IF YOU DO YOUR HOME WORK - WE WILL GET 18 MILLIONS


MY PERSONAL EXPERIENCE WITH DONOR AID TO THE MINISTRY OF WORKS,
TRANSPORT AND COMMUNICATION

LUNCHEON LECTURE HELD ON 20 OCTOBER 1993

ENGINEERING PROFESSIONAL ASSOCIATION OF NAMIBIA (EPA)

Dr.-Ing. Klaus Dierks M.P. [1]

Copyright  2001 Dr. Klaus Dierks

 INTRODUCTION TO SOME PERSONAL EXPERIENCES ON DONOR AID

 If I dare to talk about donor assistance for Namibia and more specifically for the Ministry of Works, Transport and Communication and my personal experience with it, I have to admit that we are still in the middle of a tremendous learning curve which, in many regards, we are trying to pick up. The first four years of experience were sometimes strange, sometimes very positive but always onerous. We had to learn to master new modalities and new, sometimes very odd formats. The experience is reaching from unknown bureaucracies to incredible fiction stories and flagrant interferences into Namibian internal matters which, one day, I will write into my personal memoirs.

It was three months before our Independence. I will never forget the embarrassing feeling when the Managing Director of a big German concern told me in pushy tunes that we (myself and the assigned Permanent Secretary of Works, Transport and Communication) should pull up our socks: "If you do your homework, we (the German concern) will get 18 millions German Marks" (from German Development Assistance which, must I say luckily, never materialised).

The first experience with donor assistance was that there always is a price tag attached to it. If we are talking about donor aid we are talking about the developing countries' ever-longer trail of debt that has been at the heart of international relations and development issues for years. On the debt trail there are many pitfalls. Debts have been written off, debts have been rescheduled and repayments have been reduced by the cut-price buying back of claims. In the attempt to lighten this load which crushed the life of more than one economy and the destinies of many people in developing countries, everything has been tried. Or nearly everything, with very limited success.

 

SOME HISTORICAL REFLECTIONS ON DONOR AID

 

In order to understand the vicious donor aid - debt circle, and maybe find some solutions to the problem, we should go into history to highlight some specifically bad debt examples [2].

To gain independence from colonial oppression was as hard for Latin America as it was for Namibia. Moreover, it cost a lot of money. In 1815/16, Simon Bolivar, South America's Liberator, obtained private financing for his first liberation struggles against the Spanish colonial power from British interests who staked their money on him with luck as their only security. In 1823, Bolivar had won the liberation struggle, and the British interests (bankers) started to call in their claims, with the official backing of the British Government. What was surprising was that, at the time, the physical assets pledged as security for the loan - or must I call it donor assistance? - no longer existed because the ships Bolivar had bought didn't exist anymore and there was no point in thinking about the 10.000 uniforms and personal weapons.

In 1834 a British Commission rescheduled the debt by means of an "Agreement" and assigned 1,8 million of the total debt to one of Bolivar's successor states, the Republic of Ecuador.

The Ecuadorian Government managed to keep up intermittent payments to the British creditors until 1854, when it tried to re-negotiate the 1834 agreement. All the original debt - or must I call it donor assistance? - certificates were converted into consolidated debt bonds for the original amount. Of course, none of the capital had been amortised (after 20 years of payments!!) and Ecuador was to channel a quarter of its total customs revenue and mining taxes into the settlement of the debt. Arrears piled up over the years, as cocoa and rubber prices fluctuated and in 1869 the Ecuadorian Parliament ordered the payments to be suspended. None of the capital had yet been paid back.

I would like to quote the then Ecuadorian Finance Minister to illustrate the dilemma: "... our inability to meet the terms of the contract releases us from having to do so; for the obligation is against the principles governing the transaction of civilised nations. it is dishonourable and disastrous for any State and can only meet general disapproval".

A general re-negotiation of terms with the British Government commenced in 1875, with the main objective of enabling the Bank of Ecuador to operate properly as a credit establishment and thereby take over repayment of the debt. So the consolidated debt bonds were converted once more, the capital reduced to one sixth of the nominal value, the arrears capitalised too and their interest rate cut from 7,5% to 6% annually.

Ecuador was still paying 50 years later, in the throes of the cocoa price crisis, and it was not until 1937 that the affair was finally closed, more than a century after the events which led to the liberation of South America.

Some of these historical events are sounding familiar, isn't it? "Soft loans" can be dangerous and unpredictable. Can we regard "soft loans" as donor assistance at all or should we not rather call them "reciprocal donations"?

Which brings me to the depressing history of financing the Nicholas (Moscow-St. Petersburg) railway line which was initiated in 1867. This railway project was to be financed by means of 600.000 shares of 500 gold francs each which were to be re-paid in 1953. The Russian Tsar Nicholas issued the following edict on 18 July 1867: "Having fund it necessary to sell the Nicholas railway for a term of approximately 85 years in order to set up a special fund for the exclusive purpose of completing our railways ...".

