Aid-tying and the real value of foreign assistance: the case of the Sudan.
Yassin, Ibrahim Hassan
This paper assesses the excess cost which results from aid-tying in
some development projects in the Sudan. Tying can be of two types,
either by source or by end-use. In the former case, restrictions are
placed on where the recipients can spend the assistance. In the latter
case, assistance is limited to specific items or projects. Thus, aid can
be deemed to be doubly tied. In addition, there are other unquantifiable
costs of tying. For example, the project to which the assistance will be
tied might not suit the recipient's development programme, or the
technology used may be inappropriate. Eight foreign-aided projects,
which were tied by source as well as by end-use, were analysed to
estimate the excess cost which results from the tying of aid. The
overall weighted average of tying these projects appears to be 74
percent higher than the international market. In addition, the analysis
shows that the terms of borrowing for these projects were hard;
consequently, the grant element was low. Thus, if one takes into account
the estimated excess cost of the tied foreign credits, which was greater
than the commercial cost of borrowing at which these credits could have
been sought in the absence of aid, the real value of these credits, the
paper shows by using a shadow grant element approach, was negative.
1. INTRODUCTION
Aid-tying will reduce the real value of a capital inflow if the
recipient country has to pay for the goods and services bought with the
loan higher prices than those prevailing in alternative markets. Tying
can either be by source (i.e., restrictions on where the recipients can
spend the assistance) or by end-use (through the specification of
commodities and/or projects). Spending restrictions which normally tie
the assistance to purchases from the donor country are known as
"procurement" restrictions or tying. On the other hand, use
restrictions are usually imposed to cover the foreign exchange costs of
a specific project. The combination of use and spending restrictions
amounts to "double-tying", i.e., the use of a foreign capital
inflow will be restricted to particular projects as well as to the
donor's goods and services. Hence, the excess cost of tied goods
will not only generate additional income to the donor country due to
overpricing, but it will also save the donor the cost of an export
subsidy. For if the tying had not been imposed, the donor country may
have had to pay an export subsidy in order to remain competitive.
In addition to the inability of the recipient country to buy in the
cheapest market, there are also some other unquantifiable costs of
tying. For instance, when there is double-tying, the project to which
the assistance will be tied might not suit the recipient's
development programme, the technology might be inappropriate, the donor
may unnecessarily raise the import content of the project, and so on. As
such, aid-tying not only imposes different direct (and indirect) costs
on the recipient country but it also acts as a constraint on the
recipient's freedom to allocate resources in the best possible way,
and hence causes a welfare loss.
The purpose of this paper is twofold: to estimate the direct excess
costs of tied credits received by the Sudan, and to assess the effect of
aid-tying on the value of these credits. This is done by developing a
"shadow grant element" approach. A sample of some projects and
commodities, which were tied simultaneously (i.e., double-tying)
throughout the period 1969-1977, is examined. The selection of the
sample is primarily dictated by the availability of data. The sample
incorporates projects which relate to textiles (including spinning and
weaving of sacks and hessian cloth) well drilling, printing and
bookbinding, road building, and telecommunications.
Section 2 of this paper explores the cost of tying to recipient
countries and Section 3 introduces the methodology by which the direct
excess cost of aid-tying for the Sudan is calculated. While Section 4
discusses the empirical results, Section 5 examines the effect of
aid-tying on the value of the credits. The final section offers some
concluding remarks.
2. THE COST OF TYING TO RECIPIENT COUNTRIES
The costs of aid-tying can be broadly classified as
"direct" and "indirect". Since the indirect costs are not necessarily quantifiable, it would be practical to concentrate
on the direct costs when the issue of aid-tying is empirically examined.
(1)
The direct costs of tying can be defined as the excess price
actually paid by the recipient country over the lowest price which the
country could have paid had the aid not been tied.
In the case of project-aid, the costs of tying can be avoided
partly or minimized by adopting a worldwide tender policy. In practice,
several projects will normally be allocated to certain tied sources
simply because these sources will probably finance such projects. This
is why, in many cases, the recipient countries will not be able to
follow a proper tendering procedure. Sometimes a certain project might
be allocated from the very beginning to a particular foreign firm which
will automatically get the orders. On other occasions, aid will be
allocated to a specific project according to a feasibility study which
has been prepared by a firm from the donor country in collaboration with
some firms and/or the government in the recipient country, in which case
tendering will be regarded as irrelevant. Under these circumstances, ul
Haq (1967) suggested that the recipient country should try both to
invite worldwide tenders and to threaten to shift the project(s) to
alternative sources if the aid source proved to be unduly expensive.
