What's stopping USAID from localizing?

For the last decade or more, the leaders of the U.S. Agency for International Development have been talking about spending more money at a local level. More recently, USAID Administrator Samantha Power made it a keystone pledge that local organizations should receive 25% of eligible funding by 2025. But progress has been relatively slow. When USAID released its progress report for 2022, it showed an increase in local spending on the previous year, but only to just over 10% of eligible funding — way below the target. Power herself is not overly optimistic. She has told Congress the targets will be hard to hit. Meanwhile, the target itself is under question. It applies to less than half of USAID’s overall spending, which critics say is not enough. It means the agency only needs to spend a modest $4 billion a year with local organizations — out of a total pot of more than $36 billion — to hit the target. Current local spending is around $1.6 billion. Progress is also nebulous on another of Powers’ targets — that by 2030, 50% of programming will place local communities in the lead. USAID defined what the target will involve last year, but is only starting to track results. Power has invested capital in making localization happen. She has appointed a senior figure, Sarah Rose, as senior adviser for localization, and tasked her with delivering on USAID’s pledges. And broadly, both staff and suppliers seem to have lined up behind the objective. But USAID itself has been sanguine in its public comments about the fact that it is moving slowly, and expects to continue to do so. “Systemic organizational and cultural shifts take time, and we are grateful for the immense contributions of our workforce and the development community in this ongoing dialogue on how best to design, implement and prioritize these changes,” a USAID spokesperson told Devex. “USAID has worked to holistically approach our localization commitment, recognizing that one of the challenges of institutionalizing a shift of this type is the volume of changes that are needed across the different spheres of policy, practice, and culture, not to mention regulatory and legislative changes that could be supportive.” “We are continuing to incorporate and build upon the feedback and lessons learned as we drive toward our ambitious localization goals. It’s not just a set of targets, it’s about all the ways we can strengthen the path to support more locally led, sustained results and stronger local systems.” So what is holding USAID from localizing — and what can the agency do about it? What needs to change? For localization to succeed, many experts say that USAID has to give money away differently. Right now, most USAID funding is given out via multimillion-dollar grants and contracts. The agency specifies what it wants to happen, and suppliers compete to perform those services. A small number of very large, highly specialized entities have set themselves up to receive USAID funds, and these organizations consistently win open competitions. To get more money to local organizations, USAID needs to change this process. There are several ways to do this. USAID can help local organizations build capacity to bid; redesign the bidding process to favor them; or create awards that are better suited to them. A lot of USAID’s own rhetoric has focused on the first. It has a new local capacity strengthening policy and has set up the website workwithUSAID.org to help local entities. But no matter how well local partners adapt, they are unlikely to be able to out-compete existing implementers, with advantages of connections and location, who have spent years designing their practices to meet USAID’s needs. It’s also questionable whether this would represent success. Part of the reason to fund local entities is that they are different from USAID’s current suppliers. Turning local organizations into entities that can compete in the current process could require them to change the things that make them attractive — that they’re small, responsive, and deeply embedded in their communities. To change the bidding process itself, USAID could make smaller awards that are more appropriate for the entities they are trying to fund, instead of vast awards that can only be absorbed by equally vast organizations. Or structures could favor location. USAID could ringfence contracts for local organizations, or at least score bids from local organizations more favorably — solutions suggested by local organizations themselves. Or it could build in sunset clauses that require international contractors to hand over contracts to local entities when the work is finished, which it has done with some of its work for the U.S. President's Emergency Plan for AIDS Relief, or PEPFAR. USAID is also trying to address perennial bureaucratic issues: overheads, identity numbers, translation into other languages, and overly bulky risk assessments. A new acquisition and assistance strategy last year identified cutting red tape as one of its three main goals. USAID is also trying to do more “co-creation”: the process of involving local organizations in designing its awards. Local leaders are generally highly supportive of this, but it’s an expensive process for local entities to engage in and comes with no guarantee of any money. So local leaders have repeatedly told USAID to pay for this work. It can work. Other smaller U.S. funders such as the Inter-American Foundation and the U.S. African Development Foundation have implemented many of these practices, and provide a high percentage of funds to local organizations. And USAID has successfully made pro-localization changes in the past when delivering HIV/AIDs funding on behalf of PEPFAR, which channels 70% of its funding to local organizations, and has asked USAID to do the same. Much of the local funding USAID currently provides originated with PEPFAR, and a USAID official told Devex that the agency views the PEPFAR awards as a proof of concept that it can localize successfully. Justin Fugle, the head of policy at Plan International, has described how USAID’s PEPFAR model could be transferred to other areas. He identified six factors that made it possible: a clear ambitious goal; strong leadership toward that goal; strong data systems to measure progress; capacity-strengthening measures for local partners; capacity-strengthening measures for USAID staffers themselves; and expedited procurement approaches, which make it easier for local entities to win business. What are the barriers to delivery? So why is this so hard? One big issue is capacity. Localization ideally requires making many more smaller awards. But many small awards require more staff hours than a few large ones. USAID has a well-publicized staffing crisis, particularly when it comes to contracting and agreement officers — the individuals in charge of awarding funding — partly because the agency is limited in how many staff members it can hire, and where. And USAID also has a limited time to get money out of the door before it risks being clawed back by Congress. This time pressure stifles innovation and co-creation, and pushes staffers back to familiar habits. “USAID outsources program implementation because of the way Congress divides its appropriations between a small pot for operating expenses to run the agency and a much larger