Not So Helpful

In the wake of the Blackwater private-security scandal, privatized government operations are everywhere, it seems. From prisons to schools to Social Security, Washington has grown ever more amenable to private solutions to public-policy problems. Foreign aid is no exception. Since the wars in Iraq and Afghanistan, private foreign-aid contracting has become a multibillion-dollar industry. But private contractors may not do any better for the world's poor than the governments or nonprofits they're meant to replace, says Clare Lockhart, cofounder, with former Afghan finance minister Ashraf Ghani, of the Institute of State Effectiveness. NEWSWEEK's Roya Wolverson talked to Lockhart about where private-aid contracting has gone wrong, how to learn from mistakes in foreign-aid delivery in Afghanistan and where to take the foreign-aid system in future. Excerpts:

NEWSWEEK: Why do you think the National Solidarity Program in Afghanistan (a local project implemented by the Afghan government) succeeded in building schools more effectively than private contractors such as Louis Berger?
Clare Lockhart: The National Solidarity Program puts decision-making and control over resources directly in the hands of villagers in Afghanistan by allocating block grants from a central trust fund directly to the village council. Villagers can spend funds on their priorities as they see fit, and find the most cost-effective ways of implementing the projects that they choose. Accountability is built into the program, as in order to access the funds, each village has to elect a village council, hold a meeting of the village residents and then account for the expenditure to the public. Schools typically cost a maximum of $30,000 to $40,000 to build through this program. By contrast, a contract to build a school managed by a contractor might run through several contractual layers, with an overhead taken off at each point in the contractual chain. Schools might end up costing a total $200,000 or $300,000, by the time each lawyer has been paid and security firms hired. Also, if the village manages the project directly they are [more] vested in its success than if the project is built by an external agent. The village also tends to take care of its own security, so there is no need to hire [costly] external security firms.

Why, as you suggested, are private contractors better suited to big infrastructure projects than smaller projects like health clinics and schools?
As witnessed in programs like National Solidarity Program, the village has the comparative advantage in building small infrastructure. However, villagers will not have the technical and managerial expertise or large scale equipment to build large infrastructure such as large dams, power stations, railways and highways, as these will require external assistance, either through construction companies or groups of engineers, such as the Army Corps of Engineers, as well as the involvement of Afghan public and private sector. It is important to engage the Afghan ministries as they have an important role to play in standard-setting, oversight, regulation and ensuring that funds and capacity exist for ongoing operations and maintenance.

In the case of Afghanistan, who was doing the infrastructure work before private contractors came along?
For the several years before 2001, the country was at war and there was little infrastructure construction. In early 2002, after donors pledged an initial $4.8 billion to Afghanistan's reconstruction, U.N. agencies, NGOs and private contractors all entered Afghanistan and scaled up their activities. The question is not whether private contractors should be involved--there is certainly a role for them--but how contracts are designed, procured, supervised and what type of incentives are built into the system to ensure value for money, outcomes that are appropriate to the context, proper supervision and the appropriate allocation of tasks to communities.

What about the for-profit model leads private contractors astray?
Projects are often designed by aid officials without proper attention to the needs on the ground, or the availability of new technologies, or the needs of a carbon-constrained world. For example, we could be doing a lot more to leapfrog old standards, and move toward distributed, alternative energy solutions. Procurement rules are often arcane and do not allow for proper competition and are often bundled into very large contracts that the smaller firms cannot hope to win. Afghan ministries [often] do not know of the existence of a particular project in their area of responsibility and are not given the authority to supervise the work. At the same time, the aid agencies with responsibility for supervising the contracts are often very short-staffed. [And] contractors' employees are [often] awarded bonuses if they can write more contracts for their colleagues to perform technical assistance. By contrast, in other countries, such as South Korea, technical assistance was given bonuses if it managed to write itself out of a job, leaving capability behind in the hands of national officials.

Why does USAID continue to use the same contractors despite those companies' difficulties at being effective in Afghanistan?
It does not necessarily matter which companies win the contracts, as the problem lies more in the capability of donor-agency staff (whether USAID or other countries' agencies) to design and supervise projects, the security environment which makes it difficult for any foreign company to operate, and the lack of accountability mechanisms internally within donor agencies.