Illustration by Adam McCauley
When governments seek to help less-developed countries, they often do so by awarding aid grants to meet some local need—hygiene, sanitation, infrastructure, or other demands that the country’s own government cannot satisfy—and hiring either a for-profit company or a nonprofit to do the work on the ground.
A working paper by two professors at HEC Paris (École des hautes études commerciales de Paris) examines the differences in behavior between these two types of organizations as they move through the formal procurement process for development assistance. The researchers, Marieke Huysentruyt and Bertrand Quélin, analyzed data from the UK’s Department for International Development (DFID), an agency with a vast global reach. DFID’s transparent bidding process yielded data points on how the agency identified each development project out for bid, how the bidders applied for the job, who won, and on what terms.
With data from DFID’s auctions between 1998 and 2003, the researchers were able to study how nonprofits and for-profits approached the bidding differently. They found that for-profits and nonprofits most of the time do not compete for bids. For-profits, which won more than 75 percent of all offers, dominated the market for “simple services that are easy to define upfront, where price matters a lot and where price-quality comparisons are comparatively easier to make.” But nonprofits dominated the auctions for development solutions, or “complex projects, which are costly to define precisely up front, where methodology is of key importance and price matters relatively less.”
These tendencies, driven by market and aid needs, lead to different roles for the two types. “For-profits tend to act as transaction-centric, agenda-takers, nonprofits as solution-centric, agenda-setters,” the researchers conclude. They also find that “contracts with for-profits typically involve much higher cost overruns,” while “contracts with nonprofits are cheaper but jeopardize public interests,” because they tend to address more complex problems and involve greater risk.
The concept behind forcing businesses and nonprofits to face off in bidding auctions for development work is that companies will tend to moderate their inherent greed to win bids for socially beneficial work, and nonprofits, through competition, will tend to adopt some of the professional characteristics of corporations, Huysentruyt says. But the researchers found that these competitive pressures are not typically operative, because the two types of organizations usually don’t compete directly with each other by bidding on the same projects.
These results were somewhat surprising, she says, because the researchers were expecting to find more convergence between nonprofits and for-profits. “What you see in the data is nonprofits clearly shy away from projects that are too tightly defined, that are too precise, where governments spell out clearly what they are looking for,” says Huysentruyt, an assistant professor of strategy and business policy.
Instead, nonprofits bid on projects that allow for wiggle room as they pursue their mission—and they receive weak scores in the bidding process for their ability to adhere to the posted bid notice. Companies, by contrast, bid on projects with rigid specifications, where they can provide a service or product for a fixed cost.
“In a setting like development aid, there is so much uncertainty, and it’s hard to write tight contracts that clearly specify what is needed when government sometimes doesn’t know itself,” she says.
The study is useful because it highlights one of the important problems in public procurement, says Oxford’s Stefan Dercon, an economic policy professor who served as chief economist for DFID for the past six years. “I can specify exactly what the products look like, what’s going to be procured exactly, but sometimes the agency won’t know exactly what needs to be done to solve the issue,” Dercon says.
While government agencies often find it easier to work with nonprofits, where the mission aligns more closely with the government’s development aims, the paper shows the importance of a stronger accountability framework and more precise language in the procurement process, Dercon says. For-profit contractors are more likely to charge the agency more if the project’s requirements change in the field—which they often do—requiring the agency to think of these contingencies in advance.
“You have to restructure the contracts to be much more outcome-based,” he says.
Marieke Huysentruyt and Bertrand Quelin, “Contracting Out Development Aid: What Is the True Price That Government Pays for Nonprofit versus For-profit Involvement?” working paper, 2018.
Read more stories by Chana R. Schoenberger.