016 were awarded back to firms in the donor country.” The most notorious are the United States (95 percent), Australia (93 percent) and United Kingdom (90 percent). In the poorest countries, “only 13 percent flowed back to local companies.” On top of this, OECD DAC chair Charlotte Petri Gornitza admits that backtracking on untying aid has taken place from the 2013 high of 89.5 percent.

Strategies to open up procurement to firms in recipient countries such as “advertising contracts in the local media, setting manageable contract sizes and undertaking procurement in local languages… are often ignored” by donor agencies. Furthermore, “recent changes to the ODA reporting rules on donor support to the private sector risk creating new loopholes that would allow informal tying to proliferate more than ever.”

My own research on ODA to the Philippines confirms the negative impact of tied aid. In the case of Japanese loans, “prices of tied goods were over 20 percent higher than the lowest available international prices and reduced aid value by an average of 10-15 percent,” as I wrote in “Development Down the Drain: The Crisis of Official Development Assistance to the Philippines” (a chapter in the 2010 book “Finance or Penance for the Poor,” edited by Filomeno Sta. Ana III). Further: “Japan earned from 75 cents to 95 cents for every dollar of aid it gives in the form of goods and services purchased by the recipient country.” Informal tying also results from “the hiring of consultants from the donor-country or the use of donor-country standards in the acquisition of equipment and other project requirements.”

It is correct to point out the potential harm that tied aid creates in relation to the hiring of labor from the donor country. But the effect of tied aid (loans and grants) is much more disastrous in its overall and lasting impact on recipient economies. As Eurodad pointed out, “the far greater cost” lies in “missed opportunities to catalyze local economic, social and environmental development over the long term.”

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Eduardo C. Tadem, PhD, is convenor of the Program on Alternative Development, University of the Philippines Center for Integrative and Development Studies; retired professor of Asian Studies, UP Diliman; and past president of the Freedom from Debt Coalition (2014-2018).