Thursday, September 30, 2010


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What price democracy?

Dear Colleagues

I have never been in awe if the big people that inhabit Whitehall, Washington and the other centers of government around the world. Work in Africa and other parts of the developing world taught me a lot about the sale of favors by government people at all levels absolutely appalled me.

I have seen enough of what is going on in Washington over the past 20 or 30 years to realize that the vitality of democracy is at risk. In the last three years the efforts by the banking lobby, the health lobby specifically and the broader anti-consumer lobby pro-business lobby have been sickening. I am not amused.

My agenda is for the public to be well informed ... and the disinformation that is funded by these groups is a disgrace.

There is a big space for informed dialog ... but one way misinformation and propaganda has no place in a healthy democracy.

The vote ought to be an important part of democracy ... but it is diminished when (1) the vote is when advertising misinforms ... and when elected officials are then further subverted by a lobbying industry that has an almost unlimited budget. This is not a system to be proud of any more! Sad!

Peter Burgess

Capital markets ... or merely huge gambling dens?

Dear Colleagues

First, I want to encourage my friends and followers to use Truthout and support them. They are an efficient way of learning about a lot that is or ought to be in the news!

This Op-Ed piece by Ellen Brown was published in Truthout in July ... but it remains totally relevant. I would add one thing to what she describes and that is that the underlying data being used in many of these financial casinos is fatally flawed and needs to be fixed along with a lot of other things. It is a good read!

It also raises some questions about how on earth we got into a situation where markets like this are a big part of a modern economy. I would argue that the "quants" in business schools must take a lot of the blame!

Peter Burgess
How Brokers Became Bookies: The Insidious Transformation of Markets Into Casinos
Tuesday 13 July 2010
by: Ellen Brown, t r u t h o u t | Op-Ed

"You all are the house, you're the bookie. [Your clients] are booking their bets with you. I don't know why we need to dress it up. It's a bet." - Sen. Claire McCaskill, Senate Subcommittee investigating Goldman Sachs (Washington Post, April 27, 2010)

Ever since December 2008, the Federal Reserve has held short-term interest rates near zero. This was not only to try to stimulate the housing and credit markets, but also to allow the federal government to increase its debt levels without increasing the interest tab picked up by the taxpayers. The total public US debt increased by nearly 50 percent from 2006 to the end of 2009 (from about $8.5 trillion to $12.3 trillion), but the interest bill on the debt actually dropped (from $406 billion to $383 billion), because of this reduction in interest rates.

One of the dire unintended consequences of that maneuver, however, was that municipal governments across the country have been saddled with very costly bad derivatives bets. They were persuaded by their Wall Street advisers to buy credit default swaps to protect their loans against interest rates shooting up. Instead, rates proceeded to drop through the floor, a wholly unforeseeable and unnatural market condition caused by rate manipulations by the Fed. Instead of the banks bearing the losses in return for premiums paid by municipal governments, the governments have had to pay massive sums to the banks - to the point of pushing at least one county to the brink of bankruptcy (Jefferson County, Alabama).

Another unintended consequence of the plunge in interest rates has been that "savers" have been forced to become "speculators" or gamblers. When interest rates on safe corporate bonds were around 8 percent, a couple could aim for saving half a million dollars in their working careers and count on reaping $40,000 yearly in investment income, a sum that, along with Social Security, could make for a comfortable retirement. But very low interest rates on bonds have forced these once-prudent savers into the riskier and less predictable stock market, and the collapse of the stock market has forced them into even more speculative ventures in the form of derivatives, a glorified form of gambling. Pension funds, which have binding pension contracts entered into when interest was at much higher levels, need an 8 percent investment return to meet their commitments. In today's market, they cannot make that sort of return without taking on higher risk, which means taking major losses when the risks materialize.

Derivatives are basically just bets. Like at a racetrack, you don't need to own the thing you're betting on in order to play. Derivative casinos have opened up on virtually anything that can go up or down or have a variable future outcome. You can bet on the price of tea in China, the success or failure of a movie, whether a country will default on its debt, or whether a particular piece of legislation will pass. The global market in derivative trades is now well over a quadrillion dollars - that's a thousand trillion - and it is eating up resources that were at one time invested in productive enterprises. Why risk lending money to a corporation or buying its stock, when you can reap a better return betting on whether the stock will rise or fall?

The shift from investing to gambling means that not only are investors making very little of their money available to companies to produce goods and services, but the parties on one side of every speculative trade now have an interest in seeing the object of the bet fail, whether a company, a movie, a politician or a country. Worse, high-speed program traders can actually manipulate the market so that the thing bet on is more likely to fail. Not only has the market become a casino, but the casino is rigged.

High frequency traders - a field led by Goldman Sachs - use computer algorithms to automatically bet huge sums of money on minor shifts in price. These bets send signals to the market that can themselves cause the price of assets to shoot up or tumble down. By placing high-volume trades, the largest speculative traders can, thus, intentionally "fix" prices in any direction they want.

"Prediction" Markets

Casinos for betting on what something will do in the future have been elevated to the status of "prediction" markets, and they can cover a broad range of issues. MIT's Technology Review launched a futures market for technological innovations, in order to bet on upcoming developments. The NewsFutures and TradeSports Exchanges enable people to wager on matters such as whether Tiger Woods will take another lover, or whether bin Laden will be found in Afghanistan.

A 2008 conference of sports leaders in Auckland, New Zealand, featured Mark Davies, head of a sport betting exchange called Betfair. Davies observed that these betting exchanges, while clearly gambling forums, are little different from the trading done by financial firms such as JPMorgan. He said:

"I used to trade bonds at JPMorgan, and I can tell you that what our customers do is exactly the same as what I used to do in my previous life, with the single exception that where I had to pour over balance sheets and income statements, they pour over form and team-sheets."

The online news outlet Slate monitors various prediction markets to provide readers with up-to-date information on the potential outcomes of political races. Two of the markets covered are the Iowa Electronic Markets and Intrade. Slate claims that these political casinos are consistently better at forecasting winners than pre-election polls. Participants bet real money 24 hours a day on the outcomes of a range of issues, including political races. Newsfutures and Casualobserver are similar, smaller exchanges.

Besides shifting the emphasis to gambling ("Why Vote When You Can Bet?" says Slate's "Guide to All Political Markets"), prediction markets, like the stock market, can be rigged so that they actually affect outcomes. This became evident, for example, in 2008, when the John McCain campaign used the Intrade market to shift perception of his chances of winning. A supporter was able to single-handedly manipulate the price of McCain's contract, causing it to move up in the market and prompting some mainstream media to report it as evidence that McCain was gaining in popularity.

Betting on Terrorism

The destructive potential of prediction markets became particularly apparent in one sponsored by the Pentagon, called the "policy analysis market" (PAM) or "terror futures market." PAM was an attempt to use the predictive power of markets to forecast political events tied to the Middle East, including terrorist attacks. According to The New York Times, the PAM would have allowed trading of futures on political developments including terrorist attacks, coups d'état and assassinations. The exchange was shut down a day after it launched, after commentators pointed out that the system made it far too easy to make money with terror attacks.

At a July 28, 2003, press conference, Sens. Byron L. Dorgan (D-North Dakota) and Ron Wyden (D-Oregon) spoke out against the exchange. Wyden stated, "The idea of a federal betting parlor on atrocities and terrorism is ridiculous and it's grotesque," while Dorgan called it "useless, offensive and unbelievably stupid."

"This appears to encourage terrorists to participate, either to profit from their terrorist activities or to bet against them in order to mislead US intelligence authorities," they said in a letter to Adm. John Poindexter, the director of the Terrorism Information Awareness Office, which developed the idea. A week after the exchange closed, Poindexter offered his resignation.

Carbon Credit Trading

A massive new derivatives market that could be highly destructive economically is the trading platform called Carbon Credit Trading, which is on its way to dwarfing world oil trade. The program would allow trading in "carbon allowances" (permitting companies to emit greenhouse gases) and in "carbon offsets" (allowing companies to emit beyond their allowance if they invest in emission-reducing projects elsewhere). It would also allow trading in carbon derivatives, for example, futures contracts to deliver a certain number of allowances at an agreed price and time.

Robert Shapiro, former undersecretary of commerce in the Clinton administration and a co-founder of the US Climate Task Force, has warned, "We are on the verge of creating a new trillion-dollar market in financial assets that will be securitized, derivatized, and speculated by Wall Street like the mortgage-backed securities market."

Eoin O'Carroll cautioned in The Christian Science Monitor:

"Many critics are pointing out that this new market for carbon derivatives could, without effective oversight, usher in another Wall Street free-for-all just like the one that precipitated the implosion of the global economy.... Just as the inability of homeowners to make good on their subprime mortgages ended up pulling the rug out from under the credit market, carbon offsets that are based on shaky greenhouse-gas mitigation projects could cause the carbon market to tank, with implications for the broader economy."

The proposed form of cap and trade has not yet been passed in the US, but a new market in which traders can speculate on the future of allowances and offsets has already been launched. The largest players in the carbon credit trading market include firms such as Morgan Stanley, Barclays Capital, Fortis, Deutsche Bank, Rabobank, BNP Paribas, Sumitomo, Kommunalkredit, Credit Suisse, Merrill Lynch and Cantor Fitzgerald. Last year, the financial services industry had 130 lobbyists working on climate issues, compared to almost none in 2003. The lobbyists represented companies such as Goldman Sachs and JPMorgan Chase.

