AED’s Going Out of Business Sale: A Sad Day for International Development

Published on: Mar 04 2011 by Wayan Vota

Back in December, USAID suspended the Academy for Educational Development from new government funding. This has kept AED from bidding on any new contracts and to an extent, even receiving funding for current projects.

Since then, I did a back-of-the-napkin calculation based on AED’s size and assumed proposal win rate, and figured they were unable to bid on $80 million a month in new programming, which would reduce their future size by $30 million for each month they were suspended.

I was concerned that if they were suspended too long – for more than 6 months – AED would be permanently reduced in size and scope. It seems my calculations may have been too optimistic.

Today, after just 4 months of suspension, AED Chairman of the Board, Edward W. ‘Peter’ Russell announced that AED is selling or transferring all of its important assets:

AED will pursue a process to sell itself of all of its highly valued programs and assets. We believe that this acquision of our assets is the only way to ensure the continuity of our programs and projects and to provide a new home and safe harbor for our talented staff within another appropriate for-profit or non-profit organization.

While this is a profoundly sad announcement, it is the right choice. First, and foremost, it allows us to focus on sustainability: most of AED’s programs will continue uninterrupted and most staff will continue to implement activities grounded in our mission of implementing solutions to critical social problems in the U.S. and around the world.

The Board’s decision was a difficult one to make and is premised on AED’s current and projected financial condition. We have concluded that the conditions under which we are operating – the significantly negative impact AED’s financial reserves have absorbed during the last few months coupled with an increasingly restricted revenue stream – will not be sustainable. While we have the ability to remain solvent in the near future, AED is choosing the prudent course of divesting itself of its projects and assets so that the important objectives of our programs can continue under the banner of another organization.

Now from what I can tell, that’s a going out of business sale. AED will be transferring its programs that are USAID or US government funded to other organizations (I don’t think they can be “sold”). AED may be able to sell other programs that it’s developed or acquired that have independent funding sources.

Regardless, its gong to be traumatic for all AED staff and programs. My heart goes out to all the hardworking and talented professionals who were focused on doing the right thing, and are now feeling a gut-punch. Even though funded programs will continue elsewhere, this change is going to be a wrenching emotional experience.

And don’t think this event will only effect AED. Every single USAID implementing partner is now put on notice – USAID can and will exercise the nuclear option.


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Wayan Vota works at FHI 360 and is a regular contributor to ICTworks. He started ICTworks, Technology Salon, Educational Technology Debate, OLPC News, Kurante, and a few other things.
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26 Comments to “AED’s Going Out of Business Sale: A Sad Day for International Development”

  1. Dave Algoso says:

    My heart goes out to all the AED staff who were doing good work — but I wouldn’t call this a sad day for the industry as a whole. I’m glad to see that there are consequences for failures. If this puts everyone else “on notice” as you say, then that’s a good thing.

  2. Anonymous says:

    A sad day for their many valuable domestic programs. The baby with the bathwater.

  3. Jon says:

    So is it ok for a police officer to shoot someone who goes 10 miles over the speed limit just to “put everyone else on notice?” The punishment should fit the crime.

    It is evident from AED’s decision to transfer its “assets” that it values its mission, projects and staff over other considerations. It is a shame that problems in a few projects have resulted in the dissolution of an organization that has successfully implemented hundreds, if not thousands, of successful projects over its 50-year history. It should, and does, worry other organizations in the international development community working in challenging environments. The problems AED has experienced in Pakistan and Afghanistan are common to most organizations that working in development for and length of time.

  4. Anonymous says:

    Would that the GAO would shut down rampant fraud in the defense industry. The arts, education, unions and now international aid are thrown under the bus to appease retrograde ideologies.

  5. Anonymous says:

    Perhaps the most striking part of this event for the rest of the industry is that AED has not yet been charged, much less convicted, of anything. The losses to employee fraud in Pakistan have been reported in the news as either 92,000 or 900,000, which was paid back voluntarily by AED even before the suspension. The IG investigation is still not complete, there has been no fine, and no opportunity to respond. But financial damages hundreds of times greater than the disputed costs were inflicted on the organization, resulting in them having to shut down.

