Eric Reuben Smith

Abstract

Corruption undermines the effectiveness of international development. The financial integrity of non-governmental organizations (NGO) can be improved by donor-to-organization contact, but foreign donors rarely travel to countries such as Uganda. This project involved a randomized design to compare the size of project bids by NGO management when approached by potential donors (foreigners) or donor representatives (Ugandan citizens). Local donor representatives were more likely to be denied information during an in-person visit than the foreigners visiting NGOs. Otherwise, foreign potential donors were provided with information that was the same as local representatives, except in 6 instances in which bids were substantially inflated for the foreign potential donors. Potential opportunism occurred infrequently, but NGOs demonstrated mistrust of Ugandan donor representatives.

Introduction

Nongovernmental organizations (NGOs) increasingly conduct most of the humanitarian efforts and international development activities worldwide, particularly in Sub-Saharan Africa (Stock, 2012). In 1988, between 8,000 and 9,000 NGOs were operating across the entire continent of Africa, but seventeen years later 99,000 NGOs had been registered in the single country of South Africa (Igoe, 2005). The number of NGOs operating in SubSaharan Africa has continued to increase significantly over the most recent decade (Hearn, 2007). The surge in the number of NGOs has been paralleled by a spike in funding channeled through NGOs (Siddequee and Faroqi, 2009; Hudock, 1999). With large amounts of money and other resources flowing through NGOs, methods for maximizing the effectiveness, accountability, and fiscal integrity of NGOs require exploration and evaluation.

Unfortunately, research on NGO accountability and integrity has not kept pace with the expansion of NGOs (Bilodeau & Steinberg, 2006). The lack of reliable research regarding the efficiency of NGO projects is widely known (Klein, 2004). This stark contrast between the rapid increases of funding provided to NGOs and the limited research available about NGOs fiscal practices has led many specialists to question the integrity of such programs (Spar & Dail, 2002). Increased academic inquiry on the dynamics of NGOs will improve their efficiency and indirectly lift the burden of poverty in developing countries.

Review of Literature

Research in international development seeks to answer many fundamental questions, but one of the most salient asks “What outcomes have resulted from the transfer of $4.6 trillion US dollars (2007 estimate) to developing countries in the name of international development since 1960, given the persistence of major challenges?” (Bauer, 2000; Easterly, 2012). Some scholars point to evidence suggesting that foreign aid has hampered the economic progress that it intended to foster (Moyo 2009). Although many academics defend the humanitarian methods of the past (Addison et al., 2005; Sachs & Warner, 1999) the question remains: How can NGO practices better enable local development and minimize adverse side-effects such as the use of donated humanitarian resources for personal gain?

Many of the obstacles faced by the development sector are rooted in the susceptibility of NGO’s to corruption. Unlike commercial programs, NGOs have no profit margin to inspire internal accountability and subsequent efficiency. This dynamic may contribute to NGOs having, on average, less robust anti-corruption policies when compared to businesses of equal size (Helmer & Deming, 2011). Although competition in the corporate world serves to weed out inefficient entities, causing a healthy renewal of the market, such a phenomenon is not replicable with NGOs (Burger & Owen, 2013). Struggling for survival, weaker NGOs can place undeserving attention on fundraising efforts, losing focus on the original outcome of community development (Okten & Weisbrod, 2000). Persistence in dissatisfactory service delivery also occurs, as NGOs are held responsible to those donating and not to the consumer (Kilby, 2006). Unlike for-profit organizations, NGOs are not subject to overarching regulation or professional codes. Most NGO initiatives are non-quantifiable, making accountability difficult to monitor (Fowler, 1991). With increasing competition between NGOs, funding can easily be diverted away from target communities to advertising efforts or “local awareness campaigns” (Rose-Ackerman, 1982; Okten & Weisbrod, 2000). Even mathematical modeling suggests that corruption in NGOs increases with heightened competition (Aldashev & Verdier, 2010). Understanding the limitations of NGOs in accountability may cause sponsors to prematurely dismiss their role in development.