In practice, however, aid is often tied by specific projects as
well as by commodity specifications (i.e., double-tying), in which case
the substitution possibilities for the recipient country are greatly
reduced or even eliminated.
3. ESTIMATES OF THE DIRECT EXCESS COSTS OF AID-TYING FOR THE SUDAN
The direct excess costs of aid-tying for the Sudan are calculated
by determining the mark-up (say e) of overpriced tied goods relative to
the prices of alternative sources of supply. The mark-up is calculated
by taking the difference in price between the lowest quotations of the
tying source and the lowest quotations for the same good (or a similar
one) as offered by other sources of supply; and the result is divided by
the latter.
In order to calculate e, the following steps were followed:
(a) Taking the data on its face value, the original quotations of
machinery and equipment for the different tied contracts, which pertain
to the projects under consideration, have been converted into Sudanese currency, using the prevailing exchange rate when these contracts were
signed; (2) and
(b) In order to compare the quotations of tied machinery and
equipment with alternative quotations from competitive sources of
supply, more than fifty British firms (as well as some agents of foreign
firms in Britain) which produce the same machines were requested to
provide price quotations. These quotations (obtained from current
alternative sources of supply) were then deflated to their real values
that correspond to those at the date of signing the tied contracts. In
order to do that, the difficult problem of choosing a proper deflator arose. However, since most of the alternative quotations of machinery
and equipment were collected from British sources, the use of a British
cost of plant index as a deflator seemed reasonable.
Accordingly, the alternative quotations, which were currently
obtained from non-tying sources, were deflated to their real values when
the tied contracts were signed by using the U.K. Industrial Output Price
Index (UKIOPI), which is reported in Table 1. Then the deflated
quotations were also converted into their Sudanese equivalent according
to the prevailing exchange rate, which corresponds to the date of
signing the contract. By following this sequence, the effect of the
series of devaluations of the Sudanese pound which started from 1978
will be avoided.
However, the estimates of the direct costs of tying for the Sudan
using the UKIOPI as a deflator tend to be very high, resulting in an
overall weighted average of 125 percent, as can be seen from Table 2. In
order to check the performance of the UKIOPI, we wrote back to the
British companies which supplied the alternative quotations, asking them
for information on the price increases in their equipment over the
deflated periods (i.e., the periods which pertain to the various tied
contracts). Although these companies were not expected to reveal the
true price increase of their equipment because this is a very sensitive
issue, nonetheless, from the replies received, it seems that the price
increase reflected by the UKIOPI is quite reasonable. For example,
according to the information obtained from the British firms involved,
the price increase in fibre processing plants during the (deflated)
period 1975-1982 was 110 percent, while the UKIOPI shows a price
increase of 137 percent over the same period. As for textile machinery
(in particular weaving), prices have increased by 150 percent during the
period 1974-1982 in comparison to the 190 percent increase reflected by
the UKIOPI. Furthermore, the price increase in road equipment seems to
be 70 percent during the period 1977-1981; and according to the UKIOPI,
the increase was 57 percent over the same period. On balance, however,
the UKIOP! should approximate the price increase over the deflated
periods; and hence the measured high excess costs of tying cannot be
attributed to an over deflation as a result of using the UKIOPI as a
deflator.
Furthermore, the measured high excess costs of tying cannot be
attributed to the effect of exchange rates because this possibility has
been accounted for during the process of deflation, according to the
procedure described in step (b). Finally, by asking the competitive
alternative sources of supply from the very beginning for f.o.b, export
prices, against which the tied quotations were compared, the effect of
transport costs is effectively eliminated.
However, despite all these measures, to safeguard against the
possibility of overestimating the excess cost of tying, it may still be
argued that the method of obtaining quotations for similar machinery and
equipment from non-committed firms might be questionable because these
firms may tend to have other motives than just providing accurate
information (such as to be considered for future contracts); and this is
perhaps why they have provided very low quotations. Therefore, we
assumed that these competitive firms have just attached a nominal margin
of profit, i.e., they have given a voluntary price discount in order to
attract, for instance, more contracts in future. A sensitivity analysis
was then carried out for the profit margin that should have been
considered by these firms. A profit margin which ranges between 10 to 30
percent was added to the quotations received from the competitive firms,
assuming that this range represents the discount zone within which a
buyer (or a recipient) can bargain to obtain a price discount as usually
happens in any commercial deal of this nature. As such, the actual
alternative quotations that should have been offered by these firms will
be restored and the firms' intention of having other motives than
just providing accurate information will be neutralized.