    If this doesn’t make everyone working in development in difficult countries a little uneasy, then they are not paying attention

  6. Anonymous says:

    Rumors are circulating that USAID has 3 other big firms on their “hit” list. The international development community better take cover.

  7. Alexandra says:

    The testimony to Congress on ensuring contractor accountability by Maureen Shauket of USAID makes chilling reading. Moving towards better performance is described as increasing the number of debarments, among other measures.

    http://www.wartimecontracting.gov/docs/hearing2011-02-28_testimony-Shauket.pdf

    Surely solid progress in managing taxpayer funds would mean fewer, rather than more, debarments? The important time to ensure that contractors are prepared and committed to proper implementation is before awarding contracts? The AED suspension, whatever the reasons, comes related to work in countries where visiting sites by permanent AED staff is virtually impossible, detailed oversight is extremely difficult, and the pressure for on-time spending is relentless. Truly, AED seems to have been thrown under the bus largely for reasons out of its control.

    Furthermore USAID Administrator’s announced shift to more implementation by in-country organizations makes sense, but will require a massive ramping up of oversight capability by USAID if corruption and waste is not to increase.

  8. Anonymous says:

    Although corruption in the Pakistan and Afghanistan projects did alert the OIG of issues within the organization, it has been the resulting investigation and internal audit that lead to this decision. It seems like problems with a project opened a greater can of worms – of compliance and operational integrity. I hope AED projects survive, as they are excellent in implementation, and I hope this episode shakes the development community to conducting their business with integrity and respect for taxpayers money. There is too much money wasted by USAID and their agencies. Lets all work to get it corrected.

  9. Anonymous says:

    Accounting standards and compliance seem weaker in State/USAID than in Defense/National Security. More dollars and more controversy leads to more scrutiny. A few defense contractors are “too big to disbar” but there are criminal prosecutions of individuals involved in fraud. Some USAID contractors take advantage of the goodwill and lax oversight associated with being in the aid business?

  10. Anonymous says:

    Great post; I also feel sad for the staff of AED.

    I wonder who the other three on USAID’s hit list are? I guess this shows the danger of an organization’s having poorly diversified revenue streams.

    Interested to see others’ thoughts!

  11. Anonymous says:

    Many feel that the protracted time being taken by USAID IG is by design– meant to effectively topple AED without having to actually do the dirty work. They will likely come out with something lackluster, vague, and inconclusive soon after AED has been auctioned to the highest bidder.

  12. Anonymous says:

    This AED saga will some day form the basis for academic case studies on the adverse effects of stagnant leadership. (Steven Moseley’s 40-year term does not speak well for the agency nor for him.) For a very long time, AED has been operating in isolation from and apparently oblivious to the “modern” development world; (even now) embracing a fragmented leadership team bearing no resemblance to the communities it serves and seeks to engage domestically and abroad; and utilizing some of the most outdated and ineffective operating systems imaginable. I’m not suggesting that AED is deserving of its current situation, but the fact that they never saw it coming is telling. Although their demise is reduced by AED executives to the fallout of a single damning event, it is more likely the culmination of a perfect storm. I recently had a short stint with AED, and was flabbergasted by the negligent hiring process, convoluted procurement processes, top-heavy and redundant staff structures…and on and on. Everything is “hurry up and wait.” Clearly, one of AED’s greatest strengths of late is successful proposal writing.

  13. Anonymous says:

    As a current (but hopefully, in the near future, former) employee of AED, I couldn’t agree more with your assessment. The stagnant leadership and unwillingness to adapt AED’s culture and systems to the evolving outside environment are the real reasons that AED is in this position, no matter how much senior management tries to place all blame on one bad event. Even after the suspension was announced back in December, there was no real focus on AED’s organization-wide weaknesses, of which there are clearly plenty. The focus seemed to be on what can we do to make USAID happy so that they lift the suspension, not on what we could be doing better as an organization to better execute/manage our projects, serve our clients and help disadvantaged people across the world. I don’t know…maybe I’m being too idealistic here and expecting too much.

  14. Mr. Magondu says:

    I would like to ask any person who has any information on the bidding process for the AED contracts to please pass on the informaton. Its sad though how things have turned out for AED AND ALL THE STAFF.

