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Three members of GiveDirectly‘s board of directors (Paul Niehaus, Michael Faye, and Chris Hughes) are planning to start a for-profit technology company, Segovia, aimed at improving the efficiency of cash transfer distributions in the developing world. Segovia plans to sell software to developing-country governments for use in implementing their cash transfer programs.

This development was announced today (though we have been aware of and discussing it with GiveDirectly for some time). Some discussion is available at today’s post on the Development Channel blog.

GiveDirectly and Segovia will work out of the same office space in New York City.

Dr. Niehaus, who has been our primary contact at GiveDirectly and has unofficially played the role of GiveDirectly’s full-time Executive Director, will continue to devote significant time to GiveDirectly and serve as its President with primary responsibility for GiveDirectly. He will be co-employed by Segovia and has told us that he may spend up to 20% of his time on Segovia. Dr. Faye will become Segovia’s president. (Previously, both Dr. Niehaus and Dr. Faye have had full-time jobs outside of GiveDirectly, though they have had substantial responsibilities at GiveDirectly.)

We think this development is simultaneously a potentially very positive one broadly – bringing the possibility of greatly leveraged positive impact on the world – and one that raises new issues and risks for GiveDirectly and its donors.

We think these issues and risks (discussed further below) are noteworthy but ultimately similar in magnitude to, or smaller than, similar risks that exist for our other present and past recommended charities. We plan to continue recommending GiveDirectly as a top charity and continue to see it as an outstanding giving opportunity.

Note that we have discussed all of these issues with Dr. Niehaus and Dr. Faye – they have reviewed a draft of this post – and we believe they are aware of all of the issues we discuss below.

This post focuses on the following:

• What costs and benefits does this decision pose for GiveDirectly right now?
• What additional issues could arise in the future, particularly potential conflicts of interest between Segovia and GiveDirectly?
• Why have Dr. Niehaus, Dr. Faye, and Mr. Hughes decided to serve developing country governments and why are they using a for-profit-company structure?
• What effect will this have on our recommendation of GiveDirectly?

We have not tried to formulate a view on Segovia’s possible impact because this does not seem directly relevant to GiveWell or our donors. Based on what Dr. Niehaus and Dr. Faye have told us, we believe it’s plausible that given (a) the amount of money governments transfer to recipients and (b) the amount of money that may be lost by those programs due to negligence and/or corruption, Segovia could be very impactful and may represent some of the “upside” we hoped to see from GiveDirectly.

What costs and benefits does this decision pose for GiveDirectly right now?

We discuss several potential negative impacts Segovia could have on GiveDirectly; we also discuss potential positive impacts.

1. What impact will Segovia have on key staff’s time allocation to GiveDirectly?
2. Will Segovia’s existence affect the intensity with which GiveDirectly leadership work to maximize GiveDirectly’s impact?
3. Will Segovia directly affect GiveDirectly’s ability to absorb and distribute funds to recipients?
4. Will the general public react negatively to this announcement in a way that affects GiveDirectly’s ability to raise funds or otherwise distracts it from its core work?
5. What benefits might Segovia have for GiveDirectly?

What impact will Segovia have on key staff’s time allocation to GiveDirectly?

Dr. Niehaus and Dr. Faye told us that they expect the following changes to staff time allocations due to Segovia:

• Paul Niehaus, GiveDirectly’s President, had previously been splitting his time between GiveDirectly and his academic position at University of California at San Diego. Pending the university’s approval, he hopes to take a one-year leave of absence from his academic position to enable co-employment at GiveDirectly and Segovia. During this one-year leave of absence, he expects that the total amount of time he devotes to GiveDirectly will increase slightly and that he will spend a maximum of 20% of his time on Segovia.
• Michael Faye, Segovia’s president and a member of GiveDirectly’s Board of Directors, had previously worked at a management consulting firm but spent significant time on GiveDirectly. He has now taken a leave of absence from his job and intends to spend the vast majority of his time on Segovia while still offering time to GiveDirectly. He expects the time he spends on GiveDirectly to increase. More on this below.
• Melissa Harpool, Outreach Coordinator, will split her time between GiveDirectly and Segovia. Her current primary role is managing schedules, and the people whose schedules she manages will now be splitting time between Segovia and GiveDirectly. She had previously been full-time at GiveDirectly.

