Charity Ratings Based on Administration Costs can do More Harm Than Good

The recent posting Analyze This on Philanthrocapitalism stated

Not enough orphans for all the orphanages

Needs assessments are expensive and increase administration costs, this meant that after the tsunami  aid agencies were unwilling to share their assessments. Giving another aid agency their assessment would have meant that the other agency would benefit from the information but not take a financial hit by paying for it. Therefore, each aid agency either had to pay for their own assessment – wasting overall funds through unnecessary duplication of work and leading to “assessment fatigue” in villages and government offices – or agencies simply developed programs without a needs assessment.

In one instance an orphanage was built without first determining if there were orphans in need of a home. The dearth of homeless orphans led representatives from the agency to visit my office seeking orphans, eventually they had to recruit street children. In another instance there were four aid agencies competing to lead children’s programs in a village of just 23 families, while

in a similar village 10 kilometers up the road had no aid agencies helping children.

Practices that are less expensive may appear more expensive

When I worked for the American Red Cross we funded four programs in six provinces. In order to save costs and increase coordination we decided to rent a single office in each province and hire a  coordinator, office manager, and cleaner which each program would share. We debated how to pay for this because paying for it directly meant the expenses were billed to general management, increasing our apparent administration cost. If, instead, we had given money to each program to rent their own office and hire their own staff it would have cost considerably more, but would have been billed as a program expense creating the appearance lower administration costs.

Taking advantage of the lack of communication between aid agencies

Many agencies gave out student “scholarships” (monthly or yearly payments into a bank account to pay for uniforms, books, etc). This was cost effective for the aid agency because all they had to do was send a team into the area for a week. They would meet with principals and students to choose aid recipients and set up bank accounts after that most things could be handled at a distance. There was no need to pay for an office, vehicle, or full-time staff. Unfortunately, principals, teachers, and students quickly learned to take advantage of the system to get multiple scholarships for the same students – some of which never made it to the students. This was done by repeatedly telling aid agencies that the students had not received any assistance, and then opening bank accounts at different banks. Students in easily accessible schools received more visitors and could get more funding. Students is more distant schools often received no assistance.

To keep administration costs low, agencies did not dedicate the time and staffing needed to communicate with other aid agencies. Because they came and went so quickly they did not spend time in the villages to hear what was really going on. This and other examples of unfair distribution of aid created animosity and distrust between villagers that had been neighbors for generations.

Why the focus on administration costs?

Charity rating agencies have very little information with which to work. In the US the only annual reporting required is the IRS I-90 form. Religious agencies don’t even have that requirement. As the Philanthrocapitalism article points out, getting any other information from aid agencies is extremely difficult.

“The biggest problem may be the lack of cooperation from non-profits themselves, not least because shockingly few of them actually collect meaningful data on their own performance. Berger recently asked the 100 biggest charities with a four star rating to provide him with performance data, and only 10% did.”

Changing how we rate aid agencies will change aid agency practices

Perhaps, instead of rating aid agencies on the percentage spent on projects, we could rate them according to their financial transparency. A base score could be assigned according to whether they regularly share their financial information with donors and aid recipients. Extra points could be awarded to those agencies that make their most recent audit findings available upon request.

The information used to rate aid agencies does impact aid agency practices (see related post). Agencies that score well are financially rewarded by donors, therefore priority is placed on those factors that lead to high scores. By changing how we rate aid agencies we can potentially improve aid agency practices.