Is USAID's 'go local' strategy hurting US small business?

There was a time when U.S. small businesses used to get most of the smaller awards from U.S. Agency for International Development. Now, more and more non-U.S. local partners are bagging those contracts, and as USAID is increasingly “going local,” American small businesses are feeling the pinch of the new policy. This is just one of the unintended consequences of USAID’s local partnership strategy: Small businesses have to compete for awards in a changing yet small market where they are pitted against local partners. Interviews with big-time contractors and small business firms show that the relationship of small businesses with USAID has never been easy, but it’s getting even more complicated under the agency’s new vision to engage local partners. From ‘going small’ to ‘going local’ In the past two decades, USAID has been accommodating small businesses — asking them to become subcontractors, inviting them to mentor-protégé boot camps, hosting conferences with prime contractors, even setting up offices for them. The agency engages with different types of small firms: Disadvantaged, veteran-owned, disabled veteran-owned, women-owned and belonging to historically-underutilized business areas, among others. But this policy seems to have been undermined, according to sources consulted by Devex, after the “going local” agenda was formally set forth by USAID Forward, a package of ambitious reforms aimed at building local partnerships, investing in innovation and demanding quality results. Since the agency unveiled the strategy in 2009, some small businesses are finding it harder to win projects. In practice, the most effective way to get awards from USAID is to work with a partner who knows the ins and outs of USAID contracting. Most of the time, small business holders get subcontracts with an organization currently being funded by USAID. And from there on, small businesses build relationships and prove their worth to USAID. Some small business firms are being rejected by their longtime partners as procurement proposals coming from the agency ask for local partners. One small business group told Devex that five prime contractors have turned them down recently. When they knew of projects and talked with the prime contractors, a lot of times they would say: “We would have hired you, but we need more local national partners.” This “going local” push, according to this group, is ultimately hurting the kind of boutique niche markets and small consultancy firms that USAID has been partnering with for a long time. And this fear may become even bigger soon, once prime contractors realize they can get much cheaper local partners. However, the small business group noted that choice may also mean a less quality job in the end. One prime contractor recalls recent instances when USAID asked their firm to remove U.S.-based small businesses from their bids so the implementer would engage more with local partners. Coping mechanisms For small businesses, the reality is that USAID will increasingly shift its focus to local partners and there is nothing they can do about it. They see how they and local partners can actually work together in the near future — but only if USAID listens and hears their suggestions. Small businesses see themselves in the coming years playing more of a managerial role in capacity building for local partners. That way they will provide some international expertise, but local partners will still largely do the work on the ground. This may also mean prime contractors will have to subcontract some of the work to small businesses which then provide support to local partners, or USAID will contract out work to small businesses to help local partners. This type of relationship might be complicated given that implementers consulted by Devex said U.S.-based small businesses do also need help in building their capacity in areas such as financial management, accountability or technical expertise. However, the recent revisions in the template for multi-award indefinite quantity contracts (IQCs) can provide some impetus for this relationship to grow. IQCs request implementers to provide an indefinite amount of supplies or services to USAID around the world at pre-negotiated price for a fixed period, usually five years. The draft IQC template – circulated by USAID to implementers since last year — introduces a new actor in the field: a “major subcontractor” is an organization expected to perform at least 20 percent of the technical effort or provide the professional expertise for any particular sector, even if the sector is expected to be less than 20 percent of the effort under the contract. This kind of relationship breeds a hierarchy of subcontracting, but for small businesses, it might actually save them from going out of business. They also see the need in the future to build in-country offices so they can chase procurement opportunities available to local national partners. Standing up to the ‘big guys’ Under the current business climate at USAID, small businesses complain it is tough enough to win any type of contract. Prime implementers told Devex the agency’s mentality still favors big contractors, which find it easier to follow regulations and processes that seem to have been mapped out for them by the agency. One small business owner outside of the Washington, D.C. center of power recalled instances when they partnered with other small businesses to chase after awards from USAID, but in the end the “big guys” consistently won the contracts. Prime implementers on the other hand expressed frustration at how USAID blames them for the uneven playing field in the U.S. aid market. They argue it is the agency that puts in place the system in the first place and they just follow the agency’s protocol. Those processes, according to small businesses, are set up in such a way that the agency expect small businesses to have virtually the same financial and human resources as the “big guys,” and for instance the small non-Washington, D.C.-based firm noted that while it was expected to pay several million dollars in trainings, the same was not required by USAID in the case of the prime contractor. Long lists So how will USAID really help small businesses? The solution, small and large firms say, is simple: The agency should provide more awards set aside for small business holders and put in place quotas in contracts and cooperative agreements. U.S.-based organization Small Business Association for International Companies has long been advocating for USAID to clearly communicate with missions on the use of small business and local partners and use standard language in RFPs so the missions clearly understand that small businesses are elegible for task orders worth up to $4 million under IQCs. The agency, the group adds, should also be willing to do enough “directed contracting” under this threshold when only one small business IQC holder is qualified or hold limited competition when there are multiple competitors, while for single-award and overseas procurements, the agency should increase the number of set-aside procurements. Big partners, meanwhile, suggest USAID should hold them accountable to make sure they work out their small business subcontracting plan and actually allocate work for small firms. They also believe USAID should improve its mentor-protégé program, which is intended to enhance capacities of small businesses to perform as prime contractors and subcontractors. For instance, the agency should develop an award system for large businesses helping small business holders build their capacity. What USAID can do in the meantime, aid partners say, is do more outreach — more seminars, more training, more dedicated staff. Given these concerns, sources consulted by Devex agreed that USAID needs to review its policy on how to coordinate its ongoing policy of promoting U.S. small business in its awards with its newer strategy of engaging local partners in overseas projects, where the “big guys” should still be very influential but never the sole recipients of contracts. 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