Four Ways USAID Must Reform its Procurement Practices; the Tip of the Iceberg

On May 5 and 7, 2014, The Washington Post published two articles about leading USAID contractor International Relief and Development (IRD) that capture the dysfunctional character of how the U.S. government (USG) implements international development policy through outside contractors. The Post pieces highlight three big problems within America’s development apparatus: the ‘revolving door’ of personnel between customer and vendor; the blurring of lines between non-profit and for-profit contractors; and failure of the executive branch to oversee and discipline contractors.

After receiving nearly $2 billion in grants from the agency in the 16 years since its founding, IRD now finds its relationship with USAID under scrutiny after reports of misspent funds and poor oversight. Further, as the Post reported on May 7, auditors from both USAID and the Special Investigator for Afghanistan Reconstruction (SIGAR) are examining spending and oversight practices related to IRD’s work in Afghanistan. The issues raised in the Post stories should disturb anyone concerned about how U.S. development policy is currently implemented. Procurement and contracting problems are the elephant in the room. The US Government is by orders of magnitude the largest buyer of goods and services in the economy (almost three quarters of a trillion dollars spent this year alone).  The way these dollars are spent MUST be reformed. Based on my time at the US Department of State and working with USAID contractors during my tenure as Senior Advisor for Entrepreneurship I learned these issues are the tip of the iceberg.

In the run-up to the Iraq war, critics of the invasion often argued that if the biggest U.S. foreign policy tool is a hammer (that is, U.S. military might) then all its foreign policy challenges “become nails.” While this may be true, the hammer analogy can also be extended to an increasingly failing U.S. procurement and contracting process where the growing amount of implementation of USG programs is carried out by decreasingly effective contractors. In other words, we’re now using a rubber hammer. The good news, I believe, is that our development policy “hammer” is fixable.

The story of IRD is one of an organization that was created to address development issues, but which quickly morphed into a contract-bidding-and-winning machine (as the Post authors describe)– not worried about its ability to execute the business it won.  This is a pervasive problem and one that must be fixed.  The IRD story is a useful microcosm of the broader problem. 

Personnel

From its creation in 1998 IRD won ever-larger contracts from USAID and, as it grew, the Post articles describe how it appeared to lure away USAID senior staffers by offering higher salaries (not hard to do, given government pay scales). This hollowing out of subject matter experts from federal agencies to private contractors is a pattern that has hindered the capacity of government to function effectively. There are some things ONLY government can do.   Contractors should be the primary implementers of U.S. development policy but government agencies ought not to fully outsource the creation and oversight of that policy. Good policy needs to be sustained by core competency within government, and that requires stemming the “bleeding out” of that expertise to the private sector.  

Non-Profits That Act Like For-Profits

The line separating non-profit and for-profit firms has blurred. The Post’s analysis reveals an IRD bonus system that looks a lot more like an investment bank than a non-profit. Thirty eight IRD employees received $3.4 million in bonuses between 2008 and 2012 – an average of nearly $90,000 per employee, with IRD’s executives leading the pack. IRD even defends its bonus system in language you would expect from a Wall Street firm: bonuses ensure compensation is ‘performance based’; the bonus structure attracts the best talent; and it is in keeping with practices of other contracting firms. I am not arguing for the relative merits of for-profit vs. not-for-profit firms. However, the government taxes and regulates for-profits differently than not-for-profits because of the assumption that it will encourage a “social benefit.”Many not-for-profits in the development space really do behave as not-for-profits, including in their compensation structures.  The Post article names Catholic Relief Services as among the development non-profits without a Wall Street-like bonus structure. Firms should pay for talent, and the bonus numbers in the IRD story pale in comparison to actual investment banks. Still, the trend is a distressing indicator of how the spending practices of development contractors are straying from their intended purpose and blurring the line between traditional business and those with an alleged social benefit, and thus entitled to tax and other benefits.  

Supervision

Perhaps the most disturbing line in the Post articles was this: “In Baghdad and Kabul, companies such as IRD were left to manage hundreds of millions of dollars’ worth of taxpayer-funded programs with little meaningful oversight from USAID.” Simply put, this would never happen in the private sector. Successful companies would never allow multi-million dollar projects to be overseen by underpaid or undertrained staff, or to receive little oversight at all. I can say from direct experience that this is common practice within the U.S. State Department and USAID project work, and it is perhaps the most distressing example of how government must be made to function with efficiency and practices more closely resembling the private sector.

Leveraging New Technologies

New technologies can improve the range of activities and utility of development non-profits.  For example financial inclusion platforms have the potential to extend a range of services to people in the developing world.  Mobile banking can help people borrow money, establish credit histories, and make commerce easier.  These technologies are working today in numerous countries and development organizations could play in important role in accelerating their adoption.

We should “fix the hammer” of development policy. My work is specific to the development of entrepreneurship in emerging countries with the myriad benefits this provides: job creation, economic stabilization, reconstruction after dislocation, emphasis on education, opportunity creation for those not born to privilege or access to the economic ladder, etc. In the work I did creating and running the Global Entrepreneurship Program (GEP), which was focused in large part on helping bolster the successful transition to free market, democratic societies in the Arab World (Egypt, Tunisia, Libya, maybe one day Syria), we were stymied in executing a perfectly good policy but poor implementation, in large measure, arising from the “broken hammer” of the USAID procurement and contracting system.  If we fix the hammer, I believe that for a tiny fraction of the money we currently spend on military aid and large-scale contracting projects, we could have truly effective economic development programs. Programs that provide currently active and future entrepreneurs with mentoring, access to finance, and management expertise would pay dividends in sorely needed future job creation for pennies on our current aid dollar. Entrepreneurship is, in my view, the best way to “fix the hammer” of our development policy.