Many non-governmental organisations advertise that a high proportion of money donated by the public will go toward programs — the good work that charities, aid organisations and the like do — and not to administrative costs. Donors are encouraged to think that there is minimal wastage — and that low overheads mean good development work, and more of it.
Disappointingly, this may not actually be the case. In 2009, eight charity-watchdog organisations went public and said that overhead ratios were meaningless when trying to work out whether a charity was worth supporting.
Why? Because the ratio of admin costs to money spent in the field reveals very little about the impact of an organisation’s work. An undue focus on the ratio discourages investing in tools and expertise to improve effectiveness — and at any rate, the methods of calculating overhead ratios are so varied that the results are unreliable.
What’s more, Saundra Schimmelpfennig, an expert on good donor practices, argues that lower overhead ratios in charities generally represent deceitful accounting practices, rather than a sign of effectiveness.
Why then do so many charities advertise that a high proportion of money donated goes to programs and not to admin? To answer this, we need to turn our eyes to American Football.
Earlier this month, the 46th Super Bowl was held between the New York Giants and the New England Patriots to determine the National Football League (NFL) champion for the 2011 season. The game itself was the highest rated TV show in US TV history, with over a third of the country’s population tuning in.
Meanwhile, a deal had been struck between the NFL and World Vision USA for the second year running. Before the final game is played, the NFL commissions the production of t-shirts emblazoned with the logos of both Super Bowl teams. Of course, only one team ends up winning, so they are left with 100,000 t-shirts that have the name of the losing team and "Super Bowl Champions" written on them. Apart from comedy value, these t-shirts are worth very little so the NFL donates them to World Vision, and World Vision in turn donates them to developing countries such as Zambia, Armenia, Nicaragua, and Romania.
Donations by World Vision of this variety, otherwise known as Gifts in Kind, form a significant part of World Vision’s work. In fact, they account for one quarter of their annual revenue. In the three years leading up to 2011, they distributed US$1 billion worth of gifts in kind domestically and internationally.
The thing is, the impact of such gifts — 100,000 unwanted NFL t-shirts — is highly questionable.
Donations like these flood the local markets — which means local manufacturers cannot compete and the local economy takes a hit. Between 1981 and 2000, used-clothing imports in Africa accounted for a roughly 40 per cent decline in production and 50 per cent decline in employment within the apparel production sector.
Money that is spent transporting such gifts to developing countries, whether it is in storage, shipping, customs, or distribution, could be used for more pressing expenses: water and sanitation, or immunisation programs, for example.
Finally, the message that such an action sends to both the donor country and the recipient countries is that the unwanted rubbish of one is perfectly good for the other.
The benefits of such donations to locals are questionable but there are advantages for the NGOs that carry out such programs. With help from a few accounting tricks, gifts in kind allow organisations to drive overheads down. This in turn bolsters claims that they are worthy of public support because of their low admin costs.
Looking closer, these claims may not stand up. World Vision has stated that purchasing a shirt equivalent to the NFL t-shirt locally may cost as little as US$2. However, when it comes to placing a value on the NFL shirts for accounting purposes, both World Vision and the NFL state that they are worth US$11.65 each. In other words, the value of the t-shirts is inflated by almost 500 per cent. For the NFL, it’s an inflated tax-deductible donation. And World Vision can claim a higher proportion of revenue generated through gifts in kind.
Saundra Schimmelpfennig argues that donations like the NFL loser t-shirts are classic cases of the "tail wagging the dog". A program is chosen because the overheads are low — and not because it is actually needed or helpful. In a world when donations are becoming more and more competitive, propagating the myth of the cost-effective donation is increasingly convenient.
In reality, money needs to be spent on development programs in a variety of ways. There are costs involved in running offices, hiring qualified staff and raising funds and there are costs involved in developing new and more effective ways to run programs. These costs are fundamental part to any good NGO’s work.
So too, should be spending time educating the public about what good development work entails. A good place to start would be to dispel the myth of low overheads being a sign of effective development work.