The Perverse Incentives Problem and Grant Making

NGOs have a problem with perverse incentives. Simply stated, it is this:

If an NGO eliminates the problem that they set out to solve, then they will have to lay off all their staff and dissolve their organization.

If your NGO exists to eliminate malaria, and you succeed, then your NGO would need to be dissolved. If your NGO exists to ensure women have equal social power and reproductive choice, and you succeed, then you are rendered unnecessary. If you actually make it so that there are fewer people in poverty, then you have fewer people to serve.

The good NGOs that have been around for a while recognize this. They resolve it by pivoting which geographies they are operating in or shifting their programs to meet the next level of needs. The best NGOs (precious few) have de-centralization plans in which they are slowly handing over power to local offices which will serve as flexible community organizations once the “problem” no longer needs international resources.

Part of the onus for this problem is on grant-makers. If a grant is issued to an NGO for a set term, and they are supposed to achieve sustainable results in that term, then there should be an incentive for them to do so and absolutely no incentives for them to fail. But that’s not what usually happens.

Instead, from foundations to huge funders like USAID, there is a preference for “incumbent” funding. The first round of a grant RFP may state that a project needs to be completed in 5 years, but it is easier to get an extension to that grant than it is to get a new grant for operating elsewhere. Almost always, the funder or the grantee will justify this on the basis of “unforeseen” circumstances or “unrealistic” goals. But the question remains: Why not longer funding for the first round with incentives for early completion? Why are grant makers making it more worthwhile to NOT get the project done?

If grant-makers want to, they could reverse the incentives here. Almost every grant I have assisted NGOs in applying for over the last three years has required a “Sustainability Plan.” But these tend to be wimpy. It’s rare that NGOs are required to lay out concrete benchmarks for sustainability, rather than for outputs. It seems even rarer that funders enforce or incentivize compliance with any such benchmarks.

If we all agree that individual grant terms are too short to make progress towards sustainability, then by all means, let’s extend the grant terms. After all, twelve months is pitifully short for most programs. Even four years is insufficient for many, including any programs that need to overhaul education systems. What if we simply had 8-year grants to begin with, rather than 4-year grants renewed? Once we lay a strong enough foundation that sustainability can be reasonably expected, then we also need follow on funding to measure whether the impact has been sustained.

A few foundations have started doing their own sustainability assessments, going behind their grantees one or three or five years later to track long-term impacts. But this remains rare. And even when it does happen, there’s no stake in the process for the grantee except as it might relate to future grant competitiveness.

What if organizations were promised bonuses if the programming they completed had sustained impacts? What the implementing organization received 90% of the grant for the term of the grant, but the final 10% was withheld following a delayed evaluation? If that final 10% would be forfeited if the implementing organization was still at work in the same community doing the same thing 3 years later because they had not figured out how to sustain it or hand it over to local partners? Or if the work turned out to be unimpactful?

What if instead of abruptly having to lay all the local staff off at the end of a program unless the grant renewed, organizations were given the means to give a three or six month paid severance, such that the staff did not fear saying “We have finished our work here”?  

The overall perverse organizational incentive for NGOs to survive would still exist, but the inventive to create sustainable impacts from individual programs in narrow geographies would at least change. It would be a start.

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