Case study: U.S. foreign aid
Few federal agencies are as reliant on a palmful of government contractors and intermediary actors as the U.S. Agency for International Development (USAID). Annually, Congress sets aside approximately $60 billion for U.S. international affairs spending, directing a substantial share of those investments for global development priorities. Congress determines how much funding should go to which sector, with approximately $10 billion for global health, $8.5 billion for humanitarian work, $2.9 billion for democracy, $1.2 billion for basic education, and $475 million for water projects, for example, in addition to set-asides for many other accounts, such as funds for environmental programs, trafficking in persons programs, and more. These figures and the analysis that follows does not count military aid or “supplemental funding” packages approved by Congress for shorter-term and emergency needs.
USAID manages or partially manages most of this funding — approximately $30 billion every year — with the rest divided up among other U.S. federal agencies like the State Department, Centers for Disease Control, U.S. Department of Agriculture, U.S. International Development Finance Corporation, and the U.S. Millennium Challenge Corporation, among others. The U.S. also makes contributions to multilateral institutions and international organizations that are part of the United Nations system.
Foreign aid dollars are propping up the aid industrial complex
The open secret in Washington, DC is that too little of American foreign aid ever leaves America’s capital city. As a Foreign Policy headline summed it up in 2022, “Biden’s Foreign Aid Is Funding the Washington Bubble.”
According to a June 2023 report, nearly nine out of every ten dollars that USAID spent in the 2022 fiscal year went to its international contracting partners, most of which are based in or around the Washington, DC area. Just one out of ten went to directly to frontline, local groups, and maybe even less than that. USAID measures less than half of its total spending to evaluate how much funding flows to local partners, using a denominator that skews overall performance reporting, according to Oxfam and Publish What You Fund.
(and maybe even less than that)
The aid industry is highly consolidated, too. As of 2017, 60 percent of all USAID funding went to just 25 groups. In 2022, according to Devex, just 10 contractors won more than 50 percent of every USAID contract dollar.
Note: USAID spends money primarily in two ways: grants and contracts. In its public reporting, USAID commingles grants to international organizations with grants to other recipients. It also reports grants information separately from contracts, so it’s hard to tell the overall percent of funding that flows to which prime implementing partner. USAID also just reports who their biggest contractors and grant recipients are, not how much they receive.
There’s not much “foreign” in foreign aid
The “industrial aid complex,” as USAID chief Samantha Power calls them, argues that statistics that show funding concentrated in the hands of a few create the wrong impression. The contractor’s principal role is to project manage and serve as a trusted intermediary to get the funding to the community-level organizations who will do the work. Smaller groups are often unfamiliar with USAID’s byzantine rules and regulations and need back-office help from a USAID contractor who knows the ins and outs. Working through the contractors, the funding does reach their intended foreign destinations, they say.
However, researchers at the University of Washington call America’s foreign aid “phantom aid” because the U.S. government’s U.S.-based “implementing partners” retain most of the money, including to pay for salaries or overhead or to administer programs. According to their review of a typical health award, for example, typically 15-30% pays for the contracted organization’s overhead costs (sometimes more), another ~25% pays for their headquarters staff, and another ~25% for their staff to live in aid receiving countries to manage local partners. This leaves the difference actual program delivery, often divided up among scores of organizations that must compete for small amounts of funding. Contractors’ staff salaries typically greatly exceed local salaries, too, sometimes by 10X, which can distort local economies and create brain drain.
Meanwhile, smaller organizations that are on the front lines of providing direct service delivery typically can’t compete directly for USAID funding, so they must subcontract with one of USAID’s big “prime” contracting partners. Once they do, they’re often surprised by how little the prime contractor is willing to pay them. This is because there are usually dozens, sometimes hundreds, of sub-partners on a typical project.
According to a Center for Global Development report that examined five years worth of USAID spending data, from 2017-2021, U.S.-based aid contractors distributed approximately just 14 percent of what they made those years to local, frontline organizations. Another analysis, by Devex, shows that USAID’s contractors retained more than 82 cents of every contract dollar they made in 2022, subcontracting approximately just over 17 percent of the total value of their contracts to other organizations (local or otherwise). This figure is also likely inflated because it includes instances when contractors just subcontracted to their own affiliates. For example, one U.S.-based contractor’s top subcontracting partner was their South African affiliate, according to Devex.
Note: Devex’s report notes there are significant data gaps. Prime contractors often submit duplicate reports, for example. However, after accounting for these issues, Devex estimate that prime contractors subcontracted “a little over $1 billion” out of the approximately $5.9 billion in the total contracts they won in the 2022 fiscal year.
Aid industry practices break trust with local partners and does long-lasting damage
USAID’s biggest contractors often advertise in their proposals that they will work with local organizations in order to win large USAID grants and contracts, only to later renege on those promises, creating a corrosive effect on the very communities these contractors are paid to support.
According to USAID’s own reports, “international partners undermine USAID’s localization agenda by registering themselves locally and citing local partners in proposals to which they ultimately do not allocate funds during implementation.” When USAID needs to make budget adjustments or cut funding from a project, contractors often cut funding from local organizations before taking a haircut themselves.
In 2024, Unlock Aid released its inaugural Glassdoor for Primes report, surveying the business practices of the 26 largest for-profit aid contractors, international nonprofits, and UN agencies in global development.
Click here to read the report and learn more insights about industry trends.