Billionaire financier George Soros says cap and trade will be easy for speculators to rig. "The system can be gamed," he said last July at a London School of Economics seminar. "That's why financial types like me like it - because there are financial opportunities."

Time to Board Up the Casinos and Rethink Our Social Safety Net?

Our forebears considered gambling to be immoral and made it a crime. As the Industrial Revolution and the ascendance of capital changed religious mores, gambling gradually gained acceptance, but even within that permissive paradigm, derivative trading was originally considered an illegal form of gambling. Perhaps, it is time to reinstate the gambling laws, board up the derivatives casinos and return the stock market to what it was designed to be: a means of funneling the capital of investors into productive businesses.

Short of banning derivatives altogether, the derivatives business could be slowed up considerably by imposing a Tobin tax, a small tax on every financial trade. "Financial products" are virtually the only products left on the planet that are not currently subject to a sales tax; and at over a quadrillion dollars in trades annually, the market is huge.

A larger issue is how to ensure adequate retirement income for the population without forcing people into gambling with their life savings to supplement their meager Social Security checks. It may be time to rethink not only our banking and financial structure, but the entire social umbrella that our founding fathers called the Common Wealth. The genius of Social Security was its recognition of the basic economic truth that real "security" rests on the ability of a society to provide for and take care of those who, because of age, health or economic conditions, cannot take care of themselves.

Deficit hawks cry that we cannot afford more spending; but according to Richard Cook, a former US Treasury Department official, the government could print and spend several trillion new dollars into the money supply without causing price inflation. Writing in Global Research in April 2007, he noted that the US gross domestic product in 2006 came to $12.98 trillion, while the total national income came to only $10.23 trillion; and at least 10 percent of that income was reinvested rather than spent on goods and services. Total available purchasing power was, thus, only about $9.21 trillion, or $3.77 trillion less than the collective price of goods and services sold. Where did consumers get the extra $3.77 trillion? They had to borrow it, and they borrowed it from banks that created it with accounting entries on their books. If the government had replaced this bank-created money with debt-free government-created money, the total money supply would have remained unchanged. That means a whopping $3.77 trillion in new government-issued money could have been fed into the economy in 2006 without inflating prices. Different proposals have been made concerning how this money should be distributed, but at least some of it could be used to provide adequate Social Security checks, relieving the pressure to gamble with our savings.

The Federal Reserve has funneled $4.6 trillion to Wall Street in bailout money, most of it generated via "quantitative easing" (in effect, printing money); yet, hyperinflation has not resulted. To the contrary, what we have today is Depression-style deflation. The M3 money supply shrank in the last year by 5.5 percent, and the rate at which it is shrinking is accelerating. The explanation for this anomaly is that the Fed's $4.6 trillion added by quantitative easing fell far short of the estimated $10 trillion needed to "reflate" the money supply after the "shadow lenders" disappeared. When these investors discovered that the "triple-A" mortgage-backed securities they had been purchasing from Wall Street were actually very risky investments, they exited the market, credit dried up and the money supply (which today consists almost entirely of credit or debt) collapsed.

The only viable way to reflate a collapsed money supply is to put more money into it; and creating the national money supply is the sovereign right of governments, not of banks. If the government wants to remain sovereign, it needs to reassert that right.

Niko Kyriakou contributed to this article.

This work by Truthout is licensed under a Creative Commons Attribution-Noncommercial 3.0 United States License.

Support Truthout's work with a $10/month tax-deductible donation today!

»Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In "Web of Debt," her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are,, and

Conferences ... high costs are certain ... value is unclear!

Dear Colleagues

Conferences are a big part of the modern world ... but what is the value proposition for a conference, especially big international conferences.

The following is an example ... It is the annual International Anti-Corruption Conference (IACC) ... now in its 14th year. The fee to attend us around $1,000 ... and then there is the cost of travel to Thailand and a few days in hotels in Bangkok.

Most would agree that these international conferences are fun ... but are they valuable? From what I know, it is not at all clear what value arises from these events.

This is my invitation to attend this conference!
Dear friends of the IACC,

The countdown has begun! As there are just 34 days left until the 14th International Anti-Corruption Conference kicks off, here is a list of important links for your preparations ahead of the Conference.

- click here to see the exciting line up of speakers at the Conference, recently updated! (new speakers include Sri Mulyani Indrawati, Managing Director of the World Bank; Veerle Vandeweerd, Director of Environment and Energy Group, UNDP; Salil Shetty, Secretary General of Amnesty International, and more!)

- see the attached document, hot off the press, with the complete agenda to decide which sessions you would like to attend and when! 39 workshops, 9 special sessions, 3 Peoples Empowerment Initiative sessions…so many choices!

- click here to see the workshops that will take place at the Conference, as well as the description of what will be discussed during these sessions (think fighting transnational crime; promoting water integrity; aid and budget transparency; integrity in the judiciary, and more!)

- click here for information on hotels in Bangkok – be sure to book right away!

With the Conference being so near, we will be providing many more newsletter updates in the coming days – do keep an eye out next week for exciting developments on a call for young journalists to cover the Conference - we’ll provide eight scholarships! Stayed tuned as well for more on the new “Peoples Empowerment Initiative” to be launched at the 14th IACC.

We look forward to seeing you in just over a month!

The IACC Team
International Anti-Corruption Conference Team
Transparency International
Alt Moabit 96
10559 Berlin, Germany
There are from time to time some conferences that galvanize the world to do great things ... but most are quite humdrum, and the value proposition practically non existent. The organizers make business ... the sponsors get some low cost PR ... and most participants are out of pocket financially, though they may have "take home" stories or more or less value.

There is value in meeting colleagues face to face ... and a few times this will be huge. Most of the time the meetings are not particularly consequential.

In the past I have challenged conference organizers to discuss the value proposition for conferences. Not surprisingly this is not of much interest to them.

This conference is about transparency and organized by Transparency International that is now more than fifteen years old. There is a lot of talk and conference activity around the issue of transparency and corruption ... but not a whole lot of progress, it seems, in making corruption go away. I argue that there needs to be appropriate accounting systems in place so that money is controlled in a way better way ... and I also argue for TBM value accounting so that there are better metrics about the value arising from resource consuming activities.

I want progress ... but there has to be "walk" as well as "talk"!

Peter Burgess

Greenspan's toxic legacy!

Dear Colleagues

One of the nice things about the modern Internet is you can easily see thought provoking material. This is such a piece. It talks about "The World's Most Destructive Currency Terrorist: The Fallout of Alan Greenspan's Toxic Legacy" Its URL is:

I do not agree with all of what messages like this are saying ... but they do serve to remind me of the many arguments that are in play all the time and influencing important decisions. They motivate me to continue working on The Burgess Method for value accounting since the prevailing system of metrics is deeply flawed!

The common denominator of most economic dialog capital market analysis is that it is going on with an important set of data completely missing. There are no easily accessible data that address the progress and performance of socio-economic development at the community level. We do not need more and more national level statistics to know that there are huge problems with global and local development performance.

With probably more than 4.5 billion people poor and hungry at this moment ... and billions sick and unable to get basic medical treatment ... there is a huge development failure. What we all need are data that show that this specific activity worked in this place during this time. We need the before activity state, the after activity state, the cost of the activity and the value adding resulting. Things that work well should be replicated. Things that do not should be stopped, and deep questions asked about why the activity was funded. Far too much failure is because the money is mis-managed in a whole variety of ways!

Most national level monetary and fiscal policy moves markets because of correlation ... but actually doing something tangible requites an thorough understanding of cause and effect. There is a need for management information that facilitates decision making, and the sort of data that will advise decision makers whether there is adequate progress and performance. These same data serve to provide for an oversight capability and accountability!

I listen in on the oracles of finance ... but expect them to be wrong unless there is an underlying foundation of good decision making, real investment and real results. Most of Greenspan's apparent success was because there was a successful technology bubble, a huge housing bubble at the same time that inflation was handled by exporting employment to India and China where low wages replaced high wages.

When you do TBM value accounting there has to be employment in order to have progress ... but who cares about employment in the United States or Europe when low cost productive labor is available in India, China and elsewhere and the only metrics are about profit!

The mis-management of the US and global economy during the Bush era ended up with the biggest financial crisis since the Great Crash of 1929 and the subsequent depression. Many powerful leaders of the corporate sector and around capital markets want to return to this era because they made money even while they almost wrecked the world. TBM value accounting suggests that a new era of responsible corporate business and economics is needed ... driven by value as well as profit. I am convinced that with TBM value metrics many of the money abuses that have become front page news over and over again in the past four years can be avoided in the future.

A toxic legacy from Greenspan ... a toxic legacy from the bankers! Thankfully we have survived the worst, but it will take more than what bankers and the elite corporate leaders are proposing to put quality of life back on track for the rest of us!

Despite what has happened I remain an optimist ... with the right sort of metrics all sorts of good things can happen!

Peter Burgess

Indian Microfinance Goes Public: The SKS Initial Public Offering

Dear Colleagues

The SKS Initial Public Offering (IPO) is going to be a big subject of debate in the microfinance sector for a long time to come. This is just the beginning.

I am glad to see the dialog ... but am concerned that the dialog is mainly between various sets of opinions, with many important facts missing. This happened with Compartamos in Mexico, and it is likely to happen again with SKS in India.

