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Business Insight: USAID Country Systems

In Washington, questions linger over risks and rewards of new aid model

By Pete Troilo21 May 2012

Rajiv Shah, administrator of the U.S. Agency for International Development, visits a tent city for earthquake survivors in Port-au-Prince, Haiti, on Jan. 23, 2010. Photo by: Tech. Sgt. Dennis J. Henry, Jr., USAF / CC BY-NC-SA

Reliance on country systems – the concept that aid should be channeled through institutions and systems of recipient states – is gaining traction across the donor community, including in the United States. On Friday, while announcing the New Alliance for Food and Nutrition Security initiative, U.S. President Barack Obama underscored the importance of governments taking the lead in their countries’ development, donors aligning their investments with country plans, and engagement with the private sector “from large multinationals to small African cooperatives, [developing country] NGOs and civil society groups.”

Under its USAID Forward reform agenda, the U.S. Agency for International Development has pledged to channel 30 percent of its assistance through country systems – governments, local businesses, and local nongovernmental organizations – by 2015, up from 13 percent today. Country ownership is also a fundamental element of each of the Obama administration’s marquee global development initiatives: Feed the Future, the Global Health Initiative, and the Global Climate Change Initiative.

The trend towards country systems is evident in the countries facing the most significant development challenges and receiving the highest levels of U.S. assistance. For instance, in earthquake-ravaged Haiti, Elizabeth Hogan, director of USAID’s task team in the country, recently told Devex that while transitioning to local systems would take time, the agency has already worked directly or through subcontractors with about 500 Haitian firms since the disaster. And in order to make U.S. foreign assistance to Afghanistan more sustainable amid the troop drawdown, the Obama administration has set a goal of channeling at least half of all U.S. aid money for the country through the Afghan government’s core budget by this year.

Reputable third parties are beginning to assess this new strategic commitment of the U.S. aid regime.

A 2011 Organization for Economic Cooperation and Development review of American foreign assistance observed that the United States “is constructively trying to find ways to use country systems more often.” The OECD adds that more transparent systems as well as political will are both critical to furthering the use of country systems across the U.S. aid architecture.

Oxfam America has just released a report titled “New USAID reforms put foreign aid to work fighting corruption and waste.” According to the report, USAID has completed risk assessments to evaluate public financial management systems in Liberia, Rwanda and Uganda – a prerequisite, agency officials say, to localized procurement and project administration – and is training their staff on how to better engage local organizations to help them build their competencies as well as compete for U.S. assistance. The report also sheds light on the costs of bypassing local systems. “The cost of contracts for any consultant is high so it takes a chunk of aid. You have to hire them abroad, put them in a hotel, pay them very good lump sum money, and sometimes you can find some local consultants, very skillful, and you would save costs,” says an official with Liberia’s Ministry of Education quoted by Oxfam America.

Also this month, the Center for Global Development and the Center for American Progress rolled out the findings of its 15-member bipartisan working group tasked with reevaluating U.S. aid priorities. As one of four “big ideas” for reorienting U.S. international affairs spending amid a budget-constrained environment, the working group recommends that Washington redouble its efforts to transition programming under the President’s Emergency Plan for AIDS Relief to country ownership. Highlighting successes in South Africa, as documented in a December 2011 report by the Center for Strategic and International Studies, the working group calls upon middle-income countries participating in PEPFAR to assume more of the initiative’s financial and managerial burden. For fiscal 2013, PEPFAR is slated to garner the bulk of the Obama administration’s proposed $7.9 billion in spending for global health, which is the largest foreign aid account in the U.S. international affairs budget.

Yet while leading Democrats on Capitol Hill have endorsed the Obama administration’s moves towards country-led development, country systems have been met with a much cooler reception among House Republicans. In an April letter to USAID Administrator Rajiv Shah, House Oversight and Government Reform Committee Chairman Darrell Issa (R-Calif.) and Reps. Jason Chaffetz (R-Utah) and James Lankford (R-Okla.) warn that USAID still lacks the oversight capabilities to shield U.S. aid dollars from waste, fraud and abuse by foreign entities and that instead, the agency should pursue prospective partners which are subject to U.S. legal jurisdiction. Issa and his Republican colleagues cite a 2011 memorandum from the USAID Office of Inspector General which states that USAID failed to conduct mandatory annual audits of about $500 million in funds transferred to 52 foreign recipients in fiscal 2009.

