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.
Top 10 USAID Contractors for FY 2011
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.
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