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How deep doth run the question of local procurement?

Welcome back readers! This week, Building Markets’ inquest will consider the impacts official development assistance (ODA) on local procurement.

In the context of international development, procurement refers to the purchasing of goods and services to implement projects. Procurement accounts for an impressive share of aid expenditures; more than 50% of total ODA, $69 billion annually, is spent on procuring goods and services for development projects [1]. Local procurement is a subset of procurement and refers to the purchase of goods and services from recipient countries. Local procurement strengthens the impact of aid by building local capacities through job creation and knowledge transfers [2].

Local procurement became a priority for the aid sector in 2001 when the Organization for Economic Cooperation and Development (OECD) issued a recommendation to untie aid to Least Developed Countries (LDCs) [3]. During this period, tied aid – aid granted with the condition that all purchases be made from firms in donor countries – accounted for the vast majority of development assistance. The recommendation reflected a growing international consensus that tying aid reduces aid effectiveness by halving its development impact [4]. In 2008, this sentiment was reflected in the Accra Agenda for Action, which called for the utilization of recipient countries’ procurement systems [5].

Despite these positive reforms, donors have made little headway in the move towards local procurement. Currently, 20% of all aid remains tied, totaling over $18 billion, and nearly 60% of aid is informally tied (see Figure 1. EURODAD, 2011) [6]. These numbers are also reflected in international organizations; in 2008, 67% of World Bank financed contracts went to firms from just 10 donor countries [7].

There is an added complication: the Accra Agenda specifically espouses the use of country systems for procurement. Such systems empower local governments to pursue their own public procurement strategies. However, such strategies do not always benefit local providers of goods and services; in these systems procurement contracts are open to both foreign and domestic suppliers. Furthermore, the World Trade Organization’s (WTO) Agreement on Trade-Related Investment Measures (TRIMS) limits the ability for countries to provide domestic preference for local providers, in order to prevent discriminatory trade practices [8]. Therefore, understanding the impact of aid on local procurement becomes a matter of understanding 1) the degree to which aid is tied and 2) the ability of recipient countries to utilize their domestic procurement sources. At both levels, local providers of goods and services face enormous obstacles and foreign competition.

The data suggests that local procurement forms a very small subset of total procurement transactions. For instance, in Tanzania, the government is only able to apply a 15% margin of preference in favor of domestically manufactured goods [9].

So once again let us turn things back to you. Local procurement is becoming internationally recognized as an important means of facilitating sustainable development. Do you have any evidence that the aid sector is moving in this direction? Do you think it is possible for aid to move fully in this direction, given the WTO’s restrictions? And why, given the seismic reforms that have already occurred, has tied aid remained such a prevalent phenomenon?

[1] EURODAD. How to Spend It; Smart Procurement for More Effective Aid. Rep. 2011. Print. P 4

[2] EURODAD, How to Spend It, P 4.

[3] EURODAD, How to Spend It, P 8.

[4] EURODAD, How to Spend It, P 8.

[5] The Paris Declaration on Aid Effectiveness and the Accra Agenda for Action (Organization for Economic Cooperation and Development 2008). Print. P 14.

[6] EURODAD, How to Spend It, P 8.

[7] EURODAD, How to Spend It, P 13.

[8] EURODAD. Procurement and Development Effectiveness; A Literature Review. Rep. 2009. Print. P 15.

[9] Public Procurement Regulatory Authority. Assessment of the Country’s Procurement System Final Report – Tanzania. Rep. 2007. Print. P 30.

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