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!