50 Years in Development: How Private Companies Adapt & Deliver

50 Years in Development: How Private Companies Adapt & Deliver Tony Barclay Former CEO DAI

50 Years in Development: How Private Companies Adapt & Deliver

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Contents Preface .......................................................................................................iii Executive Summary .................................................................................... 1 Introduction ................................................................................................ 3 The Development Context in the 1960s ...................................................... 5 Changes on the Landscape in the 1970s.................................................... 9 New Themes in the 1980s: Private Enterprise and Policy Change............ 15 Market Trends and New Geographies in the 1990s .................................. 19 IDC Trends and Evolution Since 2000 ...................................................... 23

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Preface

The overarching message of this narrative is simple and powerful. As U.S. foreign assistance policies and practices have evolved, development companies have matured, adapted to change, and grown with the times while always meeting the needs of their federal, foreign and private partners. From the 1960s to today, the amounts and modes of aid have varied but the value proposition that U.S. implementers bring to the enterprise has remained fixed: maximize the impact of U.S. foreign assistance by bringing highly skilled, entrepreneurial assistance to developing countries so they in turn can overcome complex challenges.

No single history can capture every aspect and nuance of the dynamic evolution of this industry. This account looks at the growth of IDCs through the lens of the synergistic relationship between companies and their federal clients, particularly the U.S. Agency for International Development (USAID). But that relationship began, and continues to evolve today, within a larger context. Diversified management consulting and service companies existed before USAID, and they brought privatesector consulting, project management, and systems expertise to the world of international donors and public sector implementation.

Credit: Lam Pham

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his compelling account of the growth of U.S. international development companies (IDCs) proves the axiom that history is best written by those who lived and helped make it. Tony Barclay, PhD, was a highly successful and widely admired leader at DAI who played a key role in helping the emerging U.S. international development industry navigate across uncertain terrain to win the high ground it occupies today. His is a unique perspective, and this narrative is an important contribution to the broader story of for-profit implementers that is still being written every day by U.S. development companies large and small.

That grounding in purely private-sector practices was particularly important in the early days of U.S. development assistance and remains a key IDC characteristic today. Given that official development assistance now represents only a fraction of net capital flows to emerging nations, IDCs are uniquely positioned to facilitate partnerships with private capital, corporations and foundations, and to help build the capacity that in turn allows IDCs to transfer management best practices, organizational systems and skills to host country institutions and recipients.

Those success stories help prove the point that IDCs, like other key actors in the development sphere, function as an extension of USAID and other donors in the implementation of aid programs, not as a substitute for local actors.

Where no local capacity exists, IDCs build it.

In the organic, but still sequential, progression of social and economic development, any alleged dichotomy or conflict between external and internal capacity represents a false choice. Rather it should never be a question of whether local actors will own and control their own development, but when in the process they will be able to sustain the momentum stimulated and supported by outside assistance.

The role of IDCs should not overshadow the critical importance and impact of local hiring and capacity building efforts. In the 1990s, U.S.

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IDCs set a clear goal to employ at least four local citizens for each American or third country national (TCN) on a project. Today that local to TCN ratio is generally thought to be closer to eight to one. This nurturing of local expertise—in effect transferring “development DNA” to local actors—is a critical part of the U.S. IDC story of effective and sustainable assistance. As but one data set, there are numerous cases of these local professionals starting new firms, founding NGOs, or becoming policy and political leaders in their home communities and countries.

The vital role played by U.S. small businesses in transferring technical expertise and mentoring foreign counterparts needs also to be recognized. So does the unresolved, perhaps irreconcilable, conflict between USAID’s current reform initiative to dedicate 30 percent of U.S. assistance spending to “local solutions” while also meeting higher U.S. small business utilization targets.

Underpinning this entire chronicle is the Foreign Assistance Act of 1961 (FAA), which provides essential context and subtext to the work of USAID and its IDC implementing partners. But development professionals have always had to navigate varied, even conflicting, policy mandates and trends as congressional earmarks and presidential initiatives imposed short-term expectations on long-term development goals. The FAA has been amended many times but has never been fundamentally restructured to reflect the new and very different realities of the modern development ecosystem. Former recipients

have graduated to become donors. Official development assistance is dwarfed by private capital flows. Science and technology now play a central role in designing sustainable projects. Public/private partnerships are emerging as a preferred platform to coordinate and leverage disparate actors and resources.

And high transaction and compliance costs continue to sap agility and vitality from aid programs. The Professional Services Council (PSC) and its Council of International Development Companies (CIDC) support congressional efforts to modernize the FAA to reflect these new dynamics and to give the U.S. government, particularly USAID, evidence-based access to the most efficient and effective contracting tools to implement modern U.S. policy objectives.

History not only explains the past but should help illuminate the path ahead. As PSC’s CIDC continues to raise the voice and the visibility of for-profit companies supporting U.S. policy goals, others will add colors and contours to the historical landscape so richly rendered here by Dr. Barclay. Even as the current chapter unfolds, efforts to reform U.S. foreign assistance, such as the USAID Forward agenda, must be informed and guided by the diverse and successful record of U.S. international development companies. Tony Barclay’s firsthand account of the role of private companies in this field offers the perfect primer for those seeking to understand where we came from, and, perhaps, where we are headed.

Stan Soloway, President & CEO Professional Services Council

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50 Years in Development: How Private Companies Adapt & Deliver

Executive Summary

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he International Development Company (IDC) industry has grown and matured over 50 years into its current state as a key part of the development ecosystem. This evolution has been anchored by a close partnership between IDCs and the U.S. Agency for International Development (USAID), the lead agency of the U.S. government’s development assistance program. The size and diversity of the industry today reflect the nature of that partnership: IDCs offer technical skills and management capacity that complement, but rarely duplicate, the internal assets of USAID itself.

By delivering this expertise through competitively awarded contracts, they support the agency’s development mission in critical areas, especially in implementing projects that demand efficiency, flexibility, and measurable results. Strict accountability for managing funds and compliance with procurement law and regulations are built into every contract.

The origins of the industry can be traced to the early years of the U.S. foreign assistance program. In the 1960s, reliance on private companies for technical and management services was the exception because USAID had the size and depth of staff resources to manage development programs itself. When hiring individuals or firms through a contract, it extended the same allowances and benefits as those provided to government employees.

These practices and the accompanying rulebook have remained in place since that time, and still affect the cost basis of USAID technical assistance contracts. IDCs have responded by closely adapting their operating models and project management systems to fit the requirements of USAID’s programs.

The trajectory of U.S. development assistance since the 1960s has been marked by several

waves that have moved the development frontier, and by institutional and budgetary changes that have affected USAID’s staffing and internal capacity. The first such wave crested in the 1970s, as it became clear that new approaches were required to address the root causes of poverty, and different skill sets were needed to design, implement, and evaluate development projects. Because USAID had been instructed to “do more with less” in managing its own staff and operating expenses, these new priorities created an opportunity for several startup companies to develop relevant service offerings. Initially, such firms were engaged to conduct applied research and support project design and evaluation, but by the end of the decade, implementation contracts were also available through competitive requests for proposals (RFPs).

