"UNTIED FOOD AID" - WFP STUDY FOR UNCTAD

UNCLAS ROME 002463

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TAGS: EAID EAGR AORC PREF ETRD WFP UN UNCTAD
SUBJECT: "UNTIED FOOD AID" - WFP STUDY FOR UNCTAD

REF: (A) ROME 002331

Sensitive but unclassified. Please treat accordingly.


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Summary
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1. (SBU) The WFP Secretariat has shared with the US Mission
a paper prepared for the United Nations Conference on Trade
and Development (UNCTAD) entitled: "Food Aid and the Untying
of Aid: Opportunities and Challenges for the Least Developed
Countries." The key premise for the untying of food aid
(i.e., provision of cash to buy food anywhere) is that
developing countries, including the Least Developed
Countries (LDCs),will be able to compete fairly on the
global market for procurement tenders to provide food aid.
Although untied food aid has been gradually increasing, of
the 10.2 million tons of food aid delivered globally (all
spigots) in 2003, 7.6 million tons (75 percent) was procured
in the donor countries. WFP has had favorable experiences in
local purchases in Burkina Faso, Cambodia, Ethiopia, Malawi,
Mozambique, Nepal, Sudan, Tanzania, Uganda and Zambia -
where, in recent years, WFP has procured on average about
U.S. dollars (USD) $50 million worth of food. However, the
potential for an LDC to take advantage of procurement
opportunities forthcoming from the untying of food aid would
heavily depend on an enabling environment for well-
functioning competitive markets being established and
increased investment in rural areas, particularly transport
and storage infrastructure. WFP's report concludes that
"until the results of these investments and the enabling
environment take hold, untying food aid is likely to further
marginalize the poorest countries as they may lose a vital
resource in reducing risk, vulnerability and hunger, while
gaining little in trade." In US Mission's view, this study
rightly shows that local food aid procurement, particularly
in LDCs, is certainly "no silver bullet" to meeting the food
aid needs of the world's hungry poor. End summary.

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Background
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2. (U) The agreement in 2001 by members of the OECD's
Development Assistance Committee to untie seven types of
Official Development Assistance given to the Least Developed
Countries (LDCs) was a landmark decision and a significant
step towards improving the effectiveness of aid. The
possibility of untying other types of aid, including food
aid, continues to be debated within the OECD and in a
variety of other arena - in particular, the World Trade
Organization. The concern over food aid centers on the
difficulty some donors would have in providing untied food
aid. Donors are debating whether the efficiency gains of
untying food aid compensate for the likely reduction in a
resource that provides considerable benefit in directly
reducing the hunger of marginalized or crisis-affected
populations often by-passed by other types of assistance.
This debate is particularly relevant to most LDCs, who would
have difficulty competing for increased trade opportunities,


and would be the most hurt by reductions in food aid
resources.


3. (U) The World Food Program (WFP) provides over a third of
global food aid and has consistently been the largest food
aid procurer in developing countries, accounting for 75
percent of the food aid purchased in recent years. Although
untied food aid is increasing, WFP still receives over half
its food resources through tied "in-kind" donations.


4. (SBU) The key premise for the untying of food aid is that
developing countries, including the LDCs, will be able to
fairly compete on the global market for procurement tenders
to provide food aid.

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The "long, uphill-all-the-way-to-the-very-end road" for the
LDCs according to WFP
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5. (SBU) WFP's report cites the following:

-The reality of WFP's experience of working in LDCs,
highlights the concern that most LDCs would actually lose
from the untying of food aid. At present, poverty,
inadequate infrastructure, lack of investment in
agriculture, limited export-earning capacity and weak
institutions will limit the ability of many LDCs to
significantly expand export sales to capture trade benefits
from the untying of food aid. At the same time, the
process of getting to a well-functioning, liberalized market
is expected to be a long and difficult path of adjustment,
particularly for the poorest, net food-importing developing
countries;
-A comparison of American and European Union food aid flows
shows a clear decline in European Union food aid after the
European Commission and European member countries moved to
untie food aid;
- Purchasing from LDCs is often limited by the capacity of
local traders to provide large amounts of cereals of an
appropriate quality for food aid on demand. Given the
political and economic context of these countries, private
sector traders are often faced with uncertainty, security
risk, poor infrastructure and poor institutions, creating
disincentives for investment and inhibiting the expansion of
well-functioning food markets;
-Over the past five years there has not been a significant
increase in purchasing from LDCs, despite cash being
available. Instead, purchases have increased in other
developing countries - mainly large exporters of cereals
like Turkey and South Africa - who are better placed in
terms of location and capacity to respond to the large and
sudden demands for food aid that are typical of emergency
operations.

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The upside and the downside of local purchases
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6. (SBU) The upside of local food aid purchases. Through its
extensive experience in food procurement in developing food
markets, WFP has helped many traders meet the stringent


requirements of international procurement. WFP's food
procurement is based on the principle of encouraging
competitive practices among commercial traders while
ensuring value for money in the purchase of food
commodities. Based on lessons learned through various
studies of WFP's food procurement, LDCs can benefit from the
following opportunities if untied food aid were to increase:
-By imparting "international standard business practices,"
procurement activities can support medium-level traders,
transfer skills, and facilitate business networks between
traders in neighboring countries;
-Sustained procurement in a market will generate sufficient
confidence for medium-sized traders to invest in securing
supply lines to meet tenders;
-Triangular transactions facilitate international trade
networks.


7. (SBU) The downside of local purchases. The difficulties
WFP has found in undertaking procurement from LDCs with
weakly developed food markets include the following:
-Standard business procedures discourage smaller traders or
those who are not formally established from participating in
tenders, limiting WFP's suppliers in LDCs;
-As food aid needs vary in levels and locations each year,
WFP is not seen as a regular buyer on the market. Therefore
only larger traders who have well-established stores and
access to trade finance are willing to regularly supply WFP;
-Few traders are able to expand their supply of properly
graded, quality food products where government investments
have not been made in food grading and standards;
-WFP regularly encounters problems with trader reliability
and quality. Thus a great deal of supervision of contracts
is required to ensure timely food aid delivery, an
administrative cost borne by WFP as part of its efforts to
increase procurement in the poorest developing countries;
-Weak transport and trade infrastructure reduce the
competitiveness of traders and can reduce reliability of
timely delivery of contracts.

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The WFP report's conclusion
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8. (SBU) The potential for an LDC to take advantage of
procurement opportunities forthcoming from the untying of
food aid depends clearly on an enabling environment for well-
functioning competitive markets being established and
increased investment in rural areas, particularly transport
and storage infrastructure. Until the results of these
investments and the enabling environment take hold, untying
food aid is likely to further marginalize the poorest
countries as they may lose a vital resource in reducing
risk, vulnerability and hunger while gaining little in
trade.

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Comment from Ambassador Hall
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9. (SBU) In this fiftieth anniversary year of U.S. Public
Law 480, we are reminded that, since 1954, the USG has
contributed more than USD $50 billion to finance more than


367 million metric tons of U.S.-grown food to over 150 food
insecure countries. Unwavering congressional support over
five decades is due, in no small measure, to the blessings
of our national agricultural abundance. As we look to the
future, we will undoubtedly need to be creative in
identifying additional mechanisms to supply food aid, given
the exponential growth in complex and intractable
emergencies. But let us keep very much in mind (as this WFP
report rightly observes) that local procurement,
particularly in LDCs, is certainly "no silver bullet" to
meeting the food aid needs of the world's hungry poor.


10. Minimize considered for Baghdad.
Hall


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2004ROME02463 - Classification: UNCLASSIFIED