Tied aid refers to aid granted to developing countries on condition that goods and services for the aid-financed projects are purchased from the donor country only. The recipient country, in order to receive the grant or the loan, has no other choice but to fulfill the condition imposed by the donor. Aid is tied in three ways:
- Nationally-tied – aid money is provided on the condition that the receiving country buys goods and services from the donor country;
- Project and Program-tied – aid which must be spent on specific projects or sectoral programs determined by Australia; or
- Performance or Condition-tied – aid tied to particular performance outcomes or conditions.
To varying extents, all three types of tied aid diminish the effectiveness of Australian aid and the sovereignty of countries and their ability to define their own development paths. International research has shown that the tying of aid is costlier and less effective than untied aid. Economists have revealed that tying aid undermines the effectiveness of aid.
In April 2006, following sustained pressure from civil society groups, Australia made the welcome step of officially untying its aid program from national procurement (nationally-tied aid). Nevertheless there are still serious financing problems within Australia’s aid program, in particular Project and Program-tied, Performance-based aid and Informally tied aid.
Project and program-tied aid
Since 2000 nearly all of Australian aid became ‘project-tied’ in that it must be spent on specific projects identified by Australia as opposed to ongoing institutional funding for organisations and governments to implement their own projects. Project-tied aid is at odds with a wealth of aid effectiveness literature, which reiterates the need for ownership of the development process by aid recipients. Aid tied in this way reduces the role of recipient countries in identifying development priorities and decreases the involvement of local organisations and government departments in the provision of foreign aid. Since the 2006 Australian Aid White Paper, Australia has entered a new phase of aid provision where most aid program expenditure looks to be encompassed by broad sectoral initiatives. Whilst aid is still project-tied, it is situated within more comprehensive whole-of-sector approaches which have been crafted in what seems to be an increasingly ideologically motivated way, with even less room for recipient countries to articulate their own developmental needs, particularly if they diverge on questions of economic management. While on the surface this harmonisation may seem sensible, closer examination suggests that these new programs are configured to specifically benefit the promotion of ‘economic growth’ to the possible detriment of a poverty alleviation or needs-based focus.
The most heavy-handed form of tied aid is performance-based aid. Performance-based aid is made available to countries when they meet certain conditions, triggering the allocation of aid into high priority areas such as roads, health and education. This form of aid acts as an incentive for recipient countries to carry out political and economic reform in areas such as education management, improved budget management, utility regulation, private sector development and sub-national government administration. International evidence is forthright in stating this is an outdated and ineffective model that can infringe upon the sovereign decision-making processes in aid recipient countries.
While few would oppose donor or lender conditions to ensure that funds are well spent, current practices have gone beyond what is necessary for basic fiduciary accountability. Conditions are now so intrusive that they can cover recipients’ trade and investment policies and even the structure of government. The 2011 Australian Government Independent Review into Aid Effectiveness specifically recommended linking core funding to performance-based outcomes and relevance to Australia. This linking of aid funding to outcomes decided by Australia undermines developing country rights for self-determination.
Informally tied aid
Despite the fact that Australia officially untied its aid program from national procurement (nationally-tied aid) in 2006, the informal tying of aid is still common practice with Australian companies receiving the majority of aid contracts. A small number of private sector firms are cashing in on the foreign aid spending boom – with just three corporations securing a colossal $4.12 billion in contracts since Labor came to office.
- Coffey International, a listed company which earned $213 million for the six months to December, has secured 248 AusAID contracts worth a hefty $1.61 billion since November 2007. Just a few months ago, it signed a $29 million contract to help Indonesia improve its health systems over the next five years.
- GRM International, which last August lost a lucrative Afghanistan contract following allegations of fraud, signed 256 contracts with the Government agency, worth just over $1.2 billion.
- Brisbane-based Cardno wrote 171 contracts since November 2007 with AusAID, worth $1.31 billion, according to the AusTender website.
- Since 2012, Fifteen Australian companies were successful in winning $30 million to supply equipment and materials for an Australian aid project in Vietnam
- So far this year, South Australian companies have also been awarded aid contracts worth $77 million.
Australian companies have the domestic connections and knowledge of the tendering process necessary to give them a substantial edge over organisations in recipient countries. Furthermore, the continuing low involvement of local organisations in aid delivery demonstrates that the formal process of ‘allowing’ recipient country organisations to bid for contracts is not enough. It is clear that additional steps must be taken to deal with the informal barriers that prevent organisations in recipient countries from playing a more active role in their countries’ development. The $127 million Mining for Development Initiative, announced by former Prime Minister Julia Gillard in 2011 is a textbook example of how this new approach works. With 230 Australian companies currently involved in over 650 mining projects worth over $50 billion across 42 African countries, AusAID’s role in promoting mining continues to blur the boundaries between community development and private profit. This informal tying of aid is a practice that privileges Australian companies and national priorities, and thus diminishes the development impact of aid in recipient countries.