A second wave emerged in the early 1980s, shifting USAID’s focus from rural development and poverty alleviation to private sector development and policy reform. New areas of expertise were in demand, and as the competitive playing field expanded, more companies entered the market for technical assistance contracting. Some were startups similar to those in the previous decade, while others were already active in accounting and finance, and expanded laterally into the development arena. USAID was now enlarging the scope of work in its contracts by adding new responsibilities. Bidding firms needed to demonstrate capability for managing project offices, hiring local staff, and procuring vehicles and equipment. As a result, the average size of contracts awarded through competition grew significantly during the decade.

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By the year 2000, the partnership between USAID and IDCs had matured. It relied on a process of technical and cost competition to select service providers and proposal evaluation criteria placed increased emphasis on a bidding firm’s past performance record.

Scopes of work were usually broad, and put a premium on companies’ project management capacity and financial strength. The aftermath of September 11 led to a rapid scale-up of demand for technical assistance in the frontline states, at the same that USAID was starting to rebuild its technical staff, reversing a decades-long trend, and reform its procurement system. Implementing these changes in the midst of conflict, while under

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Credit: Mark Birnbaum

Dramatic changes on the global political scene reshaped U.S. foreign assistance in the 1990s, expanding its geographic reach to Eurasia after the collapse of the Soviet Union. USAID and the Department of State had to grapple with new problems in this new geography, as funds were reallocated to support the complex process of transitioning from communist regimes to democratic governance and market economies.

Demand increased for senior-level technical assistance, which IDCs were well placed to recruit and deploy. Indefinite Quantity Contracts (IQCs) proved to be a flexible, efficient mechanism for accessing this talent.

As post-conflict reconstruction and the challenges of failed states began to command more attention and resources from USAID later in the decade, contractors were engaged to mobilize quickly, and their scopes of work were expanded to incorporate administration of sub-grants to local organizations, nongovernmental organizations (NGOs), and governments. These requirements reinforced the trend toward larger contract budgets and led to significant revenue growth for many IDCs.

intense pressure from Congress and the executive branch to accelerate spending and demonstrate results in short time frames, proved to be extremely challenging. With their considerable assets and experience, IDCs played a critical role in delivering technical assistance, often under trying and dangerous conditions. For many firms, as well as implementers in the nonprofit sector, contracts in the front-line states brought substantially increased risks to personnel deployed in the field and much greater exposure to risks of fraud and mismanagement, because of the volume of funds (sometimes in the tens of millions of dollars) in their contract budgets.

The resilience and adaptability of IDCs have been proven repeatedly over the 50-year period. The nature of their partnership with USAID will continue to evolve, as the U.S. government searches for ways to align its programs more closely with other donors, and places greater emphasis on country ownership and local sourcing of technical assistance. The latter objectives will require an intensive change management process within USAID itself, and intensive, targeted efforts at capacity building in host country partners.

IDCs are very well placed to partner with the U.S. government making these efforts successful and sustainable.

50 Years in Development: How Private Companies Adapt & Deliver

Introduction

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his paper traces the growth and evolution of an industry cluster that comprises several dozen U.S.-based international development companies (IDCs). These specialized professional and technical services firms focus primarily or exclusively on the development marketplace.

Most are privately owned, and many have been active in the market for 15 to 20 years, and in some cases, for more than 40 years. They range in size from $1 million in annual revenue to more than $400 million; cover a spectrum from firms that specialize in one or two technical areas to those with service offerings in multiple sectors; and have personnel with practical experience on the ground in countries across the globe. The current configuration of the industry reflects the principal areas of customer demand from the U.S. government. Over time, IDCs have adapted their staffing, technical capacity, management practices, and compliance systems to fit the needs of their clients, especially USAID. As a result, they are equipped to support the agency’s mission in the field, as implementing partners, and as a source of support for strategy, evaluation, and management in USAID’s central bureaus and offices.

Despite their long history of involvement as USAID’s partners, the track record and capabilities of IDCs are not widely known.

Today, they constitute an important element in the ecosystem through which the U.S. government manages and delivers its development assistance programs. The story of their evolution over the past 50 years illuminates many of the major trends in development over that time span, as well as the institutional, policy, and budgetary changes that have shaped demand for the service offerings of IDCs. By adapting successfully to these forces, IDCs have demonstrated resilience and an entrepreneurial approach to solving problems in a complex environment.

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The Development Context in the 1960s

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uring the first decade reviewed in this paper, most donor agencies filled their requirements for professional and technical services internally, and when external sources were needed, the scope of contracted services was narrowly defined.

USAID exemplified this model and used the services of IDCs on a very limited basis.

Passage of the Foreign Assistance Act (FAA) in 1961, the first year of John F. Kennedy’s presidency, provided authorization for the newly established U.S. Agency for International Development. It gave the agency a broad mandate to promote development across a range of countries, consistent with U.S. foreign policy interests. The original objectives in the FAA remain in force today, five decades later. Numerous subsequent amendments to the act have added new objectives and policy guidance, thereby continuously expanding USAID’s mission.

Congress has always found it easier and more expedient to amend the FAA than replace it.

The result is a complex, multi-layered legislative framework that lacks coherence and consistency.

Capital investment projects and technology transfer were the dominant features of USAID’s programs in the 1960s. Both in Washington and in USAID missions at the country level, planning and programming were characterized by a technocratic view of development as a linear process with a high degree of predictability. To summarize this approach, if gaps in infrastructure could be filled and new institutions could be built to train personnel in techniques that had worked in the developed countries, emergent nations would be able to advance rapidly through what economist Walt Rostow described as the

Select Capital Projects from 1960s • Telecommunications Facilities, Pakistan, 1963 • Gokcekaya Dam and Hydroelectric Power Plant, Turkey, 1964 • Beas Dam Project, India, 1966 • Yongnam Thermal Power Plant, South Korea, 1967 • Water Resources Development, Philippines, 1968 “stages of economic growth.” A substantial portion of the funds appropriated for the agency were directed to U.S. allies and other countries of high geopolitical interest— notably South Vietnam, the Republic of Korea, India, Pakistan, Turkey, Thailand, and Taiwan. Elsewhere, bilateral assistance programs were set up in most of Africa’s newly independent nations, in North Africa, and in Latin America, under the umbrella of the Alliance for Progress.

Infrastructure projects in the form of hydroelectric dams, irrigation systems, highway construction, and “bricks and mortar” for schools and universities were the hallmarks of U.S. bilateral assistance in this decade. Reflecting this sense of predictability, USAID’s early programs displayed an emphasis on planning, rigorous technical design, and detailed cost-benefit analysis.

Most large projects undertaken in the 1960s were financed wholly or in part with loans payable to the U.S. Treasury, rather than grants, typically with low interest rates, based on the expectation that positive economic returns would pay off the loans and produce multiplier effects on the country’s economy.

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In the agricultural sector, which was then the chief source of livelihoods and employment in almost every developing country, investments were made in spreading new technologies— exemplified by the highly successful Green Revolution in Asia—and establishing agricultural research institutions, extension systems, and university campuses modeled on the land-grant universities of the United States.

