European approach to development aid could bring at least €3 to 6 billion a year in gains

IP/09/1571

Brussels, 22 October 2009

European approach to development aid could bring at least €3 to 6 billion a year in gains

A study released during European Development Days in Stockholm, entitled “Aid Effectiveness: benefits of a European Approach”, reveals that European donors could make efficiency gains of billions of euros each year if they worked better together.

EU Commissioner for Development and Humanitarian Aid, Karel De Gucht said : “This is the first, independent report of its kind attempting to quantify for the EU the costs of ineffective aid. The study shows that the EU could be saving at least €3-6 billion on a yearly basis if it works more effectively together. In practice, this would free up funds to be re-invested in better quality aid with concrete development outcomes and reduce the bureaucracy burden for our partners. At 60% of global ODA, we are the major provider of aid. The EU can choose to become 60% of the problem or 60% of the solution. I feel strongly that the EU can make real difference and look forward to further discussions at the highest level"

The study "Aid Effectiveness: Benefits of a European Approach" has been initiated by the European Commission. It identifies a number of areas where increased aid effectiveness could lead to significant efficiency gains. The major obstacles to cost-effectiveness of aid are to be found in the volatility of aid flows, the proliferation of donors and implementing organisations and the ensuing fragmentation of aid programmes into tens of thousands of projects.

The potential efficiency gains of a European approach towards Aid Effectiveness could amount to €3 to 6 billion per year between 2010 and 2015.

Overall there are two main areas where concerted EU action would have a major impact: improved conditions for aid predictability and a better division of labour. By fully implementing international commitments taken in Paris (2005) and Accra (2008) and using tools agreed at EU level (The Code of Conduct on Division of Labour, the Division of Labour Tool-kit and forthcoming under the Swedish Presidency the "Operational Framework"), the EU could make development work better for the developing countries and trigger similar undertakings by other donors ahead of the next global forum on aid effectiveness in Seoul in 2011.

The main findings of the study are:

• an overall lack of management information systems to properly account for the costs or benefits or using different aid modalities

• increased consolidation of programmes and projects, use of joint financing arrangements, delegated cooperation and agreed division of labour could result in savings of between €200-500 million per year

• with an average cost (staff time and consultants) for design, formulation, appraisal and approval of a new project estimated at somewhere between €90 and 140,000, the total costs to the EU donors of preparing the 22 000 new projects approved in 2007 would be between €1.9-3 billion per year

• problem of donor proliferation: 41% of all sectors in recipient countries had recorded disbursements from more than three EU donors in 2007

• problem of fragmentation of aid : EU member states and the Commission together accounted for 40–50,000 aid activities or projects in 2007; improvements in this context can be achieved through more division of labour

• increased predictability of future total EU bilateral aid commitments could increase the value of EU country programmable aid by between €2-4 billion per year

• at present around ten percent of EU aid is still tied meaning it has to be spent back in the donor country. Costs to the EU aid programme from remaining tied aid may be estimated at €500 million per year

Background

The European Union is the largest aid donor, with more than a half of global aid to developing countries coming from the EU.

In 2008, the EU provided €49 billion euros in Official Development Assistance (ODA): approximately 60% of all global aid.

The purpose of the study was to identify and present costs associated with ineffective, fragmented aid, as well as potential savings in such transaction costs from further implementing basic aid effectiveness principles into European (EU and Member States) development cooperation.