The latest study by the European Network on Debt and Development (Eurodad) suggests that the effectiveness of aid depends on whether recipient countries can implement financed projects by purchasing goods and services from local companies. The vast majority of current aid however, is tied, which means that only foreign firms can receive aid-funded contracts. Local companies are either formally excluded or are unable to compete with powerful international firms. Eurodad’s findings call for a radical reform in current procurement practices, proposing a form of “smart procurement” in which contracts are exclusively awarded to firms based in the recipient countries.
By Daan Bauwens
The study by the European Network on Debt and Development (Eurodad), released Tuesday, shows that more than two-thirds of all aid contracts are bagged by companies in the developed countries.
Eurodad is a network of 58 non-governmental organisations (NGOs) from 19 European countries that researches and works on issues related to debt, development finance and poverty reduction.
The new study was released ahead of the Fourth High Level Forum in Busan, South Korea, that will bring together the world’s governments and stakeholders in November to consider how to make aid more effective.
Eurodad examined case studies in Namibia, Ghana, Uganda, Bangladesh, Nicaragua and Bolivia to arrive at its conclusions, one of which links aid effectiveness with procurement, or the purchase of goods and services in implementing aid.
Procurement refers to the awarding of contracts to private companies for aid projects such as building roads, supplying drugs or delivering schoolbooks to poor countries.
Few poor countries have managed to become independent from international aid. This is partly due to donors’ procurement practices, the report states.
"We found that most aid never enters the economy of a developing nation," says Bodo Ellmers, a Eurodad policy officer who spent two years preparing the report.
According to official statistics from the Organisation for Economic Cooperation and Development (OECD), the total amount of official development assistance in 2009 was 92 billion euro (128 billion dollars).
"Most people think these 92 billion euro were given to developing countries, but, when you take a look at the aid contracts, two-thirds were awarded to companies in the North, only benefiting the North's economy.
"That's one of the main reasons why aid is not steering development, including decent jobs and higher incomes," Ellmers told IPS.
"Aid doesn't work as well as it could because it is not delivered in the way it should be delivered," Nuria Molina, director at Eurodad, told IPS. "It is striking to see that most of the aid never gets pumped into the economy of a developing nation."
In 2001, countries in the Organisation for Economic Co-operation and Development signed the first agreements to untie aid. 'Tied aid' refers to aid in which all purchases for development aid are made from firms in the donor country.
Notwithstanding the promises made 10 years ago, 20 percent of all bilateral aid is currently still tied, says the Eurodad study. Furthermore, most untied contracts still go to firms from rich countries.
The study shows that half of the contract value in World Bank-funded projects in the last decade went to firms from donor countries, with the share increasing with the size of the contract. In 2008, 67 percent of all World Bank-financed contracts went to firms from just 10 countries.
According to Ellmers, this is a consequence of World Bank procurement practices.
Most recipient countries are pressured to allow transnational companies to bid for contracts. "The message often is: we will give aid if you open up your market for international competition," Ellmers said.
"The company that offers the best value for money will get the contract, but then we miss out on the fact that most developing countries are undeveloped exactly because they don’t have companies that can compete on a global scale."
Eurodad pleads for 'smart procurement' and preferential access for local or regional companies to be awarded aid contracts.
"If we want to build a road in Ghana, we should give the contract to a Ghanian company," Ellmers said. "It gives us double dividend: the road will be built, but most importantly there will be new jobs, income and increased capacity."
Smart procurement also means imposing conditions on contractors that ensures that aid contributes to sustainable development. "It makes no sense to employ local people if they stay poor or become sick during the job," says Ellmers.
"It doesn't make sense either if the aid project ruins the environment. The awarded companies have to take social and environmental criteria into account."
Molina is convinced that the Eurodad study can change the way people look at development aid. "There is a powerful stereotype that corruption or lack of capacities in developing countries are the only reasons why aid doesn't work effectively."
The study, Molina said, brings a strong message about donor co-responsibility in making aid work. "I hope this message is strong enough to make donor countries and development banks rethink their policies."