This approach shaped USAID’s personnel system and policies. The agency built up its staff steadily during the decade, by recruiting a new cadre of Foreign Service Officers, many of whom had graduate level training in economics, engineering, agronomy, or public administration. As their numbers grew, this early generation of “development professionals” began careers that would feature postings to several countries over a period of 20 to30 years. Arriving for an assignment that would typically last two “tours” or four years, a USAID officer would be proficient in the local language, having received three to six months of intensive language training before departing the United States. As a result, in terms of technical depth, specialized country knowledge, and total headcount, the late 1960s were the high water mark for USAID’s direct hire workforce.

Civilian efforts to stabilize South Vietnam and foster economic growth in the midst of a protracted war caused USAID to deploy many of these personnel in that country, even as the war entered a period of stalemate. At its peak, around 1970, about 18,000 technical and management staff worked for the agency, more than half of whom were assigned to South Vietnam. To meet these “surge” requirements, USAID began contracting with individuals to work for fixed terms, and offered them identical salaries, benefits, and allowances to those received by its permanent direct hire staff.

This model of contracting for personal services, which assumed functional equivalence in the assignments and

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Foreign Service Officers allowances provided to USAID contractor personnel • Post (Cost of Living) Allowance • Post (Hardship) Differential • Living Quarters Allowance • Education Allowance • Danger Pay Allowance compensation of career employees and individual contractors, laid the groundwork for the procurement system and accompanying regulatory mindset that exist today. Individual contractors were assured of comparable employment terms to those of direct hire staff, though without long-term job security, and were subject to the same rules and regulations.

From USAID’s perspective, they were extensions of the government’s workforce. In later years, as much larger numbers of specialized technical personnel were engaged to deliver services through private sector companies, the same rules and entitlements remained in place.

The ability to recruit individuals and absorb them directly into its operating structure meant that USAID rarely looked to outside organizations to supply technical personnel under contract. It commanded enough internal resources—between career staff and personal services contractors—to plan, design, and implement most of its own programs. Where large-scale infrastructure was needed, USAID could hire and oversee engineering and construction firms, as happened with the firm Morrison-Knudsen for the Kajaki Dam and downstream irrigation system in Afghanistan’s Helmand Province. Similar contracts were negotiated to build highways, dams, and power plants in other countries, with USAID taking a hands-on role in supervision.

In countries where institution-building for agriculture was a high priority, expertise was brought in from the U.S. Department of Agriculture and U.S. land-grant universities.

These sources were seen as the best equipped

50 Years in Development: How Private Companies Adapt & Deliver

to transfer technologies and knowhow, and replicate U.S. institutional models for research, extension, and training. The Board for International Food and Agricultural Development (BIFAD) was established to guide and promote agreements between these universities and partner institutions in Asia, Africa, and Latin America.

Outside the engineering sector, there was only a limited market for organizations to furnish professional and technical services in support of USAID programs and projects. Requests

for proposals (RFPs) appeared infrequently, in rare situations where teams of experts were needed. Among the earliest firms offering services to USAID were Nathan Associates (founded in 1946), Arthur D. Little (1909), Checchi and Company (1973), and Louis Berger International (1953), all of which remain active today, while others, such as the TransCentury Corporation, Experience Inc, and American Technical Assistance Corporation (ATAC) are no longer in business.

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Changes on the Landscape in the 1970s

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he new decade brought with it a more self-critical mindset in the development community, based on the disappointing record of large-scale infrastructure investments in spurring broadbased economic development. The collapse of the government in South Vietnam, despite massive U.S. funding for national and provincial institutions, and the presence of thousands of American civilians, was another contributor to disillusionment and doubt about conventional development wisdom.

Some of the impetus for change came from thought leaders in the academic community who focused their research on the persistence of poverty, especially in rural areas, and accused the large donor agencies, notably USAID and the World Bank, of ignoring the poor and investing in programs that worsened inequality. “Growth without development” emerged as a skeptical challenge to the confident linear thinking that had characterized the planning and programming of the major donors.

The heightened concern with addressing poverty fostered new priorities in the U.S. Congress, and simultaneously, in the leadership of the World Bank, where Robert McNamara championed expansion of concessionary lending to the poorest countries through the Bank’s International Development Association (IDA), its soft-loan window. In 1973, Congress passed a significant “New Directions” amendment to the Foreign Assistance Act, which mandated USAID to design programs that would meet “basic human needs” and reach the poorest, most marginalized groups in countries where it operated. In that same year, the World Bank held its annual meeting outside the United States for the first time, in Nairobi, Kenya,

and announced a similar shift in IDA lending priorities.

Grappling with the root causes of poverty in this context introduced a wider set of questions to be answered in the planning, design, and implementation of development programs. In order to meet the requirements of New Directions, USAID would now have to include a social soundness analysis, an environmental impact analysis, and an analysis of a project’s specific impact on women in every project approval package. In the past, such issues had rarely been analyzed in depth.

Development practitioners as well as academics were now viewing development as a more complex process, one that required non-technocratic skills and expertise in identifying problems and formulating solutions, and more in-depth evaluation methods to assess outcomes and impact. For the first time, the term “integrated rural development” appeared in the development debate: it was adopted both by USAID and the World Bank (in IDA lending) to describe a more comprehensive approach that would combine interventions in multiple sectors within a single project. In the central Washington Bureau for Technical Assistance, (later renamed the Science & Technology Bureau), USAID created new Offices of Rural Development and Institutional Development alongside its existing Office of Agriculture.

This new agenda forced USAID to reexamine its own inventory of technical and professional skills. Whereas only a handful of anthropologists and sociologists had worked for the agency in its first decade, people with this disciplinary background were now in greater demand. Knowledge of local cultures,

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Development practitioners as well as academics were now viewing development as a more complex process, one that required nontechnocratic skills and expertise in identifying problems and formulating solutions, and more in-depth evaluation methods to assess outcomes and impact. value systems, and the power dynamics of rural communities was necessary to complete a social soundness analysis of a new project.

Environmental expertise, particularly with respect to water, soil, and forest conservation, was also relatively scarce, and issues relating to the role of women in development were unfamiliar to most officers in an agency traditionally populated by males with technical backgrounds.

At the same time as its needs for new skills and knowledge were expanding, however, USAID was under pressure from Congress to make big reductions in its direct hire workforce. Winding down the large complement of personnel who had joined the agency in the previous decade, with many serving as civilians in South Vietnam, could not be accomplished overnight.

Initially, many of these officers were reassigned to countries in Latin America and Africa, often without strong language skills or experience that was relevant to USAID’s new focus on small farmers and rural development.

This meant that USAID had limited room to build a critical mass of new direct hires with the skills that were critical to its New Directions agenda.

With New Directions, Congress instructed USAID to break new ground, and tackle issues of greater complexity, but provided a mixed message: on the one hand, the mandate encouraged experimentation and applied research on questions for which no easy answers were readily available; but it also kept in place requirements for “adequate planning”

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in the project development cycle that were bureaucratically complex and timeconsuming. All project approval decisions were still taken at USAID’s Washington headquarters, where representatives of different offices were tasked with reviewing, critiquing, and sometimes requiring full-scale revisions of project documents and/or annexes.