Dr. Niehaus and Dr. Faye told us that relevant staff track their time allocation to projects and will be able to share whether or not they have hit the targets described above.

Will Segovia affect the intensity with which GiveDirectly leadership work to maximize GiveDirectly’s impact?

Dr. Niehaus told us that he retains his ambitions for and commitment to GiveDirectly’s long term impact, but splitting attention between two organizations is difficult, especially when both are growing rapidly and likely to face significant obstacles.

It is plausible that given GiveDirectly’s and Segovia’s overlapping leadership, staff and office space, those involved with both might see Segovia as the more exciting opportunity. We believe that this could lead to reduced ambition or it could reduce the quality of the mental effort GiveDirectly’s leadership dedicates to maximizing GiveDirectly’s impact.

Will Segovia directly affect GiveDirectly’s ability to absorb and distribute funds to recipients?

Assuming that GiveDirectly staff meets the time targets described above, we don’t think Segovia will have a direct impact on GiveDirectly’s ability to absorb and distribute funds to recipients.

Will GiveDirectly receive a negative response from the general public that affects its ability to raise funds or otherwise distracts it from its core work?

We continue to see GiveDirectly as an outstanding giving opportunity and plan to continue recommending it to donors. That said, we are not confident about how others will react and remain concerned about the impact that the general public’s reaction might have on GiveDirectly’s future fundraising prospects.

Dr. Niehaus and Dr. Faye told us that they have attempted to reduce the likelihood that the response is negative by speaking at length with media in advance of the announcement so that stories written about their decision present a reasonable perspective on this new development. They have also communicated with their major donors and report that they have not encountered negative reactions.

What benefits will Segovia provide for GiveDirectly?

Potential benefits include:

• GiveDirectly will receive an equity stake in Segovia, which could result in GiveDirectly’s receiving additional funding in the future. The size of the stake is not yet determined. Dr. Niehaus, Dr. Faye, and Mr. Hughes are currently discussing the size of this stake with potential investors.
• The technology Segovia is planning to develop would likely be helpful to GiveDirectly. Segovia would give this technology to GiveDirectly without charge.
• As discussed above, Paul Niehaus has been based in San Diego and the rest of GiveDirectly staff is in New York. Dr. Faye has been employed full-time at a management consulting firm. Dr. Niehaus will be spending half his time in New York and hopes to take leave from his academic position, and Dr. Faye will now be working full-time out of the same office. Dr. Niehaus’s co-location with the rest of GiveDirectly staff will likely improve his ability to manage other staff. Dr. Faye’s co-location with Dr. Niehaus and other GiveDirectly staff may also increase his contribution to GiveDirectly. (Dr. Faye has told us that the time he has spent on GiveDirectly has increased since he took leave of absence from his job.)
• Mr. Hughes intends to significantly increase his work on advocating for cash transfers. This should benefit both Segovia and GiveDirectly.

What additional issues could arise in the future, particularly potential conflicts of interests between Segovia and GiveDirectly?

There may be cases where GiveDirectly has to consider actions that would maximize its impact but might harm Segovia’s interests. GiveDirectly board members (Paul Niehaus, Michael Faye, and Chris Hughes) will hold equity stakes in Segovia, so their financial interests could come into conflict with their roles as Directors of GiveDirectly. We see the following possible conflicts of interest:

• GiveDirectly’s board members’ financial interest in Segovia could lead them to use GiveDirectly as a means to promote Segovia. This could be via using Segovia’s software even if it’s not well suited to GiveDirecty’s needs, or otherwise using contacts/meetings that might take place due to GiveDirectly (e.g., government, academic or media contacts) to promote Segovia’s offering.
• Segovia will also have (a) investors and (b) staff who hold significant financial stakes in Segovia, which could lead to conflicts between maximizing profit and maximizing impact.
• If Segovia were bidding on a contract with a particular government, would GiveDirectly avoid offering its service in the same area/to the same government so that Segovia would have an easier path to a sale?

