Foreign Assistance: AID's Microenterprise Assistance Program

Published by the Government Accountability Office on 1990-09-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                    United   States General Accounting      Office

GAO                 Testimony

 For Release         FOWEIGW ASSISTANCE
 On Delivery
 9:15 a.m. EDT
 September   26,     AID's    Microenterprise
 1990                Assistance      Program

                     Statement      of
                     Harold      J. Johnson
                     Director,      Foreign     Economic    Assistance         Issues
                     National      Security     and International           Affairs

                    Before    the
                    Subcommittee      on International               Economic
                      Policy      and Trade
                    Committee      on Foreign    Affairs,
                    House of Representatives

                                                                            GAO Form 160 (12/87)
Mr.      Chairman         and Members sf                  the        Subcommittee:

We are pleased                  to be here            today          to provide                 a preliminary                report      on
our on-going              review         of      the Agency              for        International                 Development's
(AID)      microenterprisel                      program,             The       issues               we have been asked                to
discuss         today       are     (1)       whether          AID       has adequately                    managed the
microenterprise                 program--           including             whether               it     has complied             with
congressional               guidance             on the        size       of        loans            disbursed,         the economic
status         and gender           of     loan       recipients,                   and the            use of      indigenous
"grass         roots"       organizations                 to     carry          out        the program;             and (2)
whether         AID's       March         1990      report           to the Congress                      on the        program        is
reasonably           accurate            and      reliable.               Upon completion                      of our         work,      we
plan      to    issue       a written             report        on these               matters.


The Congress              has     had a longstanding                           interest               in supporting
microenterprise                 activities               in developing                     countries.              In fiscal
year      1988,      it     earmarked             $50 million                  to     be    used for           credit         and other
mlcroenterprise                 assistance.                   This       amount was raised                        to $75 million
in fiscal          years         1989      and 1990.                 The Conference                     Committee         report
accompanying              the     fiscal          year        1988       earmarking                   urged AID to            target        80
percent         of the       loans         to people            in the              lowest            50 percent        of      the
economic          strata,         with        special          emphasis               on women-owned                businesses,

and those          enterprises                owned and operated                           by        the poorest        20 percent
of     the population.                   The      Committee              also         recommended that                   loan     size

IAID defines              a microenterprise                     as a business                         having      10 or fewer
not      exceed       $300,          unless             there       were       indications               that        the loan              size
should         be exceeded                to accomplish                      the    program       objectives.                      This

guidance         was reemphasized                         by the Appropriations                              Committees              in
fiscal         year       1989.           While          the    congressional                  guidance              is not
mandatory,            AID has incorporated                               the       guidance        in its            policy

Prior       to the         fiscal              year      1988 legislation,                     AID did              not     have an
overall         policy         for        structuring                microenterprise                    activities                 and
directing          resources                   in support            of       them.       In response                  to the
legislation,               the AID Administrator                               appointed          an Advisory                  Committee
to help         develop          policy            guidance              under        which      all         microenterprise
projects         would         be directed.                     The Advisory                  Committee              incorporated
the      congressional               guidance                into        an AID Policy                 Determination                  which
was issued            in October                  1988       and transmitted                   to all              of AID'S

AID does not. have a                           system        to track              detailed       information                 concerning
its      microenterprise                       activities.                   In preparing              its         March 1990
report,         the AID         missions                we visited                 had supporting                   documents              for
amounts         obligated                for      microenterprise                    projects,               but     most     of      the
specific         data       concerning                   loan       size       and the         recipient's                  gender          and
econorqic        status          was based on assumptions                                 or estimates.                      As a
result,         the data           AID reported                     to       the Congress              in March             1990      is     of
questionable              reliability.                       We found              some discrepancies                       in the data
for     eight     of the            17 projects                 we examined.                  The lack               of specific
information           should              have been noted                      in AID's         report.               This         was not

done,       and consequently                  the    impression                is given              that     the data              is
more       accurate      or based on more factual                                information                 than        is actually
the      case.                                                                                                                                   i