One day, I hope, The Burgess Method to assess socio-economic impact will help. Here is some of the dialog ... just the beginning!
Dear Microfinance Community,

CGAP has just released a new focus note, "Indian Microfinance Goes Public: The SKS Initial Public Offering" which discusses this critical transition within the microfinance industry.
The paper raises the question of what the IPO means for the future development of microfinance and for poor people and discusses key issues around the commercialization of microfinance.

CGAP Microfinance Blog has kicked off a special series on the SKS IPO as well.

In the coming weeks the series will feature a variety of voices from the industry with a new post every week. The first one, "6 Questions for SKS" is by Stephen Rasmussen. Next week we feature Malcolm Harper. We welcome your participation through comments on the blog.


Shweta Banerjee
Communications Team, CGAP
The CGAP paper may be located at URL

This is the commentary from Stephen Rasmussen.
6 Questions for SKS
by Stephen Rasmussen: Tuesday, September 28, 2010

This post kicks off a special blog series on the SKS IPO. Over the coming weeks we’ll be featuring a variety of voices on the issues raised by the IPO. We welcome your participation in this discussion through comments.

A rare microfinance occurrence took place in late July this year. The Indian microfinance institution, SKS, became the second pure MFI globally to go public by listing its shares on the stock market. SKS is one of the largest microfinance institutions in the world with almost 6 million clients, mostly poor women living in rural areas. It has also been one of the fastest growing MFIs over the past few years, with a compound annual growth rate of 165% since 2004.

From one perspective, the IPO was a great success. It was 13 times oversubscribed, the company valuation reached the top of the offer band price (valuing the company at $1.5 billion), and the share price rose 42% in the first five weeks of trading. In the process SKS raised $155 million in fresh capital that will allow it to grow and serve far more people than it reaches now.

But for most of us, including those closely associated with SKS, evidence of real success will only come when we know if many more poor people have benefited. The purpose of the IPO was not just to access capital markets, but to access them to serve the interests of poor people.

The SKS IPO story is told in a CGAP paper published this week. The paper shares facts and asks questions about SKS and the IPO to stimulate discussion of this landmark event for microfinance.

For six weeks starting today, CGAP will host a special series on this blog representing the views of global microfinance leaders on the IPO. The series will reflect a diverse cross-section of views on the implications of the IPO and its influence on future direction of the microfinance sector.

It is clear that we have a long way to go from the estimated 100-150 million people accessing microfinance services today to reach the almost 3 billion un-banked people. Scaling up outreach to many more poor and un-banked people is the main goal for most of the microfinance world. Microfinance growth has often been and is still funded by governments, international donors, and socially minded investors. In addition, an increasing number of MFIs are able to mobilize deposits (though not in India) and borrow from commercial banks.

However, MFIs still say that one of the biggest constraints to growth is not having enough funding. What the SKS IPO shows is that MFIs can indeed harness the vast resources of capital markets. The initial success of the IPO raises the stakes for SKS. Some will celebrate this milestone event as opening up new avenues and opportunities for microfinance while others will be skeptical that the goals of profit seeking capital market investors can be compatible with the interests of poor rural women.

The CGAP paper describes SKS’s track record of establishing and trying to sustain a significant ownership share in SKS for the borrowers. This was done through the creation of shareholding mutual benefits trusts (MBTs) whose shares were valued at $220 million at the time of the IPO and are worth even more with the subsequent rise in the share price. The MBTs sold some of their shares after the IPO, realizing $42 million that will go back to the original SKS Society. The Society intends to build up a network of high quality schools to serve the children of SKS clients and other poor people.

But SKS will be watched closely for more than that.
  • Will SKS continue to focus on growth that reaches poor people who are not being served by others?
  • Will clients be better served by an expanding the range of services, higher quality services, and more affordable services?
  • Will the clients retain a strong voice in the affairs of the company to help it sustain a direction that serves their interests first and best?
  • Will shareholders understand that doing what is best for the customer is fundamental to sustaining long term shareholder value?
  • Will SKS’ social and financial performance help influence policies in India and globally in favor of greater financial access for more poor people?
  • And ultimately, will the lives of the many poor people SKS serves change for the better?
The SKS story still has a long way to go. What it does next will be closely watched by supporters and critics alike but it now has the opportunity and obligation to show the world that the poor can access capital markets to their advantage.

Stephen Rasmussen
The CGAP paper and the Rasmussen comment are a good launch pad for dialog about the SKS IPA and the Indian microfinance sector. From my perspective, the dialog will almost certainly lack a critical element ... the data about impact on the socio-economic condition of people at the Bottom of the Pyramid (BoP). The main metrics are about money ... the money viability of the institution. With an IPO, management must now pay attention to keeping investors happy with the earnings being reported.

Because much of the value associated with microfinance is to do with learning as much as it is to do with money credit ... making an MFI efficient usually reduces the learning component while improving profits ... good for stockholders but not so good for society.

Here is a comment from Ramesh Arunachalam. It is likely there will be many more!
From Ramesh S Arunachalam

Dear All

1. The growth and financial success of SKS and its IPO are well covered in the CGAP article , Indian Microfinance Goes Public: The SKS Initial Public Offering. The article is well written and the CGAP team needs to be complimented for this effort.

2. The financial success of the SKS IPO is indeed a heart-warming experience for all of (Indian) micro-finance. The fact that an MFI - with very modest beginnings - has, within a span of just 10 years, become, one of ‘the most valued’ financial institutions in India is indeed a very, very significant achievement. This is even more laudable when one considers the fact that much of what SKSML has navigated used to be pretty much, “uncharted terrain’’ for the Indian micro-finance industry. Without question, we should celebrate The SKS IPO event and the stupendous financial success it has achieved.

However, I would like to humbly place the following as my comments:

3. Despite the acknowledgement of the heightened importance of Corporate Governance, with humility, I would like to state that the CGAP article has not adequately addresed some of these crucial issues (already in the public domain - Prof Sriram’s article in EPW and other material) - which are an integral part of the phenomenal growth strategy of SKSML culminating in its IPO and subsequent listing. As these issues have very significant (future) implications for the orderly growth, development and commercialisation of the microfinance industry globally, I raise these issues here, as questions (not exhaustive) for CGAP to address, in the future:

a) Who authorized the lending of Rs 1.636 Crores (as an interest free loan) by SKSML to its founder to enable him to buy an equivalent number of SKSML shares at Rs 10 per share? Was it an individual at SKSML? Was it the board of SKSML? Was it the shareholders of SKSML? Under what powers was this related party transaction authorised? What is CGAP’s perspective on the process of approval and authorization from a best practices standpoint?

b) If it were the board of SKSML which authorized the transaction and/or approved the authorization provided by other stakeholders, who were the board members present when it (the SKSML Board) voted to give an interest free loan to its founder director to enable him to buy shares in the same company? Is this transaction an arm’s length one? Were there any conflicts of interest in the Board and were these declared? What are the implications of this and other related party transactions at SKSML for Corporate Governance in micro-finance? What will CGAP recommend in terms of safeguards against such potential conflicts of interest in MFIs?

c) How appropriate is it for a financial services institution like SKSML – especially, one that is meant to service poor clients - that had significant public money (SIDBI’s investments) and client money (MBTs), to lend (interest free) to its own founder director to buy shares in the same company? Is this a good practice of Corporate Governance? Should this be allowed in MFIs? Would the investors and donors who are part of CGAP recommend this practice of MFI owners lending to themselves to buy their own (MFI/company) shares as a good practice? Would investors/banks who are investing/lending to MFIs recommend this as good practice? What is CGAP’s position on such related party transactions in micro-finance, especially from the perspective of best (good) practices paradigm that CGAP has been prescribing (over the years) in micro-finance?

d) What was the consequent impact of the above related party transaction on the financial condition of SKSML, the MFI? Did it result in a misstatement of the true financial condition of SKSML? If so, have the shareholders been (mis)informed? What are the implications of this under the various Indian laws including the Indian Penal Code and other acts as may be appropriate? In CGAP’s opinion, from a good practices perspective, in case of such related party transactions, should adjustments be done by MFIs to reflect the true financial condition? If so, what methodology should the MFIs follow and how should they present the results?

e) Can this action taken by the Board of SKSML (in which public institutional investors and MBTs held significant shareholding) be termed as one that was in the interest of the shareholders, especially the minority shareholders? While the MBTs held a lot shares in aggregate, in reality, they were individual shareholders and therefore are best considered as minority shareholders. Who on the board protected the interest of these minority shareholders? In CGAP’s opinion, was this transaction in the interest of the minority stakeholders – i.e., members in MBTs? In CGAP opinion, what should be done to protect the interests of such minority stakeholders in the future? This is a very critical question indeed.

f) Were there nominee directors of the institutional investors on the board of SKSML when this happened? If so, how did they react to this and/or even permit this? What were they doing on the Board of SKSML, when norms/rules of Corporate Governance were seemingly not followed? Did they object or express reservations on this related party transaction and other such happenings? If so, did they inform the institutional investors officially of the happenings? If they were silent, was there any conflict of interest? How did they make themselves accountable to the institutional investors for being their nominee director, safeguarding their investment and (public) funds? What are CGAP’s suggestions for enhancing the accountability of the nominee directors – both in terms of the reporting to be done by them and also the processes to be followed by investors while appointing them?

g) Institutional investors have the moral and legal responsibility to ensure that such CORPORATE MIS-GOVERNANCE does not occur, at least, in MFIs/companies where they have made investments and where they also have a responsible officer as a nominee on the Board. In the present case, did the institutional investors have any procedure to review the performance of their nominee directors and/or the functioning of the Board in MFI where investments had been made? In CGAP’s opinion, what safeguards should be built to ensure that nominee directors really act in the interest of their investors, while upholding the highest standards of Corporate Governance?