The aid industry is not delivering results
Note: USAID only reports the volume and share of grants it issues as pay-for-results, fixed-amount awards. It does not report the volume or share of contracts that use pay-for-results, fixed-price models. As a result, it is impossible to determine the overall share and volume of funding that USAID disburses each year using pay-for-results, fixed-price models.
Data gaps make it hard to assess the full scale of these challenges
USAID does not make enough of its data publicly available.
While some analyses indicate that USAID could surface at least 32 percent cost savings by cutting out expensive international contractor middlemen and directing more funding to local groups, we can’t know for sure how much savings we could realize because USAID does not make more of its spending data public – and it has also resisted calls from Congress to do so:
- USAID says it is making progress towards diversifying federal funding to local groups and other organizations, but it is impossible to replicate their claims because the agency does not make more of its underlying spending data public, as Oxfam and Publish What You Fund point out.
- Many of USAID’s largest contractors are not in compliance with federal transparency laws. Last April, for example, USAID sent a notice to its prime contractors noting that the agency had “identified a number of cases of missing data or other inaccuracies with the data reported by prime contractors.”
- The public cannot see what percentage of foreign aid funding that contractors retain in Washington, DC, compared to funding for site-level program delivery, so it’s hard to assess just how much foreign aid funding is lost to contractors’ overhead, headquarter salaries, and other expenses. Studies that have looked at this question have only been able to do so by obtaining budget and spending data through informal channels.
- The public cannot see what results a contractor delivered, or was supposed to deliver for a given project. This is partly because USAID does not require contractors to report results in a standardized way. It is also because contractors only haphazardly upload information into the agency’s Development Experience Clearinghouse transparency portal. Further, when impact and results information is reported, it is usually poor quality. According to a report published by the Wilson Center, “roughly half of impact evaluations between 2012-2019 did not meet USAID’s own definition of an “impact evaluation,” and only three percent of impact evaluations met the highest standards of quality.”
- The public cannot see what funding commitments aid contractors make to smaller groups in order to win large grants and contracts – compared to their actual disbursements.
- USAID acknowledges it often funds projects that countries do not want, but it says the agency is compelled to do this because of Congressional requirements. However, as this Wilson Center report notes, “there has been little quantified evidence to show the scale and scope of the problem, nor an ability to show a credible alternative.” USAID could produce an analysis to show the divergence between what countries need compared to what Congress directs.
Sunlight and accountability for results needed
In John Steinbeck’s Grapes of Wrath, when representatives of the landowning bank come to kick the sharecropping Joads off their ancestral plot, they explain that no individual bank employee would ever personally make the same decisions that the bank makes as an institution. We’ve been stuck in a Grapes of Wrath moment for a long time when it comes to global development. We know that most of the people who work at government agencies, for-profit contractors, and big international nonprofits got into this work to serve a higher mission. But they’re stuck in a broken system.
There’s a lot we need to do to change the way our U.S. global development system works – especially to get more resources directly to the organizations on the front lines of solving the world’s hardest problems. As a first step, we need more sunlight to understand the scope of the challenges ahead. We also need to create more accountability for results. In the context of U.S. foreign aid, the Biden-Harris Administration should do the following:
- 1. For large awards that reimburse contractors for time and activities, e.g. $50 million or more, put more sunlight on end-to-end funding flows by requiring disclosures that enable the public see how much money went to pay for contractors’ total spending according to different buckets: a) at headquarters, including for overhead; b) at the site-level, including for contractors’ salaries, international housing, and global moving expenses; and c) sub-awards to local partners and other groups involved with direct service delivery.2. To create a culture of accountability, require contractors to publish what they proposed they would sub-award to smaller partners and local communities subsequent to winning a large USAID grant or contract – and then publish their actual disbursements side-by-side. If there are good reasons for needing to make changes to proposed funding allocations midway through, publish that, too.
3. Impose penalties on contractors that break their funding commitments to local communities and smaller partners, or that fail to comply with their existing federal transparency reporting requirements, with escalating penalties commensurate with the severity and willfulness of noncompliance.4. To hasten the transition to pay for results, develop a set of standardized results indicators and begin to pay against them, especially in sectors like health, power, and food security where it is relatively easy to measure outcomes. USAID doesn’t need to recreate the wheel, either. The Sustainable Development Goals provide one such results framework. Scores of impact investors and socially-responsible companies have created many others. Making this shift would also enable USAID to more effectively crowd-in additional capital for global development priorities by attracting co-investment from philanthropic funders and impact investors who want to pay for results.5. Require contractors to upload data into standardized reporting systems used by other funders, such as the International Aid Transparency Initiative (IATI) system. This would enable governments, bilateral and multilateral aid donors, investors, and philanthropy to better coordinate and co-invest, streamline data reporting, and prevent donors from double counting or misattributing the impact of their investments. Contractors infrequently upload data into IATI.
6. Conduct and publish a Voluntary National Review (VNR) to evaluate the United States’ own progress towards achieving the Sustainable Development Goals. The United States is just one of five countries that does not conduct an annual VNR, joining Haiti, Myanmar, South Sudan, and Yemen.
7. Conduct a needs assessment to identify the divergences between what Congress and USAID provides funding for and what countries and communities say they need. Set targets for every USAID overseas mission and Washington, DC bureau to increase the share and volume of awards that go to local organizations, non-traditional partners, and via models that pay for results. Publish baseline data to show current funding levels to different categories of groups alongside targets for next year.
Only sunlight can show us the way forward.
To
progress,
