U.S. global development spending

Dear Reader,

Every year, the U.S. government spends $2 trillion dollars in grants and contracts to build bridges and roads, provide services to veterans, help children, stave off public health emergencies, and provide the public with other vital services.

But over the past six decades, a number of U.S. federal agencies have become beholden to a small cadre of expensive contractors and consulting companies to do this work, building empires around winning government contracts. While a cottage industry makes billions of dollars every year, not enough public resources reach their intended recipients at the community level.

President Eisenhower once warned of the inevitable rise of the “military industrial complex,” but in the years since the 1960s, other government agency “industrial complexes” have emerged.

How did we get here? Death by a thousand cuts.

Excessive red tape and regulations make the process to apply for federal funding so onerous that only insiders need apply. The hollowing out of government agencies has created dependencies on expensive contractors. Business cultures that favor the status quo over trying new approaches dissuade non-traditional partners from even trying to work with the government in the first place. Lobbying and the revolving door between these companies and the agencies that fund them exacerbate these issues. Once a major driver of innovation, the U.S. government too often squashes it by favoring the insider class of “Beltway Bandit” consultants.

Meanwhile, many communities cannot access the very resources that were created for them. In August, The Guardian reported that the U.S. government’s Inflation Reduction Act created $60 billion for environmental justice investments, but “many of the small, community-based organizations that would benefit from funding the most … simply don’t have the time or resources to navigate the complicated bureaucratic process of applying for funding.”

These issues are taking a toll on Americans’ faith in their government to deliver results. The debacle is perhaps one of the most well known examples of massive failure brought to you by the Beltway Bandits. But stories like this are increasingly the norm.

It's not enough for lawmakers to reduce discussions about the management of our public resources every year to tired and familiar debates about how much the U.S. should be spending on what priorities. The U.S. needs to be just as focused on who is making those decisions and to whom and to what ends those resources flow.

Case study: U.S. foreign aid

Few federal agencies are as dependent on a palmful of government contractors 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 very 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.”

Most foreign aid dollars go to insiders. 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 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.
Just 1 out of 10 dollars goes to frontline, local organizations
(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.

In 2023, over 50% of USAID contract dollars spent went to just one of ten contractors. In 2017, approximately 60% went to just 25 organizations.

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 aid industry keeps most of the money for itself

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.

Data show otherwise. Researchers at the University of Washington call America’s foreign aid “phantom aid” because the U.S. government's U.S.-based "implementing partners" keep most of the money for themselves. 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 just 10-30% for actual program delivery, often divided up among scores of organizations that must compete for scraps of funding. Contractors’ staff salaries typically greatly exceed local salaries, too, sometimes by 10X, distorting local economies and creating brain drain.

Report: America’s "phantom" foreign aid
chart reproduced using data from University of Washington

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 dumbfounded 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, and the contractor typically plans on keeping 60-85% of the total award value for themselves.

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 kept more than 82 cents of every contract dollar they made in 2022 for themselves, 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.

Analysis: USAID contractors kept .82 cents of every $1 for themselves in 2022
Another analysis, by Devex, shows that USAID’s contractors kept more than 82 cents of every contract dollar they made in 2022 for themselves

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.
In 2021, more than 73 percent of local organizations and smaller firms surveyed told us that big contractors “always” or “often” subcontracted or sub-awarded less money than they initially promised, often costing those smaller outfits significant sums in lost revenue.

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.

The aid industry is not delivering results

USAID's largest partners also frequently fail to deliver results but still get paid in full. A five-year review of USAID's spending by the agency's own inspector general found that USAID’s contractors failed to deliver intended results in nearly half of the projects they managed, yet they still got paid in full nearly 100 percent of the time, sometimes more.

USAID creates perverse incentives that enable this. Since USAID structures the vast majority of its grants and contracts to reimburse for activities, time, and materials, contractors can make more money by assigning their own people to projects to drive up billable hours – and without needing to deliver results. In FY23, USAID structured just 2.1 percent of its grants using pay-for-results models that pay an organization against the achievement of a desired result, for example.

In 2023, USAID structured just 2.1% of grant funds to pay for results
2.1 percent of all USAID’s grants  in FY22 use the pay-for-results models that pay an organization against the achievement of a desired result

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 claims 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 kept for themselves 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, such as flying personnel around the world and shipping their goods globally. 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:
We have a long way to go to rebuild our global development agencies, and all public institutions, to deliver results, break monopolies in government contracting, and democratize access to public funding. But to understand where we need to go will require a better understanding of where we are today.
Only sunlight can show us the way forward.
One year ago, we joined more than 100 other organizations and coalitions that collectively represent more than 15,000 organizations around the world to call on USAID to make more of USAID’s data publicly available. We’re still waiting.



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