h) Given that some MFIs in India (there are a few of them who have done this to a varying degree) are in habit of lending to their own directors (and none of these can be described as an arms-length transaction) to buy their own shares, are they eligible for priority sector lending funds (PSLF)? Is this practice of lending to directors (to buy own company shares and for other reasons) in consonance with norms for PSLF? What are the implications for Policy in India? What is CGAP’s position on use of PSLF and what are its prescriptions for policy in India regarding the same?

i) It has been publicly mentioned by SKSML in an advertisement dated July 28th July 2010 that the (related party) transaction of the company lending to its own founder director to buy shares in the same company does not represent a violation of the Company’s Act and RBI circulars. Is this true and particularly, when one considers the Indian Penal Code (IPC) under which other companies have been implicated for presentation of wrong information to shareholders? What is the actual position of policy (RBI, Ministry of Corporate Affairs, Ministry of Finance and other relevant authorities in India) on this, especially in the wake of the global financial crisis and Satyam Fiasco? What are CGAP’s suggestions to Indian policy makers, as per its good practices paradigm, on the aspect of dealing with such related party transactions in micro-finance?

j) Several concerns were raised with compensation aspects and process of allotment of shares at SKSML. Much of this material is already in the public domain (Prof Sriram’s article, SKS rejoinder to Prof Sriram’s article sent via Sa-Dhan by e mail and other documents). There are several issues here and it would have been useful to have CGAP’s input on whether the compensation and allotment processes followed at SKSML were indeed transparent, as per good practices norms and also legally correct:

i. Regarding the process of allotment of shares at SKSML, it would be good to know what was approved: a) in the board, and b) by the Shareholders, and compare the same with filings done with ROC (Registrar of Companies). Documents in the public domain seem to indicate discrepancy;

ii. It appears that all approvals were provided for ESOPs to be issued to the founder and others (like COO) in Feb’07. However, in reality, it seems that ESPS (Shares) were issued to the COO and Shares were issued to the founder. The question here is how could this be done when the approval was for ESOPs – Stock Options? Therefore, a clear understanding on the above, whether there are any discrepancies, would be required, especially in view of the fact that shares allotted to founder had already been fully sold out before the IPO while those given to the COO had been partially liquidated;

iii. Regarding the ESPS, it appears that the Company had a scheme where employees would be issued shares when they join, which are to be vested over a period of 4 years. The company was to give a loan to trust, which was to lend the same money to Employee to buy these Shares. In turn, the employee would enter into financing arrangement with Trust and also the Company. Under this, the Shares would be directly either freshly allotted to the Employee or if there are any shares in the Pool available, they would be transferred to the Employee’s name. This arrangement of giving any amount of Loan and allotting or transferring the Shares directly in the name of the Employee appears to be in contravention of Section 77 (3) of the Companies Act. As per this section, Shares cannot be allotted in the name of the Employee directly and also the Loan amount CANNOT exceed 6 moths salary of the Employee. Prima facie, it appears that the company was violating the above conditions;

iv. There seems to be reasonable evidence to the assertion made in Prof Sriram’s paper that at a time when the company was attempting to enter the primary market and tap retail investors, the founder INDEED held ZERO equity, and it is his unexercised options, that were subjected to a 3 year lock-in period. In fact, in the DRHP table, the founders name is not there under the Promoters group and some of the key employees were selling off their exercised options, before the IPO; and

v. There appear to be several other issues including the following - that the vesting period for some schemes were not satisfied, specific schemes were perhaps SEBI non-compliant and high bonuses had been granted to senior management.

vi. Therefore, it would have been appropriate if CGAP had looked at these issues and developed some lessons for MFIs on how to tackle compensation aspects (including composition and role of compensation committee) from a good practices perspective. CGAP’s comments on one of the key aspects in the compensation debate – i.e., whether the process and outcomes related to compensation are in line with the long-term risk inherent in the (MF) financial services business – would also have been extremely useful from an industry wide perspective.

k) It should be noted that after the IPO, Dr Vikram Akula became the executive chairman of SKSML and Mr M R Rao became the deputy CEO. It appears that key people and positions are being changed in the SKS group of institutions at will – one day, there is a trust with several members looking after the interest of the MBTs, then, another day, most members of the trust resign and there are just two people including the founder. The founder then suddenly becomes the executive chairman, post IPO. Just as I was finishing the note, there was an announcement from the Bombay Stock Exchange that SKSML had terminated the services of Mr Gurmani, its CEO, whom it had appointed for a period of 5 years from 2009.

This again raises serious questions about the effectiveness of corporate governance at SKS and the market did react, with SKSML shares going DOWN by almost 5.81% at around 3.20 PM on October 4th 2010. Therefore, it would be useful to get CGAP’s opinion, on the frequent and sudden changes in the Board and Senior Management structure of SKSML and related institutions, from a corporate governance perspective and provide lessons for the MFIs, which are indeed nascent when it comes to maintaining their valuations in the primary market. These lessons should also be invaluable to peer MFIs, even as they prepare themselves to tap the primary market.

4. Last but not the least, I would like to make the point that, ‘commercialisation of micro-finance is a very necessary trend and this critique of the CGAP SKS article should not be taken as an argument against commercialisation. However, to be welcome, commercialisation must be executed in a proper and legally correct manner. Without question, the means are as important as the ends and only commercialisation that is achieved through legally correct methods and means, should be supported - as that alone can have a positive impact on people with low income’.

Thanks. Regards.

This post was appreciated by other readers as well as myself. For example:
Dear Shri Ramesh,

I am extremely happy to read your very objective analysis of SKS IPO which could not be done by even an international organization like CGAP. We need to have such objective and pragmatic studies to assess the challenges and opportunities of MFIs to contribute successfully for inclusive growth in true sense.


The microfinance industry knows there is a metrics challenge ... but in the main the initiatives to address this have added more detail and more work without gaining much more information about community impact.

My own position is that performance depends very much on many externalities that have to be measured in order to have any meaningful understanding of performance. Each community is different ... averages are always going to be wrong!

Peter Burgess

CBS 60 Minutes and the work of Bill and Melinda Gates

Dear Colleagues

CBS 60 minutes has done a segment on the work of Bill and Melinda Gates ... and very good to see. The YouTubde link is

I would love to be managing the resources that are available to the Bill and Melinda Gates Foundation. The amount is impression, and the potential for doing great things with these resources is at hand. I am not sure, however, that the resources are, in fact, going to be used in the most useful way. Accordingly I have commented as follows on the YouTube site.
Dear Colleagues

Bill and Melinda Gates deserve credit for their philanthropic efforts. However in terms of metrics about the performance of the Foundation, there is terrible weakness, just like the rest of the philanthropic sector. Adoption of the TheBurgessMethod to build data about progress and performance in socio-economic development would be helpful and would get metrics that are better than news clips and photo-essays that is the present approach to accountability!
Peter Burgess
The philanthropic sector is well funded at the present time ... courtesy, in large part, to the success of tech sector entrepreneurs, just like the boom in philanthropy that emerged as a result of the multiple waves of the industrial revolution (Carnegie, Ford, Rockefeller, et al).

But the amount of money is only one measure of the sector ... and perhaps not the most important. TheBurgessMethod (TBM) helps to ascertain the performance of philanthropic expenditure within the framework of society as a whole. Using TBM, early indications are that the philanthropic sector has serious performance challenges, and this does not exclude the Gates Foundation. How much impact is philanthropic resource disbursement really having?

The philanthropic sector has had very little systemic performance measurement ... but this might be starting to change. There are many initiatives to improve performance metrics, and TBM is one. TBM is probably more ambitious than many of the initiatives ... but maybe simpler, cheaper and better. TBM is powerful because it is conceptually similar to money accounting but using a value construct as well as money, and also using community as a reporting entity as well as the organization and the project or activity. The elegance of balance sheet and operating accounts in money accounting is also used in TBM ... with both money and value assets and liabilities, not to mention cost and value consumption, revenue and value creation, and profit and value adding or destruction.

TBM is slowly emerging ... and accelerating modestly

Peter Burgess

Haiti ... Is this progress or more of the same old same old?

Dear Colleagues

According to the AP, in reporting by Jonathan Katz, the US has named Thomas C. Adams to be special coordinator to oversee in Washington the reconstruction plans for Haiti.
The U.S. State Department has named a special coordinator to oversee Washington's reconstruction plans in earthquake-ravaged Haiti amid complaints about the lagging of promised aid money. Two officials at the department told The Associated Press on Wednesday that Thomas C. Adams has already started on the job. The officials agreed to discuss the move only if not quoted by name because the appointment had not been made public.
In other AP reporting is is noted that of the $1.15 billion in reconstruction aid pledged by the US at the Donor Conference on March 31st has "arrived" ... whatever that means!
The disclosure came a day after the AP reported that none of the $1.15 billion in reconstruction aid pledged by the U.S. at a donors' conference in March has arrived.
It is now more than 8 months after the disastrous earthquake in Haiti. As far as I can see, the "performance" of the people and institutions in charge of the relief and rebuilding is incredibly poor ... in almost every way. It is good to have AP talking about the slow fund flows associated with the Haiti program.
Complaints about the slow delivery of promised reconstruction money on the part of nearly all countries who participated in the conference has been going on for months. Just 15 percent of the money promised for 2010-11 has been delivered, according to the office of U.N. Special Envoy to Haiti Bill Clinton — and none from the United States.
There are serious management problems with the whole Haiti situation, not the least is the multiple roles of many of the key actors ... the UN, the World Bank, the IDB, USAID and the US State Department for starters in the organization sector ... and individuals like President Clinton and Dr. Paul Farmer as individuals.

