Tied aid

[1] The OECD's full definition of tied aid is:[2] Tied aid credits are official or officially supported loans, credits, or associated financing packages where the procurement of the goods or services involved is limited to the donor country or to a group of countries that does not include substantially all developing countries (or Central and Eastern European Countries (CEECs)/New Independent States (NIS) in transition).The OECD report The Tying of Aid written by Catrinus Jepma[3] found that the motivations for tying aid were both economical and political.

From an economic standpoint, the donor country aims to raise its exports by tying the aid to domestic companies.

That study found that exports connected to tied aid constituted about four percent of the total.

In addition, Australia, Finland, France, Germany, Ireland, Japan, the Netherlands, Norway, Portugal, Sweden, Switzerland, and the United Kingdom have untied their aid beyond the recommendation's requirements.

Tied aid improves donors' export performance and creates business for local companies and jobs.

Thus, when aiming to maximize development, pursuing commercial benefits to the donor country may reduce aid effectiveness.

A scandal erupted concerning the UK funding of a hydroelectric dam on the Pergau River in Malaysia, near the Thai border.

The suggested linkage of arms deals to aid became the subject of a UK government inquiry in March 1994.

In November 1994, after an application for judicial review brought by the World Development Movement, the High Court held that the then Foreign Secretary, Douglas Hurd had acted ultra vires (outside of his power and therefore illegally) by allocating £234 million towards the damn's funding because it was not of economic or humanitarian benefit to the Malaysian people [2].

In 1997, the administration of the UK's aid budget was removed from the Foreign Secretary's remit with the establishment of the Department for International Development (DfID) which replaced the ODA.