We have spent significant time with Paul Niehaus and some time with Michael Faye and Chris Hughes over the past few years, and we believe they have good intentions.

In addition, Dr. Niehaus, Dr. Faye, and Mr. Hughes hope to identify investors whose primary motivation is social impact, and believe that choosing investors wisely is a priority. They have also told us that they plan to expand GiveDirectly’s board to 6-7 directors, 3-4 of whom have no overlap with Segovia. Dr. Niehaus told us that overlapping directors would recuse themselves from votes that involve conflicts.

Why have Dr. Niehaus, Dr. Faye, and Mr. Hughes decided to serve developing country governments and why are they using a for-profit-company structure?

Dr. Niehaus and Dr. Faye believe that Segovia’s product is one that governments will want to purchase, and the product will have significant social impact. They have had a long-standing interest in working directly with governments.

Dr. Niehaus and Dr. Faye told us of their hope that GiveDirectly would work with government-run cash transfer programs in November 2013. We discuss this possibility in our review of GiveDirectly, relying on a summary of a conversation we had with them at the time.

Dr. Niehaus and Dr. Faye told us recently that they had initially hoped governments would transfer funds directly to/through GiveDirectly. The developing-country governments that GiveDirectly spoke with preferred technology to fully outsourcing implementation, saying that they already had a significant number of individuals employed to implement their cash transfer programs. Instead, governments asked for software that could improve their operations, which Segovia now aims to provide.

GiveDirectly still believes it will have opportunities to implement government programs, but Dr. Niehaus and Dr. Faye have come to the conclusion that there will be many more cases where governments want technology alone.

Dr. Niehaus and Dr. Faye pointed us to a World Economic Forum report estimating that developing-country governments distribute $400 billion in transfers each year. Dr. Niehaus and Dr. Faye have also told us that data showing rates of leakage of 50% or more are not uncommon in large public-sector transfer programs (i.e., the amount that never reaches the intended recipients). (More information about these sources in this footnote.) They believe that governments will see that purchasing Segovia’s product will save them money by allowing them to transfer more money to recipients at lower overall cost.

We find the above explanation of Segovia’s potential impact plausible but have not tried to vet it as we don’t think our take on it has direct relevance to GiveDirectly or the donors who use our research.

We have the impression that the belief that Segovia could have great social impact is the primary driver of Dr. Niehaus’s, Dr. Faye’s, and Mr. Hughes’ desire to start Segovia.

Why has GiveDirectly settled on this corporate structure as opposed to another structure?

Dr. Niehaus, Dr. Faye, and Mr. Hughes had initially expected to undertake this project as part of GiveDirectly’s existing non-profit structure but told us that they decided on the structure of a for-profit, independent company for three reasons:

1. Recruiting. We spoke with the recruiting firm that GiveDirectly retained for this search, and the person who led the search told us that recruiting top technology talent was slow. In some cases, the engineers GiveDirectly contacted were not interested in working for a non-profit. Even when GiveDirectly offered compensation packages competitive with for-profit companies, some engineers balked when they saw the negative attention that the media and donors give to high salaries in the non-profit sector. Dr. Niehaus, Dr. Faye, and Mr. Hughes place high priority on recruiting the very best possible talent, so while they feel they could have reasonable success recruiting as a non-profit, they see the improved recruiting prospects associated with a for-profit to be a major consideration.
2. Investment. GiveDirectly told us that there are investors who would support Segovia as a for-profit entity but would not be interested in supporting GiveDirectly, the non-profit.
3. Legal advice. GiveDirectly received legal advice that an independent for-profit company is the most straightforward way to avoid jeopardizing GiveDirectly’s tax exempt status.

What effect will this have on our recommendation of GiveDirectly?

We do not expect the existence of Segovia to change our recommendation of GiveDirectly. We expect GiveDirectly to continue to successfully distribute cash to very poor individuals in the developing world, and believe that the issues and risks described above are smaller than, or at worst similar in importance to, those that exist with all of our other recommended charities.