As a system, the Haiti program is dysfunctional ... yet the people with responsibility seem to be accepting this unacceptable situation as acceptable. IT IS NOT! As AP puts it:
Washington has provided $1.1 billion in humanitarian aid since the quake, but rebuilding cannot begin without the promised longterm reconstruction funds from the U.S. and others.
To put it politely ... this is baloney! The best development for Haiti does not require the commitment of billions, it requires a lot of modest commitment to good things that in aggregate will be amazing.

This is not the development model favored by experts from the World Bank, the IDB, the US NGO and Corporate community, the UN, etc. What is going forward ... or seems to be going forward is an agenda that has little or no support of some of the key stakeholders ... specifically Haitians in Haiti and Haitians in the diaspora! It is unclear at the present what benefits, if any, are going to accrue to ordinary people in Haiti ... more than 1 million who are displaced physically and economically. This is a scandalous situation. In AP reporting:
In the meantime, 1.3 million Haitians remain on the streets nearly nine months after the magnitude-7 earthquake, living in miserable conditions and dying in storms.
In my experience it is really nice to live "under canvas for a weekend with the family" as long as the weather good ... but nine months, in all sorts of weather ... with less than acceptable water and sanitation ... with rotten security. I am incensed by the cavalier attitude of all the relief and development staff ... and especially those in high positions.
The funds were approved by Congress over the summer but cannot be released until a plan for spending the money is formalized. The State Department sent lawmakers one such plan Sept. 20 and gave legislators 15 days to review it. Whether they act or not, the money can be released as soon as the review period expires.
God help us ... will there ever be something that the Washington bureaucracy can do efficiently. My guess is that the average bureaucrat was called upon to live like the displaced in Haiti, there would be red tape cutting that would impress even me. From AP's reporting:
The Obama administration is "in the final phase of working with them (Congress) on the release of supplemental funding to implement our long-term strategy," said State Department adviser Caitlin Klevorick, who works on Haiti ... Officials said the money could be made available within the coming weeks.
This is highly efficient by the standards of Washington bureaucracy ... a very low standard. While this paperwork is being processed, hundreds, if not thousands of women and girls are likely to have been raped because security in the IDP camps is essentially non-existent. Or am I perhaps misinformed?

AP has done a good job of highlighting many important issues:
Meanwhile, the Senate Foreign Relations Committee drafted a more detailed authorization bill that could also release the money. That is being held up by Sen. Tom Coburn, a Republican from Oklahoma, who placed a "hold" on the bill because he objected to the creation of such an office, which he says would duplicate the role of the U.S. ambassador to Haiti. Coburn's office did not immediately respond to a request for comment on Adams' appointment.
But the reporting of AP should be the start of the story and not the end. There is a huge and systemic problem about accounting and accountability for money and resources consumed in relief and development generally and in this specific situation in Haiti specifically. Why is it that credible information is never available? Again from AP:
Klevorick also disputed the heightened criticism about aid funds not being delivered. She said $300 million in previously committed spending during that time has gone to water, food, shelter, health and longer-term projects such as agriculture and the creation of a center to train Haitians to work in garment factories.
Why can there not be a clear accounting for what the money gets used for? As an old auditor I learned that when you cannot get a clear answer, there is always something that people do not want you to know. What is it that the people in control do not want me ... us ... to know?
The Haiti special coordinator's office will oversee diplomatic relations with Haiti and reconstruction strategy, according to an internal State Department memo on Adams' appointment obtained by the AP. Legislators proposed financing the office at $5 million a year for five years and employ up to seven people. Adams is a 35-year veteran of the State Department, the memo says. He was previously coordinator of assistance to Europe and Eurasia, overseeing aid to 18 former states of the Soviet Union and eastern Europe.
I have a very uncomfortable feeling ... shared, I believe, by many others who had hoped for some meaningful progress way sooner than now seems to be on the agenda!

Of course I have not raised the question of the political impasse associated with the elections and delay in Haiti. While this is a big issue ... it does not explain ALL that is constraining progress.

The situation would be improved enormously if the data were better, and metrics about use of resources and progress were universally accessible. Transparency and accountability are a big part of managing resources successfully!

Peter Burgess

Concern Worldwide in Haiti ... and my issue with accountability

Dear Colleagues

As soon as I showed an interest in Haiti back in January, the organizations that specialize in raising money in response to disaster have been making contact with me quite regularly.

None of the organizations seems to have noted that the reason I contacted them was to ask about their approach to accounting and accountability in the post-earthquake rescue, relief and rebuilding process. I offered to help them with accounting and accountability ... not to donate money to them!

Of course I am not surprised ... I was not born yesterday!

The following example is from Concern Worldwide (US) ... an email received back in July under the signature of Siobhan Walsh, the Executive Director.
Siobhan Walsh to me
Jul 13
Concern in Haiti: Six Months Later ... Concern's work in Haiti

Dear Peter,

When the massive earthquake struck Haiti on Tuesday, January 12, few of us realized what lay ahead. It was the most powerful earthquake to hit the country in the past 200 years, it left an estimated 220,000 people dead, 300,000 injured, and 1.2 million people homeless. By early Wednesday morning, planning for Concern's emergency response was already underway.

We were able to respond quickly not only because of our 42 years of experience, but because we knew we could count on our friends and supporters to help. Our ability to respond so quickly is down to the support of people like you.

Concern’s Work in Haiti – Six months Update

Now in the post-emergency phase, Concern is already reaching more than 109,087 people, making this the largest earthquake disaster response in the organization’s history. We are working in three areas of Haiti – Port-au-Prince, the Island of La Gonâve, and the rural area of Saut d’Eau.

With 400 staff members on the ground in Haiti, Concern is currently:
  • Managing 13 camps for displaced people with a combined population of 58,000;
  • Supplying 64 truck deliveries of clean drinking water every day to 58,350 people;
  • Distributing household kits containing essential items like kitchen sets, and soap, reaching 96,000;
  • Screening and treating malnourished children in Concern’s nine outpatient therapeutic centers;
  • Organizing cash-for-work programs, giving 17,500 people the chance to earn a living;
  • Running a cash transfer program which has benefited 35,000 people (mostly women);
  • Providing “Child Friendly Spaces,” which give 6,500 children a safe place to play and learn.
Please read more about our work in Haiti here.

I’m very proud of what we have achieved, and what we continue to do to reduce the suffering in Haiti. Concern began working there in 1994 and is there for the long term, we are committed to helping earthquake survivors restore and rebuild their communities.

On behalf of all at Concern, thank you for your support.

Siobhan Walsh
Executive Director

Copyright © 2000-2010 Concern Worldwide US Inc. All rights reserved.
104 East 40th Street, Suite 903, New York, NY 10016 1.800.59.CONCERN
The website link referenced has the information in a little more detail and with a slightly different spin ... but not significantly different. I am not sure how much the webpage has been updated between July and now.
On January 12, 2010, the most powerful earthquake to hit Haiti in 200 years left an estimated 220,000 people dead, 300,000 injured, and 1.2 million people homeless. In the capital of Port au Prince, an estimated 250,000 residences and 30,000 commercial buildings collapsed.

“What struck me was the silence,” says Concern’s Country Director in Haiti, Elke Leidel, who was in her home outside Port-au-Prince when the earthquake happened, “You could actually see the city from where I live, and there was a big dust cloud coming up.” It quickly became apparent that an indeterminate number of people were buried in the rubble and many more were injured and in urgent need of medical assistance. “It was beyond everything we had ever imagined or seen before in our lives,” says Elke, “Dead bodies everywhere, houses collapsed, whole areas of Port-au-Prince basically wiped out.”

Concern is providing cash-for-work to the most vulnerable in Haiti. This allows local people to earn money to buy what they need (supporting local markets) and gives them an active role in building their new community.
Appeals for humanitarian aid were issued worldwide by international organizations, the United Nations, and Haitian president René Préval. More than $1.3 billion was raised by US-based relief organizations alone. Delivering aid quickly was enormous challenging: Haiti’s airport and main sea port were damaged, telecommunication systems were down, hospitals and health clinics were destroyed, and fuel stations and power systems were not functional.

“People and agencies who would normally deal with an emergency in Haiti – UN, government officials and NGO staff – were themselves incapacitated, with huge loss of life, and loss of family members, offices, and homes,” said Dominic MacSorley, Concern’s Emergency Coordinator in Haiti.

Although there were massive challenges, great progress has been made. To date, there have been no major outbreaks of diseases and no resulting increase in an already devastating number of earthquake-related deaths. The Haitian people’s immediate survival needs are being met, and at present:

  • 1.1 million people have access to safe water – more than before the earthquake
  • Over 90 percent of displaced people in Port-au-Prince have access to health clinics
  • Food has been distributed to over 4.3 million people
  • More than 1.5 million households have received emergency shelter
  • Over 116,000 people have benefited from short-term employment
  • Nearly 120,000 buildings have been assessed to see if they are safe enough to live in or can be repaired
  • Around 300 truckloads of rubble and debris are cleared away from the streets of Port-au-Prince every day

“As a humanitarian worker, of course you immediately think –what can we do to help these people?” says Concern’s Country Director Elke Leidel, “Water, food, sanitation; these were all apparent, glaring needs in the first couple of days.”