Although the involvement of NGOs presents difficulties, their role in enacting change should not be ignored. In trustworthy NGOs, quality service can be prioritized above maximized profit margins (Aldashev and Verdier, 2010). Unlike international corporations, NGOs are largely immune to labor rights violations, and a strong civil society can stimulate economy and improve social capital (Fukuyama, 2001). Usually situated in uneducated and underserved communities, NGO’s recruit local and foreign professionals that are able to better represent community interests and positively influence legislation (McGann, 2004). In fact, researchers suggest that coalitions of NGOs under government contract can increase government accountability (Zyl, 2014). Supporting these theories, Tusalem found a correlative relationship between legislation protecting human rights and the strength of civil society across various countries (2012). A strong NGO sector has also been linked to increased democracy (Scholte, 2002). NGO activities can contribute to international development, but the clear need is to enhance the efficiency of their resources.

Better implementation of accounting principles will remediate the issues inherent to NGOs. Improving transparency in NGOs should be held a priority for all international actors, including those close to home. Humanitarian organizations with headquarters in the US rank below average in transparency and selectivity (Easterly et al., 2012). Keeping strict records of financial transactions will improve the reputation of NGOs and result in both increased efficiency and donations. It is essential that full disclosure of accounts must be available to those empowered to make changes or transparency is undermined (Yu et al., 2012; Peixoto, 2013). True transparency, if required by the source of funding, will improve development.

One example of incomplete financial disclosure is found in the drafting of project budgets. Donors are generally removed geographically from developing areas and are unaware of cost differences. Thus, corrupt NGO management can easily exaggerate project bids and divert excess funding to personal gain. As NGOs are inherently vulnerable to corruption, it stands to reason that opportunism is one of the methods implemented by project managers maximizing personal gain over institutional efficiency.

Motivation to inflate bid sizes may be associated with multiple factors, not merely self-interest. Many NGOs, especially newer and less established ones, depend on inconsistent sources of funding (Fischer & Levy, 2011). Facing fierce competition, project managers may be tempted to look to the future, increasing project bids today to ensure operation tomorrow. In order to maximize available funding, NGOs vie for reputation instead of a competitive advantage in cost efficiency (Gourevitch, Lake, & Stein, 2012). Augmenting a project bid may also improve chances of funding, as some donors perceive low bids as compensation for poor reputation. Efficiency is therefore compromised as high bids can mistakenly signal a reputable NGO organizing high quality programs. Irresponsible bids may even occur unbeknownst to the individual proposing a bid. This is caused by the physical and functional separation of advocacy and service delivery departments in many NGOs (Lister & Nyamugusira, 2003). Various external factors other than self-interest clearly affect project bid sizes.

Whatever the motivation for incorrect appraisal of a project, NGOs receiving subsequent funding feel the need to protect their reputation in order to secure future funding. Low quality accounting tends follow, resulting in mismanagement of funds and corruption. Decreasing the prevalence of opportunism in the NGO sector will strike at the root of the problem, encouraging improved transparency. Ensuring honesty from the beginning of a donor-to-NGO relationship will ameliorate corruption and allow for increased impact on the ground.

One barrier to ensuring trustworthy project bids is the NGOs perception of the donor. Studies have shown that project managers have less accountability when donors are perceived to have more financial means (Christensen & Ebrahim, 2009; Keohane, 2002), meaning that project offers from foreign donors perceived as wealthy could increase opportunism. That is, inflated project bids for donors known to have extensive financial resources. Nevertheless, such opportunism may or may not occur when the foreign donor is physically present. It stands to reason that when donor-to-organization contact is limited, tendencies towards financial mismanagement could be higher.

To better understand the effect of donor appearance on project bid sizes, research must be done in developing countries most susceptible to this form of deceit. Such a situation might characterize NGOs in countries without easy travel access, such as Uganda. Uganda is a landlocked nation in East Africa, with 37.7% of the population living on less than $1.25 a day (World Bank, 2012). High rates of infectious disease and an impoverished healthcare system result in an average life expectancy of only 53 years. Such problems have received international attention and extensive humanitarian aid. According to Development Initiatives, Uganda received over 1.6 billion dollars in foreign aid in 2011 alone. With over 1,300 NGOs currently operating in Uganda (Reed et al, 2013), the importance of evaluating their efficiency is obvious.