4. THE EMPIRICAL RESULTS
As it has been clear throughout the previous discussion, it is very
difficult to arrive at an overall precise estimate of the amount of
money that the Sudan could have saved from the obtained international
assistance by buying from the international market had the assistance
not been tied. Due to the lack of adequate information on all the
credits as well as the problems involved in comparing different
equipment, having different specifications and capacities, the estimates
of the direct costs of tying are usually regarded as approximations.
Table 3 summarizes the estimates of the mark-up or the cost
difference implied by tying the assistance to the purchases of
donors' overpriced goods; while the basic detailed information has
been reported in Appendix Table 1. Both tables are based on 8 tied
projects which were also tied by source (i.e., double-tying), except the
case of the printing press which was tied by source only, as the
machinery and equipment for this project were drawn against a bilateral general commodity loan contracted with West Germany. The total cost of
these projects amounts to L. S. 30 million but the specific items of
equipment that have been included in the estimates of the direct costs
of tying were worth about L. S. 11 million.
The comparison of price quotations is largely confined to the items
of equipment with similar specifications, capacity, and quality. In some
cases, the comparison is based on price quotations for a complete
project, and in others it is based on the unit cost of each selected
machinery item.
The overall weighted average price for these projects tends to be
approximately 74 percent higher than the international prices (assuming
the maximum 30 percent price discount was given by the competitive
firms). (3) This figure might have been exacerbated by the 1970s
worldwide inflation (due to the increase in oil prices) since 75 percent
of the tied projects were contracted during the 1973-1977 period.
However, it can also be noticed from Table 3 that, within the tying
sources, donors like the USA and Belgium seem to be harder in their
tying practices.
5. THE EFFECT OF TYING ON THE VALUE OF CREDITS
In addition to the high mark-up that the donors have imposed on the
Sudan by tying the credits, the terms of borrowing on which these
credits were offered were also very hard (i.e., non-concessionary), and
hence the associated grant element was very low.
It has been widely accepted that when loans are made on
concessionary terms, they contain an aid component or a grant element
which can be estimated in cash terms and regarded as a benefit to
recipient countries. The grant element is, therefore, defined as the
difference between the nominal value of the loan and the present value
of all future repayments (amortization and interest) discounted by a
proper discount rate. The factors which determine the value of the grant
element are mainly three: the rate of interest attached to the loan
which is the major one; the grace period which lies between the date of
disbursement until the repayments start (usually during this period only
the interest is paid); and the maturity period by the end of which the
repayments obligations terminate.
Given the terms of borrowing and assuming a constant stream of debt
servicing payments (according to which the debtor will surrender a fixed
annual payment of the principal and interest when the grace period
elapses), the grant element as a percent of the face value of the loan
(A) can be determined as:
A = (F - PV / F) 100 ... ... ... ... (1)
where F is the face value of the loan and PV is the present value
of future debt servicing payments on a loan. (4)
As can be seen from Table 4, the average rate of interest attached
to the tied credits for the Sudan, the length of maturity and the grace
period were 7.3 percent, 6.5 and 1.5 years, respectively. Consequently,
the estimated overall averages of the grant element were 6.7 percent and
12.4 percent at the discount rates of 8 percent and 10 percent,
respectively. The 8 percent discount rate is assumed to represent the
world market rate of interest being proxied by the average annual rate
of the UK money markets and the Euro Dollar market during the period
1969-1977. (5) This rate acts as the rate of interest at which the Sudan
might have had to borrow in the absence of aid [Yassin (1983)]; whilst
the 10 percent is the standard discount rate of the Development
Assistance Committee (DAC) of the Organization of Economic Cooperation
and Development (OECD).
