Development, Untied: Unleashing the catalytic power of Official Development Assistance through renewed action on untying
In 2015 alone, donor governments around the world spent around US$55 billion – or more than 44 per cent of Real Official Development Assistance (ODA) – on the procurement of goods and services. Such high budgets have the potential to catalyse far-reaching change in the global south. ODA procurement can build local supply chains for essential goods such as foods and medicines; it can incentivise local companies to act in equitable, socially responsible and environmentally sensitive ways; and it can start a chain reaction of local economic growth by getting vital cash into the hands of small businesses in the global south.
However, ‘tied’ ODA procurement, which requires goods and services to be sourced from companies in the donor country, puts the commercial priorities of firms based in rich countries before development impact. In 2016, some $25 billion of ODA was reported as formally tied – more than one sixth of Real ODA, and more than the total bilateral ODA spent on health, population and water combined. This is partly made possible because the rules that govern tying under the Organisation for Economic Co-operation and Development’s Development Assistance Committee leave out key countries and sectors.
In reality, the true level of tying is even higher, 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. No official estimate of informal tying exists, but the best available proxy – data on donors’ ODA contract awards – shows that more than half of all reported contracts in 2016 were awarded back to firms in the donor country (analysis by value of contracts).
• For three donors (the USA, Australia and the UK) the share of reported contract awards going back to domestic firms was at least 90 per cent while two of these donors reported 100 per cent of their ODA as untied (Australia and the UK).
• In contrast, of the total value of reported contracts implemented in the very poorest countries, only 13 per cent flowed back to local companies.
Firms in the global south face even greater inequities that don’t show up in these statistics. This is because:
• These companies tend to miss out on the more lucrative sectors such as technical assistance.
• Sometimes even when a contract appears to be led by a company based in the global south, the main players are actually based in the global north. The toll taken by tying in the global south is too far-reaching to quantify in full. However, we estimate conservatively that 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. And that is before factoring in the far greater cost of missed opportunities to catalyse local economic, social and environmental development over the long term.
What is more, 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.
Simple strategies for opening up procurement to firms in the global south have been well documented for many years. These include advertising contracts in the local media, setting manageable contract sizes and undertaking procurement in local languages. Yet our survey of donor agencies showed that such strategies are often ignored.
If donors are really committed to maximising the catalytic impact of ODA for development in the global south – not just for their own companies – it is urgent that they take action to untie their ODA and improve their procurement processes.
A summary of this report is available here