US embassy cable - 04ROME2463

UNCLAS  ROME 002463 
 
SIPDIS 
 
 
FROM U.S. MISSION IN ROME 
 
SENSITIVE 
 
STATE FOR PRM/P, EUR/WE, EUR/NE, AF, EAP/K, EUR/CACEN, NEA, 
EB/TPP/ABT PHUDAK, WHA, WHA/USOAS AND IO/EDA BEHREND/KOTOK 
USAID FOR DA/USAID SCHIECK, AA/DCHA WINTER, AA/AFR, DCHA/FFP 
LANDIS, PPC/DP, PPC/DC 
USDA/FAS FOR U/S PENN, CHAMBLISS/TILSWORTH/GAINOR 
PARIS FOR USOECD AMBASSADOR MORELLA AND USAID DIRECTOR 
GENEVA FOR RMA, USTR/CM AND NKYLOH/USAID 
BRUSSELS FOR PLERNER 
NAIROBI FOR REDSO 
USUN FOR MLUTZ 
NSC FOR JMELINE 
OMB FOR TSTOLL 
 
E.O. 12958:  N/A 
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. 
 
--------------------------------------------- ------------ 
The "long, uphill-all-the-way-to-the-very-end road" for the 
LDCs according to WFP 
--------------------------------------------- ------------ 
 
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. 
 
--------------------------------------------- - 
The upside and the downside of local purchases 
--------------------------------------------- - 
 
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 
--------------------------- 
 
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 
---------------------------- 
 
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