Beltway Bandits

Blackwater Worldwide is only the tip of the iceberg. The private security firm, now a target of controversy over allegations that its agents gunned down civilians in Baghdad, has raised questions about whether services like security should be privatized. Education, space exploration and foreign aid are just a few of the government operations the Bush administration has privatized during its tenure, turning the outskirts of Washington into a sea of private firms that live off public contracts. And it's not only the security services arousing controversy. Here, we focus on the big firms in the business of foreign aid, a group that has been labeled "the new Beltway bandits" by their nonprofit rivals.

Some of the most notable private foreign-aid providers are Blackwater itself, the Louis Berger Group, BearingPoint and Chemonics International—names designed more to evoke the brisk efficiency of private-equity groups or Silicon Valley than the compassion of the NGOs they are displacing, like CARE and World Vision. Their selling point is that they can execute aid contracts—for food and water delivery, new roads, schools and hospitals—more cost-effectively than either NGOs or the federal government. And a conservative administration in Washington has been very receptive to this pitch. In the past four years, the top 10 for-profits working for the U.S. Agency for International Development—the chief conduit of U.S. aid—have received nearly $5.8 billion in contracts. That's twice as much as the top 10 nonprofits, and more than 10 times the amount the for-profits received in the previous four-year period.

To an extent, the privatization of aid predates George W. Bush's arrival in the White House. In the 1970s, conservatives led by Sen. Jesse Helms began targeting waste at USAID, shrinking its budget and pressuring the organization to produce results. USAID turned to private firms, which proved more likely than NGOs to simply focus on meeting contract terms and less likely to question official development goals. But the trend accelerated dramatically under Bush, as contracts for work in conflict zones like Afghanistan, Sudan and Iraq ballooned.

Between 2001 and 2005, Chemonics's revenues grew an average of nearly 25 percent each year. BearingPoint's public-sector division (of which USAID contracts are a part) has recently averaged nearly $1.3 billion a year in revenue, roughly one sixth the $8 billion pool of USAID funds for 2006. Meanwhile, NGOs, purposely cut off by the administration or turned off by the Iraq war, have increasingly moved to private sources of funding.

A rising profile has brought new scrutiny to private firms. The basic critique from established NGOs is that private firms parachute into developing-world hot spots to build x number of classrooms or drill y number of wells without the long-term (and costly) follow-up and commitment to the people they are meant to serve. NGOs tout their permanent country offices as proof that they are more neutral and in touch with local needs. "Our primary client is the people with whom we work in-country, which is very different [from contractors]," says Sam Worthington, CEO of the nonprofit consortium InterAction.

Private firms say their focus on completing specific tasks for Washington is precisely what makes them efficient. Rather than working, for example, to rally tribal chiefs behind a new education plan in some Afghan province, private contractors are more willing to build a certain number of schools to USAID specs. Tony Barclay, CEO of the for-profit Development Alternatives, says, "The mission belongs to the client," which is the U.S. government, and "if you don't like [USAID's] mission, you're misleading yourself."

Neither side has convincing data to prove that private firms are more (or less) efficient; what is clear is that private firms now dominate recent investigation headlines. Consider Afghanistan. In 2004, the then Afghan Finance Minister Ashraf Ghani was so flustered by the poor performance of BearingPoint consultants that he he asked a number of them to leave the country. Then in 2005, a congressional report found that of 286 schools scheduled to be built in Afghanistan by the Louis Berger Group for USAID, only eight were built by the end of the year; only 15 of 253 health clinics the company promised were completed over the same time period. Having failed to persuade USAID to use more effective contractors (both BearingPoint and Louis Berger have since had Afghan contracts renewed), Ghani moved to London, where he is working to devise a new aid model. The upshot: private contractors are better suited to build infrastructure like roads and bridges because of their size and technical expertise; they're at their worst when tasked with smaller, local operations like schools and health clinics, which require the time and patience to build local trust.

Yet even the bigger, technical projects assigned to private contractors face criticism, since USAID lacks the manpower to oversee how their money is spent. "[USAID] has been told to do more with less, and there's a point when that doesn't work," says Barclay. The number of USAID staff overseeing contracts has dropped nearly fivefold over the past decade. Today there are 109 USAID staff managing upwards of $8.9 billion in aid funds, about $81 million per staff member. Without the staff to monitor a growing pool of funds, USAID often punts oversight responsibilities over to the contractors themselves. Contractors then pull in regionally based subcontractors and nonprofits to implement work requiring local knowledge.

The result? Only a fraction of the original aid money reaches local economies. According to Ghani and Clare Lockhart, the lawyer on Afghanistan's Bonn Agreement, contracts in Afghanistan have passed through as many as five layers of American contractors, each charging a substantial fee, before money hits the ground; a school costing USAID $250,000, for example, would be built by an Afghan contractor for $35,000 to $50,000. Some NGOs claim they avoid those losses by moving offices abroad and contracting directly with locals, cutting out expensive expats entirely. ActionAid recently moved its central office from London to South Africa for this reason. So far, no one is talking about Johannesburg bandits.