Although it has been argued that when the excess cost of aid-tying
is very high and the terms of borrowing are very hard, the value of the
credits could be negative [Thirlwall (1978), p. 307], yet no analytical
framework has yet been developed to examine this hypothesis. Indeed, the
effect of aid-tying on the value of the assistance can be appropriately
assessed by determining the "shadow" value of the grant
element. From Equation (1), the grant element as a percent of the face
value of the loan (A) can be determined by calculating first the present
value of all future repayments on the loan (PV) using a proper discount
rate. PV should, then, be deducted from the nominal value of the loan
(F) and the net result should be divided by F. Similarly, in order to
work out the shadow value of the grant element, the present value of all
future repayments on the nominal value of the loan (or PV) should be
determined first because the repayments should cover fully the nominal
value of the loan whether the loan is tied or not. But a tied loan would
actually be worth less than its face value because of the effect of the
excess cost of tying. Thus, the nominal value of the loan should be
"deflated" to its real value by the proportionate excess cost
of tying. Since in this analysis the excess cost of tying is defined as
the mark-up on the price of tied goods ([epsilon]), F would be deflated
by 1 + [epsilon] (or [pi]) where [pi] is 1 + % mark-up on the price of
tied goods. Then, from this real value of the loan (or F/[pi]), the
already discounted future repayments (or PV) should be deducted, rather
than being deducted from the nominal value of the loan (or F). In
symbols, the shadow grant element as a percent of the real value of the
loan ([A.sup.*]) can, therefore, be expressed as:
[A.sup.*] = ([F.sup.*] - PV/[F.sup.*]) 100 ... ... ... ... (2)
where [F.sup.*] is the real value of the loan or F/[pi] and [pi] =
1 + [epsilon].
According to Equation (2), if the present value of future
repayments on the nominal value of the loan exceeds the real value of
the loan, after allowing for the effect of overpricing due to the
practices of aid-tying, then the real worth of the assistance would be
negative. The implications of this approach are analogous to the case of
the grant element.
It is clear from the examples provided in Table 5, by applying
Equation (2), that the real worth of the tied credits may become
negative because, effectively, aid-tying makes the recipient country
repay more than the actual value of the aid received. Given the low
values of the grant element of the tied credits (due to the hard terms
on which these credits were given) and the high excess cost of tying,
the values of the shadow grant element were found to be negative, i.e.,
when the grant element is very low (or PV is very high) and the excess
cost of tying is very high (or [F.sup.*] is very low), the shadow grant
element is likely to be negative.
Regarding the analysis as a whole, it should be mentioned, in
addition to the discussion contained in Section 3, that the cost
difference approach used in estimating the direct excess costs of
aid-tying concentrates only on the actual cost incurred by the recipient
country. It does not take into consideration whether the recipient might
have been able to reduce the costs of tying (for instance, by following
a better procurement policy) even within the context of tying.
Furthermore, it is not clear from the obtained data whether the Sudan
had invited international bids or not. Hence the effectiveness of this
policy in minimizing the excess costs of tying cannot be assessed.
6. CONCLUDING REMARKS
In this paper the direct costs of tying the purchases of machinery
and equipment of some Sudanese projects to the donor's source have
been quantified, using a cost difference approach. The analysis has
covered 8 tied projects (during the 1969-1977 period) which were also
tied by source (i.e., double-tying). The estimated overall weighted
average of the excess cost of tying these projects appears to be around
74 percent higher than the international market. This figure might have
been aggravated by the 1970s worldwide inflation (as a result of the
increase in oil prices), since most of these tied projects were
contracted during the 1973-1977 period.
The analysis also shows that the terms of borrowing on which the
credits for financing these projects were offered were hard; and hence
the associated grant element was low. Given the estimated excess cost of
the tied Sudanese credits, which was higher than the commercial cost (or
terms) of borrowing at which these credits could have been sought in the
absence of aid, it has been shown, by using a shadow grant element
approach, that the real value of these credits was negative.
Ideally, aid should be untied since tying reduces the efficiency of
loans in providing economic assistance. However, if the practices of
aid-tying by donors cannot be avoided on grounds of the balance of
payments protection, then the recipient countries should try vigorously
to minimize the excess costs of tying by adopting proper procurement
policies, designing efficient programming of imports, inviting worldwide
tenders, and utilizing the competitive substitution possibilities
whenever they exist.
On the part of donors, the disadvantages of aid-tying to recipients
can be mitigated if the donors can extend bilateral arrangements among
themselves in order to allow the assistance from one donor to a
developing country to be exchanged with another flow originating from
another donor country; and hence the tying levels will be maintained
just the same while the competitive opportunities for the recipients
will be increased. Similarly, multilateral purchasing arrangements can
be devised in order to enable recipient countries to buy in the cheapest
markets within a group of countries which can be chosen, such that the
gains and losses from "untying" the assistance would cancel
out.