The fiscal          year      1988         legislation               clearly            resulted            in AID focusing
greater          management attention                     to     its       microenterprise                    assistance
program.           Recently       AID took             steps           to further               improve        its        management
and oversight            of these            programs.                 In July           this        year,     AID placed                  its
microenterprise               development              projects             within          the Private                  Enterprise
Bureau.           According          to AID officials,                      this         was done to ensure                         more

effective          control      over         program           implementation                    and resources.                      In an
effort       to    increase          its     oversight               and    ability             to    respond            to
congressional            interest,             AID-contracted                  'for       a feasibility                   study          to
determine          whether      an information                       system        can      be       developed            to track
AID's      microenterprise                  programs           and produce                the types            of
information           requested             by the       Congress.                 A draft            of the         study          was
recently          submitted       to AID.

AID’S      microenterprise                 program        has evolved                   over         the past            17 years,
The 1973 "New Direction"                        legislation                 reoriented               AID's      overall
mission       towards        addressing             the        needs of            the     "poor        majority."                   AID
began developing              projects,             including              some microenterprise                               projects,
in response           to this         new focus.                It     embarked            on a long-term
research          and development               program,             which         is     the genesis               of        the
present       program,        and it          supported              a number of                 centrally           funded
projects          to obtain       basic         data      on microenterprises                           and to determine
methods         to best       assist         them.           In    1985,       AID began providing
assistance           to    intermediary              institutions                to strengthen             these
institution's              management of microenterprise                               programs.

AID's      Organizational                 Structure
Before       1981,        microenterprise                development              projects        were not
centrally           coordinated.              Project             focus       and objectives          varied
according           to the AID office                  responsible               for   the    project.             For
example,        the Office            of Science              and Technology             focused         on    (1)

developing           methods         to    improve           technology           and (2)        applying          research
and evaluation               methods        to small              enterprises.           On the other                hand,
some projects              within         the Office              of Agribusiness             focused         on
agricultural              credit.

In   1981,      AID placed            responsibility                    for    coordinating          these
microenterprise               prolects          within            the     Employment         and Enterprise
Development           Division,            Office        of Rural             and Institutional
Development,              Bureau of Science                   and Technology.                 This    was done
because        of    the division's                 capacity            to conduct       "...basic            and applied
research        in employment               and      small         enterprise          issues,       including
policy,        technology,            factors         of production                and institutions...and
to provide           technical            support       on microenterprise                    activities             to the
regional        bureaus,            overseas         missions             and private        voluntary
In July        1990, AID placed               its     microenterprise                     development             projects
within       the Private          Enterprise            Bureau.             According              to AID officials,
this      was done to ensure                more effective                  control            over       program
implementation             and resources.

AID's Response             to the
Microenterprise              Legislation
In February            1988,    the AID Administrator                           appointed           an Advisory
Committee          composed of         individuals               from       nongovernmental
organizations             who had experience                   in   implementing                   microenterprise
credit       projects       in developing               countries.                 The Advisory              Committee
was asked          to develop         guidelines           for      AID's          microenterprise
development            program.        This         resulted        in AID's              first       overall         policy
for      structuring        microenterprise                activities                  and directing              resources
in support          of them.2

In March          1988,    the AID Administrator                         also      sent        a cable       to each of
AID's      missions        advising         them of        the      legislative                   earmarks        and the
congressional             guidance      in     implementing                 the microenterprise
program.          The missions          were requested                    to report               ongoing       and
planned       programs         in support            of micro            and small             enterprises.