Active in Haiti since 1994, Concern had already been working in Port-au-Prince before the earthquake, allowing us to quickly reach those in need. Within 24 hours of the disaster, Concern’s team in Port-au-Prince responded, delivering water and aid to slum communities. Concern chartered three relief flights to bring in urgently-needed supplies to earthquake survivors, including:
  • 47,000 blankets
  • 2,300 family tents
  • 10,000 mosquito nets
  • 15,000 kitchen sets
  • 5,000 hygiene kits
  • 1,160,000 square feet of plastic sheeting
Although media attention has shifted away from Haiti over the past few months, the emergency is far from over. With an estimated 250,000 homes damaged or destroyed in the earthquake, many families are still living in overcrowded, makeshift camps without adequate shelter or sanitation. A recent screening of children under five carried out by Concern showed an increase in malnutrition rates. An estimated 90 percent of school buildings were destroyed, leaving 2.5 million children without access to education.

Now in the post-emergency phase of our response, Concern is reaching more than 109,087 people in three areas of Haiti: Port-au-Prince, the island of La Gonâve, and the rural area of Saut d’Eau.

With 400 staff members on the ground, Concern is currently:
  • Managing 13 camps for displaced people with a combined population of 58,000
  • Supplying 64 truck deliveries of clean drinking water every day to 58,350 people, and improving access to sanitation
  • Distributing essential relief items (tarps, kitchen sets, mosquito nets & soap) to 96,000 people to date
  • Screening and treating malnourished children in Concern’s nine outpatient therapeutic centers, and providing 12 “baby tents,” where mothers with very young children can get advice, privacy and support to continue breastfeeding
  • Organizing cash-for-work programs, giving 17,500 people the chance to earn a decent living by clearing rubble and doing basic construction work, and running a cash transfer program which has benefited 35,000 people (mostly women)
  • Running three “Child Friendly Spaces,” providing almost 6,500 of the most vulnerable, quake-affected children with a safe place to play and learn
Concern is deeply committed to providing effective aid, and we are coordinating our activities with other agencies on the ground through the UN “cluster” system, a partnership between UN agencies, international organizations, the Government of Haiti and local organizations.

Concern designed and is managing a site at Tabarre Issa for families who relocated from areas where they were at high risk from dangers posed by heavy rains and hurricane season. Tabarre Issa site is a lifeline for people like Marie Colas, a mother of two who lost her husband and family home in the earthquake. “In this new home, our lives can begin again,” Marie told Concern staff when the family moved into the Tabarre Issa camp, which offers water, sanitation, education, health services, cash-for-work programs, and durable, transitional homes to 2,500 people.

Rebuilding Port-au-Prince and other earthquake-affected areas will take up to ten years and the principal responsibility for this will lie with the Haitian government. "There is a role for the international community to support the Haitian people, but those in charge must be the Haitians,” says Concern US Chief Executive Officer Tom Arnold, “The courage, dignity, survival and resilience of the Haitian people over the past six months have been astounding. In the most appalling circumstances, they have proven to be the real ‘Humanitarians of Haiti’, the first to help others, to take people in and, despite immense devastation and suffering, are now working to re-establish their lives against all the odds."

Concern is in Haiti for the long term, and we are committed to helping earthquake survivors restore and rebuild their communities. “With the attention that is given to Haiti now, there might be a chance to improve the situation that we had in Haiti before the earthquake,” says Country Director Elke Leidel, “But it will certainly take years to recover from it and to build a better future for Haitians.”
Concern Worldwide and all the other international NGOs have a lot of material for stories about the work they are doing ... and this is not to be ignored ... but it would be great if they would also do some rigorous reporting about what they are doing and have done in relation to the need and in relation to the amount of money and other resources that they have consumed.

The Burgess Method (TBM) for value accounting uses a rigorous framework of value that includes (1) the state of affairs; (2) progress which is improvement in the state of affairs over time; and, (3) performance which is the relationship between what something cost and what is should have cost AND what impact or progress was achieved for the money or resources consumed.

An important element of TBM is to have data that reflects place and time ... quantity and cost ... amount of activity and the amount of impact ... the value or resources used and the value of benefit created and value adding.

Nothing of this seems to be of interest to any of the major NGOs that are multi-million dollar organizations ... it is scandalous.

Slowly slowly there will be data compiled that forces NGOs to be accountable ... from the outside if they will not embrace the idea internally.

Concern Worldwide may be doing good work ... but they so not seem capable of being accountable about it.

Peter Burgess

Skoll Foundation ... Social Edge discussion about "Nonprofit Analysis: Beyond Metrics"

Dear Colleagues

The question of metrics and management comes up in many places ... a lot more now than twenty years ago ... but the systems to do metrics are more or less the same, or perhaps worse than decades ago.

This week Social Edge, a program of the Skoll Foundation started a discussion under the title "Nonprofit Analysis: Beyond Metrics". The URL is:
Nonprofit Analysis: Beyond Metrics
Hosted by Sean Stannard-Stockton (October 2010)

One of the holy grails of nonprofit evaluation is to be able to compare nonprofits across issue areas. Concepts like “social return on investment” strive to quantify how much “good” an organization is creating, regardless of whether they are a soup kitchen or a job training program.

In recent years, the push towards using “metrics” to judge nonprofits has matured and moved beyond simplistic measures towards more holistic analysis. Groups like GiveWell, Root Cause, Philanthropedia, GreatNonprofits, and New Philanthropy Capital all strive to determine which nonprofits are best through analysis that seeks to go “beyond metrics”.

Charity Navigator, which popularized one of the most well known metrics – the overhead expense ratio – has begun a process of overhauling their evaluation approach to become far more holistic.

In my own writing about nonprofits, I’ve urged donors to focus on supporting “high performing” nonprofits. These are organization which:
  1. …base their programs on research about what works
  2. …actively collect information about the results of their programs
  3. …systematically analyze this information
  4. …adjust their activities in response to new information
  5. …and have an absolute focus on producing results.
However, Holden Karnofsky of GiveWell has argued that the key to identifying the best nonprofits is to focus on identifying which ones have the best evidence that their programs work. This approach prioritizes “evidence of program impact” over “evidence of organizational performance”.

On October 5, at the Social Capital Markets conference, I’ll be hosting a live analysis of the nationally recognized nonprofit DC Central Kitchen. Representatives from Root Cause, Charity Navigator and GiveWell will be presenting their analysis of the organization alongside a presentation from DC Central Kitchen’s CEO.

Today, we want to kick start a conversation about how nonprofit analysis can move “beyond metrics”. Here are five questions to get us started.
  1. What are the most critical elements that signal that a nonprofit is deserving of a donation?
  2. What is the most meaningful financial information that can help a donor determine a nonprofit’s ability to sustain their organization?
  3. What is the most meaning non-financial information that can help a donor determine a nonprofit’s ability to successful implement programs that work?
  4. What is the most meaningful information that can help a donor determine how much of a difference a nonprofit’s programs actual make?
  5. Since much of the information of interest to nonprofit analysts is released only on a voluntary basis by nonprofits, how should they react when some charities share substantive information, revealing weaknesses and past failures, while the vast majority share no substantive information?

Join Sean Stannard-Stockton, CEO of Tactical Philanthropy Advisors, in the conversation.
I probably would not have noticed this conversation but for Jeff Mowatt alerting me to it, and commenting favorable on my work.

This is the beginning of the conversation as of today
Redefined in terms of human benefit
Posted by Jeff Mowatt at Sep 29, 2010 12:45 AM

Hi Sean,

As one enegaged in social purpose business I can't respond in the context of nonprofits but do have some thoughts on the concept of SROI. For some time I'd assumed this meant "social return" for a given financial investment and admit to being rather surprised to find that it was an attempt to express in financial terms, what the consequence of a "social investment" has been.

I'd been acquainted with Peter Burgess online for some time and was very interested in what I'd read about his BMVA method for value accounting.

From our perspective, a business rather than a nonprofit we've been making the point that "Profit is redefined in human terms rather than pure quantitative analyses" for some time so I'll be very interested in what develops from dialogue with Peter.

In the same context, there's an absolute gem in one of Muhammad Yunus' recent video presentation where he expresses the 'bottom line' of social business in tyhe number of people who are removed from malnutrition by what Danone has been doing.[…]/muhammad-yunus_31.html
Then this:
Posted by Rubens Turkienicz at Sep 29, 2010 04:25 AM

Dear All,

Please consider the following:
a) How about leaving behind military concepts? What the world needs is to change thanks to common people taking life in their hands - yes, a revolution that will be motivated by the COMMON GOOD and have as main objective BENEFITS FOR ALL!
b)"Common sense" is at best an oxymoron and at worst brain-washing! Do we want more slogans (or "metrics", which are likewise useless) or CONSCIOUS WORK?
c) Please get off the tall horse? Let us make sense - i.e., propose things that anybody can verify, test and eventually use by themselves (mindful approach, scientific method, clarity, transparency, ethics). Otherwise this will be a sterile "operation" (here we go again with the military/war approach... uff!) that will produce more oxymorons and much blablabla.

Thanks for listening, as I am surely listening back,

Rubens Turkienicz
And then this
Social Return on Investment (SROI)

Posted by Lakshmi Narayana at Sep 29, 2010 06:21 AM

The concept is welcome and certainly helps to assess the utility of the investment made in the social development. It is the need of the hour and we all need to work for it with better sustainable and quality approaches / strategies as a problem solving one on need based approach.

