|Disaster Economics (Department of Humanitarian Affairs/United Nations Disaster Relief Office - United Nations Development Programme , 1994, 56 p.)|
|PART 3 - Financing options|
Donor and recipient countries and food agencies have shown increasing interest in devising ways of drawing on food produced in one developing country to provide aid in another developing country.
Between 1983 and 1988, transactions of this type increased from 443,000 tons to almost 1.2 million tons of grain equivalent. These transactions grew from 4.5% to 8.9% of total cereals food aid over the same period. In sub-Saharan Africa, over the same period, such transactions increased from 9.4% to 24.6% of all food aid in that region, and from 64% to 77.4% of all transactions worldwide. The most general form of transaction has been the triangular food aid transaction or TFAT. TFATs can, in principle, be generalized to any appropriate commodity; for example, animal fodder, cement or coal.
In triangular transactions, a donor agency buys food with cash from its food aid budget in one developing country for shipment to another developing country where it is used as food aid. This contrasts with food aid provided by a donor from its own food stocks or from its purchases from a developed exporting country or on the open international market. Triangular transactions combine two forms of aid and trade: foreign exchange is provided to the supplying country while food aid is given to the recipient country.
Triangular transactions combine two forms of aid and trade: foreign exchange is provided to the supplying country while food aid is given to the recipient country.
For trilateral (or barter) operations, instead of purchasing food with cash, a donor provides a food commodity which is exchanged in one developing country for a different food commodity that is shipped, usually at the donor's expense, to another developing country, where it is used as food aid.
Such a transaction combines two forms of aid: the source country has foreign exchange benefits through not having to buy commercially the food commodities provided for the exchange, minus the value of the exchanged commodity, while the recipient country receives food aid. This type of transaction tends to be used mostly by grain exporting donors with limited flexibility to use their food aid budgets to purchase commodities in developing countries.
Donors use triangular operations to strengthen food aid programs because such programs increase cost effectiveness, speed up delivery, and provide food commodities more in keeping with the food habits and customs of beneficiaries. Donors also use such food operations to enhance economic development. Additional demand stimulates increased food production and fosters intra-and inter-country trade.
Food aid of this type can involve triangular transactions, trilateral operations, local purchases, food exchanges, or swap and barter arrangements, all of which have two common features. First, they use food from a developing country in food aid operations, and, second, in most cases, they draw on donors' budgeted financial resources or commodities specifically earmarked for food aid operations.
Other types of transactions are also available. Local purchases of food commodities are made with cash from donor agencies' food aid budgets, and the commodities purchased are used as food aid in the same country. Under local exchanges/swaps, a commodity (say, wheat) provided by a donor to a recipient country is exchanged for another commodity (say, maize) available in that country, which is then used in a food-aided development program or project in the same country. Local transactions remain small in comparison with triangular transactions.
The benefits of triangular and trilateral transactions include:
· Stimulating increased food production by creating additional demand.
· Promoting exports and increasing foreign exchange receipts.
· Fostering inter- and intra- country trade and food security.
· Supporting food strategies and food security plans and programs by helping countries manage occasional food surpluses.
· Encouraging the improvement of transport, storage and logistics.
· Strengthening food management and administration.
· Assisting in the restructuring and liberalization of markets.
There are drawbacks in using TFATs. These include:
· Wide fluctuations in production and lack of accurate information, which make advance planning difficult.
· Inadequate transport, storage and other logistics, as well as poor quality control, management and administration, which makes it difficult to establish firm delivery schedules.
· The immediate disposal of surpluses above the current level of effective demand can lead countries to invest inadequately and inefficiently in storage and stocks.
Experience shows that TFAT operations are complex and their implementation must be carefully monitored. Distinctions should be made between their effects in supplying and receiving countries and between emergency operations and development activities. More attention should be given to trading in non-cereal commodities, especially pulses and other minor traded foods, to complement cereals in the food aid basket.
TFAT prices should relate to international market prices and operate within a band of import/export parity prices, taking into consideration fluctuations in world commodity and foreign exchange markets. A pricing formula should be found to dampen the effects of volatile price movements in the short run for contracts that might take 6-12 months to complete. When a forward commitment is made to purchase food commodities in a source country for a number of years, a negotiation clause should be included in the contract which, while confirming the intent to buy, would contain a clause to review purchase prices periodically.
Close attention should be paid to the administrative costs of triangular transactions. This should ensure that a disproportionate amount of time is not spent obtaining relatively small quantities of food from non-regular exporters through delivery routes that are not normally part of official trade.
While food aid transactions have been successful in transferring resources to supplying developing countries, they have mainly been carried out through parastatal marketing channels that often have incurred high costs due to inefficient operations. Transactions should more often be conducted directly with small producers through farmers' organizations, thus transferring benefits to them, and thereby stimulating increased production. Broader development benefits can be achieved by combining financial and technical assistance with food aid.
Transactions should more often be conducted directly with small producers through farmers' organizations, thus transferring benefits to them, and thereby stimulating increased production.
Adversely, financing additional food purchases in supplying developing countries can sustain inappropriate agricultural policies, leading to dependence on triangular food aid programs to stimulate increased food production and trade. Inappropriate pricing of food aid transactions and local purchases can create distortions in resource allocation and protection that are not sustainable when food aids ends. Stimulating regional trade subsidized by food aid purchasing operations can result in trade diversion that works against comparative advantage. A substitution of food aid for financial aid might therefore take place with insufficient consideration given to the opportunity cost of that substitution.
Q. What are some benefits of triangular food aid interventions?
Triangular food aid transactions can stimulate food production; promote exports; help manage occasional food surpluses; improve food management systems; promote inter and infra country food security.