Rating NGOs

India is home to some of the largest number of NGOs working in social and other charitable causes. It is estimated that there are between 1 to 2 million NGOs operating in diverse fields like education, health, housing, micro-finance, disabled and old aged welfare, agriculture, environment, disaster reilef etc. Most of them are involved in the development arena and are active participants in poverty mitigation and eradication efforts. Though the majority of NGOs are funded by private capital, a significant number of them receive some form of government grants. Except for a few large ones, the overwhelming majority of NGOs are small.

Despite the large number of NGOs working in every sector, there is very little information about the effectiveness of these organizations in achieving their goals. Numerous studies have shown, and I have seen a number of them, that NGOs are not immune from the usual malaise that afflicts government agencies. Further, given their small size and limited reach, NGOs are most effective when they are able to establish successful demonstration examples for effective delivery of a welfare service or a development activity or indulge in awareness creation and capacity building activities. Such experiments senitize local citizens, build awareness and develop demand side pressures, and help Government agencies identify the weaknesses in their delivery channels and systems. Instead we find numerous examples of NGOs trying to replicate the role of Government and compete with Government in delivering development related services and activities, thereby failing to achieve their desired objectives.

It is therefore important that we develop mechanisms to judge the performace of NGOs against their stated objectives. How effective are they? Have their actions had the desired demonstration effect? How scalable are their activities? Have their activities increased the awareness among the target group? What has been the impact of its performance on the effectiveness of Government? How have the outcomes improved in the area and the sector, since the NGO started activities? How much value for money do the NGOs activities deliver? How do charities compare in their spending on administration?

If we have credible enough rating of the performance of NGOs in each area and sector, we could indeed have a market in raising donations for charitable causes. Wealthy and willing donors would not need to scout around before donating their money. In fact, they can choose the location and activity of their choice and be rest assured that their contributions are well spent.

It will also go a long way in generating healthy competition between NGOs and improving the performance of many inefficient NGOs. Such competition will improve the economic efficiency of NGOs and ensure that they spend more of their resources on addressing their main objectives than on administration. The ineffective and inefficient ones will not be able to attract funds and will slowly leave the field, while the effective and well run NGOs will be able to attract more funding and expand their activities. Governments will also find it easier to channel scarce Government grants to the well functioning NGOs. A rating agency will be the first step, but probably the most improtant one, in ensuring proper regulation of the NGO sector.

The NYT carries a story of hedge-fund analysts, Holden Karnofsky and Elie Hassenfeld, who have floated the world's first charities rating agency. GiveWell, with only these two employees, studies charities in particular fields and ranks them on their effectiveness. It is in turn supported by a charity they created, the Clear Fund, which makes grants to charities they recommend in their research.

Do not be surprised if we have in the near future, income tax deductible charity funds, floated by organizations like Clear Fund, with the specific objective of raising philanthropic contributions for a specific cause or a bouquet of charitable causes. How about a Primary Education Fund, floated by Education Foundation, aimed at soliciting philanthropic contributions from those interested in helping improve primary education!

Update 1
Peter Singer has this in the Project Syndicate about the difficulty in evaluating charities, "Evaluating charities can be more difficult than making investment decisions. Investors are interested in financial returns, so there is no problem about measuring distinct values – in the end it all comes down to money. It is more difficult to compare the reduction of suffering brought about by correcting a facial deformity with saving a life. There is no single unit of value. "

With about $200bn given away to charities by individual donors, the importance of rating charities is bound to increase.

Update 2
How about rating micro-finance institutions? Especially since Daniel Akst feels that the best way to donate $1 is to give to micro-finance institutions.