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Tied aid describes official grants or loans that limit procurement to companies in the donor country or in a small group of countries. Tied aid therefore often prevents recipient countries from receiving good value for money for services, goods, or works.
Untying aid – removing the legal and regulatory barriers to open competition for aid funded procurement – generally increases aid effectiveness by reducing transaction costs and improving the ability of recipient countries to set their own course. It also allows donors to take greater care in aligning their aid programmes with the objectives and financial management systems of recipient countries.
From 1999-2001 to 2008, the proportion of untied bilateral aid rose progressively from 46% to 82%.
Despite this considerable progress, donors can do more. In a changing global context, challenges include a growing role of non-DAC donors that provide largely tied development funding, new vertical funding and new forms of funding to address the global financial crisis in the short-term and climate change in the longer term.
Find a detailed analysis of progress in Untying Aid: Is It Working?, the first independent evaluation of donor efforts towards untying, prepared with the Overseas Development Institute.
Since its creation in 1961, the OECD Development Assistance Committee has worked to improve the effectiveness of its members’ aid efforts. One major issue has been whether aid should be freely available to buy goods and services from all countries (“untied aid”), or whether aid should be restricted to the procurement of goods and services from the donor country (“tied aid”).
Work culminated in a Recommendation to Untie Official Development Assistance to the Least Developed Countries (DAC High Level Meeting, April 2001).
The objectives of this recommendation are to:
The recommendation calls upon donors to make developing countries responsible for procurement. A list of untied official development assistance contract opportunities allows the private sector to compete for aid-funded contracts.
The recommendation was amended in March 2006 to eliminate the thresholds and in July 2008 to expand the coverage to the heavily indebted poor countries (HIPCs).
Members' actions to implement the recommendation are continually monitored and their performance is measured against agreed statistical indicators. Their tying policies and practices are also reviewed through the DAC Peer Review process and recorded in annual implementation reports to the DAC.
Since January 2002, ODA to the least developed countries has been untied in the following areas:
Most Members have now untied all categories of ODA covered by the Recommendation. In the few remaining cases, full implementation of the coverage provisions is awaiting the conclusion of co-ordination processes.
Australia, Finland, France, Germany, Ireland, Japan, the Netherlands, Norway, Portugal, Sweden, Switzerland and the United Kingdom have untied ODA beyond the requirements of the recommendation.
Untying Aid: Is It Working? (2009)