Analysis

Development organisations need to engage with ratings agencies

Written by Gavin Chait Mohammed Yunus’, of the Grameen Bank, recent elevation in winning the Nobel Peace Prize has dramatically increased the interest in microfinance solutions to poverty.  Organisations across the globe are reinventing themselves as banks to catch some of the largess being donated by such luminaries as Bill Gates, of Microsoft, and Pierre Omidyar, of eBay.

As they do so they are being subjected to an unusual form of scrutiny – for development organisations (commercial organisations have been used to this for decades) - ratings.

In ordinary commercial operations investors protect themselves and ensure that managers run companies in everyone’s best interests through a variety of mechanisms.  Independent auditors check that the finances are being handled appropriately and reported transparently. Ratings organisations offer an opinion on the future management and effectiveness of the company.  Dedicated investors can rest assured that this level of scrutiny ensures not only that all is above board in the present, but that the scrutiny itself insures that things will continue to be above board.

Recent failures of this type of enquiry (Enron in the US, and Parmalat in Europe) has led to an extreme amount of navel-gazing and tough new legislation to ensure transparency and impartiality in audits and analysis.

The development sector is not subjected to this type of scrutiny.  But there are horror stories, such as Jacqueline Maarohanye - the principal of Ithuteng Trust in Soweto – or even traumatised volunteers complaining about maltreatment at charities they spend time with.  Donors take note and back off for a while from the entire development sector.

NGOs, nonprofits, community benefit or public benefit - whatever you wish to call them - are run by managers, on behalf of donors, to benefit the impoverished.  This is not especially different from corporations run by managers, on behalf of investors, to benefit customers.

In a commercial setting, if there were no third-party analysis, then investments would look very different.  Those looking for good financial returns would stick to the tried-and-trusted.  Interesting new startups would struggle to find finance and would be universally mistrusted.  Even worse is that those trusted organisations would be overwhelmed with cash that they wouldn’t have the capacity to invest wisely but would certainly still spend.  Neither would there be a feedback mechanism that would result in an ever-improving standard of investments and products.  It would be inefficient and wasteful.

This is the current state of the development sector.  Popular NGOs soak up vast amounts of donor funding.  They lose focus on their core programs and creep into a wide range of disconnected community initiatives simply because donors want to give them money but want to invest in specific projects as well.  There is limited innovation as organisations stick to the tried-and-tested for fear of losing their sponsors.

Worse is that plenty of donor money goes unspent for fear of putting it in poor projects.

Donor funding should be used speculatively, like venture capital, to fund startling and innovative new ideas, to support fledgling – but successful – new projects that have a real opportunity to end dependency.  Organisations that are dependent themselves have very little hope of ending dependency in others.

Without meaningful external analysis, and regular ratings reports, donors cannot know where or how to invest.  NGO commentators have stated that they would like a peer-review process, or to be self-regulated.  This will not work and will not be trusted; there is too much conflict of interest in organisations being rated by their fundraisers, or by each other.  Even donors are unlikely to want to look too closely at the organisations they regularly fund for fear of finding something ugly.

Rating agencies do not hold organisations to account.  The disclosure allows both funders and beneficiaries to do that themselves.

The increased transparency is good for organisations as well.  Many NGOs lack the critical management capacity to ensure full disclosure.  It is a costly and sophisticated exercise.  Organisations that may excel at what they do often fail to get that across to donors simply for lack of adequate reporting.

Ratings reports allow for full, impartial disclosure without additional overhead on the organisation itself.  The organisation can then use these ratings reports in their quest for funding without having to contract in specialised, and costly, fundraising services.

As with investment, so with charity; donors are spoiled for choice and those who wish to benefit must make it as easy as possible to invest.