Photo: Charlotte Petri Gornitzka, Credit: OECD DAC - Photo: 2017

We Must be Serious About Untying Aid for the Sake of Credibility and Private Sector Engagement

By Charlotte Petri Gornitzka

Charlotte Petri Gornitzka, a former Director General of the Swedish International Development Co-operation Agency (Sida), is chair of the Development Assistance Committee of the 35-nation Paris-based Organisation for Economic Co-operation and Development (OECD) since July 2016..- The Editor

PARIS (IDN) – New analysis of foreign aid flows from members of the OECD Development Assistance Committee (DAC), which I chair, reveals a worrying trend. The share of Official Development Assistance (ODA) that is tied to companies in donor countries is on the rise again.

The latest OECD report on aid untying, released this month (April 2017), shows that the share of aid that is “untied” – in other words where the legal and regulatory barriers to open competition for aid-funded procurement have been removed – has declined for two years in a row.

A good number of DAC donors now untie all or almost all of their aid, going beyond commitments made in a 2001 DAC Recommendation on untying ODA to the least developed countries. We should applaud this. But backtracking by a minority of donor countries means the share of aid covered by the Recommendation that is untied dropped to 87.1% in 2014 and 83.5% in 2015, after rising for several years to reach 89.5% in 2013. Future progress in aid untying will depend on these laggards.

The problem with the slippage in aid untying is that it runs against much of what is needed to achieve our development goals. Why is that?

Tying aid is a bit like protectionism. It may be a nice sell with some audiences at home – why not give a boost to our own companies as we provide aid by shielding them from competition? – But we know it doesn’t work. And the same dynamics that apply to trade protectionism – where ultimately everybody gets a worse deal from trying to close down competition – also apply to tied aid.

Most countries realise they cannot ‘afford’ protectionism since the wealth of our societies is built to an essential degree on open, competitive markets. So why are some donors still comfortable with tied aid? It implies a notion of ODA as a give-away, where value is not important, and where competition does not result in the best offer. Interestingly in this regard, it is not uncommon for those criticising aid for its ‘ineffectiveness’ to argue for tying aid. And sometimes the most outspoken political advocates of free trade and economic liberalism are the same who support tying aid. This is intellectually inconsistent to say the least. Anybody, who professes belief in competitive markets, should be a champion of untying.

At a practical level, contrary to trade where countries themselves bear the brunt of the cost of protectionism, the cost of tied aid is essentially borne by the recipients. For the countries covered by the DAC Recommendation, where resources are extremely scarce, the implications are significant: ODA still accounts for roughly 70% of the external finance of Least Developed Countries. Whether these resources are subject to conditions that limit recipient countries’ ability to get the best value for money is evidently a serious concern.

This has all taken on additional urgency with the Sustainable Development Goals, the Paris Agreement on Climate Change, and the Addis Ababa Action Agenda. We will not achieve Agenda 2030 without the private sector as a key partner and contributor to development. As we are on a journey to modernise development cooperation, in terms of how we partner and how we use our resources catalytically to help unlock the vast resources required for the implementation of Agenda 2030, credibility is essential.

So let’s talk about the elephant in the room: there is concern that the private sector agenda could be used as an excuse for more tied aid. And there is concern that an uptick in tying is a precursor of more of this to come in the future. So far, the analysis of the untying report has not substantiated the concern – although it will be important to continue monitoring this carefully.

It is equally important, however, to be very clear about one fundamental point: tied aid is about limiting procurement and competition. This has nothing to do with promoting the private sector, either as a source of development finance, or to mobilise skills, capacities and solutions. In fact, the very point of mobilising the private sector is based on the effectiveness of competitive market forces to deliver effective solutions. Limiting competition, as tying does, goes against the very grain of this. Suggesting otherwise would be conflating two very different things.

The role for the private sector required by Agenda 2030 goes so much beyond that of contractor or implementer of aid-financed interventions. A few key figures also put this into perspective: the annual investment gap for the SDGs is estimated at USD 2.5 trillion, much of which will have to be mobilised from the private sector. Meanwhile the Business Commission for Sustainable Development sees a USD 12 trillion business opportunity in the SDGs. In 2016, total ODA stood at USD 143 billion – and only a fraction of this is, and will be, used to support the private sector agenda.

Clearly, it does not make sense to construe the private sector agenda essentially as using aid as a prime financing source for private sector investments. Doing so would risk enshrining a very limited perception of the contribution private sector can and should make to development.

As former head of the Swedish development agency, Sida, I had many discussions with business leaders. Those companies that were serious about the opportunity of investing in developing and emerging countries were not looking for donor-funded business orders. For them, working together was not about just being given a contract, but about co-creating partnerships where the private sector brought unique contributions.

What is the upshot of all of this? Agenda 2030 has left no doubt about the importance of mobilising the private sector for development. More contributions from the private sector are needed. There should not be undue impediments to the development community working with the private sector to mobilise such contributions. In this context, untying and the private sector agenda should not be seen as conflicting – they are fully complementary. The intention of untying is not to hinder private sector engagement – rather, it would be an important enabler for effective engagement, by underpinning the principle of market competition.

Our report shows that a handful of donors have persistently high levels of aid with conditions attached and some are visibly backtracking on the DAC Recommendation, which covers most forms of ODA but excludes free-standing technical cooperation. (The Recommendation was amended in 2008 to add Heavily Indebted Poor Countries (HIPCs) not already covered due to their LDC status.)

Efforts are still underway to build the partnership and unlock the private sector contributions that will help us achieve Agenda 2030. Will we get it right? Ultimately, the question is, whether we are truly aiming to help seize a USD 12 trillion business opportunity that will be a tremendous boost to development. In the private sector efforts, untying is a seminal indicator, on whether we are serious about not letting this opportunity go. [IDN-InDepthNews – 26 April 2017]

Photo: Charlotte Petri Gornitzka, Credit: OECD DAC

IDN is flagship agency of the International Press Syndicate –

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