We will continue to follow GiveDirectly closely and report on its progress.

We have written previously about the “upside” we saw in GiveDirectly. We think that Segovia may be one example of that “upside” — Dr. Niehaus and Dr. Faye, partly through their work on GiveDirectly, saw an opportunity for significant social impact and are now pursuing it. However, we think the attention they will now pay to Segovia likely diminishes the upside of future donations to GiveDirectly.

Footnote: On the World Economic Forum report described above, Dr. Niehaus wrote, “I have some questions about the methodology but believe the basic message that it is big and has problems.” On the leakage rates, he wrote, “India’s two largest social programs are the employment scheme (NREGS) and ration scheme (TPDS). For NREGS, the best nationally representative leakage estimate is by Imbert and Papp (published in R. Khera, editor, The battle for employment guarantee. Oxford University Press, 2011) who estimate that between 44% and 58% of participation reported in official figures is fictitious. This likely understates leakage in dollar figures since people who do work are often underpaid, but nationally representative data on earnings are not to the best of my knowledge available. For TPDS, the most recent nationally representative figures I know of are from the 2004-2005 NSS and are discussed in work by Svedberg in EPW who reports a national average estimate of 54% leakage of grains intended for the poor.”

The post Update on GiveDirectly appeared first on The GiveWell Blog.

In February, Jacob Kushner, a journalist living in Kenya, contacted us. We have long been interested in seeing more substantive coverage of philanthropy, so we were excited to talk to him.

As a pilot project, Mr. Kushner decided to visit villages in which GiveDirectly had distributed some of its earliest cash transfers. We spoke with Mr. Kushner several times to offer thoughts and feedback, but we encouraged him to write about whatever he found (positive or negative about GiveDirectly). We also put him in touch with GiveDirectly to confirm that staff there were amenable to this project.

Mr. Kushner completed his trip in April, and his full article follows. He also shared his full interview notes with us which we’ve posted here.

We’ve summarized what we took away from his article here. Carolina Toth, Manager, People and Partnerships at GiveDirectly responds here.

When giving out cash to the poor, what happens when some are left behind?
A closer look at whether GiveDirectly’s cash transfers stoke community tension in Western Kenya

By Jacob Kushner

For several years now, the charity GiveDirectly has experimented with different ways of deciding who among Western Kenya’s rural poor should receive cash transfers. It’s an important consideration, because $1,000 means a lot to the families that receive it—and it can mean a lot of disappointment to the families that don’t. Last month I traveled to Western Kenya to speak with both lots, and I found that the discrepancy did not go unnoticed in their communities.

To date, GiveDirectly has undergone five different transfer programs in Siaya over the past three years, with different metrics for selecting recipients. I interviewed recipients from three of those cohorts:

• The Google Cohort (approximately 850 ‘thatch-roof only’ recipients whose transfers were completed in October 2013)
• The 200k Cohort (approximately 200 ‘thatch-roof only’ recipients whose transfers were completed in January 2013)
• The 2M cohort (approximately 2,000 recipients divided into ‘thatch-roof only’ villages and ‘saturation’ villages (in which nearly everyone is eligible) who have received one major transfer and will receive the second and final one in July 2014).

In a follow-up to a randomized controlled trial, GiveDirectly asked residents if they’d heard any complaints about GiveDirectly in their community. Sixty-four percent of respondents in Siaya County answered “yes,” as did 48 percent of those in the “Google” cohort (in Rareida it was 28 percent).

Fewer than 6 percent of respondents in all four groups said shouting or angry arguments had ensued because of the transfers, and fewer than 4 percent said they’d experienced crime, theft or violence or felt threatened as a result. Virtually no one said they’d argued with family members over how to spend the money, and no more than 7 percent in any group said their village elder had approached them asking for money.

Carolina Toth, Kenya Field Director for GiveDirectly, explained the results of a series of informal community group meetings in which GiveDirectly led residents in a discussion of who should be eligible for transfers.