History teaches us that the holders of the British bonds in Ecuador gained and the holders of the Russian bonds lost. At least, the Russian "soft loans" were used to build other railways in Russia. It was thanks to those railways that at the beginning of the First World War the Russians were able to mobilise a little more quickly than was expected by the German General Staff Command, which, to save East Prussia, withdrew from the French front two army corps to send them to the Russian border and consequently lost not only the Battle of the Marne but also the First World War. The first point I would like to make is that the "1867 donor aid" to Russia did not only changed the course of history but also teaches us that state interests and private interests do not necessarily coincide.

The second point I would like to make that there were two very different worlds at the beginning (1867) and the end of the anticipated term of the Russian railway bond (1953: Stalin's death!!), enough to break the contractual links between borrowers and lenders.

 

HISTORY TEACHES US SOME LESSONS ON DONOR AID

 

What lessons have we learned from these historical remembrances? The populations of poor developing countries like Namibia granted "soft loans" over long periods (30 to 50 years with 10-years grace periods are usual) at very low rates of interests have not yet been called upon to use their imaginations what are the political, economic, social and financial implications of such loans because they perceive the initial debt servicing as small. The serious point of the "hard currency risk" of such "concessionaire or soft loans" is not even touched upon because hard currency low interest rates (0,75 to 2,0% per year for instance) can be more dangerous for a nation than soft currency high interest rates (10,0 to 15,0% for instance).

But, in the years to come the debt is going to grow merciless, without any of the benefits of development that were supposed to go with it anymore in memory. The people, still teenagers, who will one day bear the responsibility for this are bound to wonder whether it is right for them to have to put up with what must look to them very much like extortion on an international scale.

What do young people think when they have to pay off commitments undertaken by their great grand parents? What will a young Namibian say in the year 2040 if he has to produce hard currency to pay off the last instalments of a "soft loan" given in 1993 for infrastructural projects? And what would the present French leaders say if they had to try and balance their books while servicing a debt contracted under the Marshall Plan, which was of course a US dollar donation? Might not the very generosity of extremely long-term loans at very low rates of interest have unwarranted effects on future generations, involved, in endlessly re-negotiating debts whose purpose has been long forgotten?

I can only hope that we engineers of 1993 do our homework properly to choose the right projects geared to sustained growth and development and the optimised distribution of scarce resources to the benefit of future generations. Furthermore I will express my hope that these future generations will be able to maintain properly these projects.

Will, at the end, the developing country not benefit the developed country which provides the donor aid or will the poor not subsidise the rich? Is this not already happening? Is this still assistance? Or should we rather call this kind of donor aid "reciprocal donations"?

In 1919, John Maynard Keynes [3] claimed that it would be an exaggeration to say that the European allies were unable to pay both the capital and the interests on their debt, but that making them to do so would place a terrible burden on them. They could therefore be expected to keep trying to evade this obligation and their attempts would be a never-ending source of upsets and ill will for years to come. Nations with debts were not fond of their creditors and there was no point in expecting any goodwill towards the lenders from the borrowers if the further development of these countries was paralysed by the annual tribute they would have to pay. They would be tempted to look elsewhere for their friends and, if they broke off peaceful relations, it would give them the enormous benefit of allowing them to avoid paying off their external debt. But, cancelling these major debts would encourage real solidarity and friendship on the part of the associated nations.

Keynes' contention was that development had to take precedence over debt. The point I would like to make here is that this vicious debt circle could make uneasy bedfellows and even develop quite a dangerous revolutionary potential on side of the receivers of "soft loans". To my mind, stretching the link between the purpose of a loan and a scheduled repayment period of 30, 40 or 50 years will have serious repercussions in the future. The money will simply not be there and the international bankers will re-negotiate and reschedule and find all manners of tricks to change the dates of repayments - without, of course, getting more than the debtors have.

What could be the solution to this? Some people are saying I am naive and maybe I am naive to say the following: But, why not replace what the experts call "soft loans or quasi-grants" by grants pure and simple? As far as the rich countries in the North are concerned, giving grants instead of soft loans would amount in using savings which already exist in preference to the future savings of their children. Taking into account that the poor South is already paying and re-paying much more to the rich North than the developing world is receiving in donor aid [4], what would it cost the developed world today to switch over to grants? Surely an extra outlay which would be offset by the satisfaction and the positive advantages, of not leaving a time bomb for future generations to dispose off!

 

MY PERSONAL DONOR AID EXPERIENCE

 

Miracles are rare in this world and maybe there are no direct solutions in breaking the vicious donor aid/debt circle. Speaking about the Namibian and my personal donor aid experience in the nearly four years after Namibia's experience I would like to refer to a newspaper article from March 3rd, 1990: where I formulated the following points for "Donor Aid without Strings" [5]:

1. The Government of Namibia has to formulate clear policy guidelines on Donor Assistance before accepting it.

2. Donors should not do what the Government has to do: to prioritise her development objectives and projects and to undertake feasibility studies.

3. Donor funds have to be channelled through the Budget and the State Revenue Fund.

4. The National Planning Commission has to be the national aid-co-ordinating body within the Government.

5. The Government has to set the parameters of development and not the Donors.

6. Any strings attached to Donor Aid should be avoided because tied aid can be very dangerous and expensive for a developing country. Grants should be negotiated and "soft loans" be avoided as far as possible but it seems that grants are seldom given for infrastructural projects.