allocation to finance programs,” Patrick Fine, the former CEO of FHI 360, wrote in a recent article for the Brookings Institute. “Add in congressional and administrative directives and compliance requirements—to guard against misconduct, support a plethora of priorities, and measure and report on results that respond to domestic advocacy groups—and you have an operating model that has come to rely on purpose-built [implementing partners] who understand and can manage the complex and risky business of working with the U.S. government.” To combat this, USAID has implemented a “burden busting” program with the intention of cutting red tape and freeing up more staff time. A USAID official also told Devex that it takes more staff time to work in locally led ways because it involves listening to local voices, translating documents, and expanding channels of communication. The official also emphasized that USAID has made a number of hires aimed at helping with this, including more than doubling the number of foreign service nationals — local staff in USAID missions — who hold a warrant, which allows more authority to award grants and contracts. It is clear that USAID still wants to hire more local staff, and it wants Congress to give it the operating expenses necessary to do so. In theory, USAID could circumvent some of these staff issues by making a single large award to a third party, expressly so that the third party could make small grants to local providers. This would outsource the administration costs and circumvent the limits on agency staff. This idea has been put forward by, among others, former contracting officer Chuck Pope, who described it as a “good enough” compromise, during a Devex Pro event last year. But Pope said the agency has shown little enthusiasm for this idea. “As the agency chases perfection, these awards are not being made,” he said. Another barrier is that USAID’s goals do not necessarily align that well with those of local entities. Historically, USAID’s partners have been local governments. They want to deliver big projects in areas such as infrastructure, health, and education, so this is what the agency funds. But local organizations do not necessarily want to deliver these kinds of projects. Nor do they have the skills or scale to do so. “While local organizations are hungry for USAID funding, most do not aspire to be de facto U.S. government contractors,” Fine wrote in his recent article. “Moreover, for them, localization means foreign aid grants to pursue their mission, not USAID’s.” USAID is also heavily scrutinized, with much of the scrutiny focused on ensuring that funds are not misused, diverted, or stolen. And it is bound by government procurement regulations aimed at domestic contractors, which do not take into account USAID’s very different context. On top of that, Congress is filled with Republicans skeptical of U.S. foreign assistance. If something does go wrong with a localization project, critics could pounce on any mistakes to paint the entire agency in a bad light. So it’s not surprising that USAID has come to have thorough, but often burdensome, accounting and reporting regimes before it parts with money — requirements that can be difficult for small organizations, or those unaccustomed to working with big Western donors, to meet. USAID is spending American taxpayer money and thus has a responsibility to be transparent and accountable about the results. So it is reasonable that it is risk-averse about fraud and mismanagement. But as USAID itself has pointed out, there is another kind of risk — the risk that nothing gets done. The aid community has repeatedly said development funders should focus less on compliance and more on results. But it’s hard to do in practice. USAID is naturally concerned that if it does so, it might get hauled in front of Congress. Nonetheless, the agency is trying to shift the needle. In 2022, it published an updated risk appetite statement, which Power said was intended to show “a high appetite for taking smart and disciplined risks in working with local partners.” USAID spending is also limited by congressional budget rules. George Ingram, a senior fellow at Brookings, has criticized this rigidity, which tells USAID what it can spend money on, and where, and how. It also routinely hands over money late but claws it back if it isn’t spent in time. Congress, he told Devex, is sending mixed messages. It is supportive of localization in the abstract, but has not changed its practices to offer support. And others are similar. “Samantha Power has made localization a prime objective of USAID,” he said. “But it is not a prime objective of the National Security Council, or of the State Department. They want that aid money used for geopolitical purposes, not for building up nice little local organizations. And they want more control in the headquarters and Washington, not out in the field.” Others, though, would caution against placing too much emphasis on Congress as a barrier. In testimony to the U.S. Senate Committee on Foreign Relations last year, for example, former USAID chief of staff Bill Steiger argued that the agency “already has the legal authorities and other tools necessary to pursue a comprehensive localization agenda.” And USAID itself has tended to downplay the importance of congressional earmarks, with officials saying that while more flexibility would make it easier to respond to local capabilities, there is scope within earmarks to ask local organizations their priorities and design ways to offer grants to help. Steiger argued that it’s down to USAID to change its own culture and behaviors, and Ingram believes staff are supportive of that shift. “USAID is not a place you go to make money,” he told Devex. “You go to work there, for most people, because you really do buy into the mission. And if you buy into the mission of promoting development, localization is just the logical thing to support.” But staff may also feel other pressures, not least the desire to do what is known to have worked in the past, and the requirement to follow the rules. Under particular pressure in this scenario is the procurement function, which holds a lot of power within the agency; Ingram described it as a “toll booth” in the process of moving projects along. “[Samantha Power] can't dictate to the procurement officers to be less risk averse,” Ingram said. “They have to follow U.S. rules and regulations. They have their own fiduciary responsibilities.” This suggests that leaders within USAID do not always have their hands on all the levers of change they would like to move. They are not as all-powerful as some private sector CEOs, Ingram said. They must help staff to feel sufficient confidence that they have the coverage to make radical changes. Ingram described USAID as a battleship — powerful, but very slow to turn. USAID, after all, commits funding in multiyear tranches, often agreed far in advance. Even if radical changes to program design were to begin under Power, many of those changes would only emerge during the reign of her successor, while Power is potentially reaping the benefits of incremental changes made under her predecessors, which were invisible during their tenure. All of which means that while USAID is working hard to achieve its localization goals, progress is likely to remain slow and steady for a while.