Macro Economics

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How tied aid affects the cost of aid-funded projects in Ghana
(AERC, 2003-11) Barfour Osei
This case study of the Sixth Power Project in Ghana is an empirical analysis first, to investigate whether tied foreign aid funded inputs bear additional costs on account of price mark-up and, second, to assess the impact of the cost of tying on the concessionality of the assistance. The excess cost of tying is estimated following the “cost–difference” method and the impact of tying on the concessionality of aid is assessed through the “shadow grant” element. The basic conclusion reached from the analysis is that there is significant mark-up on the prices of funded inputs relative to the prices from alternative sources of supply. The price mark-up reduces significantly the concession embodied in the aid flows. On the part of donors, it is argued that there is need for action to liberalize the market for the supply of aid exports. Finally, while the mark-up on prices of tied aid inputs may be a price Ghana had to pay to receive the assistance, the cost to Ghana of tying provides a case for the cancellation of aid debt of the country.