In this period, an initial concept paper (Project Identification Document, or PID) would typically run between 15 and 25 pages, not including annexes. It would be drafted by the mission team in country, and then a date would be set for a review in Washington, attended by one or more USAID staff from the mission. PID approval was usually not contentious, but the elapsed time from drafting to sign-off in Washington could run from two to six months. A comprehensive project design process would then begin, leading first to an intermediate product, the Project Review Paper (PRP), and eventually to a final Project Paper (PP) which might be 150 to 200 pages in length, including annexes. Even after the PRP stage was eliminated in the mid-1970s, the interval from PID to PP approval usually stretched out to 12 to 18 months, depending on the type of project and the range of issues that had to be resolved.

Faced with a demanding project approval process and an inquisitive audience in Washington, and confronting numerous unknowns in trying to fulfill the New Directions mandate, USAID missions found it increasingly necessary to reach beyond their own direct hire staff when preparing project designs. The preliminary work leading up to a design often involved studying topics such as indigenous farming systems in remote rural areas, the feasibility of creating agricultural credit and marketing cooperatives, constraints and opportunities for engaging women in development activities, and mechanisms to foster participation of beneficiaries in the design and implementation process.

50 Years in Development: How Private Companies Adapt & Deliver

In some topical areas, USAID engaged land grant universities such as Michigan State, Ohio State, and Cornell to field faculty and graduate student teams to carry out applied research in countries where the university planned to establish long-term relationships with host country institutions. In other cases, a mission might hire a single consultant to prepare a specific analysis. Often however, the subject matter called for a multidisciplinary team that would develop ideas and concepts for the design, working under the supervision of USAID staff. Collaboration with IDCs expanded USAID’s reach and reinforced the agency’s reputation for thought leadership in rural development. Later, at the midpoint and completion of project implementation, the use of external evaluation teams from IDCs became a common practice to acquire subject matter expertise and independent analysis.

These new requirements put a premium on flexibility and speed in deploying external resources, typically for short periods that ranged from three weeks to three months.

Contracting was a practical way to access these specialist services: USAID could define what it needed, and use competition to test the market and select the most qualified team. A well-drafted scope of work would specify the schedule, the technical areas to be covered, and the deliverables expected from the consulting team. This helped the agency achieve a closer fit with project-specific requirements, by relying on external service providers to propose teams and place them in the field on a just-in-time basis.

This was the market environment in which the second generation of IDCs emerged. The leaders and staff of the new firms had varied backgrounds: while some had worked for USAID in the past, most came from a younger generation, often starting their careers as Peace Corps Volunteers (PCVs) and then earning graduate degrees in fields that were now in high demand. A returned PCV with a master’s degree in agriculture, for example, might bring a deeper understanding of small farmers’ behavior than a senior agronomist

New Firms on the Landscape • PADCO (1965) • DAI (1970) • Chemonics (1975) • Creative Associates (1977) • Pragma (1977) • ARD (1978) steeped in advanced production technology and U.S. county extension methods. Expertise in land tenure systems, cooperative development, rural credit, and women in development was also more abundant among new entrant professionals. Up until this time, the term “consultant” usually referred to an individual with 30 or 40 years of experience in a given industry. Now, knowing the right questions to ask, and knowing how to acquire the information that would produce sound answers, mattered more than producing a prescription based on what the consultant had done in the past. This shift opened new career paths in the private sector for development professionals between 25 and 35 who had a combination of grass-roots field experience and a graduate degree.

These firms were small in size, and most were started with a small capital base, often just the personal savings of the founders. Although medium- and long-term job security was highly uncertain, they were able to attract significant numbers of young development professionals to work on variable terms: some as full-time employees, others part-time, and some as occasional consultants. Of necessity, flexibility in staffing and careful cost management were essential for a startup in this market to survive and grow. Some firms deferred paying salaries to their founders for several years, just as entrepreneurial startups often do in the venture capital industry today.

In doing business with these firms, USAID adopted the Indefinite Quantity Contract (IQC) as its preferred vehicle for selecting teams to carry out sector studies, design assistance, and external evaluations. Efforts to use a full-and-

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open bidding process proved slow and costly: even a small contract (for example, a threeperson team, working for four weeks, with a budget of about $50,000) might attract a dozen proposals and take four months or even longer before a contract could be finalized. In contrast, the IQC provided a mechanism to prequalify several firms on the basis of staff, technical capability, and pre-negotiated costing rates.

Task order competitions and award decisions could then be completed in a matter of weeks rather than months.

IQC activity in the 1970s was a niche business: a firm might achieve revenues of $500,000 to $1 million per year by executing 5 to 15 individual task orders. However, a much larger market for contracting firms opened up once project designs reflecting New Directions priorities had been approved. Their implementation plans typically required specific types of technical assistance. For smaller projects, where only one or two technical personnel were required, USAID could hire individuals as personal services contractors (PSCs), as it had done to meet surge demand in the Vietnam era. But by the late 1970s, when larger integrated rural development projects came into vogue, USAID began to use competitive RFPs more frequently to solicit proposals for technical and management teams.

Full and open competition was the norm for these larger contracts. Most were for periods of 36 to 48 months, and included detailed scopes of work for expatriate staff, all of whom were eligible for standard U.S. government allowances. The contracting system was focused on controlling cost inputs, and required presentation of budgets in a “cost-plus” format. USAID Contracting Officers (COs), all of whom were based in Washington during the 1970s, exercised close oversight: •

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CO approval was needed for the annual salary or daily consulting rate for each individual who worked on the contract.

This was true not just at the contract

•

•

•

•

negotiation stage, but for all subsequent personnel actions, whether a team member was being replaced or a short-term consultant was being mobilized to support a team working in the field.

Approvals were also required for all international travel and annual leave schedules involving personnel working on the contract.

The firm’s indirect rates for fringe benefits and overhead had to be supported by a Negotiated Indirect Cost Rate Agreement (NICRA) with the U.S. government. All such costs were subject to a final audit, with the government having authority to reject “unallowable” overhead expenses and demand reimbursement from the company.

Finally, the “plus” in the cost-plus formula was a profit factor, or fixed fee, which translated to a percentage of estimated contract costs. While the government’s statutory ceiling for fixed fees was 10% of costs, the fixed fee component in most USAID contracts ranged between 4% and 7%.

In a few countries—for example, Egypt, Mali and the Philippines—USAID relied on host country contracts where the host government was the signatory to the contract, supervised the work of the contractor, and approved all payments.

However, the same costing standards, regulations, and approval requirements had to be applied, even when the host government was the client.

Companies that competed in this market became conditioned to following USAID’s rulebook. Pricing of proposals followed a standardized format with vast amounts of supporting documentation to justify salary rates, indirect costs, and estimated direct costs. There was limited scope for a firm to develop its own unique compensation and benefits system, and compliance with regulations brought a need for administrative and accounting staff who could provide support to teams in the field, while ensuring

50 Years in Development: How Private Companies Adapt & Deliver

that all cost inputs on each contract were thoroughly documented.

