Tied/Untied Aid Policy
Prepared by
Area Coordination Group
Corporate Management Branch

October 1990
(Updated May 1997)

Table of Contents
1. Purpose
2. The Tied/Untied Aid Policy
3. The Operational Framework
4. Tied Aid Authority
5. Untied Aid Authority and Local-Cost Financing
6. General Guidelines for the Use of Untied Aid Authority
7. Monitoring
8. References
 
 

1. Purpose 

This document outlines CIDA's current Tied/Untied Aid Policy and details the operational framework and guidelines for use of the authority.
 

2. The Tied/Untied Aid Policy 

2.1 Background

Funds for all types of regular bilateral assistance are allocated under either tied aid authority or untied aid authority. Within funding approved under the untied aid authority, funds can be allocated and reported as local-cost financing.

The decision to use funds under either the tied aid or untied aid authority depends on a variety of efficiency and effectiveness factors, including:


2.2 Tied Aid and Untied Aid Authorities

2.2.1 General

One of the primary goals of Canada's Official Development Assistance (ODA) is to facilitate the development efforts of recipient countries.

Within this context, Canada's tied aid and untied aid authorities reflect the legitimate concerns of Canadians that their tax dollars should not end up subsidizing competitors in other industrialized countries. The aim of this policy is to provide an incentive for competitive Canadian businesses to expand their horizons, by designing and adapting more products to meet Third World requirements.

As such, Canada's tied aid policy addresses the interests of maintaining Canadian international trade interests and, at the same time, its responsiveness to the changing capabilities and requirements of developing countries.

Many Third World countries have the human resources and other capacities to produce goods and services that can be utilized to contribute to their own development.

Furthermore, in the poorest countries, Canada's tied/untied aid authority allows increased local-cost financing, particularly for agricultural, grassroots and community projects.

2.2.2 Authorities

The authority for the current tied aid policy is the Cabinet approval of the recommendation in the 1987 Memorandum to Cabinet on Canadian International Development Assistance Policy. This memorandum served as the basis of the ODA Strategy, Sharing our Future, which described tied aid authorities effective April 1,1988. This policy has not changed since the 1988.

2.2.3 Scope

The authorities described in this document apply to Geographic Program assistance, including the Canada Fund for Local Initiatives programs. A separate authority applies to bilateral food aid.

2.2.4 Approval Levels

Approvals of funds under the tied aid and untied aid authorities for bilateral development a ssistance (excluding bilateral food aid) are controlled at the aggregate level of project approvals under two categories:

(Bilateral food aid is untied up to 5 percent of total food aid allocations for the purchase of surplus food products from developing countries.)

2.3 OECD-DAC Notification

As a participant in the donor community, Canada, through CIDA, reports to the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD-DAC) on use of its ODA including the use of tied/untied aid. Statistics on the amount of untied aid committed and disbursed must be collected and aggregated to meet Agency requirements for OECD-DAC reporting.
 

3. The Operational Framework 

In summary:


4. Tied Aid Authority 

4.1 Definition

Expenditures are considered tied when they are approved for the procurement of goods and services in Canada meeting the Canadian content or other established guidelines applicable to the category of procurement involved. (See Annex B, Canadian Content, of the Framework Policy for Bilateral Aid.)

This definition applies to procurement by CIDA, Public Works and Government Services Canada, a Canadian executing agency and the recipient country from Canadian sources.

4.2 Objectives

The objective of the tied aid policy can be summarized as:


5. Untied Aid Authority and Local-Cost Financing 

5.1 Definitions

5.1.1 Untied Aid

Expenditures are considered untied when they are for the procurement of goods and services from any country (including Canada) using international competitive bidding (ICB), or any directed competitive or non competitive procurement in third countries, or for cash contributions to a recipient country government or agency or for the local-cost financing of projects.

This categorization applies to the regular bilateral assistance and food aid programs.

5.1.2 Local-Cost Financing

Local-cost financing is the provision of free foreign exchange for expenditures related to project activities for the purchase of goods and services on the local (recipient) market:


The following elements are excluded from local-cost financing:


5.2 Objectives

5.2.1 Objectives of Untied Aid

The objectives of untied aid can be summarized as:


5.2.2 Objectives of Local-Cost Financing

The objectives of local-cost financing can be summarized as:


6. General Guidelines for the Use of Untied Aid Authority 

The guidelines described in this section are based on current tied/untied policy, as well as long-standing practice and interpretation of these policies. Their intent is to provide guidance for officers designing projects within the scope of normal operations. Departure from these guidelines to accommodate specific circumstances is subject to the approval of the Geographic Vice President. Such departures may require specificTreasury Board approval depending on the circumstances (which can be proposed in the Project Approval Documentation).

The use of the untied aid authority at the country program and project level may vary from zero to 100 percent. In principle, high levels may be used for projects with high local-cost financing components.

Generally, projects should not be considered for CIDA support if the required Canadian and/or recipient capability and procurement is low and the project is dependent, in a large part, on third country procurement. When projects are designed, it is incumbent upon the planner to ascertain what Canadian or local goods/services may be appropriate. If the project is expected to be dependent on third country procurement, particularly from an industrialized third country, the selection of this project should be reconsidered.