These political positions are likely informed by some history. In 1989, 56 percent of USAID funding flowed through country systems until it and other American foreign assistance organizations were burned by a flurry of investigations over the misuse of U.S. foreign aid by host countries. In a 2011 evaluation of USAID’s implementation of the Paris Declaration on Aid Effectiveness, consulting firm Social Impact suggests that these developments not only turned USAID away from country systems, but also made it a much more risk-averse institution overall.

Within the last year, over 50 of the largest aid contractors in the U.S. have formed the Coalition of International Development Companies to communicate what they say is the value of the American development industry: accountable, transparent and sustainable solutions to address global challenges. In an op-ed for the Federal Times, the presidents of CIDC member firms Creative Associates International and Development & Training Services make the case that they can play a complementary role to country systems. “Whether it is an urban health clinic or rural water project, we aim for local ownership as soon as possible, and our projects frequently employ as many as nine local workers for every American,” argue Charito Kruvant and Indira K. Ahluwalia.

On the other side, Oxfam America has begun circulating an open letter signed by representatives of 16 leading civil society groups from around the world, urging U.S. lawmakers to support USAID’s efforts to work more directly with local organizations. The letter reads, “We hope you will support [USAID] efforts to invest modest sums—less than one third of USAID’s total investments—through local watchdogs, businesses, and governments in developing countries. More than anyone else, we know the costs of corruption, and we want to work directly with the U.S. government to end it.”

In other interesting developments, Senate Foreign Relations Committee ranking member Richard Lugar (R-Ind.), a high-profile champion of U.S. foreign aid in that chamber’s Republican caucus who has commended USAID’s shift to country ownership, will not be returning to Washington next year having lost his bid for renomination earlier this month.

USAID still has a long way to go to catch up with its peers. Case in point: the European Commission reports that back in 2009, it had already achieved its target of channeling 50 percent of its government-to-government assistance through country systems. The 2008 Accra Agenda for Action commits donors “to channel 50 percent or more of government-to-government assistance through country fiduciary systems.” In the 2011 Brookings Institution and Center for Global Development Quality of Official Development Assistance assessment, the U.S. ranked second to last among 30 donors in its use of country systems, just inching ahead of Luxembourg.

Moreover, while the EC and other donors such as the United Kingdom and Sweden transfer large portions of their development assistance directly to government treasuries – part of a more expansive definition of country systems – the U.S. government has been authorized to use general budget support only for strategic partners including Jordan, Egypt and Afghanistan. U.S. foreign assistance is largely disbursed through project-based support, where funds are allocated for specific projects.

Recent revelations by State Department officials that inefficient bureaucracies and delays due to long negotiations with recipient countries have left a staggering $1.5 billion in PEPFAR funding still in the pipeline will only add complexity and zeal to the debate. Critics charge that with the U.S. government apparently unable to keep track of every aid dollar, it would be foolhardy to expect the same of foreign entities. The challenge here for USAID will be to ensure that its efforts to strengthen monitoring and evaluation as well as transition to country systems – both pillars of USAID Forward – keep pace with one another.

With all these important issues up for discussion and as Congress deliberates President Obama’s $56.4 billion international affairs budget request for fiscal 2013, we are interested in hearing your thoughts. Leave a comment below and let the Devex community know.

Lorenzo Piccio contributed to this report.

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About the author

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Pete Troilo

As director of global advisory and analysis, Pete manages all Devex research and analysis operations worldwide and monitors key trends in the global development business. Prior to joining Devex, Pete was a political and security risk consultant with a focus on Southeast Asia. He has also advised the U.S. government on foreign policy and led projects for the Asian Development Bank and International Finance Corp.


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