Why the private sector shouldn’t deliver aid

Delivering development and humanitarian projects is a big business, and a very profitable one. DFID will spend well over a billion pounds through the private sector in 2013-14, about 11% of its budget. This blog argues that using the private sector to deliver aid exacerbates some of the worst aspects of the development sector, leading to short-term, unaccountable aid projects.

Private sector contractors are typically selected through an open tender; competitors bid to win a contract, demonstrating that they can deliver quality outputs at the lowest possible price. Motivated by profit and drawing upon private sector expertise, contractors could be more efficient than NGOs, more reliable than local partners, and cheaper than direct delivery by DFID. It’s a seductive logic, and something we’re all familiar with; I go to the burger joint down the road because it sells the tastiest burgers at the lowest price.

However, open tenders encourage the winners to deliver aid in the worst possible way. Businesses typically win contracts for five years or less, and so have an incentive to focus on the short term. Cynically put, their economic interest is served by perpetuating the situation which they benefit from, rather than building local capacity or handing over to local partners.

Moreover, the accountability of private sector contractors is exclusively to their funder. There is no incentive to involve local communities in their work, which slows programmes down and costs money. Effective monitoring and evaluation can be deprioritised; why spend money on something which might make you look bad?

Of course, you could level similar accusations against other methods of delivering aid. In particular, NGOs are also dependent on funders, and tender for bids. Perhaps NGOs have a moderate countervailing force; they’re generally set up with an explicit social rather than financial purpose, which can affect the incentives that the staff work under. At some level, most senior managers in NGOs are required to care about more than burn rates and deadlines. In private sector contractors, by contrast, directors are often not from the development sector, and will have no institutional incentive beyond profit (even if they do have individual beliefs or desires to help). (See the comments below for more discussion on this.)

A lot of the current problems in development and humanitarian work come from misaligned incentives. The people who deliver aid have little incentive to think about the long term, to listen to or involve the people who they are delivering aid to, or effectively monitor and evaluate programmes. The only way the sector will improve is if donors think harder about how to improve these incentives, perhaps through longer-term partnerships with organisations sharing the same aims. Spending more and more money through tenders to the private sector is a big step in the wrong direction.

Footnotes:

By ‘private sector contractors’ we mean operators that are primarily driven by a financial imperative. This doesn’t necessarily include all those working in the private sector – though if they’re not primarily driven by financial imperatives then I would view them more as NGOs.

This certainly isn’t an argument against engaging with the private sector. The private sector is a key source of income and employment, and a more functional private sector in developing countries (including increased access to multinational firms, I think) should be a key aim of development projects. That’s a very different case from saying that the private sector should be a significant deliverer of aid.

Finally, as you can probably tell, I am quite short of ideas for ways that donors and governments could genuinely align incentives so that deliverers of development aid are not encouraged to focus on short-term, unaccountable projects. Ideas welcome in comments!

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12 thoughts on “Why the private sector shouldn’t deliver aid

    • I basically agree. I think a system which relies purely on tendering out contracts will inevitably produce the results I complain about above – and this is part of the reason that NGOs have been so heavily criticised over the years.

      While I have no perfect solution, I think part of it has to be to try and move away from tendering pre-designed projects to a system where donors support NGOs, civil society, or anyone with aligned interests. M&E should be to help understand and improve – rather than the adverserial ‘did you do it right’? you get in a contract. I think it’s also important for donors to keep the capacity for direct delivery – the increase in use of the private sector has been at least partly at the expense of donors own capacity to deliver aid, I think. Arguably this makes donors much more disconnected from facts on the ground, since they don’t have to deal with them except through the medium of project reports.

      Your blog was interesting – though see our rebuttal of that ICAI report here https://aidleap.wordpress.com/2013/06/05/new-report-aims-to-scrutinise-spending-on-contractors-and-fails-miserably/

  1. I actually find this quite offensive, particularly: “Perhaps NGOs have a moderate countervailing force; they’re often staffed by people who joined the sector because they genuinely care about development”. Perhaps people work in the private sector because there is no opportunity to work for an NGO where they live or they don’t understand what the qualitative difference is between this NGO that does gender sensitised climate change focused disaster reduction ‘programming’ and the one next door that appears to do exactly the same. How about we recognise that committed people with good experience and intellectual rigour can be found in a range of places and ‘good development’ is about harnessing what they have to offer to achieve meaningful outcomes?

