Opinion: USAID funding to local orgs may hurt localization’s larger goal

While the U.S. Agency for International Development has established a four-part strategy to encourage localization, the channeling of 25% of the agency’s budget directly to local organizations by 2025 has understandably monopolized the conversation. Yet, this metric dangerously oversimplifies a highly complex process and the burden on local groups could actually be counterproductive. Not only does it ignore the political economy constraints of foreign aid, but it could also have unintended consequences that could weaken foreign aid’s credibility and effectiveness. This is an unfortunate and certainly unintentional development. Such a focus risks undermining our collective goal of shifting power to the people, communities, and institutions our foreign aid is designed to support. The international development community should consider the consequences honestly and objectively and work together without recrimination to seize the opportunity that is underway with the paradigm shift toward more locally led development. The political economy of localization Vastly increasing direct funding to local groups and organizations will not alone make USAID programming more locally driven. The mistaken assumption is that by circumventing U.S.-based implementing partners, or IPs — i.e., the constellation of international consulting firms, NGOs, and humanitarian-focused nonprofits — USAID can better advance localization. However, just like traditional IPs, USAID is also an outsider. Even when USAID provides funding directly to local organizations, the inherent power asymmetry of foreign aid stays unchanged. Given USAID is answerable to Capitol Hill and must uphold fiduciary responsibility to the U.S. taxpayer, it would continue to exercise power and influence even if there were no traditional IPs acting as intermediaries. A more genuine approach would recognize that shifting leadership, decision making, and ownership to the people and institutions who are best able to drive their own change would require confronting the political economy of aid. These are the dynamics, incentives, and constraints that shape the behavior of USAID and others in the U.S. foreign aid system. Oversight from Capitol Hill, dizzying compliance regulations, risk aversion, budget rigidity, and culture are just a few factors that would need to be addressed not only to substantially increase the volume of direct awards but more importantly to truly shift power from external to local groups within the foreign aid system. It is due to this political economy that USAID has long outsourced its risk management function to traditional U.S.-based IPs. Whether they are consulting firms, NGOs, or humanitarian-focused nonprofits, traditional IPs act as the U.S. government’s fiduciaries, putting in place sophisticated compliance departments to manage the program and financial risks. To manage this risk, traditional IPs establish extensive procurement, financial accounting, recruiting, knowledge management, monitoring and reporting, and HR systems. These systems respond to the U.S. government’s intense compliance expectations and are funded through indirect rates. Indirect rates are applied in much the same way by for-profit and nonprofit organizations and represent justifiable costs of doing international development. True localization is a complex, long-term endeavor that cannot be achieved by simply transferring funds. --— Because local organizations don’t work on the same global scale and are not structured in the same way as traditional IPs, it is not fair and would not make business sense to ask them to invest in complex systems to comply with one specific donor’s accounting requirements. USAID could develop its own internal risk management function and not rely on traditional IPs or local groups to manage risk and ensure compliance. But this is simply not feasible without a fundamental transformation and restructuring of the agency. Given this reality, along with the heavy public scrutiny and outright suspicion in some quarters of U.S. foreign aid, it would be unwise to fundamentally reform how fiduciary risk is managed. Unintended consequences What is more, quadrupling direct awards may actually harm local organizations themselves over the next two years. By routinely implementing larger and more complex awards, local groups will need to pivot toward managing risk and compliance themselves, adopting systems that are too expensive and impractical to serve their comparatively small local markets. Without expanding globally or at least regionally, indirect costs for local organizations will invariably rise and potentially become unsustainably high. As they receive more direct awards, they will spend a far greater proportion of their time managing risk and compliance instead of driving positive change in their countries. They may also become tempted to divert attention from diversifying their funding base, developing cost-recovery models from domestic sources, and end up relying solely on USAID for the entirety of their income. This is not to say that directing some funding to local groups is a bad idea. On the contrary, local organizations should continue competing for development funding. It should not matter whether the funding comes directly from USAID itself or from any one of its many traditional IPs, which routinely award large portions of their USAID awards in the form of grants and subcontracts to local partners. What is important is that any funding, regardless of its source, is not allowed to undermine fledgling organizations’ desire and ability to seek diverse public and private funding, ideally including domestic sources. Membership dues, user fees, and other fee-for-service cost recovery models are also important elements. Encouraging more sustainable financing models such as these and expecting local organizations to encounter actual market forces has the added benefit of strengthening them institutionally, enhancing their accountability and performance, and ultimately boosting the capacity and credibility of civil society itself. Looking ahead As localization advances, all of us within the foreign aid system should cooperate to strengthen local systems, capacity, and impact at scale, rather than try to meet counterproductive direct funding targets. Everyone has a role to play. It is the ability to be flexible and adaptive and deliver low-cost, highly contextualized development programming that makes local organizations truly indispensable. Traditional IPs need to continue ensuring compliance, managing risk, and providing contextually aware capacity strengthening and comparative international experience when applicable. USAID is at its best focusing on evidence-based policy and research and providing high quality funding for impactful, locally led programming. True localization is a complex, long-term endeavor that cannot be achieved by simply transferring funds. Let’s keep the focus where it should be on working together to shift power while appreciating the inherent limitations of the foreign aid system.