  15. Anonymous says:

    I am not sure that AED will be able to “sell” their projects to any one single organization. AED would like the continuity of the projects to continue uninterrupted by having the acquired organization keep AED’s employees, but, how realistic is that? Any organization “purchasing” AED’s programs would, in all likelihood, use their own employees which they could pay a lot less than AED’s employees.

    Any idea on what’s going to happen to the projects that are not funded by USAID or with US government funds? Many of AED’s projects, both domestic and international, are funded by foundations and embassies, how will these be “sold” by AED? Are there organizations in some of these third-tiered countries that have the capacity to run these projects? There will be a lot of unanswered questions for years to come in this unfortunate event in the life of AED.

  16. Anonymous says:

    While I applaud the work of the IG in uncovering fraud in USAID programs, I am troubled that the USG does not apply the penalties of suspension or disbarment consistently. In 2009 USAID suspended a $644 million Iraq jobs program ( Community Stabilization Program) managed by International Relief and Development (IRD) after two outside reviews raised concerns about misspending, including an inspector general’s audit that found evidence of phantom jobs and money siphoned to insurgents. The program was suspended but not IRD itself. It still has programs in Afghanistand and is allowed to bid on USAID projects in war zones. In November, 2010 Louis Berger Group Inc., a New Jersey engineering consulting firm, agreed to pay $69.3 million to resolve criminal and civil probes related to overbilling for reconstruction contracts in Iraq and Afghanistan and other work. Prosecutors, who filed criminal charges of overbilling from 1999 to 2007, said they will dismiss the case in two years if the company tightens internal controls and fulfills other promises. Two former executives pleaded guilty in federal court in Newark, New Jersey. Louis Berger was never suspended and is also allowed to bid on USAID projects in war zones.

    The IG also found that USAID itself was guilty of mismanagement of its programs in Afghanistan yet it has increased the dollar value of its programs. According to the Special IG as reported in December, 2010 , the amount of US government aid in Afghanistan since 2002 which has been entirely squandered or stolen reaches “well into the millions, if not billions, of dollars.” “There are no controls in place sufficient enough to ensure taxpayers’ money is used for the (intended) purpose.” His report is the latest in a growing number of corruption probes detailing massive amounts of aid being stolen.

    So where’s the consistency ? One non-profit siphoned money to insurgents in Iraq, another for- profit admits to fraud, USAID itself mismanages its programs, and they all continue business. AED is suspended and is out of business.

    If USAID Adminsitrator Shah and its Procurement Director Maureen Shauket think they are on the right path to fixing a problem they are sadly mistaken. Their decisions are clearly political and their actions should be questioned. If they were serious, USAID itself should be suspended from conducting business and thrown under the bus.

  17. Wayan Vota says:

    Nancy Birdsall, founding president of the Center for Global Development, has written an article on AED’s demise and its greater lessons for international development:

    Risking the Dog for the Tail – Security-focused aid does not work

    In December, the U.S. Agency for International Development banned one of its biggest and oldest contractors, the Academy for Educational Development (AED), from receiving future contracts because of “substantiated evidence of misconduct” in the $150-million program for Pakistan’s federally-administered tribal areas. This scandal dealt a blow to both institutions.

    U.S. President Barack Obama and Secretary of State Hillary Clinton have pledged to reinvigorate what had become a beleaguered and weakened USAID long before its troubles in Pakistan. But the AED scandal does strike at the Obama administration’s ambition to keep aid flowing into Pakistan, making good on its 2009 promise of $7.5 billion in nonmilitary assistance over five years. That hope already looks naïve as deficit-hawk Republicans have taken over the spending arm of the U.S. Congress. Some might see the ban as an appropriate resolution to the situation, but embedded in this story are two larger lessons for policymakers.

    First, this is a wake-up call for the U.S. military. Aid programs do not easily complement counterinsurgency programs. The history of aid in militarized settings—from Vietnam to Iraq and Afghanistan—is replete with stories of projects that benefit only local elites, of money vanishing without trace. Ongoing research at Tufts University is finding that, in Afghanistan, while aid can sometimes sweeten dialogue between military units and local communities, aid projects do little to improve security over the longer term or to win support for the American military mission.