Appendix Table 1
The Higher Prices Paid for Machinery Items under Tied Credits:
A Sample of Selected Sudanese Projects, 1969-1977
Lowest
Quotations of
Lowest Alternative
Quotations Sources of
of Supply Deflated
Tied Source by the UKIOPI
FOB; in Sudanese Pounds
Nature of the Project; Source of (L. S.)
Credit; Year of the Contract and
Some Selected Machinery Items (1) (2)
Well Drilling; Yugoslavia (1969):
Reciprocating Deep Well Piston
Pump Complete with Accessories 2586.000 1217.67
Sucker Rods 3/4 Inch A.P.I. 30.724 4.730
Hoist Complete with 200 Ft.
Wire Rope 1/2 Inch 437.000 201.750
Rising Main 4 Inch I.D.P.I.
(per Foot) 1.500 0.750
Printing Press; West Germany
(1973):
Total Cost of Machinery for the
Press 190617.720 96850.832
Shendi (Gadow) Textile Factory;
Italy (1974):
Cotton Production Card, Mod C40 16864.466 5056.579
Drawframe for Cotton Mod S20 6723.778 3371.053
Cotton Ring Spinning Frame Mod
RC/701 (per Spindle) 39.700 15.150
Hopper for Waste Mod B11/1 5717.370 2696.842
Hopper Feeder Mod B72/1 7128.430 3792.432
Automatic Single Shuttle Weaving
Loom Mod T5C IXI 3569.787 1404.605 (UK)
3569.787 1077.000 (Japan)
3569.787 1800.000 (USA)
Open Width Continuous Washing
and Bleaching Range 163327.070 78657.894
Chainless Mercerising
Range--Type IMS 30 176222.660 56184.21
Giant Jiggers with Cover--Type
F03 36508.915 19663.659
Hot Air Stenter Frame for Drying 66996.100 50565.789
Open Width Continuous Washing
Range after Printing Mod RHONE 111083.020 67421.052
Inspecting Measuring Rolling up
Machine--Type VI/A 13569.787 4213.816
Pneumatic Calendar 5
Cylinder---Type CP5 28555.509 22473.684
The Six Weaving Factories; Belgium
(1974):
Automatic Single Shuttle Weaving
Loom 2249.590 1404.605 (USA)
2249.590 1077.000 (Japan)
2249.590 1800.000 (USA)
Inspecting Measuring Rolling up
Machine 13397.130 4213.816
High Speed Winding Machine 200.970 112.368
Abu Naama's Fibre Processing
Back-up Project; Italy (1975):
The Total Cost of Machinery 4055362.100 2598566.000
Tonj's Fibre Processing Back-up
Project; Italy (1975):
The Total Cost of Machinery 5850397.000 2598566.000
The 22 Automatic Telephone
Exchanges; Japan (1975):
The Average Cost per Line 110.679 62.944 (USA)
Road Building Equipment; USA
(1977):
Seaman Model MA Trailer-mounted
(Single Axle) Maintenance
Bituminous Distributor--600
Gallon Capacity. Spray Bar
Nozzle Spaced on 4 Inch
Centres. Bar Length 6 Ft.,
Hand Spray Attachment 1 Inch x
15 Ft. 5759.158 3172.005
Seaman Senior Bituminous
Distributors. Mounted on Heavy
Duty Chassis. Tank to Hold
2000 Gallons. Rear Mounted
Engine Drive. Dual Fuel Tanks 20252.402 5117.117
Overall Weighted Average
Percentage
of Excess
Cost of
Aid-tying
[(1) - (2)/
Nature of the Project; Source of (2)] %
Credit; Year of the Contract and
Some Selected Machinery Items (3)
Well Drilling; Yugoslavia (1969):
Reciprocating Deep Well Piston
Pump Complete with Accessories 112.4
Sucker Rods 3/4 Inch A.P.I. 549.6
Hoist Complete with 200 Ft.
Wire Rope 1/2 Inch 116.6
Rising Main 4 Inch I.D.P.I.
