Not only that, but 40% of international aid is spent buying overpriced goods and services from the donors' own countries, Action Aid and Oxfam said in a joint report on Monday calling for urgent reform of a politically compromised system.

"First and foremost, they need to spend aid where it is needed - on poverty reduction - rather than channel it to their own consultancy and infrastructure industries and geopolitical allies," the report said.

It accused the United States and Italy of being the worst culprits in aid "round tripping", spending some 70% of their aid on their own companies.

"This is the ultimate form of round tripping - taking with one hand what is given with the other while advertising your 'generosity'," it said, noting that the inefficiency involved inflated procurement costs by some $7 billion a year.

Bureaucratic quagmire

The report, Millstone or Milestone?, also accused the international institutions of imposing impossible conditions on recipient nations and of tying the whole process up in a bureaucratic quagmire.

The report noted that in 2003 Senegal had to play host to 50 delegations from the World Bank.

Agencies say foreign aid is being
used to obtain political leverage

It said the existing international aid system had grown out of the Cold War when donor countries frequently used aid to obtain political leverage and fly the national flag.

"Byzantine donor procedures and conditions have distorted incentives and systems in aid-dependent countries and undermined local capacity, hindering with one hand what they have helped with the other," the report said.

Aid was still often misdirected at high-profile projects or aimed at "donor darling" countries like Nicaragua, which received aid equivalent to $178 per head in 2001 compared with Niger which got just $22 a head despite a similar income level.

Major challenges

"Donors tend to be more concerned about the success and visibility of their project or programme than the success of a country's development plan," the report said.

It complained that donor nations often bypassed local delivery networks thereby undermining them and leaving countries less able to stand on their own feet.

All aid should be untied, technical expertise should be trained locally, goods and services should where possible be procured locally, and the focus should be on directly helping the poor and building local skills.

"These are major challenges to the aid system since they imply a redistribution of power between recipients and donors and a far greater openness and accountability than currently exists," the report concluded.