    Second, for those in charge of U.S. development aid programs, the AED experience should prompt major reconsideration of how aid dollars are spent in Pakistan. Aid in dangerous areas like FATA (and much of Afghanistan) is obviously a risky, messy business. Yet the U.S. has committed to spend 10 percent or more of its $1.5 billion annual aid package in Pakistan’s tribal belt, home to 2 percent of Pakistanis. Trying to force that much money through a narrow pipeline creates pressures that lead to big failures like the AED contract and smaller failures like the purchase of hundreds of computers that auditors later found still in their boxes, collecting dust in a warehouse. Even from a security perspective, the U.S. should probably spend less of its limited development aid for Pakistan in FATA, and more elsewhere in Pakistan where there is greater hope it can be more effective in helping people and strengthening local institutions.

    While the benefits of security-focused aid are marginal and fleeting, the costs to the broader mission of development are great. The promise of development is the self-transformation of societies: helping citizens build their own capable, accountable and legitimate states. This fundamental development goal is fully compatible with long-term military objectives in Afghanistan and Pakistan. However, as more and more resources are diverted to the frontline, as aid workers continue to risk their lives in conflict zones (80 USAID contractors were killed in Afghanistan in 2010 alone), the long-term development objective gets eclipsed by immediate security and military imperatives.

    Even the very idea that the United States cares about the long-term well-being of the people of Afghanistan and Pakistan (and not just their “hearts and minds”) is eroded by episodes like the AED scandal. For those in Pakistan inclined to believe that American aid is mostly about narrow security concerns and about lining the pockets of private U.S. contractors, the news about AED surely confirms their worst suspicions.

    In the contested and insecure parts of Pakistan, aid programs have to be modest in size and ambition. Small-amount aid can be used like high-risk venture capital, to provide partial guarantees to jumpstart or expand local businesses and create employment. The proposal in the U.S. Congress to reduce tariffs on imports from FATA-based businesses should be passed. Spending for social programs, meanwhile, should be in the form of grants to local humanitarian and service organizations. USAID’s modest program to build small-scale infrastructure, with the close involvement and participation of local communities, also seems to be working well.

    Aid should not be the tail that wags the dog. Its downside risks shouldn’t become a distraction for the U.S. or Pakistani governments from other items on a long to-do list: key political and economic reforms, flood reconstruction efforts, and building the channels of accountability necessary for citizens to exercise control over their elected representatives. In the quest for regional stability, it is these efforts that will count the most

  18. Wayan Vota says:

    DevEx published more AED asset sale details from an interview with AED communication staff.

    What’s Next in AED Asset Sale: A Conversation with Misha Galley

    Last week, AED announced plans to sell its assets and transfer its programs to another organization. This week, it clarified that although a “significant number” of organizations have expressed interest in acquiring its assets, AED’s goal is to find a “single acquirer” that believes in the not-for-profit’s mission, shares its values, and is capable of acquiring all or most of its assets.
     
    The whirlwind of activities at AED will likely continue through May, when President and CEO Gregory Niblett expects a sale and transition to take place, as Devex reported.
     
    Over the last 50 years, AED has secured a reputation as one of the leading U.S. non-governmental organizations  working to boost development worldwide. In 2009, the organization reported $119 million in total assets and $440 million in revenues. In December, however, AED’s revenue stream narrowed significantly when the U.S. Agency for International Development, one of the company’s main donors, temporarily suspended new funding to AED due to irregularities uncovered in its work in Pakistan and Afghanistan.
     
    AED officials stress that the organization’s greatest asset lies in its technical expertise, provided by nearly 3,000 aid workers around the globe, not including consultants. To keep these talented professionals informed about the impending sale and transfer of programs to another aid organization, Niblett and senior management have been hosting conference calls and webinars over the past week.
     
    The goal, says Misha Galley, AED’s acting director of communications, is to move as many of its staff to a new home.
     
    In an e-mail interview, Galley shared AED’s next steps, specified the assets being sold, and clarified how AED is safeguarding its projects and staff in the transfer process.
     
    Can you clarify what “programs, projects and assets” will be sold, if not all?