(per Foot) 100
Printing Press; West Germany
(1973):
Total Cost of Machinery for the
Press 96.8
Shendi (Gadow) Textile Factory;
Italy (1974):
Cotton Production Card, Mod C40 233.5
Drawframe for Cotton Mod S20 99.5
Cotton Ring Spinning Frame Mod
RC/701 (per Spindle) 162.0
Hopper for Waste Mod B11/1 112.0
Hopper Feeder Mod B72/1 87.9
Automatic Single Shuttle Weaving
Loom Mod T5C IXI 154.1
231.5
98.3
Open Width Continuous Washing
and Bleaching Range 107.6
Chainless Mercerising
Range--Type IMS 30 213.7
Giant Jiggers with Cover--Type
F03 85.7
Hot Air Stenter Frame for Drying 32.5
Open Width Continuous Washing
Range after Printing Mod RHONE 64.8
Inspecting Measuring Rolling up
Machine--Type VI/A 222.0
Pneumatic Calendar 5
Cylinder---Type CP5 27.1
The Six Weaving Factories; Belgium
(1974):
Automatic Single Shuttle Weaving
Loom 60.2
108.9
25.0
Inspecting Measuring Rolling up
Machine 217.9
High Speed Winding Machine 78.8
Abu Naama's Fibre Processing
Back-up Project; Italy (1975):
The Total Cost of Machinery 56.1
Tonj's Fibre Processing Back-up
Project; Italy (1975):
The Total Cost of Machinery 125.1
The 22 Automatic Telephone
Exchanges; Japan (1975):
The Average Cost per Line 75.8
Road Building Equipment; USA
(1977):
Seaman Model MA Trailer-mounted
(Single Axle) Maintenance
Bituminous Distributor--600
Gallon Capacity. Spray Bar
Nozzle Spaced on 4 Inch
Centres. Bar Length 6 Ft.,
Hand Spray Attachment 1 Inch x
15 Ft. 81.6
Seaman Senior Bituminous
Distributors. Mounted on Heavy
Duty Chassis. Tank to Hold
2000 Gallons. Rear Mounted
Engine Drive. Dual Fuel Tanks 295.7
Overall Weighted Average 125
Source: Own estimates based on data from the same source as Table 2.
Author's Note: This paper is based on my Ph.D. thesis
completed at the University of Kent at Canterbury. I am very grateful to
Professor Richard Disney for his invaluable comments, and to an
anonymous referee for his/her helpful suggestions; but they should be
absolved of any responsibility for the final product.
REFERENCES
Bhagwati, J. (1967) The Tying of Aid, UNCTAD Secretariat,
TD/7/Supp. 4, United Nations, New York. Reprinted in J. Bhagwati and R.
S. Eckaus (eds) Foreign Aid. Harmondsworth, Middx: Penguin. 1970.
ul Haq, M. (1967) Tied Credits: A Quantitative Analysis. In J.
Adler (ed) Capital Movements and Economic Development. London:
Macmillan.
Singer, H. W. (1965) External Aid: For Plans or Projects? Economic
Journal 75.
Thirlwall, A. P. (1978) Growth and Development with Special
Reference to Developing Economies, (2nd ed). London: Macmillan.
Yassin, I. H. (1982) When is Trade More Valuable than Aid?
Revisited. World Development 10 : 2.
Yassin, I. H. (1983) Foreign Capital Inflows and Economic
Development: The Experience of the Sudan 1958-1979. Unpublished Ph.D.
Thesis, University of Kent at Canterbury.
Yassin, I. H. (1989) The Estimation of the Grant Element of Loans
Reconsidered. The Pakistan Development Review 28 : 2.
(1) The indirect costs include, for instance, the relatively higher
prices that the recipient normally pays for spare parts and the long
delays in delivering them, inadequate follow up of projects and, most
importantly, the development costs (i.e., the effect of tying on the
recipient's development plans as well as the choice of appropriate
technology). For a comprehensive discussion on this subject, see, e.g.,
Singer (1965) and Bhagwati (1967).
(2) The exchange rates were obtained from the IMF, International
Financial Statistics.
(3) The cost of the tied projects was also made more expensive by
including in the contracts price escalation clauses, additional
commissions which are payable on top of the rate of interest attached to
the credits, and contingency items which do not necessarily relate to
the projects under consideration. On the other hand, the tying sources
not only tend to control the domestic Sudanese market by stipulating the
prices of domestic materials required for the projects, but they also
try to safeguard against any fluctuations in their currency in order to
keep the value of the credits intact [see, e.g., Yassin (1982)].
(4) The present value of future repayments on the loan (PV)can be
calculated by applying this formula:
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]
where r is the annual rate of interest attached to the loan, F is
the face value of the loan, i is the discount rate, G is the grace
period and N is the maturity period. For an elaborate discussion on the
formulae by which PV can be calculated, see, e.g., Yassin (1989).
(5) The interest rates were compiled from the IMF, International
Financial Statistics.
Ibrahim Hassan Yassin is Lecturer in Economics at the University of
Gezira, Sudan.