The AID policy             issued      in     1988 stated                that      a microenterprise
‘I . . . should     have no more than                 10 employees                 and should              have
characteristics             (assets,         revenue,            etc.)          that     fit       well     within      the
objectives          of the program.                  Special        emphasis             should           be placed       on

2AID Policy  Determination-17                         (PD-l7),             Microenterprise                   Development
Program Guidelines,     (Oct.                  10,      1988).

small-sized               and        individually-owned                    productive              activities.'                   The
policy          included            guidance          on (1)         social        and micro-economic                        policy
reform,           (2)     use of           institutional                 intermediaries                in implementing
programs,               (3)    the provision                of     technical            assistance              and training,
and (4)          terms         to     intermediate                financial         institutions.                   The Advisory
Committee              also      incorporated               into         the   policy        the       congressional
guidance              regarding            loan     size,         program       beneficiaries,                   and other
matters;              however,            this    guidance          was not made mandatory.

The     objective              of AID's           microenterprise                  program,           as stated              in    the
policy,          is      "to    help         people        with     limited         or no access                 to capital
achieve          a level            and quality             of     business         activity            that      will        permit
increased              access        to formal             financing           and technical               services               and
expand         productive                 employment         and incomes."                   It     broadly         describes
microenterprise                     activities             as including             "the          whole    spectrum               of
productive              activities               ranging          from     rural-based              agribusinesses                     and
handicraft              production               to urban-based                trading,            service,         and
manufacturing                  enterprises,             many of            which     are labor             intensive."

Overall,          AID's         guidance            gives        mission        officials            the       flexibility                  to
adapt         their       program           to specific             country        conditions.                  For example,

--    Although            the mission               in Guatemala               targets        microenterprises                         in
      rural       areas,            the     focus     of     its        microenterprise                development
      program           is to promote                non-agricultural                    activities.               This           was
      done in hopes of stemming                              the        flow    of migration               to     urban           areas
      and reducing                  the population's                    dependency          on agricultural

       activities.            The mission              also        targeted           a large        segment of             the
       population           that     had been historically                           neglected.

 --    The Honduran           microenterprise                  program              emphasizes           the     creation         of
       jobs      in     urban areas          rather       than         subsistence               self-employment
        initiatives.               In Honduras,           the        majority          of unemployed                  people      are
       located          in the      urban     areas,          and,         consequently,             the vast            majority
      of      resources       are directed              towards             businesses            that     have the
      potential           to expand and generate                           employment            In those         areas.

--    The mission            in Senegal             targets          Its      program         resources           to both
      agricultural            and non-agricultural                          microenterprises                   in rural
      villages          and small           towns.       However,              the mission               plans        to expand
      its     program        to target         microenterprise                      activities            in Senegal's
      capital,          Dakar.

AID'S       Approach        to Assisting              Microenterprises
In adapting             to specific           country          programs,              AID's      guidance             provides
for     a variety          of microenterprise                      activities,            including              training         and
technical             assistance,       institutional                      support,       policy          and regulatory
reform,        and credit.

--    The Guatemalan               government          implemented                  a program,           with      AID
      funding,          designed       to     (1)     increase              the productivity                   and income of
      microenterprises               and (2)          generate              employment           within         the
      informal          business       sector.           Its        goal       is     to provide           credit,
      technical          assistance,           and training                  to 20,000           microenterprises                   in

     3 years.         Three        Guatemalan         banks disburse                    funds         held       in trust
     for    the private            voluntary        organizations                 (PVOs) that                  implement
     the program.            The average            loan        size     disbursed              under          this     program
     is $753.

--   The Honduran           mission       brought          in a contractor                     to provide
     technical        assistance          and training                 to PVOs that                  implement
     microenterprise               projects.          The contractor                    provides             assistance          in
     the areas        of marketing,              credit         systems,          management                 information
     systems,      training,           overall        program           management,                  and
     adminrstration.                The Honduran               mission         also      supports              direct
     training      for      small      business           owners        and cooperative                      members
     through      the     Central        American          Peace Scholarship.                          Participants
     receive      training          in production               processes,            marketing,                record
     keeping,      inventory           control,           and new technologies.                                                  e

--   In Senegal,         PVO staff          were provided                training              in     credit
     management,         organizational              development,                 financial                accounting,
     and proposal          writing.             Literacy          and numeracy                 training          was also
     provided      to village           organizations.