    • Fair enough, that was clumsily phrased and I didn’t mean to imply that everyone who works in the private sector doesn’t care about their work. I will edit accordingly.

      However, NGOs often have several institutional systems designed to ensure that their staff don’t get trapped in discussions about burn rates and accountability to their funders. Actionaid’s accountability, learning and planning system comes to mind. For others, it might be the influence of volunteers (MSF?), a kind of founding myth, or simply the fact that everyone who the staff talk to say ‘oh, you must be doing such good work!’ I haven’t seen many equivalents in private sector contractors, though would be happy to see some examples. Overall, I think that this is less likely to happen in an organisation driven by primarily financial incentives. You can get plenty of committed people with good experience and intellectual rigour – but if the directors, shareholders, or whoever make the ultimate decisions are primarily interested in the bottom line, then that’s going to filter down.

  2. I think the argument you are making is more about tendered contracts and the general habits of the aid sector, not the weakness of the private sector as a contractor. I’ve never worked for a private sector aid organisation but I don’t think they’re inherently worse at delivering on those contracts than NGOs. (Having said that, full disclosure, as an independent consultant maybe I am “private sector”?).

    Where the problem really lies in my view is in measurement of results. So long as contracts don’t specify or measure real results (other than burn rate), I think we’re likely to get poor implementation, whether the private sector or an NGO implements. If NGOs and private sector are competing for the same contracts (they often are), I don’t think the financial incentives really come into it since their tenders will be judged on cost among other things.

    I can see what you are getting at in your characterisation of the motives of private vs NGO organisations but I just don’t see it as clear cut; and certainly by the time we’re talking about the implementation of multi-million pound contracts, I think there is so much baggage in the aid and tendering system that they end up behaving more or less the same. NGOs under contract have burn rates too.

    What is different between private and NGOs is that NGOs can access grant (as opposed to contract) financing that the private sector cannot access. This gives NGOs the scope to define their own programmes, test new approaches… an interesting way to flip your question would be to ask what private sector organisations might achieve with grants?

    I’d be interested to know your thoughts on Development Impact Bonds – whereby investors (presumably they will often be private ones) take a risk by investing their capital in getting results on a given issue, and get paid a return by a donor or government if they achieve those results? (NB although this model tends to assume the finance will be private, there is nothing to stop those investors working with either private or NGO implementers for the actual delivery).

    • Thanks Matthew for that interesting comment. The discussion on this blog has been particularly thought-provoking – perhaps because my thoughts are still only half formed.

      I agree that the private sector is not inherently worse at delivering on contracts – or at least, I have no evidence to the contrary. I think that the question is important and has received relatively little attention. There is a huge volume of work critiquing NGOs and development in various forms, but I have seen relatively little focused on the specific issues raised by private sector contractors.

      Your three questions – about results, grant-based funding, and development impact bonds – are all closely related. Basically, my problem with development impact bonds is that there are relatively few sectors with the kind of easily measurable, tightly defined outcomes that you need for that kind of system. I think prison rehabilitation is one good example and the Peterborough scheme has a lot of potential – but I don’t think this can easily be generalised, especially given the much greater data quality issues in most developing countries.

      Consequently, I think the drive to measure ‘real results’ can be illusory. Successful M&E in most sectors will require large amounts of qualitative, subjective judgement. Even if the results themselves are quantifiable – which they generally aren’t – questions around attribution, distribution and sustainability of outcomes need rich, qualitative, and often subjective data. This requires the participation of the country team to supply honest monitoring data, and it is difficult for an evaluator to be enough of an outside to be independent, but enough of an insider to really understand what is happening. So I am slightly sceptical about the possibility of regularly holding programmes to account purely through measuring results. It will be great in some cases, but not widely applicable. Perhaps I am biased because I work in a particularly fluffy sector . . .

      Which leads to the final question about grant based funding. If I was a donor, I would feel far more comfortable giving a grant to an organisation with a social aim than a financial one. Could DFID really justify giving an unrestricted grant of (say) ten million dollars to one of the big four consulting firms? How easily could they establish the outcomes and impact of the grant, and does the very attempt bias the consulting firm towards easily measurable, but perhaps less transformative outcomes? How do they say what is a ‘good enough’ use of money? How could they be sure that the unrestricted nature of the funding doesn’t just increase the profit margins of the firm? You might be willing to give relatively unrestricted funding to civil society because you support their goal and believe they have the capacity to deliver. But I think a relationship with a private contractor is necessarily results-based; and as discussed above I am not convinced that this is achievable.

