Lawsuit alleges illegal grantmaking by USAID

The U.S. Court of Federal Claims will soon hear arguments in a case that could force the U.S. Agency for International Development to reconsider how it spends billions of dollars in U.S. foreign assistance funding. USAID has a range of options when it comes to how it funds development projects around the world. One of the biggest distinctions the agency must make is whether it seeks to procure goods or services — which typically requires a contract — or whether it seeks to fund an organization to advance its own mission — which typically requires a grant or cooperative agreement. Generally speaking, for-profit companies win more contracts, while nonprofit organizations win more grants and cooperative agreements. That means USAID’s choice of which funding instrument to use is a high-stakes decision that can advantage some potential bidders and disadvantage others. The lawsuit — filed by global health for-profit BroadReach Health Development — alleges that USAID chose the wrong instrument to fund an HIV/AIDS program in South Africa which they hoped to bid on. They argue that the agency’s decision to provide funding through a cooperative agreement, rather than having bidders compete for a contract, violates U.S. procurement law and should be reversed by the court. Because the case could have broader implications for the agency’s “choice of instrument,” it has brought renewed attention to an issue that divides parts of the U.S. foreign aid community. The complaint submitted to the court by Broadreach stated that the case presents an opportunity to clarify the Federal Grant and Cooperative Agreement Act — the 1977 law governing federal funding — and “to stop agencies from using grants and cooperative agreements to circumvent the competitive procurement system.” “Congress enacted the Federal Grants and Cooperative Agreements Act to mandate the proper selection of contracts versus assistance agreements. Several bid protests have been litigated in the past decade where agencies have not followed the law. This case presents an opportunity for the Courts to clarify and enforce the law in this area,” Robert Nichols, a lawyer representing Broadreach in the lawsuit, wrote to Devex. “Agencies are not supposed to choose cooperative agreements and grants to avoid competition or to avoid the bid protest process. We all know that’s exactly what they’re doing, but it’s not what they’re supposed to be doing,” Nichols said in an online event about the case last year. The court will hear oral arguments in the case on Feb. 13. One longtime USAID procurement expert and consultant told Devex the allegations in the lawsuit are unconvincing. The agency does have significant flexibility when it comes to choosing which funding instrument to use, and its decisions generally reflect complex, nuanced policies that tend to get oversimplified in public discussions, said Olga Wall, founder and CEO of Avallon Consulting. Wall said that where USAID often falls short is in transparency and clear communication about why it chose one funding instrument over another. However, she does not buy the argument that USAID is purposefully using grants and cooperative agreements to avoid competition. “They would have to be super organized, and they're not organized enough to be the mafia,” she said. “This lawsuit should be thrown out,” she added. Not surprisingly, groups representing for-profit development companies and nonprofit organizations weighed in with starkly opposing views. The Professional Services Council, an industry association representing for-profits, has “long been concerned” about USAID’s choice of instrument, said David Berteau, the organization’s president and CEO. “PSC has always maintained the efficacy of contracts because they provide best value based on a competitive bid process,” he added. USAID did not respond to an inquiry from Devex. In response to an inquiry from Devex, Tom Hart, president and CEO of the NGO coalition InterAction, disputed that USAID has overused grants and cooperative agreements. “We do not agree that USAID has the balance wrong. If anything, given USAID’s mission, grants should be a larger share,” he wrote, adding that directing more funds through contractors “would be more costly for the American taxpayer, reverse efforts to further the journey to self-reliance, and shrink partnerships with local and faith-based organizations.” “At a time of tightening budgets and growing global need, it’s disappointing to see private companies trying to make greater profit off the world’s poor,” he wrote.