Table 1
The U.K. Industrial Output Price Index (UKIOPI), 1969-1982
Year 1969 1970 1971 1972 1973 1974 1975
UKIOPI
1975 = 100 50.5 54.1 59.0 62.1 66.7 81.8 100.0
Year 1976 1977 1978 1979 1980 1981 1982
UKIOPI
1975 = 100 117.3 140.5 153.3 172.0 200.0 221.3 237.2
Source: Various issues of the IMF, International Financial
Statistics.
Table 2
The Excess Costs of Tying the Purchase of Machinery of Some Selected
Projects in the Sudan, 1969-1977
Lowest
Quotations
from Tied
S. Source
No. Name of Project Year (Country)
1. Well Drilling 1969 Yugoslavia
2. Printing Press 1973 West Germany
3. Shendi (Gadow) Textile Factory 1974 Italy
4. The Six Weaving Factories 1974 Belgium
5. Abu Naama's Fibre Processing 1975 Italy
Back-up Project
6. Tonj's Fibre Processing Back-up 1975 Italy
Project
7. The 22 Automatic Telephone 1975 Japan
Exchanges
8. Road Building Equipment 1977 USA
Overall Weighted Average
Lowest
Quotations from Excess Costs
Alternative of Tying
Sources of [(1) - (2)/
S. Supply (2)] %
No. Name of Project (Country) Using UKIOPI
1. Well Drilling Great Britain 117.4
2. Printing Press Great Britain 96.8
3. Shendi (Gadow) Textile Factory Great Britain, 123.0
Japan and USA
4. The Six Weaving Factories Great Britain, 165.7
Japan and USA
5. Abu Naama's Fibre Processing Great Britain 56.1
Back-up Project
6. Tonj's Fibre Processing Back-up Great Britain 125.1
Project
7. The 22 Automatic Telephone USA 75.8
Exchanges
8. Road Building Equipment Great Britain 248.3
Overall Weighted Average 125
Source: Own estimates based on data compiled from the Sudanese
Ministry of Finance and National Economy as well as various British,
American, and Japanese firms.
Table 3
Alternative Estimates of the Excess Costs of Tying the Purchase
of Machinery of Some Selected Projects in the Sudan, 1969-1977
Lowest
Quotations Lowest Quotations
from Tied from Alternative
Source Sources of Supply
Name of Project Year (Country) (Country)
Well Drilling 1969 Yugoslavia Great Britain
Printing Press 1973 West Germany Great Britain
Shendi (Gadow) Textile 1974 Italy Great Britain,
Factory Japan and USA
The Six Weaving Factories 1974 Belgium Great Britain,
Japan and USA
Abu Naama's Fibre Processing 1975 Italy Great Britain
Back-up Project
Tonj's Fibre Processing 1975 Italy Great Britain
Back-up Project
The 22 Automatic Telephone 1975 Japan USA
Exchanges
Road Building Equipment 1977 USA Great Britain
Overall Weighted Average
Percent of Excess
Costs of Tying when
the Alternative
Sources of Supply
Increase their Profit
Margin by
Name of Project 10% 20% 30%
Well Drilling 87.6 85.4 67.2
Printing Press 78.9 64 51.4
Shendi (Gadow) Textile 102.7 85.8 71.5
Factory
The Six Weaving Factories 141.5 121.4 104.09
Abu Naama's Fibre Processing 41.9 29 19.1
Back-up Project
Tonj's Fibre Processing 104.7 87.6 73.2
Back-up Project
The 22 Automatic Telephone 59.9 46.5 35.3
Exchanges
Road Building Equipment 216.7 190.3 168
Overall Weighted Average 105.5 88.8 73.8
Source: Own estimates based on data from the same source as Table 2.
