BY JOHN NORRIS | JULY 18, 2012
Rajiv Shah, President Barack Obama’s U.S. Agency for International Development administrator, is waging a high-stakes battle to make U.S. foreign aid programs less dependent on American for-profit contractors. At the same time, he’s aiming to roughly double the amount of assistance that flows directly to governments and local organizations in the developing world.
Shah’s initiative reflects Obama’s broader desire to clean up government contracting announced early in his term, as well as the thrust of a White House review of development policy and the State Department’s first-ever Quadrennial Diplomacy and Development Review. Although Shah’s plan hasn’t gotten much public attention, it represents a seismic shift in how American foreign aid programs are conducted and will require both wrenching institutional change and a very tough political battle if it is to become a reality.
Given the degree to which USAID works with contractors, some of Shah’s language has been delightfully undiplomatic. In a 2011 speech, he drew parallels between the agency’s reliance on for-profit firms and Eisenhower’s warnings about the emergence of a military-industrial complex. Saying that USAID was “no longer satisfied with writing big checks to big contractors and calling it development,” Shah argued that development firms were more interested in keeping themselves in business than seeing countries graduate from the need for aid. “There is always another high-priced consultant that must take another flight to attend another conference or lead another training,” he complained.
Shah’s fiery rhetoric quickly set off alarm bells among USAID’s many for-profit contractors, particularly since it came hot on the heels of the agency’s December 2010 decision to suspend a huge non-profit, the Academy for Educational Development, or AED, from receiving new government contracts because of abuses in two of its Pakistan projects and what USAID argued was “serious corporate misconduct, mismanagement and a lack of internal controls.” AED was one of USAID’s larger partners, managing about $500 million annually in grants and contracts, and the suspension led AED to go belly up just month later in the spring of 2011. AED insiders complained bitterly that USAID overreacted; USAID insiders countered that AED would have survived had it not tried to downplay and conceal the problems when they were first discovered. Eventually, AED paid $5 million to the U.S. government in a Justice Department settlement for the Pakistan projects in question.
A bit of history is important in explaining why the Obama administration remains convinced that too much foreign aid flows through firms around the Beltway. Much of the current struggle has its roots in a bitter battle between the Clinton administration and Senator Jesse Helms during the mid-1990s, during which Helms and his allies attempted to abolish USAID and fold its functions into the State Department. USAID managed to fend off Helms, but ended up weathering steep cuts to its operating expenses, which forced it to dramatically reduce staff size through layoffs and attrition. Even when funding for foreign aid rebounded after Sept. 11, USAID was a shell of its former self, having lost much of its staff and expertise in key development areas like agriculture. A 2003 Government Accountability Office report captured the dilemma: “Since 1992, the number of USAID U.S. direct hire staff declined by 37 percent, but the number of countries with USAID programs almost doubled, and, over the last two years, program funding increased by more than 50 percent.” In short, USAID had gone from being a development agency to being a large, poorly organized contracting agency. Incredible pressure to push money out the door in Afghanistan, Iraq, and Pakistan only exacerbated these trends.
Because USAID remains laden with bureaucratic restrictions, it also tends to rely on large umbrella contracts that favor a handful of well-connected Beltway firms. The 10 largest USAID contractors received more than $3.19 billion in 2011, and more than 27 percent of the agency’s overall funding was directed to American for-profit firms last year. To put this in perspective, if the for-profit contractor Chemonics were a country, it would have been the third-largest recipient of USAID funding in the world in 2011, behind only Afghanistan and Haiti.
Thus Shah’s push, under the rather benign title of “procurement reform,” to channel more funds directly to institutions in the developing world: governments, entrepreneurs, educational institutions, and NGOs. The theory behind relying more on local institutions is simple and compelling: If the goal of development is to build sustainable local capacity and ownership, why not have countries play a larger role in helping help themselves? Not only is this good development policy in countries where proper management controls are in place, it also has the potential to save American taxpayers a great deal of money.
U.S. contractors, looking at losing large amounts of revenue, were not about to take this lying down. The Professional Services Council (PSC), an umbrella group of government contracting firms, quickly hired lobbyists to push back against procurement reform and helped establish the Coalition of International Development Companies, an advocacy coalition of 50 contractors touting the role of “America’s most effective, efficient and innovative international development companies” in advancing the national interest. Perhaps it was a coincidence, but increased lobbying funded by the PSC directly preceded a sharply worded letter from the chairman of the House Committee on Oversight, Rep. Darrell Issa, to USAID questioning the wisdom of procurement reform. The letter hammered home one of the key arguments that contractors had been using against channeling more money directly to developing-country institutions: the threat of waste and corruption by foreigners.
That argument might be a little more persuasive if American for-profit contractors had not had their own problems in this regard. In 2010, Louis Berger Associates agreed to pay $69 million in penalties after the Justice Department found that it was intentionally overcharging taxpayers for its activities in Afghanistan. A 2009 Washington Post story revealed that managers at Chemonics encouraged employees in Afghanistan to deliberately downplay or ignore failing programs so as not to disrupt the flow of the grants.
The risk of waste, fraud, or abuse is a constant specter in American aid programs, but it should also be acknowledged that spending hundreds of millions of dollars on overhead for American firms is also a real cost, and doesn’t always contribute a great deal to lasting development. To its credit, USAID seems to be taking a rigorous approach to ensure that proper systems are in place in countries where it is pushing out more money through local channels, and it has been conducting audits of public financial systems in those cases where it wants to work directly through foreign governments.
USAID’s response to Issa highlighted a recent example from Senegal in its defense. In Senegal, the agency shifted from using American for-profit contactors to build schools and instead carried out the work through a partnership with the Senegalese government. Money for the schools was not disbursed until after a completed school was certified to have met agreed safety and quality standards. The cost difference was striking: It cost $425,000 per school through American contractors, but only $200,000 when built by the Senegalese government.
Things now stand at an uneasy crossroads. Contractors don’t like Shah’s new approach, but are nervous about too aggressively biting the hand that feeds them. USAID has committed to working with local institutions, but its spending totals in 2011 actually saw the proportion directed to American for-profits go up, not down. The agency has a huge amount of work to do if it still hopes to reach its target of 30 percent of its aid being channeled directly to governments and local organizations in the developing world by 2015. And Shah’s aggressive push for a new paradigm will likely wither on the vine if the White House flips come November. For-profit contractors have always had their strongest allies on the Republican side of the fence.