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USAID’s Big Contracts Don’t Pay Off

American foreign aid needs to go to smaller, smarter deals.

By , a consultant at Starling Strategy and a former U.S. diplomat, multilateral bank advisor, and technology entrepreneur, and , a consultant at Starling Strategy and student at Stanford University.
Samantha Power is sworn in as administrator of the U.S. Agency for International Development with her husband, Cass Sunstein, at the White House on May 3.
Samantha Power is sworn in as administrator of the U.S. Agency for International Development with her husband, Cass Sunstein, at the White House on May 3. Drew Angerer/Getty Images

President Joe Biden has proposed a $6.8 billion increase in U.S. international affairs spending, including a 10 percent funding boost for the State Department and the U.S. Agency for International Development, the government department that manages over half of U.S. foreign assistance. Recently confirmed USAID head Samantha Power has a strong vision for the agency’s future, potentially backed by more money. But if the administration wants a real return on this investment, USAID needs to transform its business model, which consistently pays for poor performance, according to its own inspector general. A 2019 report that surveyed three years of USAID spending found that 43 percent of the agency’s awards achieved, on average, just half of their intended results.

USAID spends so inefficiently because every year the agency needs to move more than $20 billion to projects worldwide. It has become dependent on funneling hundreds of millions, sometimes billions, of dollars to mammoth government contractors. In fiscal year 2017, for instance, 60 percent of agency funding went to just 25 organizations.

To right the ship, USAID needs a procurement renaissance. It must break its dependence on large and inefficient government contractors, increase its use of pay-for-results programs, and scale up initiatives that make it easier for small and medium-sized enterprises and organizations based in low- and middle-income countries to do business with the world’s largest development agency. Smaller organizations are far nimbler than juggernaut contractors. And local organizations have intimate familiarity with the issues that need solving and have a more direct stake in producing good outcomes.

But it should come as no surprise that large contractors have blocked reforms and created spinoff small businesses and local organizations to win USAID contract awards that are designed to enable a wider selection of organizations to compete. And while the big guys often entice local firms and smaller organizations to join their proposals as “bid candy” to win over USAID contracting officers, according to a forthcoming survey we conducted of more than 35 innovative small organizations that work in international development, more than two-thirds of them said that large contractors routinely cut them out of promised work after they win the awards.

USAID needs a procurement renaissance.

More transparency could ensure that local organizations and small and medium-sized enterprises are properly used. USAID can require that the winners of large government contracts publicly report both the percentage of the awards promised to smaller organizations and what was actually disbursed. USAID does not systematically track how large contractors work with their sub-awardees, but if you don’t measure it, you can’t manage it.

Disbursing contracts through organizations that can function as fiscal agents such as large philanthropic foundations could also vastly increase the number of organizations that are smaller or are based in lower-income countries that could be tapped to work with USAID. Such foundations have no financial interest in doing the work themselves but have the systems in place to absorb large sums of money and can subcontract to those best equipped to do the job.

USAID also needs to change how it structures awards. The agency relies almost exclusively on “cost reimbursable” methods that pay largely by number of hours worked (a “butts in seats” model). This incentivizes large contractors to drag out projects, put a lot of their own staff on them, and often reinvent the wheel—or the software program. They’re also virtually consequence-free if a project goes south. According to an Inspector General audit of 35 awards made between 2014-2016 where the contractors failed to deliver intended results, USAID still paid an average of 97 percent of each award’s total value. In one case, USAID paid a contractor 103.9 percent of an award’s projected value for delivering just 14.3 percent of the project’s intended results.

Instead, the agency should increase its use of fixed firm price awards that pay on the basis of milestones reached and are far less cumbersome for small organizations to comply with because they don’t require the customary bean-counting reporting requirements. Many U.S. government agencies such as the Department of Defense, as well as large foundations, routinely use fixed firm price awards or use hybrid models of cost-reimbursable and fixed-price methods to incentivize good performance. But of the $11.5 billion that USAID allocated for assistance during the 2019 fiscal year, just $58 million was allocated using the fixed firm price framework.

Finally, USAID needs to make it easier for smaller organizations and those based in aid-receiving countries to work directly with the agency. Our survey found that 80 percent of the small and medium-sized enterprises that work with USAID decide to “often” or “sometimes” forgo good-fit business opportunities with the agency. More than one-third of the firms surveyed have decided to avoid USAID completely, preferring to work with more nimble philanthropic foundations.

USAID knows this and has experimented with different models to cut down the obstacles to working with the agency, including to reduce the mountains of paperwork to apply for its awards and to remove the big contractors as the agency’s gatekeepers.

For example, under former USAID Administrator Rajiv Shah, then-Chief Innovation Officer Maura O’Neill co-created the Development Innovation Ventures program. When it was first established, the program’s proposal process accepted basic concept notes, USAID responded to them within three weeks of receipt, and it funded projects within six weeks.

Similarly, the Saving Lives at Birth program, also set up under Shah (and co-financed by other organizations including the Gates Foundation and Grand Challenges Canada), set out to partner with innovative organizations that had never worked with USAID before. It offered smaller awards, up to single-digit millions of dollars, so that smaller and local organizations could manage them without going through bigger firms. Both programs also tended to pay on the basis of milestones reached.

USAID’s newly confirmed head has an opportunity.

USAID also recently introduced the New Partnerships Initiative, set up during the Trump administration under former Administrator Mark Green. Since 2019, it has awarded approximately $400 million in funding for what the agency identifies as “new and underutilized” partners, including organizations that have received less than $25 million from USAID within the last five years. Under the New Partnerships Initiative, organizations that are smaller or based in lower-income countries can also receive funds to build the financial management and other systems needed to administer larger USAID awards in the future.

But while USAID has announced ambitious plans to change the way that it does business, many of these organizations are skeptical, because they’ve heard this song before. Programs like Development Innovation Ventures, Saving Lives at Birth, and the New Partnerships Initiative are the exceptions at the agency, not the norm. And USAID tends to revert to its old bad habits. In January, the agency’s President’s Malaria Initiative announced $30 million for the use of data for malaria control and elimination in Africa, but not a single African entity was included as one of the US-based contractor’s seven major sub-partners. USAID has also disbursed many of its New Partnerships Initiative awards via its large legacy contractors, putting the big companies back in charge of deciding when, where, and how much smaller organizations can receive.

Here, USAID’s newly confirmed head has an opportunity. Large and bureaucratic organizations tend to incentivize officials to favor compliance over performance. USAID already has many of the authorities and tools it needs to improve. But a sea change will only happen if its leaders insist that it chart a new path and accept the risks that come with it.

USAID’s goals become more and more difficult to achieve as growing climate change wreaks more havoc, increasing numbers of migrants arrive at America’s borders, democratic states backslide, and global health risks increasingly threaten Americans at home. To truly implement the kind of change the Biden administration has signaled it demands, Power will need to give significant attention not just to what USAID spends its money on, but how it spends it.

Walter Kerr is a consultant at Starling Strategy and a former U.S. diplomat, multilateral bank advisor, and technology entrepreneur.

Maya Guzdar is a consultant at Starling Strategy and student at Stanford University. She previously worked at National Security Action and with the nonprofit sector in Estonia and China.