Wednesday, 13 April 2011

The 'Business' of International Aid

What if Marriott paid hotel guests $50 per night, then bragged about its occupancy rates?

The Wall Street Journal

April 11, 2011


Mr. Starr is a former financial executive and co-founder and managing director of Abaarso Tech, based in the Maroodi Jeex region of Somaliland.

What if Marriott operated without any revenue, room-rate or other meaningful customer-usage data from its individual hotels? Suppose it remitted money to cover salaries and other expenses, without knowing if any of it was producing a product for which customers were willing to pay. Imagine further that Marriott asked only for self-graded quarterly "report cards" from its managers, and that, as its only act of supervision, it simply audited its hotels' expenditures.

You don't need to run a Fortune 500 company to know how quickly such a system would run amok. Absent accountability, managers and staff would have no incentive to provide a reasonable service. They'd have to be somewhat honorable to even bother showing up to work. In short order we'd find employees buying $10,000 worth of furniture for $20,000 and splitting the difference with the vendor. Come audit time: $20,000 expense item, $20,000 vendor receipt, "check and check, all looks clean here."

If you think that no business would operate this way, then you're evidently not familiar with the "business" of international aid. International nongovernment organizations get their funding from governments and other donors, not the men, women and children they are supposed to be serving. Without revenue or other quality customer-satisfaction metrics, NGO executives and donors have no way of measuring whether employees on the ground are providing a product of value to their impoverished "customers."

They then take a bad situation and make it completely unworkable by routinely paying beneficiaries to avail themselves of NGO services. Having bought their customers, NGOs send home reports about the great attendance that led to successfully training X-number of people on fishing/farming/water/waste/health. It would be as if Marriott paid guests $50 per night to stay in its hotels and then bragged about its occupancy rates. If the poorest people in the world require payment to take your services, what does that say about your services?

Because NGOs lack the ultimate customer-feedback metric of revenue, one would expect them to achieve accountability through oversight by executives on the ground with operations in a single geographic market. Sticking to one geographic market makes sense on many levels since there are no economy-of-scale advantages to being a multinational NGO (no bulk purchases, no manufacturing, no branding advantage) and all kinds of diseconomies of scale (foremost the lack of accountability). So why do countless NGOs operate as multinationals in dozens of countries with their executives sited in Washington, New York, London, Addis Ababa, Nairobi and Geneva? The obvious answer is that like everyone else, these executives respond to incentives, and what works on the ground isn't what pays their salaries. John Smith, NGO administrator, maximizes his personal value by going multinational while staying proximate to his donors, never mind the damage that model inflicts on the poor communities he purports to serve.

It doesn't have to be like this.

A few years ago I quit a career in finance and dedicated 100% of my time to improving education in Somaliland, my uncle's home country. Happily ignorant of the aid industry's modus operandi, I designed the Somaliland non-profit organization, Abaarso Tech, to be run like a business with the Somali people as both shareholders and customers.

I began with the precept that our employees' principal form of compensation would be pride in a worthy deed well done. Not only is generous pay unnecessary for success in development work, it is counterproductive. With low accountability, highly compensated individuals will choose the path of longest-term funding over good solutions (I suspect one case in point are NGOs in Haiti, which deploy money notoriously slowly). So I donated a large portion of my savings and promised not to take any salary. Having led by example, I was able to recruit like-minded individuals also willing to make financial sacrifices for equity in something special.

Turn a deaf ear to the aid agencies that tell you they cannot recruit quality employees without compensation packages that are far larger than what they could make in the for-profit world; the pay is essentially tax-free and NGOs already cover virtually everything, including room and board and all kinds of paid vacations. In Abaarso Tech's short history our teachers have included Ivy League graduates, a Ph.D. in physics, a Ph.D. in chemistry and nearly 20 well-trained, native English-speaking American, Canadian or British teachers. Our $3,000 annual salary basically pays interest on their college loans with enough left over for the occasional can of Pringles. Our staff works 70-hour weeks because they are motivated by the mission's goal and feel ownership for its success.

Managing a single geographic market with executives on the ground, highly efficient costs and properly motivated employees was a good start. But our nonprofit still needed to offer programs that the Somali people would value. Somaliland is one of the poorest nations in the world, but that doesn't mean Somalis won't scrape together what they have to buy something good. Just 20 months after landing here, Abaarso Tech has 100 students in its secondary boarding school, 100 in adult English classes, 20 in the undergraduate School of Finance, 50 in primary-school tutoring and 30 in the graduate business courses. Almost all of those 300 enrollees find a way to pay something towards their education. One of our top boarding-school students cannot afford much, but his family still brings us a bag of fruit each term as their way of saying "thank you." On the other extreme, we have a couple of wealthy British Somalis who left U.K. private school to join our boarding school at a tuition of $5,000 a year. Our program is a living repudiation of the notion that development beneficiaries need be paid to accept the services of their benefactors. Today, our program's net operating loss is approximately equivalent to the compensation package of a typical NGO worker.

Which brings me to a second question for the taxpayers and donors who, over the past few years, have provided hundreds of millions of dollars of aid to Somaliland: Even accepting that our boarding school and finance program would have been too sophisticated for a typical development agency, why, after spending all that money and far more time on the ground, has no other NGO thought to provide native English-speaking teachers for adult English courses? We just started the program in January, charging $200 for three months of classes, and our phones won't stop ringing with Somalis who want to pay to learn proper English. This isn't brain surgery; it is just listening to what the customers are asking for and finding a way to provide it at a reasonable cost. It is exactly what Marriott does every day.

Somalis are good people who could use well-spent aid money to rebuild their country from an awful civil war (which was in part caused and funded by Western food aid—see Michael Maren's 1997 book, "The Road to Hell"). However, until we take the perverse incentives out of the international NGO business, and only provide funding to those organizations whose executives are on the ground overseeing the otherwise unmanageable, the bulk of the money spent on international aid will, at best, be wasted.

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