8. UNTYING AID
(24015)
14526/02
COM(02) 639
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Commission Communication on Untying: Enhancing the effectiveness of aid.
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| Legal base: | —
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| Document originated: | 18 November 2002
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| Deposited in Parliament: | 25 November 2002
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| Department: | International Development
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| Basis of consideration: | EM of 4 December 2002
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| Previous Committee Report: | None
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| To be discussed in Council: | No date set but probably before the end of June 2003
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| Committee's assessment: | Politically important
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| Committee's decision: | Cleared
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The issue of untying aid
8.1 The Development Assistance Committee of the Organisation
for Economic Co-operation and Development (DAC) comments in its
2001 report[26] that
a long-standing issue in the discussion on ways to improve the
effectiveness of aid has been "whether aid should be freely
available to purchase goods and services from substantially all
countries, i.e. untied, or whether it should be restricted
to procurement in certain countries, i.e. tied".
8.2 The Commission introduces its Communication by saying
that:
"In the last few years, a consensus has emerged on the international
scene that the practice of tying the granting of aid, directly
or indirectly, to the purchase of goods and services procured
by means of that aid in the donor country reduces its effectiveness.
It is generally recognised that the untying of aid is an important
factor in a coherent pro-poor development policy".
8.3 The Commission argues that untying aid can be seen
as a sign of generosity and solidarity, enhancing transparency
and accountability and therefore reducing the scope for corruption
and mismanagement. It improves effectiveness, whereas tied aid
is widely argued to have a negative impact. Tied aid may provide
supplies which are incompatible with those provided by other donors
for the same sector in the recipient country. It may also involve
trade considerations and protectionism which conflict with the
concept that the recipient country should accept ownership of
the aid, and may lead to an overly donor-driven approach.
8.4 Other issues, on which the Commission says that it
lacks sufficient information, include:
- the ability of companies in developing countries to participate
and compete effectively in a fully untied market for the procurement
of goods and services for development purposes;
- the effect of partial untying where full untying may produce
only marginal gains;
- the impact of tied aid for which supplies are produced exclusively
in the donor countries; and
- the possible effects of untying on balancing the efforts amongst
donors, on public support in donor countries and on aid flows.
The DAC recommendation
8.5 After long and difficult negotiations, the DAC adopted
a "Recommendation on Untying ODA[27]
to least developed countries" in May 2001. The Commission
says that it regards this Recommendation as "a good political
signal, a first, but insufficient step in the right direction.
The Recommendation — due to its many conditions, limitations
and loopholes — has only a very limited impact on a marginal
amount of ODA".
8.6 At the DAC High Level Meeting in April 2001, the
Commission indicated that it would implement the spirit and objectives
of the Recommendation, while complying with the policies and procedures
defined at the Community level and in the partnership agreements.
8.7 In February 2002, the Commission committed itself
to implementing the DAC Recommendation, stating in a Communication
prepared before the March Monterrey conference:
"The Member States should decide to fully untie bilateral
aid amongst the 15 Member States and vis-à-vis all their
partners in the developing world, while maintaining the existing
system of price preference of the EU-ACP framework".
8.8 In March, the Barcelona European Council Conclusions
included a commitment to implement the DAC Recommendation and
to continue discussions on further untying.
The state of play on untying Community aid
8.9 Community aid has been untied to a significant degree
for more than 25 years. Calls for tender are open to the 15 Member
States and to all 71 ACP countries[28]
without distinction between Least Developed Countries (LDCs) and
other developing countries for projects financed by the European
Development Fund (EDF), to all Mediterranean partner countries
under the MEDA programme and to the beneficiary countries for
Asia and Latin America (ALA). As a result, under the 6th,
7th and 8th EDF (1985 - 2000), the ACP countries
were awarded 23.6% of the contracts, amounting to _1.4 billion.
Moreover, the Commission points out, Community aid is being progressively
directed at balance of payments and budgetary support which is
entirely untied.
The Commission's approach to the DAC Recommendation
8.10 The Commission comments that the scope of the Recommendation
is very limited. It focusses exclusively on the LDCs and does
not cover food aid and its transport. Almost one third of the
LDCs are in conflict or pre- or post-conflict situations. As far
as food aid and its transport is concerned, the Commission intends
to advocate complete untying when the Food Aid Convention is re-negotiated.
Implementation of the Commission's approach
8.11 In order to further untie Community aid, changes
will have to be made to the legal bases of a whole set of financial
instruments for Community aid. These could include the EDF Financial
Regulation, Annex IV of the Cotonou Agreement and a number of
geographical financial instruments. A list of the relevant texts,
27 Regulations in all, is annexed to the document. These amendments
would be subject to a number of procedures and constraints. For
instance, a new negotiation might be needed on the Cotonou Agreement.
