Abolish Sham Aid

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Abolish sham aid

Development aid has long been distorted by ‘ting’ aid funds to exports from donor countries. Adrian Hewitt reports on a more recent, and even more cynical practice – the plundering of aid budgets to subsidise exports by large firms fighting for overseas contracts.

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El Cortijo

September 9th

Dear James

To see me sitting here on the hotel balcony, sipping a marguerita and looking out at the Pacific Ocean, you might never guess that I'm struggling to make sense of the past fortnight. It began with a week’s trekking ‘holiday’ in the Sierra Madre mountains with my old school friend David Bligh, now working for the UN in Mexico City. Seeing how these mountain people live really takes your breath away (as if the climbing weren’t enough). - They lack almost everything — decent health care, Schools, clean drinking water, food — and yet Mexico is one of the leading ‘middle income’. developing countries. One just doesn’t expect to see such poverty in the rural areas.

Then I was transported to another planet. That’s how it felt anyway. In reality I visited the Sicartsa steelworks now being built on the Pacific coast. We’re helping to pay for the new works with a grant of over $50 million. I met our team of engineers and some of the Mexican plant managers. They’re constructing the finest steel plate mill money could buy - a lovely ‘turnkey’ job. But the question bothering me is whether steel mills and similar big projects have anything much to do with ‘aid’ as such. Do they make much difference, for example to the people I met up in the Sierra Madre? Could the money be better spent?

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The British do it because the French started it. The Japanese have not been slow to imitate. Now the Germans and the Dutch do it, and even the liberal Swedes have joined in. The market-oriented Americans look on with distaste but they do it anyway.

Most aid donor governments in the West now set aside a portion of their aid budget to subsidise selected national firms trying to win lucrative contracts in the Third World. The names may differ — credits mixtes in France, ‘mixed financing transactions’ in Germany. ‘concessionary credits’ in Sweden, the ‘Aid-Trade Provision’ in Britain, and so on — but it’s basically the same thing. Funds voted by national parliaments as development assistance — aid are used to subsidise exports by domestic firms. The subsidies go to firms in Doncaster or Düsseldorf, not to textile workers in Bombay or to peasant farmers in Africa.

If the sole result of this new wave of protectionism were just a spate of beggar-your-neighbour policies among rich countries, the Third World could afford to look on bemused. But it is not the only result. The real losers are poor people in the Third World.

The British government, for example, now takes about $100 million a year from the aid budget to use as export subsidies — known as the ‘Aid-Trade Provision’ (ATP). This is nearly 20 per cent of the funds available for project aid, most of which are tied to the purchase of British goods anyway.

The ATP works like this: a British firm wants to win a contract to build a steel mill in. say, India. The firm estimates it can do the job for around $200 million but knows that Japanese and French firms are also bidding to win the contract. To make its own bid more attractive to the Indian government, the British firm wants to lower the price by getting a subsidy of. say, $20 million from the British government. So it makes an application to the Department of Trade, which tests it for commercial soundness and also considers how many jobs it would create (or save) in Britain.

After approving the application the Department of Trade passes it on to the Overseas Development Administration (ODA) for a ’minimum test of developmental soundness’. According to one official, this amounts to only a ‘snap judgement’. Once the ODA approves the application, a ‘mixed finance package’ is assembled consisting of the ATP subsidy (up to 20 per cent of the total) plus a larger sum of low-interest credit through the Export Credits Guarantee Department and commercial bank lending.

Cartoon: Len Munnik. Given the sort of sophisticated technologies involved in ATP financing — steel mills. copper refineries, aircraft, power plants and hydro-electric schemes — the firms seeking subsidies tend to know more about comparative costs than do the civil servants allocating the funds. But even they cannot know the exact tender price of their foreign competitors. The whole point about competitive bidding is that it is secret. So firms try to obtain the largest possible subsidy. The government of the developing country, however, still ends up by going into debt to pay for firms which pull off the big ATP-subsidised deals — such as GEC, the Davy Corporation and Balfour Beatty — tend to be large and well-connected. GEC is currently Britain’s strongest exporter: an unlikely candidate to be drawing funds from the British aid budget. The British government admits that the ATP does not enhance development aid. Its purpose is simply ‘to match our foreign competitors’. Asked by an MP during a House of Commons enquiry whether the ATP was simply a bribe to award the contract to the lowest tender, an official of the Department of Trade replied frankly, ‘I think "equal bribes" might be the best way of describing it’.

Concern is mounting about the harmful effects of export subsidy schemes. In Britain the Independent Group on British Aid criticises the UK’s ATP scheme for the following reasons:

• It is not a proper use of aid funds. According to the House of Commons Select Committee on Overseas Aid, the ATP is used as a system of hand-outs on a first-come, first-served basis’ and is ‘governed primarily by commercial and industrial considerations which have no relevance to development aims’.

• It reduces funds available for genuine development aid such as water supplies, health care, small-scale irrigation and technical assistance.

• It distorts the aid programme away from the needs of the poor, contrary to official rhetoric of ‘poverty-focused aid’. The poor in rural areas are not linked up to electrical power supplies. They do not consume steel or fly in aeroplanes. They are not even going to get any of the few jobs in building power plants and copper refineries.

• It shifts aid away from the least developed countries. Among the most prominent recipients of Britain’s ATP funds are middle-income developing countries such as Mexico, Brazil, Morocco and the Philippines.

• Aid ministries are losing control over a substantial and growing part of the aid budget. In contrast to other requests for aid, which originate in the recipient country and come to the Aid Ministry, requests for export subsidies come from a firm in the donor country. They reach the Aid Ministry after approval by the Ministry of Trade. You have to move fast to ‘double guess’ your international competitors for big contracts, so aid officials are usually given neither the time nor the means to make an informed appraisal of a project’s likely developmental value.

Even representatives of firms receiving export subsidies from the aid budget have expressed reservations about the present system. Some are concerned that their subsidies may be reducing funds available for genuine development aid. The Organisation for Economic Co-operation and Development, which groups all Western aid-donor countries, has recently announced guidelines for the control of mixed credit’ transactions.

These guidelines, in themselves, are unlikely to lead to a reduction in mixed credit deals because there is no international machinery to ensure their enforcement. What is now required is an international truce on these transactions, which are eroding real aid. It should not be beyond the capacity of governments and competitive firms to promote trade without plundering aid budgets for export subsidies. A recent example demonstrates what can be achieved. The Danish government offered Tanzania a $15 million interest-free loan to purchase new railway wagons. A Danish firm would supply the bodies, but the Tanzanians wanted to keep using British running gear previously supplied by the Gloucester Carriage Company. The Danes had no objection, so the British firm won the order for the wheels, axles and spring assemblies without an export subsidy. Beggar-your-neighbour aid and trade policies were put aside, at least temporarily.

Unfortunately a more common case is that of the Sicartsa steelplate mill in Mexico. In 1983 Queen Elizabeth and Prince Philip donned hard hats and inaugurated this new mill, a project won by the British firm Davy McKee with the help of around $60 million from Britain’s Aid-Trade Provision. The Mexican government took on a debt of around $300 for the project. Whether the country’s economy founders under the huge burden of this and other massive foreign debts or produces even more unsellable steel for the world market, the deal will leave the foreign contractor content, the aid lobby perplexed and workers in Britain’s own declining steel industry furious. As for the Mexican peasants who might have benefitted from a more appropriate aid project, nobody ever thought to consult them.

Adrian Hewitt is an economist with the overseas Development Institute, working on EEC and British aid and trade policy.

Day 69, Sept 7th.

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New Internationalist issue 126 magazine cover This article is from the August 1983 issue of New Internationalist.
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