The missions          in Guatemala,              Honduras,             and Senegal              fund         a variety      of
microenterprise            credit       programs           that        serve      the     needs of micro                  and
small      enterprises         that     do not       have other                sources          of     credit.           These
include,        but are      not      limited       to,        small     credit          associations,                  such as
village      banks,      cooperatives,              credit        unions,          and solidarity                     groups.
Group sizes        varied       according           to the        nature         of      the        credit       programs.

Cooperative        membership            included        up to 250 members,                 village       bank
membership        ranged        from     10 to 45 members,              and solidarity                group
membership        ranged        from.2      to 6 members.              These programs             typically

used the      "group       loan     methodology,"             which     employs       group       pressure           as
an incentive         to repay          loans.        Loans disbursed             through        these
organizations          ranged       from     about       $45 to almost           $1,200        per

The Role of        Intermediaries
~11 three        countries         we visited         used intermediary               organizations                 in
the design        and implementation                 of their     microenterprise                 projects.
These groups         were PVOs and nongovernmental                         organizations               (NGOs)
based    in the United             States       or abroad.            Most of       these      organizations
implemented        their        microenterprise              programs      either       through          or    in
conjunction        with      locally        based community             organizations,                often
called    grass      roots        organizations.              However,      the      extent       to which
grass    roots     organizations             were used varied              among the           countries,

--   The majority          of     PVOs in Guatemala             worked      directly           with      the
     beneficiaries           of    the    program.

--   The mission           in Honduras          funded       two umbrella           PVOs, which
     supported       nearly        25 community-based                 organizations            that
     implemented          a variety         of microenterprise              projects.

--   In Senegal,          the     PVOs and NGOs worked                 closely       with      cooperatives
     and local       community           organizations          in funding           eight       local

       community                    organizations                          and one PVO that                 provide            credit          and
       literacy                    and numeracy                   training               directly          to 57 village

Difficulty                    in Tarqeting                       the Poorest                of the Poor
None of the                        three         countries                  we visited              targeted         their
microenterprise                               projects             to the poorest                    of    the poor.              However,             some

PVO officials                           with      whom we talked                         said       that     these       people              were
benefiting                    from            their         projects.                   Other       PVO officials               said          that
they        did         not         have the                financial               and management capacity                             to target
these        groups,                    especially                    if    the poor            reside       in remote,            inaccessible
areas.             According                     to these                  officials,            this      group      might        be         better
served        by social                        welfare            programs               that       address        problems             of health
care,        nutrition,                        or literacy.

A problem                in targeting                           a particular                economic           strata,          such as the
lowest        20 percent,                             is    identifying                  who they          are     since        there          is no
agreed            upon criteria.                                The general               consensus            among AID officials
was that                standard                 criteria                  to    identify           the poorest            20 percent                of
the population                           would             be    difficult               and costly            to develop.                    However,
officials                at         the mission                    in       Guatemala            and at AID/Washington                          stated
that        they         are conducting                            studies              to develop          poverty            indicators              that
may     be    helpful                        in creating                   the    necessary             criteria         for      identifying
the poorest                        of    the      poor.                According            to these          officials,                it     would      be
difficult                to measure                        relative              poverty         levels       based on income alone
because            it         is        of     questionable                      reliability.               These officials                     said
that      other           factors                 must           be        considered,            such as the differences

between          urban       and      rural       areas.              The urban poor                lack       access         to land
and other              natural        resources             upon which               the rural             poor      can subsist.
However,           the     rural       poor       usually             live      in remote           areas         and may not
have access              to basic          government                 services         such as health                  care,
education,              and nutrition              programs.

