Who benefits from Swiss development funds?

In an interview with Swiss Radio and Television SRF in the summer of 2024, Helene Budliger-Artieda, Director of the State Secretariat for Economic Affairs (SECO), said the following: "In our work of development cooperation, we strive primarily to place orders in the local economy. But this is about reconstruction [in Ukraine]. In this case, we have a different logic". The interview was about the Federal Council's plans for supporting Ukraine. The Federal Council has earmarked 1.5 billion francs for support to Ukraine over the next four years. Of this amount, 500 million is to benefit Swiss companies operating in Ukraine. Is this still development cooperation or is it export promotion?

This is an instance of tied aid, which is frowned upon. The term covers development funds that are made conditional on the procurement of goods and services from donor countries. This is why it is often referred to as shopping vouchers. The partner countries are left no choice: in an emergency, we also accept Migros shopping vouchers, even if this harms our own village shop, which would be much more important for locals in the medium term.

Bad deal for the Global South

All available estimates arrive at the same conclusion – if goods and services must be bought in donor countries, projects cost 15-30% more than if countries are able to choose a supplier. Yet, cooperation without countertrades enhances more than just efficiency in the use of funds and self-determination on the part of partner countries. Promoting local markets and companies also generates positive stimuli that go beyond project outcomes. If local suppliers are used, it becomes less problematic to obtain spare parts, as the supply chains are significantly shorter. Maintenance costs will otherwise be higher and can jeopardise long-term success if funds are lacking upon completion of the project.

Has history taught us nothing?

Tied aid is part of a decades-long debate on the effectiveness of development financing. In essence, it is about two closely related concerns. One is future-oriented international cooperation based on principles of effectiveness and efficiency. This means that the debate on tied aid also has a bearing on the decolonisation agenda, in that partner countries should be able to determine their own development path. The other relates to the potentially distorting effects of tying allocated funds to the export of goods and services from donor countries.
It is also about a level playing field. After all, those countries that forego the practice of tied aid – instead putting their contracts up for international tender – justifiably assert that they would be at a disadvantage if other countries failed to follow suit. Hence, Swiss suppliers, for example, have only limited access to other markets, while international suppliers have ample access to Switzerland's procurement system.

To facilitate international coordination, donor countries agreed in 2001 on the "Recommendation on Untying Official Development Assistance (ODA)" in the OECD framework. The purpose of that common agreement was and remains that of providing as much untied development funding as possible, thereby rendering international cooperation more efficient and effective. There is agreement in the international community, after all, that this form of public development financing is paternalistic, costly and inefficient.

Obscure pathways into Switzerland

Official figures for untied aid show that so far, Switzerland has a good record compared to other countries. According to an OECD analysis, 3% of the funds provided by Switzerland in 2021 and 2022 was tied. Yet, the picture presented by the analysis is an incomplete one, as the figure only includes funds that were formally tied. There are, however, also informal ways of giving preference to domestic providers. The pool of candidates can be controlled, for example, by means of the language used in the tender, the financial scale of the projects or the choice of communication channel.

There is no precise overview of the extent of informally tied aid. However, procurement statistics can form the basis for estimating the portion of the funds up for tender that goes to domestic providers. Assessments by Eurodad, the European Network on Debt and Development, show that 52% of all untied funds were awarded to donor country suppliers in 2018 – this being the most recent data available. At 51%, Switzerland is about average. Overall, only 11% went directly to suppliers in partner countries.

Untied aid had long been free of controversy in Switzerland. The current draft of the International Cooperation Strategy (IC strategy) 2025-2028 states: "It [IC] is in line with international trade law, which aims to prevent trade-distorting subsidies in favour of Swiss companies. […] Switzerland takes account of the content of the OECD-DAC Recommendation on Untying Official Development Assistance". Yet, in the light of the decisions regarding Ukraine funds going to Swiss companies, this affirmation seems to be playing to the gallery, for just weeks after the publication of the IC strategy, the Federal Council wrote in a press release: "The Swiss private sector is to play a key role in Ukraine's recovery." This project also signals Switzerland's intention to formally reintroduce tied aid (see also here).

Swiss export promotion or development of the Ukrainian economy? Ukrainian construction workers during reconstruction in Mariupol. © Keystone / AFP / Stringer

(Un)controversial core contributions

Under OECD guidelines, core contributions to non-governmental organisations from donor countries are not regarded as tied aid, as NGOs operate in the public interest and on a non-profit basis. Internationally, however, this preference is controversial. In recent months, the international #ShiftThePower movement has called for more development funds to go directly to organisations in the Global South. While this call is entirely justified, a more detailed look at how funds can reach partner organisations in the Global South is warranted. The fact is that putting more projects and programmes up for international tender does not automatically mean that organisations in the Global South will win bids. It is therefore crucial to ensure that award processes are created that pave the way for smaller organisations in the Global South to receive core funding and not remain in the role of project implementation partners. Swiss NGOs in particular, all of which have long-standing, solid and trusting partnerships with countless organisations in the Global South, play a crucial bridging function in this context.

Going forward on an equal footing

Many countries make no secret of the fact that they tie their development funding to foreign policy interests. Carsten Staur, the Danish Chair of OECD Development Assistance Committee, said in an interview in 2022 that there has never been any official development assistance in history that has not pursued foreign and security policy aims in one way or another.

Interestingly, those calling for tied aid in Switzerland are the very same political parties that otherwise champion liberal trade rules. But suddenly these rules are no longer to apply to IC. Moreover, such policy decisions mean that those claiming that international cooperation is not effective are in part responsible for the possibility that international cooperation funds may be deployed less efficiently.

If cooperation is to be sustainable and effective and is to take place on an equal footing, partner countries must be able to shape their own development paths. Believing that we in Switzerland should determine what partner countries "need" is failing to do justice to the international debates on forward-looking international cooperation. It should also be clear that tied aid is inefficient and costly. It is therefore high time once again to abandon this approach and invest in long-term partnerships on an equal footing.