Unfortunately studies have found corruption to be pervasive throughout developmental work in Uganda. Of the funds allocated to Uganda’s ministry of education, only 13 percent reaches schools. (Reinikka and Svenson, 2001). Unfortunately, Mawdsley found rates of corruption in government projects to be the same as NGOs in Uganda (2005). In a study examining project bids obtained via email, researchers found Ugandan NGOs to inflate bids 4-8 times the actual cost (Reed et al, 2013). Solving the corruption present in NGOs is a priority for the future of Uganda. This line of research can also facilitate our understanding of NGOs across East Africa that operate under fairly similar conditions and with irregular direct contact with foreign donors.

This research project was designed to evaluate the hypothesis that the physical presence of a potential foreign donor will result in different responses by NGOs providing bids on a hypothetical project. Project bid size, an indirect indicator of opportunism, will be examined as a dependent variable across a diverse sample of NGOs differing in terms of number of employees, years operating, and number of international affiliates. These results will be compared to project bids obtained by local donor representatives. We hypothesize that, in general, bids from NGO’s contacted by donors will be higher than those visited by locals. Further, we expect differentials in bid size between donor and donor representative to be heightened in NGOs that are newer, employ less people, and receive limited foreign aid.

Method

From July 22 to August 8, 2014 our research team consisting of four Americans and four Ugandan citizens visited NGOs in the greater Kampala region. Ugandan “donor representatives” were members of the Baganda tribe, ages 23-28. Being all recent college graduated from programs of social work, none of these individuals had worked for an organization included in this study. Locals were compensated for costs of transportation and received a modest daily wage for their work. Four caucasian volunteers were selected from students involved in the “Uganda Mentored Research Abroad” summer program sponsored by Brigham Young University, with ages spanning from 18-24. Only one of these volunteers had previously visited Uganda, yet had never participated in projects organized by any of the NGOs visited.

During this period, visits occurred Monday through Friday, from 9 AM until 4 PM, with data being recorded on site in notebooks. Each night data was entered in an excel sheet, followed by discussion on the projects efficacy.

Our team used two methods to contact participating NGOs. During the initial four days of research, Ugandan research assistants contacted registered NGOs and set up times for future visits. After numbering the contacted NGOs based on the order of contact made, a function in excel (RAND) randomly assigned either 1 or 2 to each organization. All NGOs coded as 1 were visited by local donor representatives while the number 2 marked the NGO to be visited by the American volunteers. NGOs were then visited by corresponding researchers on the decided date.

In order to accelerate the process of contacting NGOs over a large geographical area, the method of contacting NGOs was modified for the last 10 days of research. Our team mapped the remaining nationally registered NGOs and divided them by location into seven neighborhoods (Nsambya, Kololo, Nakawa, Mulago, Mengo, Kawempe, and Ntinda). After blocking by location, each organization received a random number corresponding to be visited either by a donor or donor representative using the method previously described. Both treatment groups performed visits within the same neighborhoods before moving on to the next assigned area. To include unregistered NGOs in the data, research assistants performed “walk in” visits to visible NGOs nearest their assigned visits to registered NGOs. These visits were documented in a google document and reviewed nightly to prevent NGOs from being visited repeatedly.

Researchers from both groups carried a business card and a letter of recommendation stating their affiliation with Uniting Children Uganda. This community based organization has operated in Mukono, Uganda since 2010, performing projects aimed at various issues, including special education, malaria prevention, and HIV education. Research assistants were trained to explain the following three items in a uniform manner:

1. The purpose of Uniting Children Uganda is to fight poverty and promote global development. We are exploring hypothetical partnerships of NGOs in Kampala with UC Uganda (explicitly using the term “hypothetical”).

2. Explaining a generic potential project that aligns with the mission of the NGO visited (e.g., malaria prevention for an NGO specific to community health outreach) and providing a timeframe for completion of two to six months, including 1-4 NGO staff members and a budget between $1,000 and $10,000.

3. If we were to partner with your organization in a research project, how much money (in Uganda Shillings) would you require to fund each of your staff members per day? In other words, what is the average cost per unskilled personnel each day?

The following questions allowed for secondary analysis of the effect caused by NGO demographics on project bid levels.

