Are UK aid contractors doing enough to make local firms competitive?

Facing accusations in the media of profiteering, for-profit contractors working with the United Kingdom’s Department for International Development made the case in Parliament Monday that with the aid agency’s help, they are the best-placed actors to catalyze a shift toward localization.

“I think DfID should and could compel any organizations, whether U.N., NGO or contractor, to build capacity on the ground,” said Sarah Maguire, director of technical services in governance at DAI Europe said during the hearing, on DfID’s use of contractors and their effectiveness. Many Western contractors subcontract local and national NGOs in project implementation, but donors are under pressure to increase direct and indirect engagement with local firms to encourage local ownership.

The U.K. has promised to implement 25 percent of its funding through local organizations by 2020. DfID was unable to provide figures about how much aid is currently implemented through local and national organizations — through priming or subcontracting — but figures range from 3 percent to close to half, based on individual organizations’ reporting the breakdown of their subcontractor pool.

“The more we as contractors are rewarded for working through civil society, the more able we are to use that avenue,” Maguire said when asked whether contractors should be expected to mentor and build up subcontractors’ capacity in recipient countries.

Contractors are under fire from prominent media critics, including another witness at the hearing, Mail on Sunday contributing editor Ian Birrell, who argues that generating a profit from aid work forfeits transparency, public good and value for money. He rejected the idea of contractors needing a “reward” to work through civil society.

Unlike public-private partnerships in public health, a great deal of aid work is difficult to quantify, allowing for what he said is “an abuse of statistics” by Western contractors. “You can quantify what’s happening at the [National Health Service], but it’s too difficult to quantify the impact of aid on say, improving governance in Nigeria,” he said.

‘Poverty barons’ or local mentors?

Birrell took aim at contractors as well as nonprofit implementers for their outsized executive salaries. He claims the Oxfam America head receives a salary of half a million dollars per year, corroborated by the organization’s 2015 annual report at $457,957, and claimed several of the attending organizations’ heads earn more than 300,000 pounds ($436,941), citing Mail on Sunday-initiated research.

The nonprofit trade magazine Third Sector in 2015 listed the Oxfam GB head’s salary as less than $125,000 per year. Save the Children International CEO, Helle Thorning-Schmidt, earns just under $350,000 per year, according to the organization’s tax filings. The top earner “by far” at for-profit firm Adam Smith International earns $340,000 per year, and “took a pay cut” from another position in the private sector “to come and work for us,” Peter Young, director of Adam Smith International, told Devex.

Speaking at the session, Claire Provost, a fellow at the Centre for Investigative Journalism, suggested that the government’s use of contractors is not necessarily a case of overspending for questionable aid impacts. Rather, what she called the U.K.’s “heavy reliance on aid contractors” is the product of a procurement model that should be updated and refocused around local suppliers, with the help and mentorship of the group of larger firms that regularly prime the bulk of DfID contracts.

“You can turn procurement and contracting into development assistance of its own by helping build capacity and local organizations,” Provost said.

“There’s a lot of evidence of how this can magnify the impact that you get with every pound.”

Provost referenced DfID’s 2014 annual report, which states that 90 percent of all contracts go to U.K. firms. Whether or not this suggests U.K. firms are superior at delivery, she said, the statistic points to a lack of competition in the bidding process.

Young told Devex after the hearing that the 90 percent figure is misleading; while it includes all companies that have registered entities in the U.K., these are not all necessarily U.K. firms.

“The vast majority of foreign firms that compete for DfID contracts have established a legal entity in the U.K. from which they are bidding,” Young said. “If you look at the top 11 suppliers, five are British, DAI is American, Palladium is Australian, Coffey was Australian, now American, KPMG is Dutch,” he said.

Still, the field of organizations priming DfID contracts is still dominated by relatively large and Western firms.

One reason for this reliance on Western firms may be logistical. DfID saw its budget increase from 0.56 to 0.72 percent of gross national income from 2012 to 2015, but its staff levels only increased marginally — by less than 10 percent — in comparison, according to DfID annual reports. This means U.K. aid grew its budget without a proportional increase in its capacity to manage funds. That may be limiting DfID’s ability to increase its count of smaller projects, which would be more accessible to local firms, Provost pointed out.

DfID relies heavily on large-scale projects, on which only a handful of larger firms have the capital or the institutional capacity to bid. A 2013 report from the Independent Commission for Aid Impact on DfID’s procurement found that an organization spends an average of 40,000 pounds bidding on a DfID contract, an amount that is likely prohibitive to smaller, local firms.

A sketchy bottom line

But Birrell as well as Diane Abbott, member of the Parliament and shadow secretary of state for international development argue that the fundamental problem of profit remains. For Abbott, a for-profit model simply does not incentivize firms to support and train their subcontractors to eventually compete for bids.

“The private sector consultancies and administrators do not want local contractors to work directly with DfID as they could compete for contracts,” Abbott told Devex.