As the increased untied aid authority is intended to finance local costs, such use is encouraged where appropriate. Procurement in the recipient country is considered to be funded under the untied authority by local-cost financing. It may be applied, therefore, to locally produced or off-the-shelf items imported from either a developed country or from another developing country, under a normal trading relationship.

6.1 Procurement from another Developing Country

Funds available under the untied aid authority may be used for the procurement of goods and services from other developing countries. Normally, procurement should be for goods available in the region (regional procurement). However, where circumstances warrant, procurement can be considered from other developing countries outside the region provided approval is obtained from the geographic Vice President (VP).

Untied aid authority is used for regional procurement to promote regional integration among the smaller economies, such as the countries of the CARICOM, Central America and sub-Saharan Africa. However, regional procurement may also be used, where appropriate, to achieve other project objectives.

Regional procurement is usually justified under the following circumstances:

Tied/untied authorities apply to all projects. However, flexibility may be required when untied aid authority is considered for procurement, from developing countries, for projects implemented through contribution agreements by Non-Governmental Organizations (NGO's), Non-Governmental Institutions (NGI's) and International Non-Governmental Organizations (INGO's) as well as multilateral organizations. Projects with these organizations should follow the spirit of CIDA policy. However, as a result of the philosophy of partnership, which is the basis of CIDA's agreements with such organizations, CIDA's judgments concerning sourcing may be less stringent. These judgments could be based on either reduced shared costs or certain project benefits perceived by the recipient organization.

When instances of regional or other developing country procurement are known in advance, they should be referred to and justified in the Project Approval Document (PAD). When goods to be procured are known to be in competition with similar Canadian products, thi s point should be specifically noted in the PAD. If the possibility of such procurement is not mentioned in the PAD, but develops during the implementation stage, it should be brought to the attention of the branch Vice President for a decision.

6.2 Procurement from Industrialized Countries

The untying authority is not intended to accommodate procurement from other developed (industrialized) countries, but is intended for local-cost financing. In normal circumstances, however, funds under the untied aid authority may be used for direct procurement from other developed countries when the goods or services constitute a small percentage of the project value (up to 10 percent) and alternate Canadian, local or regional goods or services are either unavailable or inappropriate (e.g., vehicles, specialized and specific equipment). The philosophy is similar for procurement from more industrialized LDC's where, again, untied authority may be used for specialized goods, but should not be used for goods that compete with Canadian products and do not have an existing normal market in the recipient country.

The rationale for procurement from another developed country or from another LDC MUST be referred to and justified in the Project Approval Document.

6.3 Untied Authority for Food Aid

The tied/untied authority for food aid allows a maximum of 5 percent of the food aid approvals to be untied plus an annual cash grant to multilateral food aid agencies to cover transportation costs.

The 5 percent authority is to be used to procure food from other developing countries including transportation costs.

Use of untied authority is not required for trilateral cooperation arrangements where procurement of food aid in Canada is the component contribution by Canada.

6.4 Estimation of Required Untied Aid Authority

The use of funds required for a project under tied/untied aid authorities including local-cost financing MUST be estimated during the design stage of the project and summarized in the Project Approval Documents (PADs). This is necessary for monitoring by CIDA, as well as reporting to Treasury Board and to the OECD-DAC. Notional information MUST be indicated in the Concept Paper and specific estimates indicated on the PAD coversheet and entered in AIDIS. Accurate monitoring depends on use of the Concept Paper/PAD coversheets and consistent data entry into AIDIS.

The use of untied aid authority is measured empirically and controlled by CIDA as a cumulative percentage of estimated program budgets rather than in absolute terms.

Thus, amounts of tied/untied/local-cost financing estimated with the PAD are not considered to be absolute ceilings.

However, significant changes in the use of tied/untied authorities (i.e. greater than 10%) during project implementation are to be reported, justified and entered in AIDIS. In practice, such changes may result from changes in the sourcing of such goods and services or from the differences between the estimated and actual costs of the goods and services.

In the latter type of case, where the cost of local sourcing in a contractor's contract increas es over the original estimate (but it is not necessary for the Project Manager to seek approval for additional funds, change of scope or component transfer) an amended approval is not required.

Similarly, approval to amend the tied/untied allocation would not be required if, during implementation of a training program designed to train 100 trainees in Canada, it is perceived that training of 1 or 2 individuals in a third country would assist in achieving project objectives.

However, if a major philosophical change occurs (including the shift of a major component from tied to untied procurement, particularly if to an industrialized country, or the addition of a major new untied component), then an amended approval for change in scope may be required. In all cases of change in levels, data on intended use of tied/untied aid must be updated in AIDIS without delay.

The estimated use of untied aid authority should be reassessed when any approval documentation is being prepared for "change of scope", cost increases and component transfers and updated in AIDIS.
 

7. Monitoring 

The Geographic Program Branches are responsible for monitoring the actual procurement of goods and services to ensure that they are consistent with tied/untied authority proposed in project approval documentation, for amending such approvals if and when required, and for updating data entry into AIDIS.
 

8. References 

For more information on the use of tied/untied aid, please refer to Guidelines for the Use of Untied Aid Authority, Area Coordination Group, October, 1990 (which is available from the Strategic Management Division within your branch). This document provides specific detail, on the categorization of tied/untied costs, a step-by-step approach to the allocation of tied/untied aid, and information on other special considerations related to the subject.
  


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