NEED BASED APPROACH should be the manta for Social investment which should work as a development model against earlier concept of charity.

While doing the audit with the concept of SROI, the parameters will vary based upon the cause or the target groups. In the case of persons with disabilities in general and particularly the one with intellectual disabilities, the parameters of SROI should be based on their challenges, skills, needs and living circumstances.

Based on the cause and target group, the concept of SROI is welcome and needs to follow for the empowerment of the people under coverage which helps all of us to remove the barriers and to improve the access & connectivity so that real development can be achieved with better efficiency and quality.

N Lakshmi Narayana
For me, the idea that there will be better analysis when we go "beyond metrics" is not credible ... rather we need metrics that are better and more meaningful ... metrics that go beyond metrics that mainly measure money to measures that reasonably measure other important factors in the quality of life. This is not "beyond" metrics, this is better metrics.

I posted the following to the Skoll Social Edge discussion ... but by the time I did the writing there were some thirty plus other comments. There is interest in the subject of metrics ... I like to think The Burgess Method will make better more meaningful metrics practical.
Dear Colleagues

Thanks to Jeff Mowatt for alerting me to this discussion.

I am delighted to see an active discussion around "Nonprofit Analysis: Beyond Metrics" ... but my take is somewhat different from most people. I start with the idea that "management information is the least amount of information needed to make good decisions in a timely manner" and also that more and more and more money and wealth should not be the goal of economic activity in a sane society.

Since the beginning of my career I have been impressed by the elegance and power of double entry accounting ... and appalled by the idea that more and more consumption and more and more profit are the primary goals of market economics and capital markets. Money is only a part of the equation ... the other is value.

People usually respond to the idea of value by observing that it is subjective! My response is "Yes ... but is it important?". In most all cases people consider value to be important ... and even though it is subjective, I then argue that it can be quantified. There are methods for doing this ... simply put, everything is relative. In some cases price is a proxy for value ... but some very important values are usually not being traded so there is no price proxy but there may still be quantification.

In The Burgess Method for Value Accounting we use standard values in much the same way cost accountants use standard costs ... it simplifies everything, without going simplistic ... the problem with, for example, averages!

"Beyond Metrics" suggests that there is going to be quantification of the money metrics and only qualitative information about everything else. This is the approach that has been in play for decades, and really does not work very well and contributes to information overload without contributing much to understanding progress and performance.

The Burgess Method which uses "State". "Progress" and "Performance" as three discreet elements of a coherent framework enables way more understanding with reduced data overload ... just as corporate financial reporting facilitates corporate management and decision making.

The Burgess Method also looks at entities like the community as a reporting entity ... and activities ... not so much simply the organization. People work in an organization, or buy from an organization ... they live in a community and it is improving quality of life in the community that should be the core metric for success!

Early in my career I worked on getting money accounting computerized in the corporate world. It would be great to see value accounting sitting on top of the technology used for modern social networks!

Peter Burgess
The dialog can be found at

Haiti ... back in July this friend wanted action!

Dear Colleagues

Back in July a friend copied me on an email about Haiti. She knows of my interest in Haiti.

Readers of this blow known I am appalled ... disgusted ... furious ... at the cavalier attitude that exists towards the people of Haiti in the aftermath of the devastating earthquake last January, almost nine months ago.

Within hours of the earthquake I tried to put an "accountability" dimensions into the post-disaster activities of rescue, relief and rebuilding. I was not entirely surprised that none of the big organizations and high profile people showed any interest whatsoever in "doing" accountability, though they have, in some cases, acknowledged conversationally that accountability is important.

My impressions is that talk is all the accountability there is going to be unless we really stand up and insist. There was a little bit of good news. Many small organizations are very much in support of accountability and are completely prepared to be in an accountability mode. Some small organizations are doing amazing work with almost no resources ... in contrast to the big organizations with hundreds of millions of dollars flowing, and not really clear at all how well they are performing. How can there be ... meaningful metrics are missing!

This is the email ... it is worth reading! She is not happy! It was in response to the slow pace of everything in the 6 months to July ... and now we are coming up to 9 months in October.
Tue, Jul 20, 2010 at 3:41 PM
subject FW: Bill Clinton as Envoy to Haiti

We met at the State Office Building this past Friday. Here is a communication that I sent to the Black Caucus.

Subject: Remove Bill Clinton as Envoy to Haiti
Date: Tue, 13 Jul 2010 18:56:08 -0400

Greetings all Congressional Black Caucus Members, please ask President Obama to remove Bill Clinton as the Envoy to Haiti.

I plead with you this critical hour six months and one day after the devastating earthquake in our First Independent Nation, Haiti. After watching "Democracy Now" and other Independent News (Non Commercial) account of a 6 month follow-up on the clean up of Haiti, I thought, with the a combination of the humidity and the shock of what I was witnessing on the TV, I thought I would expire.

The Parishes that the Host of Democracy Now visited looks the same as they did the day after the earthquake (Six months ago).

What kind are people are we? That can watch so much misery and we act as if it's normal? Have we become so with complaisant with devastation caused by Nature; because of the devastation we have caused in other parts of the world?

With over Five Billion Dollars that was supposedly collected, none of the Earthquake victims have benefited. One resident said no one had visited his parish with help. Buildings still in rubble bodies still under the buildings, people living in tents with no protection from the sun, rain and disease.

Two weeks ago while the people in Haiti was digging themselves out of the mud, during the rainy season, Bill Clinton was sitting at the World Cup in South Afrika telling Wolff Blitzer of CNN, that President Obama should blow up the BP gas spill.

Sean Penn, "He was among 23 honorees, including former U.S. president Bill Clinton and CNN reporter Anderson Cooper, lauded on the site of the presidential palace in Haiti's capital of Port-Au-Prince on Monday (12Jul10)". (I Googled Sean Penn)

I see the work that Sean Penn is doing, pray tell me what has former President Bill Clinton done accept ware the title, "Envoy" and check on his sweat shops that he has set up in Haiti a few weeks before the earthquake. According to another Actor, activist, that appeared on "Democracy Now earlier", the sweat shop workers are not paid enough to afford transportation to and from work.


Give thanks.
In January and February of this year there was an amazing outpouring of support for Haiti ... and hope that the silver lining to this dark experience would be some new possibilities for the people of Haiti. Coming up on 9 months later, there is a lot of "the same old same old".

It is very difficult to understand the disconnect between some of the very big numbers that have been pledged ... some of the very big numbers associated with money raised ... and the disbursement of these moneys ... and the effectiveness of the expenditures.

Every person I know who has recently visited Haiti has stories that make my blood boil ... some relief workers are doing great things in not very good conditions ... others are doing very little and living very comfortably thank you. Without accounting and accountability this cannot be managed ... there is a need to differentiate between the baby and the bath-water.

At the moment ALL the big institutions need to get their acts together to facilitate accountability ... starting off with the Haitian Government and its advisers, and including the UN operations, the activities being handled by the UN Special Envoys, and the activities of many other bi-lateral actors. At the moment there is really nobody that seems very interested in the welfare of more than 1 million people who are displaced both physically and economically.

I am appalled ... disgusted ... furious! But I am also energized to get a handle on this problem. There is a rapidly growing community that are on the same wave about progress and performance in Haiti and about getting some meaningful metrics in play and using resources to do things that have beneficial impact for people in Haiti.

Peter Burgess

Paul Polak ... seems like someone whose knowledge is worth a damn

Dear Colleagues

I don't know Paul Polak's work very well ... but my early impression is that he makes a whole lot of sense, and is well worth listening to.

His blog is an easy way to get an idea of what Paul Polak thinks about and how he sees things.

I have not spent a whole lot of time researching Paul's work, but this post with a story from Maputo touched a chord with me.

I have done my own share of work in Mozambique and have experienced something of what Paul describes. In this case the Government official thought of irrigation as "big civil works" rather than being "getting water in the most effective way to plants so they flourish". The government official had his views and was in his office. Paul saw fit to do some visiting of his own and found success where the government saw none.

This is, of course, a big part of the problem with the international relief and development community ... the World Bank, the UN agencies, bilateral organizations like USAID, the UK's DFID and so on ... they are bureaucrats talking to bureaucrats, and very well educated, but God forbid, that reality on the ground should get in the way and that good little things should be encouraged.

Another post starts off:
The single biggest reason that the appropriate technology movement died and most technologies for developing countries never reach scale is that nobody seems to know how to design for the market.

Over the past 30 years, I’ve looked at hundreds of technologies for developing countries. Some provided elegant solutions for challenging technical problems. Some were big and clumsy. Some were far too expensive. Some of were beautifully simple and radically affordable. But only a handful were capable of reaching a million or more customers who live on less than two dollars a day.
This is my experience as well. My perspective is that there is the need to get economic activity so that it is appropriate to the market and the community where it is located. The debris that is littered around developing countries that once were "projects" of the official development assistance (ODA) community is enormous ... and, of course, a disgrace. Worse is that few people in the ODA world really want to learn from it ... the system works quite fine if the goal is simply perpetual existence and a suitable leaky system.

