Denmark will continue to use so-called tied mixed credits in development aid, despite a warning by the Organisation for Economic Co-operation and Development (OECD) that this violates a 2001 agreement to abolish tied aid.

A mixed credit is a financing package combining a commercial loan and an aid-funded grant amounting to 35-50 per cent of the contract value, under the precondition that suppliers come from the donor country. This is in effect an export subsidy for donor country industries.

Many companies from the other Nordic countries, which do comply with the OECD rules to abolish tied aid, found that they could not compete in the aid market without subsidies. Not so in Denmark, where the aid business is booming. In 2005, 14 projects worth DKK 2.2 billion (EUR 295 million) – of which several were large water projects – were launched as tied credits.

Although Denmark admits that mixed credits are tied aid, it refers to a reservation it made in connection with the 2001 OECD recommendations. Because of its then high aid level, Denmark argued it was unfair that bad aid performers should be allowed to compete for Danish contracts. Since then, however, Denmark has reduced its aid level by 20 per cent while at the same time it scaled up its export subsidies through its mixed credit scheme.

Web site: Wikipedia – Tied Aid

Source: Development Today (subscription site), 20 Nov 2006

Tags: policies & legislation