These practices were generally well matched with USAID’s own capacity to manage its field programs. Most missions still had technical depth from direct hire senior and junior officers responsible for agriculture, health, public administration, and other sectors. Those officers closely supervised the work of contractors’ teams, and retained approval authority for the annual work plan in every contract. Procurement of equipment and

logistical support for each project usually remained the mission’s responsibility.

Technical assistance teams were small (usually 2 to 5 individuals) and total contract budgets ranged from $2 million to $5 million, depending on the length of the contract and the size of the team. Contract administration was fairly straightforward, so that even with COs based in Washington, rather than in the field, the transaction costs of USAID’s contracting system were low by today’s standards.

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New Themes in the 1980s: Private Enterprise and Policy Change

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he 1980s opened on a note of uncertainty. Many people active in the development community had viewed Ronald Reagan’s 1980 election as U.S. president with apprehension. As a candidate, Reagan had been outspoken in criticizing nonmilitary government spending programs of all kinds, and foreign assistance seemed especially vulnerable to sweeping cuts. There was some speculation, fueled by fiscal conservatives in Congress, that USAID might be eliminated altogether.

The actual consequences of the White House transition, while bringing a sharp change in direction, were much less drastic. Reagan named Peter McPherson, who had served as a Peace Corps Volunteer before starting a career in finance, as the USAID Administrator, and McPherson proved to be a capable leader and change agent. One of the most visible changes was a much more explicit alignment of USAID bilateral programs, both in funding levels and country selection, with U.S. foreign policy interests. This was especially evident in Central America, where programs were expanded rapidly in Honduras, Costa Rica, and El Salvador, and Guatemala, as a counterweight to the Sandinista movement that had gained power in Nicaragua; and in the Eastern Caribbean, after the 1983 U.S. invasion that toppled a leftist government in Grenada. By the middle of the decade, USAID budgets in these countries, all with relatively small populations, had reached unprecedented levels in per capita terms.

Much more significant for the longer term was the emphasis that USAID’s new leaders

placed on enhancing private sector participation in development. They were highly critical of the integrated rural development model, citing the indifferent results achieved in such projects, reliance on weak host government institutions to manage project activities, and the absence of market incentives to encourage rural producers. These concerns were consistent with a worldview skeptical of government-led programs, and a belief that public sector dominance of developing economies was impeding economic growth. State-owned enterprises, many having been allocated monopoly positions but known to be inefficient and corrupt, were frequently singled out as proof of failed statist policies.

At this time, in many developing countries, an emphasis on import substitution, targeted government investment in certain industries, and state control of commodity markets and exports, were common characteristics of national development policy. In sub-Saharan Africa, virtually every post-independence government had followed this path: agricultural markets were strictly controlled, and producer prices were kept low in order to subsidize food prices for urban consumers whose discontent might threaten the government’s stability. Just as the Reagan administration began to aggressively challenge this model, an in-depth study for the World Bank, led by economist Elliot Berg, came up with similar conclusions and recommended the liberalization of markets across subSaharan Africa. In the next several years, the World Bank and the International Monetary Fund (IMF) joined forces in a major push for

50 Years in Development: How Private Companies Adapt & Deliver

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“structural adjustment” that conditioned large loans on host governments’ commitment to fiscal austerity and reductions in public sector payrolls.

As a consequence of this major shift in U.S. development policy, two key themes began to take shape: (1) a sharper focus on the macroeconomic and fiscal policies of host governments, and (2) financial and technical support to stimulate the private sector in developing countries. The first of these themes was not entirely new, but a different set of viewpoints was introduced into the debate, mirroring the structural adjustment paradigm of the World Bank and IMF. USAID economists looked more closely at the growth of government budgets and questioned their sustainability. Privatization of state-owned enterprises emerged as a potential driver of change, although the political difficulty of implementing such measures was often underestimated.

The second theme brought a new perspective into the development agenda, but was closely tied to the first. Major policy adjustments, and in some cases radical reforms, would be necessary to create space for a dynamic, growing private sector, but very few donorfinanced development programs had engaged private enterprises, either internationally or domestically. Aside from the International Finance Corporation (IFC), the private sector arm of the World Bank, which was relatively small and focused on middle income countries, none of the major donors had given much attention to the private sector. Direct relationships between donors and corporations hardly existed, and few donor agency staff outside IFC had any private sector experience.

USAID needed to deepen its own knowledge of the private sector and create internal capacity to plan and execute programs. One of the earliest initiatives of McPherson’s team was establishing a new central Bureau for Private Enterprise and staffing the bureau, and key overseas missions, with people who had backgrounds in finance and business. Some

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Select Projects from 1980s Focusing on Private Sector Development • Thailand, 1983: assisted exportoriented, natural resource-based, labor-intensive business ventures in unindustrialized areas by connecting industry groups in Thailand with those in the United States and establishing a credit support program for small/medium sized businesses.

• Grenada, 1986: established a private, nonprofit National Development Foundation that provided business, accounting, and managerial technical assistance to existing and promising microenterprises and provided credit to microentrepreneurs who were otherwise ineligible for bank funding.

• Botswana, 1988: assisted private sector development by promoting exports, increasing credit availability (especially for small rural firms), and providing technical and entrepreneurial training. came in as political appointees, and USAID’s personnel classifications were also expanded to create career tracks for those who aspired to careers as Private Sector Development Officers. But opportunities for direct hire employment were limited: USAID’s marching orders to “do more with less” meant that overall staff numbers were bound to decline.

By now, many senior Foreign Service Officers (FSOs) who started their careers in the 1960s were reaching eligibility for retirement, and the rate of new hires failed to keep pace with attrition.

To augment limited internal capacity, USAID made known its interest in sourcing expertise

50 Years in Development: How Private Companies Adapt & Deliver

from firms possessing private sector experience. The strongest response came from the large audit and accounting firms (at that point in time known as the “Big Eight,” subsequently consolidated into today’s “Big Four”), which had active consulting practices and were familiar with delivering professional services to government clients.

They also had international networks and local partnerships in many countries where USAID missions were operating. They were quite successful in capturing new IQCs that were competitively awarded for design and evaluation services, and helped USAID translate its new policy initiatives into program designs for policy reform and private enterprise development.

Starting in 1978, USAID had significantly modified its centralized model for program and project development, through a series of delegations of authority. The time-consuming Washington review process for mission-level projects was streamlined; greater authority for strategy development was given to Mission Directors; and increasing numbers of Contracting Officers joined the Foreign Service and relocated to overseas posts, where they were more directly engaged with implementation issues. This process of decentralization made USAID more flexible and responsive to country conditions.

However, it also led to greater variability and inconsistency in the agency’s business processes.