“They place themselves as gatekeepers between DfID and [civil society organizations], using them only as subcontractors. This means the money and the development expertise remain with Western organizations, which hinders real sustainable development and transformative social change in the global south,” she said.

Provost argued that DfID and other donors are obliged to find ways to open up the market to local suppliers, and that contractors’ own consortia of local organizations is the best place to start.

Young, referencing current ASI projects in fragile and conflict states, said this type of support is already underway. “We’re doing a lot of work in mentoring and bringing forward individuals and companies in these markets,” Young said. He cited examples of local employees in Afghanistan and Sierra Leone moving into team-leader positions.

Apart from anecdotal cases from the field, there are no statistics available that show the balance of new, local entrants and Western-based suppliers in the DfID market. Asked for the data, DfID suggested that Devex submit a Freedom for Information request.

In general, stakeholders throughout the U.K. aid community appear frustrated at the dearth of coherent statistics on local contractors and subcontractors. Likewise, many raised questions about whether knowledge-sharing throughout the supply chain — between for-profit firms and NGOs, subcontractors and prime contractors, and implementers and DfID — is rigorous enough.

DfID’s new key suppliers’ management programme provides a forum for DfID’s largest 11 suppliers to share knowledge. Erika Hoganson, head of DfID partnerships at Crown Agents said these efforts are promising, but still in its early stages.

“Because of the emphasis on new entrants to the market in addition to their key supplier program, they’ve got a healthy market, and really heading in the right direction,” Hogansen said.

“We could always be driving innovation, and asking how we can we improve the spirit of where DfID is trying to go with adaptive programming, and that means allowing for a safe space to be really open and transparent, and be able to communicate what works and doesn’t work,” she said.

On the point of competing statistics and missing information from DfID, Provost said, “It’s one of the reasons why there are so many misinformed debates about aid spending right now.”

Birrell added that “For all its talk of transparency, DfID does all it can to avoid giving any detail on its statistics.”

The way forward

Provost pointed to the United States as a potential model for localization, following recent procurement reforms at the U.S. Agency for International Development, and the agency’s target to direct 30 percent of all aid to local organizations.

“[The U.S.] faced similar problems to DfID, maybe ten years ago, where they also lost a lot of its in-house staff, was also contracting a lot of work out,” Provost said during the hearing. “They’re five years into the reforms, they’ve gotten local procurement from ten percent up to 20 percent, still not at the 30 percent target, but it shows what can be done in five years.”

The USAID initiative, called Local Solutions, saw aid spending toward local organizations at 16.9 percent in 2014, down slightly from 17.9 in 2013. Aid effectiveness advocates claim the initiative led to a positive shift in the relationship between USAID contractors and their subcontracting consortia. As primes, new local USAID contractors also have more influence in program design, an area where many feel local players can offer the most insight and yet have been left out of the equation.

But in the runup to a June 14 parliamentary debate on the legally mandated 0.7 percent of GNI benchmark for aid spending, Young and others questioned whether another benchmark, this time for local partners, might impede U.K. aid’s flexibility, particularly in fragile states.

“DfID definitely wants its key contractors to encourage the development of local capacity and support the contracting of work to local advisers, and what’s needed is going to vary from program to program,” Young told Devex.

“These things are [on a] case by case basis in the tender process and that’s the way it should stay,” he said. For ASI, Young said, local advisors and consultants make up the bulk of implementation in-country. Young named three projects in Nigeria in which locals make up on average about 80 percent of staff. In Syria and Pakistan, the average is 80 and 90 percent, respectively, he said. DAI’s head of communications, Steven O’Connor, told Devex around 48 percent of aid given to DfID is implemented through local organizations.

Provost called on DfID to do more to contract directly with local institutions, something both she and Young said would require a greater DfID presence on the ground. An increase to DfID staff, both centrally and in country offices, could help the department better manage the kinds of programs suitable for smaller, local organizations.

Jeremy Lefroy, MP, a member of the parliamentary International Development Committee, added that increased staffing could also help DfID address some of the issues of tracking the balance of spending between implementing organizations.

“It should just be a matter of using the instruments available to put together the correct information and making it available,” he told Devex at the hearing. “I think part of the issue is staffing — that staff could be increased to help manage some of this.”

Young and others agreed, while the perennial accusations of profiteering remain, the question of contractors’ roles and the need for more DfID staff to supporting new entrants to the DfID market is at least a more productive one, and will hopefully carry into the debate over the 0.7 aid benchmark next week.

For more U.K. news, views and analysis visit the Future of DfID series page, follow @devex on Twitter and tweet using the hashtag #FutureofDfID.

Update, June 8, 2016: This article has been updated to clarify that DfID increased staff between 2012-2015, not between 2013-2014. DfID increased staff from 2,750 to 2,970 during the 2014-2015 period. DfID reached the 0.7 goal in 2014.

Update, June 9, 2016: This article has been updated to clarify that Ian Birrell is contributing editor to the Mail on Sunday. It was also updated to add salary information for Adam Smith International, Oxfam GB and Oxfam America.