    AED will pursue a process to transfer all of its programs and assets to a single acquirer. AED’s primary assets are: its projects, which are funded through contracts, and cooperative agreements and grants; the staff experts who work on these projects; and the staff experts who operationally support these projects. Other assets include furniture, equipment, etc., which are used to support the projects.
     
    AED has spoken of “safeguarding programs and staff” through this transition. Does that mean all current staff – full-time or temporary consultants – will be retained on current projects, or even not-yet-begun projects?

    With regard to current projects, yes: We hope all current staff will be retained until the acquisition and after. It would also mean that staff would remain on any new non-U.S. government-funded projects that would begin between now and the acquisition, since we will not be starting any new federally funded programs between now and the acquisition.
     
    What will be the next steps, and when will more details be announced on the transfer procedures?

    The next steps will be to identify potential acquirers and support the bidders’ due diligence process. The acquisition process is highly confidential, so details about a potential acquirer will not be announced until after a purchase agreement is completed.
     
    Was USAID’s decision to freeze new business with AED the only reason for these new steps you’re taking, or was there any other factor?

    AED’s board, senior management and staff have been implementing organizational and operational improvements over the past few months. At the same time, the board and senior management have been scrutinizing our financial situation and confronting hard financial realities. It is clear that our revenue stream has been severely restricted and significant demands have been placed on our financial reserves. The board of directors weighed options about the best way to move forward in a way that is consistent with our mission and has the future of AED’s many programs and talented staff as its highest priority.
     
    Did AED receive positive signals in recent weeks from USAID about anti-fraud steps taken after the temporary suspension, or was the prospect that it would take years to lift the suspension?

    We do not believe it would have taken years to lift the suspension. While we cannot speak for USAID, we believe that many compliance and internal controls were already in place at AED when the suspension was imposed. Working with USAID, we have identified internal controls that could be strengthened, and AED has been in the process of doing this. We believe these actions would have warranted a lifting of the suspension in weeks or months, not years.

  19. Wayan Vota says:

    They got a twofer with AED – international development and the arts. AED is selling it’s stunning artwork collection too. Gone are the Rothko, Raushenberg and Warhol paintings that always turned my eye as I walked the AED halls.

  20. Wayan Vota says:

    Whomever wants to takeover AED programs will need to bid for all of them at once, though I am still wondering how:

    AED Pursuing Orderly Transfer and Sale of its Programs and Assets to a Single Acquirer

    Washington, D.C., March 10, 2011 —On March 3, 2011, AED’s Board of Directors announced that the organization will pursue a process to transfer its highly valued programs and assets to another organization. The Board has directed management to identify a single organization that believes in AED’s mission, holds similar values, and has the capacity to acquire all, or substantially all, of AED’s assets.
    AED’s mission is to make a positive difference in people’s lives by working in partnership to create and implement innovative solutions to critical social and economic problems.
    “A single acquirer and compatibility with AED’s mission are the Board’s primary criteria for identifying a new home for all of AED’s programs and staff,” said Edward “Peter” Russell, the Chairman of AED’s Board of Directors. “We believe this is the best choice to ensure the continuity of our programs and projects.”
    The organization continues to be financially solvent and stable despite having endured financial strain in recent months due to its inability to conduct business as usual. AED has established a rich portfolio of U.S.-based and global programs in education, health and economic development. The organization has implemented thousands of projects and has had only one terminated for cause during its nearly fifty-year history.
    Client surveys consistently show that AED is a highly valued partner. On the most recent survey, nearly 90 percent of respondents reported that they were satisfied or very satisfied with AED’s financial management. More than 96 percent of government clients said that they were satisfied or very satisfied with the quality of AED’s international work.  The choice to move all of AED’s staff and programs together will allow AED’s programs to continue their excellent record of performance uninterrupted.
    “We have been through a period of extensive organizational improvements, which ensure that the acquiring entity receives solid, high-quality programs and portfolios,” Russell said. He added that the Board and senior management have recently implemented a series of management, risk assessment, internal audit, compliance, and financial improvements of its systems and reporting structures. 
    AED’s officers and senior management have been proactively reaching out to donors and partners with assurances that all programs will continue throughout this process.
    “We pledge to all of our donors and partners that we will continue to provide exemplary program implementation between now and the transfer of our projects and staff to a new organization,” said Gregory R. Niblett, AED’s President and CEO. “We are making every effort to ensure that we retain our experienced staff in order to effect a seamless transition so that we can continue to achieve our common goals and serve our beneficiaries, both domestically and abroad. The vast majority of AED’s staff remains deeply committed to remaining with the organization through the transition. ”
    Niblett said that there has been strong interest in the acquisition and that a significant number of organizations are willing to acquire all of AED’s programs. He expects there will be a meaningful competition and that a sale and transition will occur by the end of this spring.

