America’s Foreign Aid Is Shackled by Budgetary Obligations

Last month, U.S. Agency for International Development (USAID) administrator Samantha Power appeared before Congress four times in support of the Biden administration’s proposed $29 billion request for global development programs—up 10 percent from the year prior.

Given the war in Ukraine and a growing global food crisis, the hearings largely focused on what USAID planned to spend its money on. But as Congress considers the administration’s budget request, it should also examine how the agency spends its money. The Center for Global Development’s Scott Morris and Charles Kenny described a few weeks ago just how little foreign aid funding ever leaves what they called the “Washington bubble.” This has to change if the United States wants to play a meaningful role to address the effects of a rapidly warming climate or to achieve by 2030 any of the 17 Sustainable Development Goals that it and 192 other countries set to improve food insecurity, health, and other global challenges.

Power understands this problem. In a speech last fall, Power outlined a bold “new vision” for U.S. foreign aid that included a pledge to direct more resources to local organizations based in low-income countries. But she also added, the “status quo … is tough to shift.” Indeed, agency administrators before her—from both parties—had also pledged to diversify USAID’s partner base with mixed results. Between 2020 and 2021, amid massive upheaval abroad and at home, USAID directed less money to organizations in low-income countries than the year before. If Power is going to be successful on this go-around, Congress needs to assist.

Congress can start by giving USAID what’s known as a longer “period of availability” to spend—or “obligate” in government speak—its annual appropriation. Every year, as a result of drawn-out appropriations and executive review processes, USAID’s officers get just a few months to obligate their annual multibillion-dollar budget. Since money not obligated must be returned to the U.S. Treasury, USAID staff have big incentives to lock up cash as quickly as possible. The fastest way to do this is to write a supersized award to a known contractor or grantee. Last fiscal year, 10 organizations—all U.S. based—won more than half of the total value of all of USAID’s contracts.

Extending the period of time that USAID has to obligate funding would enable agency staff to design more targeted, fit-for-purpose awards. This would also speed up USAID’s ability to work with newer partners because the agency would have more cash on hand for longer periods of time, so it could deploy funds when they are needed without waiting for Congress to pass the next spending bill.

Congress already gives other U.S. development agencies longer periods of availability, including the International Development Finance Corporation, the Millennium Challenge Corporation, the President’s Emergency Plan for AIDS Relief, and USAID’s humanitarian programs. Why not USAID’s core development programs too?

Congress also needs to address the issue of directives. Every year, USAID missions create two internal budgets—one based on what Congress appropriates and the other based on a data-driven assessment of countries’ actual needs. There are always mismatches.

Most constraining are regional directives and so-called country top-lines, minimum amounts of money that USAID is legally required to spend in a long and growing list of countries, which often include sub-directives that specify spending on particular areas. In the budget for the 2022 fiscal year, Congress directed USAID to spend $2 million for democracy programs in Gambia and an additional $2 million in economic support funding for the Maldives, for example. Although directives often started with a good rationale, and many of them are still defensible, there are now dozens of them. Add them up and by the time the agency gets its budget, more than 96 percent of it is spoken for. This can create distortions as well as problems responding to unexpected catastrophe: Heaps of funding can be available to address one problem in a country where the greatest need is in another. Directives also slow down USAID since changes to directed programs require congressional notification, often triggering long project delays.

Lawmakers have addressed this issue in recent budgets by giving USAID flexibility to deviate by as much as 10 percent from some sector-specific directives, such as the one to spend at least $250 million on higher education projects. This makes a big difference because it frees up hundreds of millions of dollars that USAID can repurpose as countries’ needs evolve.

This year, Congress should allow USAID to deviate from other directives where funding remains inflexible or increase the 10 percent threshold to 20 percent or more, as Brookings Institution’s George Ingram proposed. In parallel, to ensure money gets to where it is needed most, Congress should also require USAID to publish its two internal budgets and publicly report how much money arrived in the countries that USAID supports, which contractors and subcontractors received what money, what progress was made toward achieving what objectives, and where there were still funding gaps. Congress should also require that every grant document and contract be made public, along with amendments, extensions, and progress reports.

Finally, Congress should use this budget to demand greater impact from USAID—something Power wants too, as she recently told the international development contracting community in a speech entitled “Progress, Not Programs.” Congress can help by requiring that a greater share of USAID awards pay for results rather than effort. Last fiscal year, just 1.3 percent of agency grants used milestone-based contracting models that paid against the delivery of objectives achieved. Aside from direct transfers to international organizations, the rest of USAID’s grants and most of its contracts paid for “best efforts,” so contractors and grantees got paid even if they failed to deliver.

Congress should also double down on scaling programs that work. Take initiatives supported by USAID’s Development Innovation Ventures (DIV) unit. DIV uses tiered-funding models and rigorously evaluates every program it funds, so as DIV-supported initiatives show evidence of impact, they’re eligible to receive more money. This is one reason why the DIV unit delivers a $17 social return for every $1 it invests. However, given DIV’s small appropriation—less than 0.1 percent of USAID’s total budget every year—the unit must rely on other USAID bureaus with beefier budgets to scale up successful programs, but this rarely happens.

To solve this, like Congress did for other federal agencies when it created the Small Business Innovation Research program, lawmakers should mandate that a set percent of USAID’s funding must scale programs that can show evidence of impact. This can include initiatives that have graduated to DIV’s “Stage 3: Transition to Scale” category.

But since so much of the highest-impact work in global development is often funded by other global development funders, Congress should additionally instruct USAID to pursue reciprocity agreements with other major donors under which the agency could accept the results of their impact evaluations, vetting, and then fund or co-finance awards to their partners that are producing the best results. Many of these organizations have been incubated and evaluated by high-impact investors like the Global Innovation Fund or they thrive in the private sector, reaching many millions of people every day. Their business models might not need USAID, but USAID needs them.

As global challenges become increasingly complex and intertwined, USAID’s mission could not be more vital. But meeting this moment will require a rapid move away from business as usual in favor of new models. The quality of U.S. foreign aid is ranked 35th in the world, putting it in the bottom third of all donors worldwide. Power was right when she said the status quo is tough to shift, but she also added, “We have got to try.”