      • I’m personally unsure about private sector organisations getting grant funding (and of course there are rules against them doing public fundraising). But I think some of the issues you’ve outlined in relation to grants apply just as much to NGOs. And although in theory NGOs are more accountable to communities, in practice this doesn’t always happen…

        I work in a fluffy sector too but I think there’s probably a lot of development work and service delivery that can be better specified – but I think sometimes there is a tendency for aid actors to want to over-differentiate between each other (remember, even NGOs are competing for grant or public funds), and the result is that results that maybe could be specified are not. Because each organisation has a “unique” approach (I’m being facetious here but… things along the line of “Skateboarders against Street Litter”!).

        I still think the overall problem is to do with what gets put into contracts, and with the very linear, cookie cutter approach to aid funding, rather than the implementer per se. I also reckon there are probably some things that there is much more capacity in the private sector to do (I’m struggling to think of an NGO that is good at building roads – but development financing pays for a lot of roads).

        Where I do see a big practical difference between private and civil society sectors is that CSOs are more likely to combine service delivery/implementation with a broader vision on justice and change. They will often use their service delivery experience (whether gained through contracting or grants) to inform their social justice and advocacy work; this is where I think the sector is truly unique.

  3. I traveled to Goyavier, Délugé, and Bois-Neuf, Haiti earlier this year to try to meet with farmers benefiting from the US government’s Feed the Future WINNER project in western Haiti, which is being implemented incidentally by Chemonics. What resulted is a small story from a much larger picture of private contractors and aid effectiveness entitled “We are spectators no more,” which appeared in Oxfam’s latest CloseUp magazine last month. See http://www.oxfamamerica.org/articles/we-are-spectators-no-more

    Because they had been working with USAID/Haiti during the feedback process described in the article, the Aid Effectiveness team at Oxfam America reached out to USAID/Haiti for a comment on a draft of the CloseUp story, which features a specific story about a delivery of storage bins to a farmers association in Goyavier by Chemonics, the largest USAID for-profit contractor. The draft of “We are spectators no more” made its way up the chain to Washington, DC, with Oxfam fielding calls from the State Department Office of the Special Haiti Coordinator and a statement on the article being issued. See http://politicsofpoverty.oxfamamerica.org/2013/10/17/oxfam-article-on-feed-the-future-in-haiti-causes-a-stir-in-washington-dc/

    When citizens are conveying their side of the story, this clearly can have ripples throughout the layers of aid bureaucracy. As other commenters have added about good intentions not being identified with one entity over another, it was not surprising to me that differences in viewpoints between farmers, farmers association leaders, Chemonics, USAID and other stakeholders occurred on this particular story. More importantly, USAID showed that they must be more deliberate and intentional about getting accurate information and representative feedback from people on the ground. Without this, and with the current incentive structures in place for private contractors, development aid often becomes just a check-box system of delivery that disregards local priorities and local realities.

  4. Interesting post. It raises some important questions on how to ensure that implementers are accountable to donors and beneficiaries. I’m not sure I’d agree though, with the blanket statement that the private sector should not deliver aid.

    The ultimate problem is that there are accountability issues – how can donors ensure that private sector contractors are held accountable to certain standards in terms of the quality of output and the achievement of results?

    In reality though, don’t the same accountability issues exist for NGOs? While it’s arguable that most NGOs are driven by an objective to achieve some vision of positive change, not all NGOs are driven to meticulously prove that their projects are achieving the desired impacts. Many will nonetheless continue to seek funding for project after project, regardless of whether not they are contributing to change in the status quo.

    I don’t think private sector vs NGO is a helpful level of disaggregation when deciding on implementers. There is so much variation within those categories that other factors should be much more decisive.

  5. My sense from the blog post was that the countervailing argument of NGO incentives of grant money, risk aversion, high admin costs etc. was not accounted for. (For example, NGOs may have the same short term incentives.) However, comments and reaction to comments have provided a more nuanced approach. This is a governance problem that can only be resolved by recognizing and correcting for incentives in profit, non-profit naff government organizations. (And, hybrids.)

  6. Pingback: Reflection on 2013: Merci beaucoup | AID LEAP

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