TRACKING TRENDS in ETHIOPIAN CIVIL SOCIETY (TECS) 1 POLICY BRIEF 8

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1 TRACKING TRENDS in ETHIOPIAN CIVIL SOCIETY (TECS) 1 POLICY BRIEF 8 Impact of the 70/30 Guideline to Determine Operational and Administrative costs (Guideline 2/2003 EC) Phase III Issue: The Guideline to determine the operational and administrative costs of charities & societies (ChSOs) was one of the eight guidelines approved by the Charities and Societies Agency s (CSA s) Board in July All ChSOs and donors agree that the 70/30 ratio is reasonable in principle, but there is widespread concern that the actual classification of administrative costs has a negative impact on ChSO programmes and projects. Following a baseline study (Phase II) in 2012, which showed challenges in compliance, TECS produced a rapid follow-up study to compare the impact of the guideline after a second year of its implementation. Research objective This study is a rapid follow up to the study carried out in 2012 (Phase II) and its overall objective is to provide an update on the actual impact of the 70/30 Guideline on charities and societies, including a review of actual changes since the baseline, analysis of reasons for changes, and the impact on charities and societies operations. Approach and methods The study used similar quantitative and qualitative research methods and analyses to those used in Phase II. The quantitative approach involved an analysis of audited financial reports, and the qualitative approach was based on interviews with ChSOs, 1 The Development Assistance Group (DAG) was established in 2001 to foster information sharing, policy dialogue and harmonise donor support to Ethiopia in order to enable the country to meet the targets set in the Millennium Development Goals (MDGs). DAG also assists in the preparation, monitoring and evaluation of the country s Poverty Reduction Strategy (PRS). DAG currently comprises 26 donor agencies providing development assistance to Ethiopia within the Paris Declaration principles of aid effectiveness and harmonization. Disclaimer: This policy brief is based on research commissioned by DAG members through the Tracking Trends in Ethiopia s Civil Society (TECS) project. The research study was carried out by Atos Consulting. The authors were Dr Berhanu Denu and Getachew Zewdie. The views presented in this briefing note are those of the authors and Atos Consulting, and do not necessarily represent the views of DAG members. TECS September

2 a development partner and audit firms. Interview questionnaires were based on those in Phase II, with some revisions and updates to reflect the findings of Phase II and the known changes in the environment. Twenty-seven ChSOs were interviewed. Most of them shared their 2012 fiscal year audited financial reports with the research team. Forty-five of the target 63 audited financial reports of the 2012 fiscal year were gathered and analysed. The sample characteristics were similar to those of the Phase II sample. Reasons for the shortfall were the reluctance of the ChSOs to share their audited reports, and the fact that some ChSOs were inaccessible either by phone or through . Findings Extent of compliance The baseline rate of compliance in this study (based on the 2012 fiscal year) is 58%, which compares with a baseline figure of 19% obtained in the TECS Phase II study (based on the 2011 fiscal year). By compliance rate we mean that, according to the TECS analysis, 19% of the ChSOs accounts in 2011 demonstrated that they had spent at least 70% of their budget on operational costs, with 30% or less of their budget on administrative costs, whereas for the 2012 fiscal year 58% had managed to achieve this rate. Figure 1: Extent of Compliance as per the TECS Analysis of the 2012 Audit Reports 2 No. of Accounts Analysed FC ERC ERS ES C/N Types of ChSOs Complied Not-complied Source: TECS 70/30 research sample survey, July 2013 Figure 1 above shows the rates of compliance according to the different categories of ChSOs. The highest rate of compliance is found among Ethiopian Resident Charities. The majority of this category - 82% complied with the Guideline. Over half of the foreign charities and Ethiopian resident societies managed to comply with 2 FC = foreign charity; ERC = Ethiopian Resident Charity; ERS = Ethiopian Resident Society; ES = Ethiopian Society; C/N = Consortia/Network TECS September