Sixty-two percent of respondents in thatch-only villages said they’d heard complaints relating to ineligible households, compared with 46 percent in saturation villages. Thirty percent of those in thatch-only villages said they’d heard complaints about different criteria being used across different villages, compared with only 4 percent in saturation villages.

GiveDirectly concluded that the strongest takeaway from the discussions is that poorer ‘thatched’ households are more deserving but also that certain households that have mabati or permanent houses are deserving of the transfers as well. When asked about their own villages, residents preferred the saturation method. When asked about other villages, they preferred thatch-only. No one thought it would be “bad” if cash were given to some wealthier households.

Because recipients in saturation villages have yet to receive their second transfer (due in July), it’s too early to draw definite conclusions. But this and other previous reports leave several question unanswered:

To the extent that community tension may result in the wake of cash disbursements, how does that tension actually unfold? Who are the parties and what are some examples? Most importantly, what do non-recipients in those communities think about the fairness of the selection process? Do they feel stigmatized for not having received the money, and how does their perception of whether animosity resulted from the cash transfers compare with those of the recipients’ themselves?

In April I made a reporting trip to Siaya County to interview recipient and non-recipients in the communities where GiveDirectly has made those disbursements. Over three days I interviewed 15 people, asking whether they were happy with GiveDirectly’s selection process and whether any tension arose in their communities as a result of it.

I interviewed some recipients from each of the three cohorts and also interviewed recipients and in both the ‘saturation’ and ‘thatch’ divisions of the 2M cohort. I interviewed four non-recipients, at least one in each of the three cohorts.

My interviews seemed to reflect many of the conclusions of the RCT and subsequent follow up interviews and meetings. No one reported intra-family arguments about how to spend the money or being coerced by a spouse or family member to spend it in a particular way. Only one recipient said he’d originally disagreed with his spouse but that they eventually came to a mutual agreement. No one reported theft or that their own money had gone to waste in any way.

But 12 of the 15 respondents did indicate that some amount of tension had fostered in their community as a factor of some people having received money while others did not. By far the most tangible conflict mentioned to me occurred in the 200k cohort in the village of Koga.

There, the village elder did not receive a cash transfer. He was, however, consulted by GiveDirectly staff to assist in a tour of the boundaries of the village so GiveDirectly could identify eligible households, for which he was given a small token payment as compensation for his time. But in the words of one recipient there, “there was a scandal.” The elder “had conspired (to enlist) some households that were outside the area and had better houses, with the understanding that they would give him some money.”

GiveDirectly staff say the elder seems to have directed residents who lived in tin-roof houses to “squat” in vacant thatch roofed houses in order to receive the money. Subsequently, the assistant chief, with the support of the other village council members, dismissed the elder from his position.

When I spoke with the elder, he confirmed that he had misrepresented certain households in the village so they would be enrolled in the program. He justified that decision saying, “I was the village elder and I was working for the (entire) community.”

He said tension resulted when the initial disbursements were made and some families, including his own, were left out.

“I felt degraded by my community members. They were laughing at me that I didn’t receive any help even though I was the leader of the community. I was so humiliated.” He said the incident led him to ‘resign’ after more than 35 years of serving as an elder in Koga (he is 62 years old).

The second most tangible takeaway was the resentment and frustration expressed by the four non-recipients I interviewed. One woman in a “saturation” village was visibly angry as she described how she was not selected because the living room in her tin roof house is cemented, even though her other rooms are not. Another Koga man said he was cheated out of a transfer:

“The time the GiveDirectly team was working in the village, they came to my home but at that time I was grazing cattle outside the compound and I saw them in my sister-in-law’s house. I was curious. But due to how relations within households go sour, my sister told the GiveDirectly team that I had left and was never around.”

Despite an appeal he said he made to GiveDirectly field staff, this man did not receive a transfer. He says his economic situation is similar to that of the other recipients:

“I live in a house like this—(a) grass thatch house. I have children in school and I struggle to pay their fees. Some of my children for lack of funds have to be supported by my relatives in other areas, in Nairobi. I have only two cattle.”