  21. Wayan Vota says:

    Statement of Michael G. Carroll Deputy Inspector General U.S. Agency For International Development at the Committee on Senate Commission on Wartime Contracting In Iraq and Afghanistan on February 28, 2011

    (His full testimony is here)

    Of the 37 USAID suspensions and debarments currently in effect, more than three-quarters or 28 in total are based on actions taken within the last year.

    While there has been a major uptick in the quantity of work that USAID is doing in the suspension and debarment arena, the most notable sign of progress over the last year relates to a single case. In December 2010, following months of consultation with our office, USAID took the extraordinary step of suspending one of its largest funding recipients, the Academy for Educational Development (AED). USAID’s suspension decision underscored the seriousness of its commitment to responding to mismanagement of U.S. Government funds and established that no implementing partner was too large to escape accountability.

    Indeed, at the time USAID took this extraordinary step, it had 65 active awards valued at approximately $640 million with AED and work underway in countries like Afghanistan and Pakistan. And the implications were felt across the Government, as AED’s portfolio extended to other federal agencies.

    As you might imagine given the ramifications, USAID did not make this decision lightly.
    OIG opened the underlying investigation in the spring of 2009 and began sharing information with the Agency’s suspension and debarment staff last summer. USAID determined to proceed with the suspension after we presented it with evidence of serious corporate misconduct, mismanagement, and a lack of internal controls that raised grave concerns about the firm’s integrity.

    This significant step followed on another notable case in which a major firm was held to account for its work with USAID. After years of investigative work, OIG established that high-level Louis Berger Group (LBG) employees had conspired to charge the U.S. Government falsely inflated overhead costs. In November 2010, our work in unraveling the complex accounting scheme behind this effort produced plea agreements from LBG’s former Chief Financial Officer and Controller, and a $69.3 million settlement with the company.

    This settlement and USAID’s new approach to suspension and debarment have helped reset the accountability environment in foreign assistance. Individuals and organizations working with USAID now have heightened awareness that they will be held accountable.

    OIG intends to capitalize on this new momentum by increasing our engagement with those who come forward with information about possible violations. We are intensifying outreach efforts and reinforcing opportunities for fraud reporting. We have increased our permanent staff presence in priority countries and are working closely with host government investigators and prosecutors to secure convictions of local law breakers affecting USAID programs. These efforts all serve to extend our reach and enforce a culture of accountability.

  22. Anonymous says:

    Sounds like a shell game to me – like they’re going to to “sell” all their programs to some kind of brand new subsidiary that has a whole lot of ex-AED leadership running it.

  23. Anonymous says:

    Listen to the current and former employees and they will tell you that this is not a “sad day” but rather a day that AED leadership should have seen coming a long way out. This is a not a charity, this is a business. Doing business with USAID is not always pretty and you have to play by their rules. What else is new?

    And who cares about the fact that they’re selling off their prized art collection? Replace AED with any other company or organization that has wasted taxpayer money, knowingly or unknowingly. Would you be sad that BP sold off their art collection? Bank of America? Exxon? Please.

  24. Anonymous says:

    You’d be heartbroken at the way this went down too. Absolutely dreadful.

  25. Anonymous says:

    I suspected it might have been by design too, but the more I discover, the more I realize that AID is completely inept and out of their depth.

  26. Anonymous says:

    We should all be watching what’s happening to the Academy for Educational Development. AED Watch is an attempt to track what’s happening – we’ve listed every published report we can find:

    http://aedwatch.wordpress.com/

    .

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