Decentralization was accompanied by modest growth in USAID’s market for technical assistance contracting. Companies that had been active in the previous decade found it necessary to adapt to a changed competitive landscape. Although rural development, livestock management, and small farmer agriculture had gone out of favor, there was now increased demand for skills in finance and banking, marketing, small enterprise development, investment promotion, and agribusiness. To prepare themselves for new project RFPs, and ensure access to appropriate personnel, several firms broadened their

Firms Entering or Re-Entering the Market • MSI • IRG • Deloitte & Touche • Abt Associates • Barents Group/KPMG (later Bearing Point) • Coopers & Lybrand (later merged with Price Waterhouse) • Ernst & Young • CARANA Corporation technical offerings by adding new staff with training and work experience in these fields.

Compared with the situation 10 years earlier, the Technical Assistance market of 1990 had these characteristics: • • •

• • •

•

A larger supply of RFPs for technical assistance issued over the course of each year; A larger and more diverse group of firms prepared to compete for contracts; Expectations for contractors to take on management functions that had been previously handled by USAID, such as purchasing office equipment and vehicles, renting offices, and hiring and supervising host country administrative and accounting staff; Greater autonomy for contractors to operate in project structures outside the host government; Scopes of work in RFPs requiring more specialized, highly compensated expatriate personnel; Continued strict enforcement of salary ceilings, standardized allowances, and other features of governmental practice in USAID contracts; and As a result, the average contract budget contained more cost elements and higher unit costs for personnel, and was in a range of $4 million to $10 million, roughly double the 1980 level.

50 Years in Development: How Private Companies Adapt & Deliver

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Contract budgets, of course, were shaped by USAID’s requirements. As technical assistance became the key component in more and more projects, with increasing need for management systems and field support by contractors, USAID was able to draw on a

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significantly broader and more experienced base of suppliers through the competitive proposal process. The more active and successful firms serving USAID were achieving annual revenues of $20 million to $25 million by the end of the decade.

50 Years in Development: How Private Companies Adapt & Deliver

Market Trends and New Geographies in the 1990s

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he next decade was characterized by steady growth in the IDC industry, as USAID’s development programming was modified to address dramatic political changes, new geographies, and events that pushed a number of countries into prolonged instability when state structures collapsed. The role of experienced implementing partners— both IDCs and NGOs—grew in importance as the development arena expanded and USAID’s internal capacity was constrained by budgetary limits and an extended battle over its future between the executive branch and congressional leaders who were deeply skeptical about the value of development assistance.

In ways that no one had anticipated, the collapse of the Soviet Union and its client states altered the geographic boundaries of donor-financed development and introduced different policy approaches and programming models. The pace of change between 1989 and 1991 across Central Europe and Eurasia was astounding. As communist party structures and governments dissolved, a wrenching transition began that would require new institutions and radical policy reforms, forcing painful adjustments across all levels of society in Russia, the other former Soviet republics, and the nations between the Baltic states and the Balkans.

Under President George H.W. Bush, Congress and the State Department moved quickly to put financial and technical support behind the transition process. New legislation authorized parallel programs for Europe and Eurasia, each supervised by a “Coordinator” who was based in State and reported directly to the Secretary. USAID established a new geographic bureau for the region and began opening field missions, but programming

The role of experienced implementing partners grew as the development arena expanded and USAID’s internal capacity was constrained by budgetary limits and an extended battle over its future between the executive branch and congressional leaders who were deeply skeptical about the value of development assistance. authority resided in Washington, and was closely controlled by the two Coordinators.

The frontier had expanded rapidly, encompassing countries where few development professionals inside or outside USAID had lived or worked. The challenges of facilitating the transition from Marxist ideology and totalitarian regimes to open economies and accountable democracies were unprecedented, and often underestimated. As had been true 10 years earlier with the advent of the private enterprise focus, USAID had few staff who were well versed in fields such as privatization, pension system reform, government restructuring, and capital markets development, which were the centerpieces of the transition programs authorized by Congress and directed by the State Department.

The urgency of these challenges led to increased reliance on consulting teams and implementing partners, particularly through the use of IQC task orders. Traditionally, task orders had been used to acquire services for short periods. Now, their use was expanded to include implementation and management services over periods of 12 to 36 months. The advantages to USAID were considerable:

50 Years in Development: How Private Companies Adapt & Deliver

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•

•

•

•

•

•

•

The largest time commitment was at the front end, when IQC requirements for a given sector were laid out in an open solicitation, which would require a large proposal investment by competing firms and methodical evaluation of their technical and cost proposals by USAID; The multiple-award method for an IQC assured USAID of a choice between several firms (usually prime contractors leading a consortium) that had cleared the qualifications hurdle; Once the IQC had been awarded, the successful firms were “on call,” and could respond to a task order RFP in a matter of weeks, or even days; USAID encouraged teaming arrangements, so that almost all successful IQC proposals blended the personnel and technical qualifications of several firms; Each IQC awarded to a firm incorporated a schedule of “fixed burdened daily rates” for different labor categories to be furnished on task orders. This streamlined the comparison of costs between firms and the negotiation of task orders with the winners; Task order scopes of work could build in greater accountability with deliverables and time schedules that the contractor’s team would have to meet; and Modifications to task orders could be executed rapidly by adjusting the number of work days allotted to different labor categories and other direct costs such as travel and per diem.

Given the aggressive goals for the transition program and generous funding levels— Congress reallocated annual appropriations toward Europe and Eurasia while reducing them for Africa, Asia, and Latin America—the average size of task orders in the new round of IQCs grew substantially. Task order budgets of $5 million per year, or even more, were not uncommon. In order to field qualified senior talent with 20 years of experience in money center banking, for example, a company would charge a fixed daily rate well above

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Spending half of the decade under siege placed a heavy burden on USAID, although the forced marriage with State was averted and its autonomy was preserved. $1,000, comprising a salary of $500 to $700 per day (well below what such bankers had earned in the past) and a “multiplier” in the range of 2.0 to 2.5. The multiplier comprised fringe benefit costs applicable to the employee, the company’s overhead costs, and a profit factor (on average less than 10 percent of the full rate).

The fixed daily rates underscored the fact that technical assistance was becoming more specialized and as a result, more expensive.

Sometimes the rates became a target for criticism, as happened in the early years of the Clinton administration. Advocates in the NGO community, often acting in pursuit of their own organizational agendas, tried to cast doubt on the value and reasonableness of contractors’ costs. Brian Atwood, who was named USAID Administrator in 1993, was initially uncomfortable with the role of contractors as implementing partners, and signaled an interest in using grants and cooperative agreements with NGOs and nonprofits as an alternative.

Rivalry between contractors and NGOs intensified in the mid-1990s, as funding levels for USAID’s development and humanitarian programs came under threat from the Republican majorities who took control of both houses of Congress. Much of the rivalry focused on the relative proportions of grants, cooperative agreements, and contracts in the USAID portfolio. Contracts accounted for about 40% of USAID’s dollar obligations, or approximately $500 million annually, in the late 1990s.

The political landscape in Washington also grew more contentious. Jesse Helms, a longtime adversary of foreign assistance who was then chair of the Senate Foreign Relations

50 Years in Development: How Private Companies Adapt & Deliver

The Clinton administration was already committed to “reinventing government” and had promised to make every federal agency leaner and more efficient. This meant that USAID’s OE budget could not keep pace with inflation, let alone grow.

