CONFIDENTIAL
flexibly with such cases. It is difficult to assess the amount that might be appropriate but we suggest that it should initially be some 5% of the bilateral programme, ie about £25m of the 1977/78 programme. It is important that this figure should be regarded as flexible and subject to adjustment in later years in the light of experience. The allowance would not be allocated by country and would be reserved for developmentally sound projects of commercial/industrial importance, in circumstances when funds cannot be found within the existing aid allocation and for developing countries with a gnp per head of less than $1000. Moreover it would be possible to use this allowance to provide the aid element in measures to associate aid and commercial credit (whether in Credit Mixte form, as in para 16 above, or in the other ways described in para 17). This would represent additional aid for a country to whom it was offered in respect of particular projects, and would provide a means of effectively pursuing commercial
objectives in certain key cases. Ministers are invited to endorse this proposal, which would represent a modification of existing policy.
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LOCAL COSTS
29 Local costs aid is a form of untied aid in that free foreign exchange is provided to the recipient in return for which counterpart local funds are earmarked for specified purposes. Guidelines for the provision of local costs aid were agreed among Departments in 1971. These stressed that limited local costs might be necessary in excep- tional circumstances (where a country's domestic resources are inadequate to meet these costs), and that the level of local costs. should be determined in the light of the various UK objectives, developmental, commercial and political. These general principles still seem sound. A reasonable flexibility in the provision of aid for local costs is necessary in implementing any aid strategy (especially one which emphasises rural development) but it would be in our commercial interests that there should be a positive and conscious effort to keep them as low as possible at all times. exception to this would be when the provision of aid for local costs could provide an opportunity to obtain additional exports for the UK through the association of aid with commercial credit (see para 15 above). Posts should be instructed to look for such opportunities. This would be a departure from present practice.
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Ministers are invited to endorse the proposals in para 29.
COUNTRY ALLOCATION
An
31 An important element in the balance of the Aid Strategy (set out in para 4 above) is to place increasing emphasis on the needs of the poorest countries. The commercial effects of this policy are best illustrated by an examination of its effects on UK aid to India, our largest aid recipient. Recent and proposed allocations are as follows:
a
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