3 the Guideline, but the rate of compliance was lower. Only one of the four Ethiopian Societies complied with the Guideline, while none of the networks/consortia complied. The analysis of the data suggests certain factors explain to some extent the ability of ChSOs to meet the guideline. Economies of scale is one of the contributing factors in the sense that the larger the organization, the more likely it is to comply; the smaller the organization, the less likely it is to comply. The other explanatory factor is the nature of projects/programs of ChSO, in the sense that those ChSOs with a classic service delivery focus are more likely to comply, while those with project/programmes focusing on research, training and capacity building are less likely to comply. The overall combination of these factors provides the greatest explanation. Thus, we see some large foreign and resident charities unable to comply because they focus on training and capacity building for sustainability. On average, across all the 45 ChSOs 2012 fiscal year audited accounts which were reviewed, the operating to administration cost ratio was 65/35, compared to the baseline of 52/48 in the 2011 fiscal year. Most organisations have therefore made considerable efforts to meet the 70/30 ratio and have moved far closer in the direction of compliance. However, efforts to comply have also had certain negative consequences. Consequences of complying The study found that the challenges ChSOs have encountered in order to comply with the Guideline remain similar to those identified in the baseline study. The categorization of certain costs as administrative has been most challenging in bringing the expenditure items within the ratio required by the Guideline. These include: project and programme staff salaries and benefits (mentioned by 75% interviewees); training costs (33.3%); monitoring and evaluation (25%); consultancy services (20.8%); transportation and per diems (16.7%). Measures taken to reduce administrative costs included reducing staff salaries and benefits (mentioned by 81.8% of the ChSOs). Nearly three quarters (72.6%) have introduced measures to reduce other administration costs, for example by purchasing materials and services of cheaper quality, or at the location of beneficiaries (at higher prices) to avoid transportation costs; by reducing consumption; and by relocating their office to property with a lower rent. The ChSOs interviewed believe that there will be many negative consequences of cost cutting measures. These include: lower quality service delivery to beneficiaries; an inability to develop and effectively implement programmes/projects that support the development plans of Ethiopia; and an inability to meet the expectations of donors on project design and implementation, M&E and capacity building for sustainability. TECS September

4 Most ChSOs (94.7%) stated that the best option for survival was to engage in dialogue with the Government, in order to seek some revisions and flexibility in its application through convincing the ChSA of the adverse impact of the Guideline. Consortia/networks stated that they have been unable to fulfil their mission and goals, since they are required by the ChSA to focus on fundraising. Additionally, the fundraising function is itself problematic because it involves passing on project and capacity building funds to member organisations. Member organisations are reluctant to receive capacity building funds because they are classified as purely administrative costs, which negatively impacts on their own 70/30 ratio. Conclusions and Policy Recommendations Despite an increase in rates of compliance with the guideline, ChSOs consider that the key problems and solutions remain the same. Essentially, as long as certain costs are classified as administrative (monitoring and evaluation, capacity building, transportation, research and consultancy), ChSOs will either fail to comply with the guideline and the Agency requirements, or comply with the guideline but fail to meet the standards required by donors. The ideal prototype ChSO which could more easily comply with all the guidelines (70/30 and others) would be one focused on service delivery, of which the main cost and activity would involve food hand-outs. This ideal ChSO would make little or no effort to support local communities and authorities to sustain the project after the ChSO withdrew; there would be no innovation, or efforts to understand lessons, and probably no project operations in remote or challenging areas. This kind of ChSO operation may be the type most likely to comply with the guideline, but it would not be operating in the best interests of beneficiaries. The key recommendations based on the findings of the study are: i. The ChSA should consider revising the 70/30 Guideline, especially the classification of costs, in line with generally accepted charity accounting standards and international charity operations. ii. The ChSA should engage in dialogue with ChSOs, to exchange views with stakeholders on the impact of the Guideline and make the necessary changes by taking into account evidence from this report and any other sources in Ethiopia, and the practices of other countries which are successful in charity oversight. TECS September

5 Prepared by: The TECS team. For information, contact For further information, please read TECS research report: Impact of the Guideline to determine Charities and Societies Operational and Administrative Costs (70/30 Guideline) Phase III Final Report, September 2013 TECS September

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