The Economics and Governance of NGOs in Bangladesh

1. The Economics and Governance of NGOs in Bangladesh Hassan Zaman The World Bank

2. Study objectives • Improve knowledge, and reduce misperceptions, of NGO sector within Bangladesh by providing facts on key services and advocacy activities provided by NGOs • Explore trends and implications of different ways of financing NGOs • Examine legal and regulatory framework for NGOs • Suggest steps that Government, donors and NGOs could each take to strengthen the development impact of NGO activity

3. A few facts • Around 2000 “development NGOs”, most operate in less than 5 districts • Rapid growth in NGO programs; proportion of rural communities with at least one NGO program almost doubled 1995-2000 • A World Bank survey of 300 NGO branches in 2004 shows that micro-credit, health, sanitation and education are the four most common services. Another common activity is pro-poor advocacy • Micro-credit reaches around 60% of poor households, and 37% of total households – but regional coverage uneven. • Certain health programs have nationwide reach through community health workers but health facilities are surprisingly scarce (e.g. only 4% of women obtained post-natal care from NGO facilities) • Around 8% of total primary enrolment are in NGO schools – of these 75% are in BRAC schools

4. Reaching the poor • NGOs are reasonably successful in targeting services to the poor (small share of non-poor get benefits) • Primary education is a good example (HIES 2000)

5. Socio-economic impact • On individual and household level benefits there is clear evidence of positive NGO impact on a range of key outcome goals (see micro-finance presentation later) • For instance impact of NGO schools on test scores is highly significant (compared to girls who don’t go to school, NGO girl students have 22% higher reading scores compared to 8% higher for GOB schools) • NGO presence in a village contributes to a 20% point difference in malnutrition rates probably due to the interaction effect of micro-credit on consumption, nutritional education and nutritional supplements. • On cost-effectiveness, there is evidence that certain key programs e.g. TB, micro-credit and primary schooling, are most cost-effective when delivered by NGOs.

6. Advocacy issues • Most NGO advocacy focuses on issues directly affecting the poor (violence, land rights etc) with numerous successful examples of pro-poor change • A number of NGOs are involved in issues that challenge Government policies more directly (e.g. anti-corruption, human rights) • Recently a few NGOs were accused of involvement in partisan politics. • NGOs that provide services and are engaged in advocacy on contentious issues may consider formally separating the 2 functions into different legal entities so that funding for service provision is protected.

7. Success factors: an understated GOB role • Several factors have led to unparalleled size and development impact (leadership, funding, geographical/social homogeneity). One key factor is role of Government. Compared to other countries GOB has provided far greater space for NGO activity. • Macro-economic stability and sustained growth has contributed to the success of micro-finance. Partnership programs in key sectors (e.g. total sanitation, TB) have explicitly involved NGOs, PRSP confirms this. Fiscal policy has been supportive. • Recent tensions need to be seen in this broader context.

8. Success factors: pay and incentives • Internal incentives for staff performance rests largely on close supervision of staff attendance (helped by campus-style living arrangements), easily monitorable targets, ability to dismiss workers easily, and reasonably participatory decision-making. Performance-linked pay in certain programs help. • On other hand frontline NGO worker pay is on average lower than GOB counterparts, compression ratios similar resulting in high staff turnover in certain professions e.g. doctors. Moreover staff altruism is over-rated especially for “second generation workers.”

9. Financing NGOs - external sources Total aid to NGO has remained stable at around 0.7% of GDP – this is during a period when total aid to Bangladesh has fallen from 5% of GDP (1990-95) to 3% of GDP since 1995.

10. Financing NGOs - external sources Contd… • Corruption has plagued Government financing of NGOs in social sectors. • However in micro-finance (PKSF) and solar energy (IDCOL) contracting has been successful. • Once contracting processes are improved (e.g. through autonomous foundations), greater social sector NGO delivery could go via Budget. • Private charitable contributions have not been tapped by development NGOs

11. Self-generated funds • Interest income on micro-finance key source (see next presentation) • NGO-linked commercial enterprises common in other countries typically as separate legal entities • Here NGO businesses are registered under numerous laws resulting in controversy with private sector • Profitability of NGO businesses varies by sector and by NGO capacity to hire business professionals. • Decisions to enter and exit markets need to be done depending on whether the objective is to be a ‘social venture capitalist’ or to maximize revenues

12. Regulatory framework and financial accountability • Legal framework (registration, oversight, tax) outdated and the multiple implementing agencies lack capacity. • Laws relating to internal governance, accounting, disclosure and transparency are rudimentary • NGO Boards face similar corporate governance problems as corporate sector (family members, lack of term limits, lack of role clarity) • Donor financial reporting requirements are questionable • Quality of external audits and public access to reports vary significantly

13. Regulatory framework and financial accountability Contd… • Uniform accounting standards using IAS, oversight system for audit quality through proposed Financial Reporting Council and public access to audit reports would help • Board composition and functions could be strengthened in line with Code of Corporate Governance • An Independent NGO Commission is one option for improving institutional framework • Certification bodies, as in Philippines and Pakistan, can screen out fly by night NGOs • Legislative revision carries risks as does current status quo.

14. Scaling up through a strategic compact • NGOs have made a difference for their clients but the macro impact of NGO programs is limited by the ‘micro’ nature of some of these interventions (e.g. growth impact of micro-credit, less than 10% of primary enrolment, few facility based health services). • Strong case for a focused scaling up of NGO activity through a mix of enhanced direct provision and facilitating (local) Government and community provision so that accountability relationships are strengthened

15. Scaling up through a strategic compact Contd… • Existing ‘franchising model’ of expansion remains basis for growth though future products will be more complex • Middle management capacity, retaining incentives, cost-effectiveness and leadership succession are key challenges as NGOs deliver more complex services. • A ‘strategic compact’ between GOB, donors, NGOs and clients where each improves certain aspects of its current practices could further enhance development impact of NGOs

16. Scaling up through a strategic compact Contd… • GOB part of compact could be (i) to oversee NGOs while not impairing their ability to innovate (ii) withdraw from direct service provision where NGOs have comparative advantage (e.g. micro-credit) (iii) strengthen procurement and budgetary practices to improve contracting and evaluation of NGOs • Donor role in ‘compact’ could be to support NGOs while ensuring that accountability of NGOs to Bangladeshi stakeholders is preserved. As contracting processes improve more donor funds to NGOs, for social services, could go via Budget. Advocacy needs to be funded directly.

17. Scaling up through a strategic compact Contd… • NGO part of the compact could include (i) strengthening financial management and corporate governance (ii) improving transparency and active publicity about activities and finances (iii) carrying out strategic reviews to determine scaling up or down of programs/enterprises (iv) strengthening middle management and succession planning • Clients can contribute to the compact by actively exercising their power as consumers (eg vouchers), by monitoring service quality and demanding information