8.12 The Commission has decided that it should consider
revising each instrument in a step-by-step approach, based on
inserting common concepts into:
— Horizontal (thematic) budget lines
- untying aid to all developing countries; and
- untying aid to all developed countries, conditional on reciprocity
and the agreement of the recipient.
— Geographical budget lines
- untying aid to developing countries on a regional basis;
- untying aid to all developed countries, conditional on reciprocity
and the agreement of the recipient;
- possibly further untying, on a case-by-case basis, taking
into account specific geographic or thematic circumstances.
8.13 According to the Commission, this approach goes
far beyond the scope of the current DAC Recommendation and will
lead to an almost complete untying of Community aid. All EC aid
would be untied immediately as regards 16 of the 23 members of
the DAC, 32 developed countries and 151 developing countries.
EU Member States' bilateral aid
8.14 Bilateral aid from the Member States is based on
a separate set of rules and procedures which must, however, respect
the EC Treaty and relevant Community law. The Commission comments:
"Both the EC Treaty on free movement of goods and services
and the EU Public Procurement Rules prohibit any criteria that
discriminate in favour of national enterprises and against operators
established in other EU countries. Tied bilateral aid may be in
breach of EC competition law and Internal Market rules and infringe
[on] the non-discrimination principle inscribed in Article 12
of the EC Treaty. Following complaints, the Commission is therefore
investigating the regime applied to development aid by Member
States and has recently launched infringement proceedings against
certain Member States, in particular under the Public Procurement
Directives."
The Commission's recommendations
8.15 The Commission suggests that:
- a comprehensive effort should be made to fill the gaps in
information available to it, summarised in paragraph 8.4 above;
- it will propose that the approach to untying Community aid
presented in this Communication be integrated into all relevant
legal bases ;
- all EU Member States should comply with those rules of the
Internal Market and the Directives on Public Procurement which
apply to Member States' development aid;
- Member States should undertake to untie aid, and to insert,
systematically, a contractual clause which obliges the authorities
of a recipient country to award contracts based on the principles
underlying the Public Procurement Directives, namely the principles
of equal treatment, transparency, mutual recognition and proportionality.
The Government's view
8.16 The Secretary of State for International Development
(Clare Short) says that the Government welcomes the Commission's
proposals. The Commission's approach is consistent with the Government's
commitment to work for multilateral untying and the EU's pledge
at the International Conference on Financing for Development,
Monterrey, in March 2002, to build on and enhance initiatives
for greater effectiveness of aid. She comments that the proposals
to untie regional aid instruments to developing countries in particular
regions, and to third countries only on a reciprocal basis, will
need consideration to ensure they are consistent with the EC's
commitment to the DAC Recommendation to untie financial aid to
the least-developed countries. She adds:
"We also want the Commission to complete arrangements for
implementation of the DAC Recommendation promptly and not to wait
for agreement to its proposals for wider untying.
"The Government welcomes the clear affirmation that Member
States' bilateral programmes are subject to the Procurement Directives,
which has the practical effect of untying within the EU".
8.17 Finally, the Secretary of State says that the Government
believes that untying will generate better value from EU development
spending by securing internationally-competitive prices and purchasing
from the most appropriate sources.
Conclusion
8.18 In its July 2002 report on Financing for Development:
finding the money to eliminate world poverty,[29]
the Commons' International Development Committee set out various
reasons, similar to those in this Communication, why tied aid
is ineffective aid. It applauded the Government for untying UK
aid and encouraged it to continue its efforts to persuade its
"more recalcitrant European partners" to untie their
aid too. It commented that tied aid is arguably in contravention
of EU internal market and free competition rules.
8.19 We agree with the Government in welcoming the
affirmation by the Commission in this document that the bilateral
aid programmes of the Member States are subject to the Procurement
Directives. After ambivalence in previous years on this issue,
the Commission has demonstrated its commitment to this analysis
by taking action for infraction against Denmark and Italy.
8.20 We trust that the Government will press for enforcement
action against clear and present Treaty infringements by Member
States, pointing out to the Commission that there should be no
question of delay until the extensive programme of amending legislation
which it proposes is completed.
8.21 We now clear the document.
26 The
DAC Journal Development Co-operation: International Development;
2002, Volume 3, No. 1. Back
27 Overseas
Development Assistance. Back
28 African,
Caribbean and Pacific countries which have signed the Cotonou
Agreement. There will be 77 ACP countries when the Cotonou Agreement
enters into force. Back
29 Fifth
Report, HC 785-I (2001-02), Volume I, paragraph 69. Back
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