Table 4
Terms of Borrowing, Values of Grant Elements, and Excess Costs of
Aid-tying: A Sample of Selected Sudanese Projects, 1969 -1977
Value
of the
the Tied
Loan
S. L.S. The Tying
No. Name of Tied Project Million Year Source
1. Well Drilling 4.3 1969 Yugoslavia
2. Abu Naama's Kenaf Fibre
Production Plant 1.1 1972 Italy
3. Tonj's Kenaf Fibre
Production Plant 2.8 1973 Italy
4. Printing Press * 0.6 1973 West Germany
5. Shendi (Gadow) Textile
Factory 7.6 1974 Italy
6. The Six Weaving Factories * 5.0 1974 Belgium
7. Abu Naama's Fibre
Processing Back-up Project 4.1 1975 Italy
8. Tonj's Fibre Processing
Back-up Project 5.9 1975 Italy
9. The 22 Automatic Telephone
Exchanges 1.7 1975 Japan
10. Road Building Equipment 0.7 1977 USA
Overall Weighted Average
Terms of Borrowing
Rate of Maturity Grace
S. Interest Period Period
No. Name of Tied Project (%) (Years) (Years)
1. Well Drilling 3 7 1
2. Abu Naama's Kenaf Fibre
Production Plant 7 8 4
3. Tonj's Kenaf Fibre
Production Plant 7 8 2.5
4. Printing Press * -- -- --
5. Shendi (Gadow) Textile
Factory 8 8 1
6. The Six Weaving Factories * -- -- --
7. Abu Naama's Fibre
Processing Back-up Project 8.5 5 1
8. Tonj's Fibre Processing
Back-up Project 8.5 5 2
9. The 22 Automatic Telephone
Exchanges 8 5 .5
10. Road Building Equipment 8 6 1.5
Overall Weighted Average 7.3 6.5 1.5
The Grant Element The Excess
at a Discount Rate Cost of
Based on Aid-tying
S. Using
No. Name of Tied Project 8% 10% UKIOPI%
1. Well Drilling 16.2 21.5 117.4
2. Abu Naama's Kenaf Fibre
Production Plant 14.5 21.6 **
3. Tonj's Kenaf Fibre
Production Plant 10.8 17.6 **
4. Printing Press * -- -- 96.8
5. Shendi (Gadow) Textile
Factory 4.2 10.8 123
6. The Six Weaving Factories * -- -- 165.7
7. Abu Naama's Fibre
Processing Back-up Project 1.8 6.7 56.1
8. Tonj's Fibre Processing
Back-up Project 4.6 9.5 125.1
9. The 22 Automatic Telephone
Exchanges 1.7 6.3 75.8
10. Road Building Equipment 4.8 10.2 248.4
Overall Weighted Average 6.7 12.4 125
Source: Own estimates based on data from the same source as Table 2.
Notes: * The terms of borrowing for these contracts are not available.
** They are not included in the estimates because quotations from
alternative sources of supply are not available.
Table 5
Examples of the Effect of Aid-tying on the Value of the Assistance
(1) (2) (3)
S. Nature of the Tied The Tying
No. Project Source Year
1. Well Drilling Yugoslavia 1969
2. Shendi (Gadow)
Textile Factory Italy 1974
3. Abu Naama's Fibre Processing
Back-up Project Italy 1975
4. Tonj's Fibre Processing
Back-up Project Italy 1975
5. The 22 Automatice Telephone
Exchanges Japan 1975
6. Road Building Equipment USA 1977
(1) (4) (5)
Real Value
Face Value of the
of the Tied Loan
Tied Loan (F/[pi])-:
(F) n = 74%
S. Nature of the Tied
No. Project In L.S. Million
1. Well Drilling 4.3 2.47
2. Shendi (Gadow)
Textile Factory 7.6 4.37
3. Abu Naama's Fibre Processing
Back-up Project 4.1 2.36
4. Tonj's Fibre Processing
Back-up Project 5.9 3.39
5. The 22 Automatice Telephone
Exchanges 1.7 0.98
6. Road Building Equipment 0.7 0.40
(1) (6)
Present Value of
Future Repayments
on the Nominal Value
of the Loan (PV);
Discounted by
S. Nature of the Tied
No. Project 8% 10%
1. Well Drilling 3.60 3.37
2. Shendi (Gadow)
Textile Factory 7.31 6.77
3. Abu Naama's Fibre Processing
Back-up Project 4.02 3.82
4. Tonj's Fibre Processing
Back-up Project 5.62 5.34
5. The 22 Automatice Telephone
Exchanges 1.67 1.59
6. Road Building Equipment 0.66 0.62
(1) (7)
Shadow Grant Element
[A* = ((5) - (6)/(5))
%]; at a Discount Rate
Based on
S. Nature of the Tied
No. Project 8% 10%
1. Well Drilling Negative Negative
2. Shendi (Gadow)
Textile Factory Negative Negative
3. Abu Naama's Fibre Processing
Back-up Project Negative Negative
4. Tonj's Fibre Processing
Back-up Project Negative Negative
5. The 22 Automatice Telephone
Exchanges Negative Negative
6. Road Building Equipment Negative Negative
Source: Own estimates based on Table 3.