Some years ago, when I was working on an assignment in Africa I was travelling with a very experienced development expert who was about as mad as I was about the way the system had become dysfunctional. He told a story of an assignment (secondment to a developing country's government contracts office) where he had the role of oversight of big international contracts ... mainly to address the issue of over-invoicing on contracts. This practice works so that the business profits are not affected, and there is an adequate surplus to fund bribery. An example he described was a contract invoiced at around $18 million that in this expert's opinion should have been more like $12 million ... and he refused to OK the contract and its payments. Nothing happened ... a delay of a few months, and then a re-billing but this time at $27 million rather than $18 million. The justification for the higher billing now simply that the cost of bribing everyone to progress the contract had gone up substantially. In other words the contract process is highly dependent on the "built in leakage" and not much to do with the technical quality and the price.

I will look a lot more at Paul Pollak's work ... it sounds very much like his knowledge is worth a damn.

Peter Burgess

Wednesday, September 29, 2010

AAI-H ... great organization ... I think ... but meaningful metrics are missing

Dear Colleagues

I am a member of many Internet communities that have dialog about relief and development including the group "Networking for Development" at Ning

Many of the people who are members of this group are doing very interesting and valuable work. The following is an example:

In this profile there is the AAI-H organization's website which shows some interesting activity by this organization.

I downloaded the 2009 Financial Report and the 2009 Annual Report and was totally disappointed in what I found. This is not to say that the organization is good and worthwhile or not ... it is merely to report that the Financial and the Annual Reports are totally useless as reports on the progress of society, and the performance of this organization.

This is not the fault of the organization, it is the failure of the accounting profession and other related disciplines to get to grips with what is needed.

The Financial Report is prepared following all the rules of GAAP accounting and audit ... and in the end says almost nothing about the performance of the organization beyond confirming that they followed the rules. In terms of performance metrics, the financial report is a complete waste of time and money ... though it is good to know that the organization was following the rules.

The Annual Report is a standard picture book about the activities of the organization ... good journalism and following the methods of modern "communications" with pictures and numbers giving a sense of reality for the story. In terms of performance there is absolutely nothing that helps to position the organization as good, bad or indifferent. Clearly the donors "like" the organization, and that is good ... but what the organization does with the money to produce progress and where the organization is efficient or not is ignored completely in the presentation ... both the financial presentation and in the stories of the Annual Report.

As I observed already ... this is not the fault of the organization. They are following the norms of the international relief and development industry which has completely avoided any system of accounting and reporting that addresses progress and performance with meaningful data.

Needless to say ... this confirms again the need to get something like The Burgess Method for value accounting deployed as soon as possible.

Stay tuned

Peter Burgess

Rail ... critical infrastructure and a big global sector

Dear Colleagues

I am encouraged rather than discouraged by the various international media sources that are available ... they carry stories about all sorts of investment possibilities that have the potential to improve the productivity of society in impressive ways. This contrasts with much of the press in North America and Europe which is heavily pre-occupied with the disastrous performance of its banking and finance industry and the essentially bankrupt status of public finance. This link is to webnews from the Gulf

The following link is specifically about rail transportation in the Emirates ... There are many others.

Rail was a huge driver of the economic success of North America and Europe in the past ... and rail is not dead in these places, but it is not anywhere near the center of much dialog.

Recently in the UK's Financial Times there was a big story about the role that rail is going to play in the infrastructure development in China ... but their investment in building rail as infrastructure is also going to be a piece of building a big new export sector for China. The rush into China by corporations with expertise in rail engineering ... including from Germany, France and Japan ... is going to end up with China knowing the best practice from everywhere, and in due course this will be the best practice for a Chinese rail equipment industry.

In the Gulf countries there is money ... and a commitment to major investment. Rail seems to be part of this.

The impression is that the USA is getting completely left out of all of this rail investment potential and a global market ... and the building of productivity into its infrastructure. Maybe this is completely valid, or maybe it is simply the pathetic performance the the modern US media in understanding and writing about important issues.

Maybe the fact of Warren Buffett's investment in the BNSF railroad is encouraging. Maybe the efficiency of the modern GE rail motive power equipment is encouraging ... and the huge freight capacity of modern trans-continental trains in the USA is encouraging. Maybe. But the idea that the US will be a true world leader in rail engineering seems like a very long shot at the moment.

I would like to know a lot more about the rail world ... it is one of the most important pieces of infrastructure, and it is going to be very interesting to see who are the global economic beneficiaries in this sector.

Peter Burgess

Monday, September 27, 2010

Talk is cheap ... and there is a lot of it!

Dear Colleagues

I have been an active observer of the UN activities in New York over the past few days. The UN General Assembly is bad enough, but when combined with an MDG Summit and activities like the Clinton Global Initiative and other side-shows ... it becomes a huge circus.

The amount of "talk" is impressive. Sadly, people like me have not completely lost our memories, and much of the talk is a recycling of talk that has taken place over and over again over a very long time.

In health, I am reminded of the 1978 UN Al-Maty declaration about Health for All by 2000 ... and I was very discouraged by the MDG initiative by the UN in 2000 to introduce a whole new set of goals to be achieved a "safe" fifteen years into the future. In 2000, it would have been much more useful to have taken a good hard look at why so little progress had been made in the previous forty-plus years and do something practical to do things better.

My interest in accounting and accountability goes back a very long time. As someone trained professionally in accountancy, I am quite capable of "following the money" and it is appalling that this is so rarely done within the public sector and the international relief and development community. Without control of the fund flows ... anything goes ... and this is a formula for disaster for society as a whole, while perfectly suited to the greedy, corrupt and powerful.

The major personalities in the UN and the international community have made their speeches ... and a lot of big numbers have been thrown out. Where the money is going to come from is less clear. The UN especially is good at talking about big numbers, but less capable of mobilizing the money in practical terms. There is an urgent need for the high profile global leadership to "get real" about the money that is going to be available, and how it can be used to get the most benefit.

The efficiency of the system is awful ... and with rather modest amount of money there could be huge progress if the money was used well. Few of those in power are interested in low resource flows being used well ... for obvious reasons. With such abject system failure and so much deep poverty a results oriented use of funds can have a huge impact and be a step forward to progress out of poverty. There needs to be really clear focus on addressing needs ... but also using available human resources as the major resource to satisfy needs ... not merely mobilizing money and essentially wasting it!

With good management ... good decision making ... there can be better performance. Part of the reform has to be making way better use of data for decisions and accountability.

The e-list message that sparked this not is set out below


Peter Burgess

UN launches $40 billion health drive
By Tim Witcher (AFP) – 2 days ago

UNITED NATIONS — UN Secretary General Ban Ki-moon on Wednesday announced a 40-billion-dollar drive to improve the health of women and children, which he said would save millions of lives around the world.

Governments, philanthropists and private groups pledged the cash, giving a spectacular end to the UN summit on eliminating poverty, a campaign that has been badly battered by the international financial crisis. "We know what works to save women's and children's lives, and we know that women and children are critical to all of the Millennium Development Goals," Ban said.

"Today we are witnessing the kind of leadership we have long needed," he declared ahead of the close of the summit when US President Barack Obama will be the keynote speaker.

Ban estimated that his Global Strategy for Women's and Children's Health could save 16 million lives by 2015. Of the eight key development targets set a decade ago, cutting deaths of women during pregnancy and childbirth and those of children younger than five have seen the least progress.

Countries from Afghanistan to Zambia -- but also including Australia, Britain, China, France, Germany, India, Japan, Russia and the United States -- have contributed to the drive. The foundations of the world's richest men, Mexican tycoon Carlos Slim and Microsoft billionaire Bill Gates, were among the contributors. They joined rights groups such as Amnesty International and multinationals such as LG Electronics and Pfizer.

"Never have so many come together to save the lives of women and children," commented Norway's Prime Minister Jens Stoltenberg, whose country is one of the world's top aid donors.

US Secretary of State Hillary Clinton said investing in women and children's health was "an issue that deserves to be at the top of our development agenda."

A UN statement said the deaths of more than 15 million children under five would be saved between 2011 and 2015 through the initiative.

It added that it would prevent 33 million unwanted pregnancies and 740,000 women from dying from complications relating to pregnancy and childbirth. It estimated that 120 million children would be protected from pneumonia.

It was unclear how much of the 40 billion dollars announced is a new spending commitment and reaction to the announcement was mixed from aid groups. "We have learned to be skeptical of big announcements at summits, and we question how much of this money can possibly be new," said Emma Seery, a spokeswoman for Oxfam.

"What really counts is where the money is coming from, which means leaders going home and putting that money into national budgets." Seery said 88 billion dollars was needed up to 2015 to meet child and maternal health goals.

Several governments in poor nations promised major increases in spending as part of Ban's initiative. Afghanistan said it would increase per capita health spending from 11 dollars to at least 15 by 2020. The UN said that Britain will spend an additional 2.1 billion pounds (3.2 billion dollars) on child and maternal health from 2011 to 2015. The three-day summit was called to rejuvenate the eight development targets set at the 2000 Millennium summit, aiming to be reached by 2015.

The goals set target of cutting by two thirds the number of children who die before they are five, and reducing the number of women who die during childbirth by three quarters.

>From 1990 to 2008 the number of child deaths fell by 28 percent, but there are still almost nine million deaths a year.

The Millennium goals also included cutting the number of people who survive on less than one dollar a day by half, halve the number of people who suffer from hunger, halt the spread of AIDS and other killer diseases, achieve universal primary education and empower women.

The United Nations has estimated that at least 120 billion dollars will be needed over the next five years to meet the MDGs, which most experts predict will not be met by the 2015 target date.

From AFRO-NETS, an e-forum on health research and development in Africa