THAT the foreign aid can hardly be without strings has never been a controversy. Nor is there any dispute over the fact that aid essentially serves the donor states’ economic and strategic interests. They take advantage of their direct control of the funds by insisting on certain gains in return from the recipient countries.

In recent years, the effectiveness of aid has been a subject of intensive debate and investigation in the West. Though results have been mixed, there is a consensus that foreign assistance does not benefit its recipients sufficiently in the South and that the donors’ aid-tying practices considerably benefit the North. In 2001, countries in the Organisation for Economic Co-operation and Development (OECD) signed an agreement committing themselves to untie aid. The ‘tied aid’ practice required recipients to buy from donor country companies. The UK formally untied all development assistance in the same year but many countries have reneged on their promises and at least 20 per cent of all bilateral aid remains formally tied.

About $69bn (more than half of the total official development assistance) is spent each year on buying goods and services for development projects from donor state firms.

Much of this money is “boomerang aid” – meaning it goes to developing countries only on the books and never leaves the donor countries, says a new report released early this month by the European Network on Debt and Development (Eurodad), a network of 54 NGOs from 19 European countries.

Eurodad examined case studies in Namibia, Ghana, Uganda, Bangladesh, Nicaragua and Bolivia to arrive at its conclusions, one of which links aid effectiveness with procurement, or the purchase of goods and services in implementing aid.

In 2009, as much as 67 per cent of aid from Greece was given on the condition that Greek contractors were used on development projects. In the same year 54 per cent of Austrian aid was tied, along with 50 per cent of South Korean aid and 39 per cent of Portuguese aid.

Meanwhile, more amazing is the revelation that even when aid is not formally tied, donors continue to procure in a way that favours big firms of their countries. This is a major reason why aid does not work as well as it could.

Currently, two-thirds of formally untied aid contracts still go to firms of the donor countries because, says the report, “developing countries are squeezed out of the equation by powerful transnational companies and complex procurement systems.”

Companies from developing countries are less likely to have the ability to monitor tenders from dozens of donors, each with a different set of criteria to meet and paperwork to fill out, and struggle to gain an edge while larger companies strategically open up offices in key hubs for the global aid industry – such as Washington and Brussels.

Big development banks — including the World Bank — carry out competitive bidding in a manner, notes the report, that increases the chances of multinationals from donor countries to win contracts. Half of the contract value of World Bank-funded projects in the last decade went to companies from donor countries.

In 2008, as much as 67 per cent of the World Bank-financed contract amounts went to firms from just 10 countries. In Uganda, for example, only 18 per cent of the contract value of such projects went to local firms. For contracts valued at over one million dollars, the share dropped to 11 per cent. Firms from China and the UK won the bulk of large World Bank contracts in Uganda, 32 and 19 per cent, respectively.

Some poor countries have been receiving aid for decades but could not develop capacity to wriggle out of aid dependence because of the donors’ procurement practices. Although the donors did commit earlier to use country systems provided the recipients reform and strengthen their systems.

According to the Paris Declaration on Aid Effectiveness signed by donor states in February 2005, recipients were supposed to take the lead in such reforms. But the case studies conducted for this report show that donors – and particularly the World Bank and other multilateral development banks – continue to exert a strong influence on the procurement policy reform in the developing countries.

There is no evidence to show that donors have encouraged developing countries to shape up procurement policies that favour their own domestic firms and also increased their productive capacities. Nor have developing countries been given the chance to use procurement to promote their social and environmental objectives, as foreseen in the United Nations agreements on sustainable public procurement.

Now there is a growing concern, if not a sense of alarm, among the OECD countries, which are the principal donors, over the emergence of their rivals such as China, India, South Africa, Brazil and Venezuela.

The latter are gaining importance every year as financial supporters of poorer or smaller countries. While the OECD’s official development aid known as DAC aid is about $125bn a year, that of non-DAC aid ranges between $30bn and $60bn and is on the increase.

The OECD is thinking to integrate these countries into the Paris process. But, however, welcoming the OECD tries to be, these new powers would not like to be part of an old world club – and they don’t need to. They will be setting their own rules.

The problem is that the OECD’s way of giving aid is outdated. That is partly why the Paris process was launched in the first place. It is founded on a post-colonial client relationship which is crumbling with the passage of time and being overtaken not only by the large new donors but by the growing south-south co-operation under which the developing countries tend to support one another’s development. Not only are the terms “donor” and “recipient” becoming anachronistic, even the word “aid” itself needs to be dropped. Surely, all countries benefit from cooperation in development efforts.

It is time that current aid relationship undergoes a radical change. The new era of aid effectiveness has to be recipient-led. The Paris process has supported attempts begun by civil society in the 1980s that power over aid strategy and spending should be increasingly in the hands of recipient countries.

The OECD must accept the urgent need for aid effectiveness in a manner that brings countries together in a more or less balanced way to discuss the policy and process.