At a recent Meeting of the Council of Ministers in Dili, on September 16th, 2009, it was agreed that Portugal will grant a 100 million Euro credit line for projects in East Timor:
'Memorandum of Understanding with Portugal for attribution of a line of credit. This line of credit aims to finance the investment projects in Timor-Leste, by involving the acquisition of portuguese goods and services or the participation of Portuguese companies (without prejudice of the associated local component). The areas intended to this Line of Credit will be: construction and rehabilitation of roads and bridges; construction and rehabilitation of physical infrastructures, including Health and Education; construction and rehabilitation of infrastructures of transport and communications; and the production, transportation and distribution of energy and water.'
This is a practice referred to as 'tied aid', as it attaches conditions to the loan that restrict the autonomy of the recipient, and ensures that most of the benefit of the aid flows back to the donor country (because as we all know, charity begins at home). In some respects this is merely a formal acknowledgement of what is likely to happen anyway; all foreign currency transfers are destined to be spent on imports at some point (see the excellent reasoning by Owen Barder that gives an economist's explanation of why this is so), however, if you are smaller country like Portugal, how do you absolutely guarantee that those loose Euros will find their way back to Lisbon or Porto?
The UK used to be one of the worst offenders at tying aid to the purchase of British goods and services, but since 1997 the Department for International Development has made good progress in decoupling aid from narrow national interest, and 'tied aid' was made illegal under the International Development Act (2002).
According to Concord (an NGO that monitors EU development projects), Portugal is generally a poor performer in terms of amounts of aid as percentage of GNI, and how it is deployed, although not as bad as Italy (which is beyond parody where international aid is concerned). They report that:
'Bilateral aid targets 10 countries, which are mainly Portuguese speaking countries and fragile states. This can be positive for enabling an alignment of Portuguese cooperation with development priorities of partner countries; however, it also represents an increasing alignment of development cooperation to foreign policy and commercial interests.'
Why is tied aid a problem?
One must acknowledge that tied aid increases the political support for spending taxpayer's money on foreigners. In the US, budgets for USAID are explicitly presented in terms of the benefits to domestic firms, as otherwise Congress will not vote the funds (47% of aid tied to the purchase of US goods and services). If untying aid means lower aid budgets and a reduction in international solidarity with the plight of the poorest in the world, then clearly it is not a good policy, however efficient. Some voters may feel that international aid is an obligation that wealthy countries have to the poor; that it is inherently moral. Others may see the pragmatic reasons for ensuring that failed states are repaired and helped back on their feet so they do not in future become havens for terrorists or organised crime. But in many cases aid is seen by politicians and journalists as taxpayer's money that is 'lost' from the system, squandered on corrupt dictators or rapacious consultants (do they mean me?), and therefore not fiscally efficient.
But tied aid is more inefficient. The OECD as calculated that tied aid increase the costs of development projects by as much as 30 percent. This is because it reduces the likelihood of competitive tendering and transparency in procurement. Furthermore, the EU takes a dim view of restrictive practices that prevent other EU countries from making competitive bides. Article 87(1) of the EC Treaty provides that:
“... any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market.”
Tied aid thus increases the costs of goods and services provided to the recipient country, reducing the amount available for other projects. It may also lead to inappropriate procurement, with poor countries being persuaded to take on debt to buy white elephants that suit the purposes of the elite but do nothing to address poverty.
In the case of Portugal's loan to Timor-Leste, how likely is it that Portuguese firms are able to supply every component of an infrastructure project at the lowest cost available in the EU or internationally? In view of the distance involved, in most cases they would be out-bid by the Chinese, Koreans or Japanese in open tenders. I imagine that the Indonesians would also have a chance on some bids, with concomitant benefits to mutual rapprochement. For specialised engineering, the Germans are surely going to be in with a chance, and some newer entrants to the EU may be able to offer good quality technical assistance at competitive rates.
We already have one example of Portugal-only tendering in Timor-Leste: Timor Telecom (see other posts, and the lively Facebook group 'why timor telecom sux'), and it does not stand as a monument to Portuguese competitiveness. This is not to say that Portugal may not be in the best position to service Timor-Leste's needs (it has the linguistic and shared cultural roots), but it should allow this advantage to be expressed through open tender, not deals done in a fetid atmosphere of post-colonial fealty. To do otherwise is not only in breach of EU law, it is also manifestly not in the best interests of Timor-Leste.
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