The agency would have to double down on the do-more-with-less promises it had been making since the late 1970s. Starved for resources, Atwood and his leadership team were in a difficult position. They scrapped the agency’s project design and approval process in the name of “reengineering,” invested in a costly new management information system that failed to work, and in 1996 were forced to carry out a reduction in force (RIF) that cut deeply into USAID’s remaining cadre of experienced technical officers in agriculture, engineering, and other sectors. The RIF had severe consequences for morale, and removed many career officers who would normally have coached and mentored junior professionals at USAID. Spending half of the decade under siege placed a heavy burden on USAID, although the forced marriage with State was averted and its autonomy was preserved. While staff numbers continued to shrink, the agency’s reporting requirements to Congress and oversight bodies steadily increased. The Office of Inspector General and the Government Accountability Office were chartered to audit both mission programs and Washington programs, and congressional staff as well as elected members frequently demanded reports and data on short notice.

Credit: U.S. Agency for International Development

Committee, took aim at USAID and proposed folding it into the State Department with a drastically smaller budget. Helms hammered away at programs he did not like, and labeled USAID as a top-heavy, overstaffed bureaucracy. The agency’s Operating Expense (OE) budget, which paid the salaries of its civil servants and Foreign Service officers, was a vulnerable target for such attacks.

Accountability to these oversight bodies took on a greater degree of importance and consumed an increasing percentage of staff time, both in Washington and in overseas missions.

In this constrained environment, managing a portfolio of numerous projects, large and small, with numerous international partners and host country groups as contractors or grantees, was no longer a feasible option for most USAID missions. Consolidating the portfolio into a smaller number of management units was a logical response: this meant that what previously would have been related but parallel projects in a given sector would now be “bundled” into a single package. This trend accelerated during the second half of the decade, and affected contracts as well as cooperative agreements.

On both tracks, USAID developed many solicitations that required one organization to take the lead and propose a management structure in which other organizations were subcontractors or sub-grantees.

The result of this trend was a further acceleration in the size of contracts and cooperative agreements. Sometimes the bundling of activities in a single instrument created opportunities for synergy and increased development impact. But where this

50 Years in Development: How Private Companies Adapt & Deliver

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was done solely for the sake of management efficiency, it was difficult to achieve such synergy, and components of a large contract often functioned as disconnected “silos.” In the post-reengineering era, the lack of rigorous project design and agency review sometimes allowed such odd combinations to go forward.

Responding to a loosely constructed scope of work could involve recruiting strange bedfellows to join a consortium. If successful, the consortium might then struggle to achieve cohesion among its different members, unless it was able to create a shared vision for the program among its team members and USAID clients.

The skill sets of staff in IDCs expanded in line with market demand for expertise in topical areas that were central to transition programming. New entrants to the industry included mayors and public servants from U.S. cities and states; bankers and workout specialists; taxation and public expenditure experts; scholars with deep knowledge of the political context in the former communist countries; professionals media and public communications; and specialists in negotiation and conflict resolution. The latter group would prove to be in especially high demand as the global landscape changed and the issue of failed and failing states came to the fore.

One of Brian Atwood’s enduring innovations was establishing the Office of Transition Initiatives (OTI) as USAID’s operational arm to deal with countries emerging from conflict or going through an uncertain transition in government leadership. OTI cut its teeth in places like Bosnia and Angola, and became the leading edge of USAID’s reentry into the Democratic Republic of Congo after Mobutu Sese Seko fell from power. There were to be numerous other places where OTI would intervene: its model featured flexible, quickdisbursing grants to civil society groups and

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local NGOs under the supervision of a prime contractor organization. Indonesia’s political transition after Suharto was one; others included stabilization programs amidst conflict in Iraq and Afghanistan. More than a decade later, OTI launched programs immediately after the change of government in Tunisia and Libya during the Arab Spring.

Rapid response to the many uncertainties of countries in transition proved to be one of USAID’s strongest assets, and its contracting processes—especially the IQC mechanism— were better matched with fluid situations than those of other multilateral and bilateral donors. Here was a new arena in which several of the seasoned contractors were adept at serving the complex mission. Having worked with USAID for many years, they had management systems, financial strength, and quick deployment capacity to address issues in the field, identify and vet local partners, and issue sub-grants in kind or in cash that had visible impacts in a short time frame. Scopes of work in OTI’s country programs had to be flexible and adaptable, and the same was true of the implementing partners that executed the work.

By the end of the decade, market opportunities in the form of larger contracts, some of which included significant pass-through dollars for sub-grants, had created space for more rapid growth in the industry. The leading firms were now four or five times larger in revenue terms (several passing the $100 million threshold) than they had been in 1990. Mid-tier firms and small businesses were also on a stronger footing. As a mature industry base, contractors were now an indispensable part of the development ecosystem, offering a wider range of services to USAID, while being sensitive to the agency’s needs and operating constraints.

50 Years in Development: How Private Companies Adapt & Deliver

IDC Trends and Evolution Since 2000

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he IDC industry has continued to grow in the first years of the 21st century.

Increased demand for project implementation services has led to contracts of unprecedented size, especially in the front-line states of Afghanistan, Iraq, and Pakistan, and a larger set of responsibilities and risks. A dynamic market environment, characterized by shifting client priorities, volatility in funding, and a high bar for compliance and accountability, has tested the mettle of many companies. One sign of the industry’s maturity, confirming the attractiveness of this market, has been the entry of new firms that have acquired well established IDCs and consolidated them into larger businesses. In most cases the buyers have been engineering firms that rely on acquisitions to maintain their own revenue growth. Yet a number of the IDCs that have been active since the 1970s remain independently owned, and new entrants, most of them small, maintain substantial diversity in the IDC industrial base.

On a global level, the development landscape has changed more rapidly in this decade than it did in the previous four. A much broader range of actors now occupies the stage. These include nontraditional donors (foundations, social enterprises, and countries from the global South) that invest substantial funds in development programs; an expanding advocacy community that has access to greater amounts of current information on what the donors do and how they do it; researchers, journalists, and bloggers who seek to influence the development debate; public personalities from athletes to musicians and movie stars who can credibly champion various causes and bring the human side of those causes into focus; and a larger talent pool of practitioners from developing countries themselves. Additionally,

On a global level, the development landscape has changed more rapidly in this decade than it did in the previous four. the role of private capital in developing economies—often dwarfing bilateral assistance—added a new paradigm.

In this environment, old and new donors alike must answer to a larger and more diverse set of stakeholders. The latter are generally impatient with the rate of progress and the bureaucratic business processes of established organizations, and call for “reforms” that are sensible in theory, but often very difficult to implement. Important themes in reform proposals include placing much greater emphasis on country ownership of programs; setting more ambitious goals and targets (for example, the U.N. Millennium Development Goals for 2015); building rigorous impact evaluation into every program to measure performance; making data on expenditure and results more transparent and accessible; and achieving greater efficiency and “value for money” in the budgets of the bilateral and multilateral donor agencies. In practice, it has proven difficult for any organization to fulfill all of these objectives simultaneously.

