A Project of the American Enterprise Institute and the Federalist Society

Known Unknowns In The World Of Aid


June 22, 2005

By Don D'Cruz

The tsunami disaster struck a chord with people around world. This is reflected by the staggering donations made to non-government organisations (NGOs) engaged in foreign aid.

In the United States, close to $1 billion was raised. In the Great Britain, the amount raised was almost $550 million. And even in a relatively small countries like Australia and Canada foreign aid NGOs raised around $230 million and $160 million, respectively.

In some respects this outpouring of generosity was understandable. After watching the pictures of wholesale destruction and human misery, giving to aid agencies was a small but tangible way that people have been able to "make a difference".

In doing so, people have placed a high degree of trust in the foreign aid industry. As Australia's Treasurer Peter Costello, the man widely-regarded as the next Prime Minister of Australia, said in a speech shortly after the controversy surrounding the Red Cross's Bali Appeal in 2003: "Trust is the currency of the charitable sector."

In spite of the large sums of money flowing to various aid agencies, there is surprisingly little information and good hard data about exactly how this money is being spent, or how and where it will be spent in the future. Most charities have issued their appeals with general but sketchy plans about how the money will be used.

Aid agencies can be excused for this at present. Though much of the urgent emergency relief work has already been done by the military and volunteer teams of medical personnel, emergency workers and police, the relief operations are still in their infancy.

It would be a grave error of judgment, however, for foreign aid NGOs to believe that their current levels of disclosure are sufficient.

Aid agencies must regularly provide the public with detailed audited financial statements providing a breakdown of exactly how the money raised has been and will be spent.

The donor public are always interested in efficiency when it comes to charities. This is out of a great desire that the maximum amount of money reaches those in most need. As Mr Costello pointed out in that same speech, "charities have to do better if they want to keep the public trust" because "inefficiency is corrosive of trust".

Foreign aid NGOs need to spell out the costs associated with their relief work in sufficient detail.

That goes far beyond explaining the amount taken out for administration costs, which features so frequently in the media

It has not uncommon to hear claims such as that only around 10 cents in every dollar will be used to cover costs.

The problem is that the definitions of "administration costs" tends to be kept deliberately vague and narrow.

In order to determine how efficiently aid money is being delivered, one needs to examine the cost of delivering services sometimes defined as "project costs".

"Project costs" in the aid industry tend to be expenses can cover a broad range of costs that members of the public might associate with administration costs and cover items such as travel, accommodation, wages and stationery. As such, they need to be revealed separately instead of being embedded in the cost of projects in an attempt to avoid scrutiny and to allow donors evaluate efficiency properly.

Many aid agencies collecting money don't have any assets in the tsunami affected areas and rely on contracting their services to other organisations, most of which would also have additional administrative costs. All of this needs to be spelt out clearly.

In addition, there needs to be a full breakdown of the capital expenditure made by the aid agencies so that we can see what sort of equipment is being purchased.

The cost of providing such information is usually cited as a reason against providing full disclosure. This is as false and risky for charities as it is for the corporate sector. It's also a poor excuse as these NGOs would have this information on hand for purposes of internal management.

The donor public also needs a better idea of how much money is being spent now, how much money is being held back and whether the funds being held for longer-term projects are being kept for weeks, months or even years.

Generally, aid agencies tend not to disclose their internal assessments of projects, but there is really no reason the public should not know details of the aid efforts which their charity dollars have paid for.

People around the world have responded to the tsunami disaster with unprecedented generosity and aid agencies have a responsibility to repay this trust with high levels of disclosure and transparency. The public and the media have a moral obligation to tsunami survivors to keep asking the question: how is the money being spent?

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