4. What year did your organization begin humanitarian projects in Uganda?

5. How many employees do you pay each month? How many volunteers?

6. What international agencies have sponsored your projects in the last year?

Collected data were statistically analyzed to determine the magnitude and statistical significance of any difference between bids given to foreigners and to Ugandan representatives, with the null hypothesis being no difference. Variables such as the size of the NGO, year of operation, and its prior experience in working directly with foreign donors was examined in secondary analyses using a regression model with categorical predictors dummy coded.

Results

A total of 150 in-person visits were made to NGOs in the greater Kampala region, with 52 of those visits to NGOs found on the official government registration list and 98 unlisted. Of the NGOs visited, 50 NGOs denied the researchers’ requests for information. Across the 100 visits in which information was provided, the NGOs reported having 19.7 paid employees and 14.5 volunteer workers, with the average length of operation being 14 years and with funding provided from an average of 4.6 international sponsors/agencies. NGOs found on the government registration list did not differ (p > .05) from unlisted NGOs in terms of the number of paid employees, number of volunteer workers, number of international sponsors, or length of operation. As would be expected, NGOs with longer lengths of operation and greater numbers of international donors had larger numbers of employees (p < .05). The percentage of inperson visits made by Ugandans (51%) and Americans (49%) was about equal, with equivalent percentages of visits to NGOs on the official government list (47% for Ugandans and 53% for Americans). However, the Ugandan representatives were denied opportunities to speak with NGO personnel or otherwise not provided with information by the NGOs in 52% of their visits, whereas the American representatives were given information in only 14% of the visits they conducted. This difference was highly statistically significant (Chi-square = 24.7, p < .0001). Local representatives (Ugandans) were provided with information more often (p < .05) when the NGO (1) employed fewer people, and (2) had fewer international donors. That is, they were denied information more often by larger NGOs than by smaller NGOs. NGOs listed and unlisted with the Ugandan government provided information to our researchers at equivalent rates. Eighty of the 100 NGOs that provided information regarding their operations also provided data regarding proposed daily wages, with 30 of those estimates generated in the visits by Ugandans and 50 generated in the visits by Americans. The Ugandans were provided with estimates of proposed daily wages for the hypothetical project that averaged 40,000 Ugandan shillings (UGX). The Americans were provided with estimates that averaged 75,377 UGX per day, 88% higher than the estimates provided to Ugandans. However, those averaged values were impacted by the inclusion of several estimates that were blatantly inflated. When six daily estimates received by the Americans (12% of the total they received) that exceeded 100,000 UGX were eliminated from the data, the average daily pay estimates were essentially the same (41,747 UGX for Americans and 40,000 UGX for Ugandans, a difference less than 65 cents in US currency). In general, the size of the NGO was not associated with the size of the daily wage estimate, although there was a tendency for local representatives (Ugandans) to receive lower priced bids from middle sized NGOs than small NGOs. They received insufficient data from large NGOs to make that comparison.

Concluding Statements

This study sought to evaluate whether the physical presence of a potential donor vs. a donor representative would result in different information provided by NGOs in Uganda. A randomized field experiment was conducted in which American citizens and Ugandan citizens made in-person visits to NGOs in the greater Kampala region.

Ugandans visiting the NGOs were denied information at rates much higher than foreigners (52% vs. 14%). This finding suggested that mistrust of local representatives was commonplace among NGO personnel. NGOs may be more accustomed to dealing directly with foreign donors, rather than local representatives, or they may question the credibility of local representatives. Thus local representatives of NGOs will need multiple sources of credibility (beyond a card and introduction letter) if they are sent out to organizations. Or if the information sought is essential, the foreign representative should attempt to obtain the information directly, without local representation.

Rejection of local representatives was more common among well established NGOs with many international benefactors and employees. This trend makes sense as such NGOs usually discuss program logistics with foreigners. Enjoying reputation in their field, they would be more accustomed to direct contact with donors.

The vast majority of NGOs gave honest/fair values relative to known employment wages in the Kampala region. This finding contradicted the assumption that financial opportunism would occur frequently. Nevertheless, inflated bids for daily wages were given in 12% of visits by the foreign potential donors, so foreign individuals need an accurate understanding of local norms before working with NGOs. They should receive multiple bids on any project, rather than assume that the bids of any particular organization are accurate. However, in general, they need not approach NGOs with an elevated defensiveness, given the overall likelihood that they will be dealt with forthrightly by NGO personnel.

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