USAID was confronted with several simultaneous challenges as the decade began.

Its continuing struggle to “do more with less,” at the urging of Congress and successive administrations in both parties, had left its personnel resources stretched very thin. It labored under legislation that had been written 40 years earlier and was amended numerous times, but never replaced. The spread of its programs was exceptionally broad, but most

50 Years in Development: How Private Companies Adapt & Deliver

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of the funds appropriated each year were earmarked by Congress and it remained the U.S. government’s first responder in humanitarian crises, failed states, and postconflict reconstruction. Efforts by Andrew Natsios, who was named administrator in 2001, to launch innovative alliances between USAID and multinational companies and revive investment in agriculture (a sector neglected for the preceding 20 years) had to be balanced against these competing demands.

The tragic events of September 11, 2001, had profound consequences for U.S. development assistance. As figure 1 shows, funding levels rose sharply. For USAID, the dominant share of the increase was allocated to the so-called “front-line states” where U.S. security interests and counterterrorism efforts were focused—first in Afghanistan and Pakistan, and then in Iraq, following the U.S. invasion in 2003. Assistance programs in these countries were scaled up quickly to levels not seen in any country since the Vietnam era.

With the increased appropriations came high expectations on the part of Congress as well as

the executive branch, for results that could be delivered in a short span of time. By 2007, Congress had finally acknowledged the fallacy of “do more with less” and authorized USAID to start rebuilding its cadre of Foreign Service Officers, whose numbers had dropped by almost 75 percent since the mid-1970s.

Although several hundred new officers entered the agency each year after that, the rebuilding task was made difficult by the scarcity of seasoned mid- and senior-level staff to train and mentor them, and the urgency of filling personnel gaps in many understaffed missions. In the front-line states, tours of duty were typically 12 months, because family members could not accompany FSOs to these posts, and this resulted in continuous turnover of staff responsible for project design, oversight, reporting, and evaluation. To cite one telling example, USAID’s mission in Afghanistan had 10 different directors between 2002 and 2011.

With U.S. staff rotating constantly, and strict limits on their travel within these countries due to security concerns, these missions struggled to develop close relationships with

Figure 1. Source: USAID Office of Budget and Resource Management

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50 Years in Development: How Private Companies Adapt & Deliver

government officials, which should have been critical to the process of planning and resource allocation in each country program. Host country staff hired as Foreign Service Nationals (FSNs) often held more of the institutional memory and detailed knowledge of the program than U.S. direct hire personnel assigned to the country for a single tour of 12 months.

Programs in the front-line states were especially vulnerable to simultaneous criticism both for slow “burn rates” and deficient supervision and oversight of implementing partners. With experienced technical officers in short supply, and a procurement system whose business processes had never been streamlined (the lead time for contract awards under full and open competition usually exceeded 12 months), USAID faced daunting quantity vs. quality tradeoffs, and in many cases, transferred the resulting risks to its implementing partners. Not only were IDCs stretched thin by having to operate in unstable security environments, while ensuring the safety of their employees, but their implementation teams had to contend with frequent changes as USAID personnel rotated in and out. Contract funding levels became unpredictable from one year to the next, and even within the same year. Often the volatility was outside USAID’s control and resulted from shifting priorities in the State Department and the Pentagon. Contractors were continually required to modify work plans, adjust targets, and revise their budgets up and down, based on changing directives from their government clients.

Under these difficult conditions, many of the development projects implemented by IDCs were notable for their creativity, professionalism, and measurable results. Such performance was possible only because their technical staff and project managers were adept at understanding local conditions, building trust with stakeholders, mentoring and developing local professional staff, and deciding when, where, and how to carry out activities critical to project success. The fact

that civilian U.S. government personnel had very limited mobility “outside the wire” meant that such capabilities among IDCs and other experienced implementing partners were indispensable to get things moving on the ground.

In theory, capacity for outreach and practical execution by IDCs should have solidified the sense of partnership and interdependence between the U.S. government and its service providers. But the overall environment was highly politicized, and any work being performed by “contractors” could be called into question, because media coverage and audit reports had spotlighted shoddy, unprofessional and costly work by a number of security companies that worked for State and the Pentagon. The spillover of negative reports into the development sector put USAID on the defensive. It had been given a virtually impossible mandate to begin with, to disburse and manage a vastly larger program budget in the midst of conflict and political tensions, without having had adequate time to beef up its technical and management ranks. The agency’s latitude for making decisions based on development principles and facts on the ground was seriously constrained by its subordination to the State Department. As a result, the relationship with its service providers was less stable and trusting than it had been before the surge in program funding for the front-line states.

In other parts of the world, the relationship was generally more stable. There, the content of the work was closer to the core development mission of USAID, and to the core competencies of IDCs and other partners.

Security concerns and risks to personnel were far less of a factor. But the management challenges that USAID was dealing with created systemic stress for the agency: large numbers of personnel were pulled from Africa, Asia, and Latin America to serve in the front-line states, creating higher turnover in almost every overseas mission; competitions for contracts and cooperative agreements took

50 Years in Development: How Private Companies Adapt & Deliver

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longer; and implementation teams had to cope with similar volatility in funding levels and frequent requests for revisions to their work plans.

Looking ahead, as the surge of funding for the front-line states subsides, and the overall U.S. foreign assistance program resumes a more traditional shape, further adaptation and resilience on the part of IDCs will inevitably be required.

The Obama administration’s far-reaching initiative known as USAID Forward aims at remedying many of the systemic weaknesses that have made the past several years so stressful and difficult. A central theme in USAID Forward is the need to respond to changes on the development landscape, by aligning U.S. foreign assistance more closely with the policies and practices of other major donors. The latter now place increased emphasis on using recipient countries’ government institutions and domestic service providers, both NGOs and private companies.

USAID Forward has a highly aggressive target of disbursing 30% of the agency’s program funds through local channels by 2015. This has raised questions about the feasibility and inherent risks of fast-tracking this new model in countries where the U.S. has used local sourcing previously to a limited degree, or not at all.

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Programs in the front-line states were especially vulnerable to simultaneous criticism both for slow “burn rates” and deficient supervision and oversight of implementing partners.

Some of the public messaging that accompanies USAID Forward either implies, or states explicitly, that the agency’s traditional U.S. partners will become progressively less essential and relevant, because local sourcing can provide comparable or better results at lower cost, and more sustainably. This rhetoric masks some assumptions that are unproven, and possibly unsound. In reality, IDCs and other USAID partners usually work more directly with host country stakeholders, and have a better understanding of their institutions and cultural characteristics, than their U.S. government clients. This knowledge of strengths, weaknesses, and gaps in country systems should be tapped if the longer term vision of country-owned development is to be realized.

Rather than being sidelined, IDCs represent a resource that should be applied to the task of capacity building with and for host country organizations that aspire to be fully empowered partners of USAID and other international donor agencies in the future.

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50 Years in Development: How Private Companies Adapt & Deliver