GiveDirectly staff pointed out that “targeting” is a universal problem in development aid. Other methods used to select recipients—such as letting communities vote on who should receive, or requiring people to go to some lengths to prove they are indeed quite economically poor-off—have major drawbacks: Cronyism, and excessive bureaucracy and burdens, respectively. As an alternative, GiveDirectly employs another common method that uses easy-to-observe characteristics such as roof style to judge how wealthy or poor a household is. According to GiveDirectly’s own research, less than 5 percent of people in the 2M cohort villages complained, legitimately or otherwise, of being unfairly excluded. (In comparison, a recent study of the Kenya Hunger Safety Net Program found an exclusion error rate of 46 percent).

The man in Koga who says he was unfairly excluded also expressed sympathy for the Koga village elder. “I would not be happy with what has happened to him, because the feeling he has now at losing his job is the same feeling I have at not getting the money. I feel bad for him because I am also going through some pain.”

The man also aired some critiques as to how some people in the community spent their money.

“I saw some beneficiaries, the way they misbehaved when they got the money, and that made me feel it is important that recipients receive training on how to spend it. For example there are people who wasted it on drinking sprees, and others bought items that they didn’t understand how they would maintain. For example, one bought a motorbike and used it for a few months, but now it is unused and has not really helped him.”

Indeed, several interviewees mentioned the need for training to accompany the transfer process. GiveDirectly currently does not provide training or advise recipients as to how they should spend their money. GiveDirectly does, however, provide a brochure that lists different possible categories of expenditure such as home construction, business, and farming. GiveDirectly is considering experiments in which brochures also list the average returns that previous beneficiaries earned on each category of investment.

After completing the interviews, I asked Carolina Toth, the GiveDirectly field director, what she made of it all. I asked Toth what she thought about the village elder scandal in Koga—that a man who had served as elder for 35 years lost that position not because he violated a community custom, but simply a rule imposed by GiveDirectly.

“The village elder more often than not is one of the richer members of the community,” Toth said. As to his “previous feelings of entitlement to benefit from whatever is happening … I don’t think that’s an expectation we want to uphold.”

Toth and I also discussed the consequences for individuals who are excluded in a community where most residents receive the cash.

“It’s definitely a psychological event in their live,” Toth said. “But we know from the (randomized controlled trial) that there are huge spillover effects to the people who didn’t receive.”

When I asked Toth about the man who says he missed out on the transfer because his sister-in-law misinformed the GiveDirectly staff that he was not living in the village, Toth said it’s certainly true that some people get left out by mistake. But she said such cases are rare. As to the woman with the cemented living room who didn’t receive cash even though the rest of her home is not yet cemented, Toth said the GiveDirectly field staff can only make decisions based upon what they see—and that the distinction between a cemented house and a non-cemented house is not always entirely clear under such circumstances.

The vast majority of people who aren’t selected, said Toth, are skipped because they come from a marginally higher socioeconomic standing to whom the money would be less useful.

“What is the value of $250 given to a family that’s richer? Wouldn’t that be more valuable in the hands of people who are really poor?” Toth asked. “We have a mission of giving to the extreme poor, so by excluding some people who are not in the extreme poor, you are able to reach more extreme poor.”

Ultimately, the question any cash transfer implementer must decide is, “Is the possibility that community tension may result from a non-universal disbursement so great or concerning that transfers should be made to all residents in a village despite the opportunity cost that fewer, even poorer people in other villages will not receive any cash?”

Thus far GiveDirectly has answered that question in the negative. With certain exceptions (such as allowing communities to nominate a pre-determined number of otherwise unqualified people for the disbursements) and with increased nuance (by considering more advanced criteria than simply thatch versus tin roofs and indoor plastering), GiveDirectly intends to continue excluding those residents who do not qualify as the poorest of the poor.

Jacob Kushner is a journalist based in Nairobi. He reports on foreign aid and investment in Africa, human rights and the extractives sector.

The post A journalist visits GiveDirectly villages in Kenya appeared first on The GiveWell Blog.