7. The right s and duties of both, the Government and the Donor must be identified.

8. Namibian "citizen-owned" consultant and contractor firms must get preference for the execution of donor-funded projects. The minimum requirement should be that foreign firms (insisted on by Donors) must form joint ventures with citizen-owned firms.

9. No feasibility study funded by Donor Aid should be allowed without firmly pledged implementation.

What has transpired from all these postulates, four years after Independence? What have we learnt?

 

PRINCIPLES

 

As far as the principles on donor aid to the Ministry of Works, Transport and Communication were concerned we were reasonably successful in our negotiations with many donors to minimise any strings attached. Our conditions and demands always carried a heavy weight in the talks. But, we should never forget that we as the receivers of donor aid also carry a heavy responsibility because we should never forget that we deal with taxpayers' money from workers from the donor countries. The rights and duties for both partners, as partners in development should always in our mind.

 

EXPERIENCES

 

We had to learn that no project could be considered by any donor without proven economic, environmental, technical and social (gender issues) feasibilities. This was a new experience for us where we have gained valuable experience, especially as far as environmental matters for engineering projects were concerned.

Right from the beginning we tried to negotiate mainly grants for development projects but this was not always possible (see point 6 above) but we tried to made sure that the economic rate of return for all our projects was always on the high side to warrant a "soft loan". In some instances we were very successful to arrange grants for engineering projects, especially for socially-motivated road projects and design studies.

We had many positive experiences in forming a real partnership as partners in development between donors and our Ministry without the typical "hand-out-syndrome" which characterised the normal donor relationships with many developing countries. In this regard I would like to quote an old, shrewd civil engineer in one of the Development Banks who, after 40 years of sometimes bleak donor aid experiences, always insisted that German consulting engineers have to supervise the projects. After having dealt for the first time with Namibia and when approached by some of his collages to appoint German engineers for the Trans-Caprivi-Highway he said "why German engineers? The Namibians can do it much better than the Germans!"

On the negative side it has to be reported that strings to donor aid could not always be avoided, for instance regarding foreign legislation which has had to take preference to Namibian legislation or tendencies of some donors to apply a "stick and carrot" policy towards us. Sometimes we were embarrassed by heavy-handed, pushy tunes to the limits of blackmail (the colonial master is speaking to his "aborigine subject"!). It also seems that it will be difficult to level the playing field between Namibian and foreign contractors. We are trying hard to find solutions to all these problems and to overcome perceptions, misunderstandings and break-downs of communication between the partners in development.

But, it is also clear that without donor aid we cannot stimulate sufficiently local enterprise and development, trigger off foreign investment and create working opportunities for our jobless people. The secret of success for an optimised donor aid is that we have to go for a stimulation of our economy without getting to high debts.

If somebody would ask me what would be my personal learning curve on donor aid from 1990 to 1994 I would answer the following: 1990 I said "Aid without Strings" should be the keyword while for 1994 I would say: "The Vicious Donor Aid/Debt Circle has to be broken".

 

Dr.-Ing. Klaus Dierks M.P. Windhoek, January 1994

ENDNOTES

[1] Klaus Dierks was 1994 Deputy Minister for Works, Transport and Communication in the First Government of the Republic of Namibia and Member of Parliament
[2] Diehl, Jean-Pierre: Talking about debts..., The Courier 141, September-October 1993
[3] Keynes, J.M.: The Economic Consequences of the Peace, 1920
[4] It is believed that in 1993 due to the debt burdens and unfair trade practices the poor South is paying US $ 120 thousand millions to the rich North but is only receiving US $ 60 thousand millions in donor aid.
[5] Namibia Today: Aid without Strings, Windhoek, March 1990, p.3

POSTSCRIPT (2001)

If I look back at ten years as a minister with various experiences with donor assistance to Namibia, I can only come to the conclusion that in most cases donor assistance (so-called development aid)  is a very expensive business for the receiving developing country. In many cases developing countries should learn as quickly as possible to stand on their own feet and to refrain from donor assistance, especially from donor assistance with attached strings. We should rather concentrate on "fair trade" and to avoid "aid".

However, the most sad experience I had with donor assistance, are the many foreign consultants to the Ministry of Works, Transport and Communication as well as the Ministry of Mines and Energy. On the account of valuable time and costs paid by tax payers in both, in developed and developing countries, Namibia is flooded with many "advisory" reports and memoranda of foreign consultants which create the impression that Namibia had no development on their own and no knowledge of their own country. In many cases we have never received usable concrete results of these consultants. Most consultants have no experience about Africa, Namibia and their peculiar problems. They have first - for exorbitant "first-world-rated" fees naturally - to learn the basics and to tap in any case on the experience and knowledge of indigenous people. Many consultant reports brought disastrous results for the Namibian economy and environment. My advice would be, consultants may only work if they have one paid indigenous partner at their side who will, at the end, not disappear and leave Namibia with the consequences of their work.

Dr. Klaus Dierks, June 2001