A growing share of aid is spent by private firms, not charities
“THE gold rush is on!” That is how a cable from the American ambassador to Haiti described the descent of foreign firms upon Port-Au-Prince in early 2010. An earthquake had flattened the city and killed hundreds of thousands. This becomes a bonanza for charity services and corporate aid offered by private firms.
A deluge of aid presented an opportunity. The message, released by WikiLeaks, noted that AshBritt, a Florida-based disaster-recovery firm, was trying to sell a scheme to restore government buildings, and that other firms were also pitching proposals in a “veritable free-for-all”.
During the following two years $6 billion in aid flooded into a country of 10 million people, for everything from rebuilding homes to supporting pro-American political parties. Of $500 million or so in aid contracts from the American agency for international development (USAID), roughly 70% passed through the hands of private companies.
Haiti is one example of a trend of non-profit foundations, where aid is funneled through consultancies and other private-sector contractors that profit from the work. Nearly a quarter of USAID spending in 2016 went to for-profit firms, a share that was two-thirds higher than in 2008.
Think-tanks are still trying to work out where all the Haitian disaster-relief funding ended up. Private-sector involvement can further obscure the picture, because the winners of bids may use a host of subcontractors, or insist that some information is kept confidential for commercial reasons.
Even as aid budgets have grown, governments have sought to make aid departments smaller and more nimble. USAID have around the same number of employees now as they did when their budgets were just half as large in real terms. As aid agencies struggle to manage contracts, they have turned to the private sector.
Typically, firms win aid contracts at auction, rather than receiving grants, as charities do. Some have become global players. Chemonics, an American firm founded in 1975, is active in 70 countries. In 2015 it won a contract for health-care services with USAID worth up to $10.5 billion over eight years.
Together with the high cost of preparing bids—as much as $100,000—this has led to market concentration. Only large bidders can stomach the risks. A smaller firm’s best chance to pick up some of this work is to join a consortium led by a larger firm.
Private firms do seem to pay higher salaries than charities to their top executives. The bosses of the private firms earn on average more than $500,000 a year—more than twice as much as their non-profit peers. The total personnel costs proposed by non-profit firms were on average just two-fifths those proposed by private firms. What is more, the contracts won by for-profit outfits were more likely to bust their budgets and miss deadlines.
One reason for the shift towards the private sector is the changing nature of aid. A smaller share now is made up of traditional projects, such as building schools or handing out food parcels, and more is “technical assistance”, for example to streamline a country’s tax code and strengthen tax collection, or to set up an insurance scheme to help farmers when crops fail. Private firms may be best-placed to advise on, or even run, these schemes.
What is known, though, is that for-profit and non-profit groups work differently. A non-profit body typically has large bureaus in the countries where it works, or forms long-standing partnerships with local charities that do. It will consider whether a proposed project fits with its charitable purpose, and whether it has suitable in-house expertise; only then will it decide whether to bid. Firms, by contrast, tend to have fewer staff, and to rely on subcontractors and freelance experts who can be flown in for as long as a project lasts. This model means that firms may be less likely to understand local cultures, build relationships with governments and monitor long-term results. But it can also be more flexible, with firms matching expertise and staffing to each contract.
One estimate puts the total value to firms of such “aid-like” work in developing countries at around $20 billion a year, a figure that is expected to rise. Having built their businesses on contracts with Western governments, private aid firms may need to diversify if they are to continue to thrive.
To shed light on the shift towards private-sector aid delivery, The Economist has analyzed 4,500 subcontracts from USAID worth more than $25,000 each. (All were granted since 2010. Those for which data were not available were excluded.) A third went to for-profit firms, and the rest to charities, NGOs or other governments. For contracts where a firm was the primary contractor, on average 41% of subcontracts went to other firms.
How to be the Change
- One way to keep going during leaner times is to bid not only for contracts, but for grants—that is, to do some aid work at cost, without making a profit from it.
- Another opportunity is to work directly for the governments of countries that have long been aid recipients. Some have started to fund programs similar to those paid for by donors, such as improving the way their health-care systems are administered.
- A third option is to expand into the fledgling “corporate-aid” sector. This strand of development work involves multinationals building capacity in poor countries, not principally for philanthropic reasons, but to benefit their businesses. Starbucks, for instance, is training coffee farmers in Rwanda and Ethiopia.
- Private aid contractors may be well placed to act as consultants to firms keen on such projects, or as brokers between them and local partners.
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