In     late31988           and     1989,        several          members of             the Congress                  requested
that       AID provide             specific             data       to document               that     it     was complying
with       the     legislative             earmarks             for      the microenterprise                         program        and
the       guidance         on loan         size         and recipients'                 gender             and economic
status       as specified                in the          accompanying                 Committee             reports.           In
replying           to the         requests,             AID stated             that     it     had complied              with           the
law;       however,          it    stated         that       the        specific        data        requested           was not
readily          available            and would             be difficult               to compile.

In February              1990,        shortly           after         we began our             review,            AID sent          a
survey       questionnaire                 to     its     missions             requesting            detailed
information--              including            the      types          of funding,            loan         sizes,      and
beneficiary              gender        and economic                status--           on their         microenterprise
projects.               The questionnaire                    was in response                   to a congressional
request          for     information              concerning                 AID's     compliance              with     the
earmarking              legislation             and congressional                      guidance,              AID issued                its
report       in March             1990.3

3Report to the Congress,                           AID Microenterprise                         Development              Program,
(Mar. 30, 1990).
The report          presents          statistics                from 47 missions                   reporting

microenterprise              projects             for     3 fiscal              years--1988,              1989,     and 1990.
We   focused        on AID's          loan        data         for     fiscal          year      1989,     which      was the
most recently              completed          fiscal            year.           We examined            the methodology
and supporting              documentation                 used by three                   of AID's         missions,
Guatemala,          Honduras,          and Senegal.                     We selected               these        to examine            in
detail      because,         according             to AID's             report,           they     accounted          for
about      27 percent          of     the $30.3            million              for     microenterprise               loans          in
fiscal      year     1989 --$3.2            million             in Guatemala,                  $1.6    million        in
Honduras,        and $3.3           million             in Senegal.4

Observations          on Mission              Loan Data
None of the          three      missions                we visited              had a system              to    reliably          and
accurately          obtain      the        loan         data         requested          by AID/Washington's
questionnaire.               We found             supporting              documents              at the missions               for
amounts obligated               for        microenterprise                      projects,          but     most of          the
other    data       on loan         size      and beneficiary                         characteristics              had to be
obtained        from PVOs or NGOs implementing                                        the projects.              However,
these      groups     also      did        not     routinely              track         this     data,         nor were they
required        to do so by AID.                    Also,             in some cases,               they        were not       able
to provide          data     by the         U.S.         government              fiscal         year      because      their
accounting          systems         were on a different                          fiscal         year      basis.
Therefore,         much of          the     data         reported          by     the overseas                 missions       was

4The top eight countries     reporting    microenterprise    loan projects
were El Salvador  with $5.5 million,        Senegal with $3.3 million,
Guatemala with $3.2 million,      Indonesia    with $2.4, Madagascar with
$2.1 million,  Jamaica with $2.0, the Philippines         with $1,8, and
Honduras with $1.6 million.
     th a t    33 percent           o f th e 3 ,9 1 5             loans m a d e u n d e r o n e o f th e a b o v e
     projects           w e r e m a d e to w o m e n ; h o w e v e r ,            th e s u p p o r tin g
     d o c u m e n ta tio n      a t th e m ission                showed 25 percent               o f th e loans w e r e
     m a d e to w o m e n .

W e could n o t d e te r m i n e               th e     reasons       for   th e differences                b e c a u s e th e
A ID o fficial           who had compiled                     th e d a ta   for      th e q u e s tio n n a i r e        was no
longer        with      th e   m ission          a n d did        n o t leave a n y inform a tio n                  on how
th e d a ta h a d b e e n c o m p i l e d .

In H o n d u r a s w e fo u n d            th r e e     discrepancies             in th e d a ta          reporte d       for
o n e large          m icroenterprise                  project.        T h e m ission         reporte d         th a t

--   $ 1 .2 m illion           in loans               h a d b e e n fDnded in local               currency           under
     th e project,             b u t s u p p o r tin g         records      s h o w e d th a t      $ 1 .6 m illion             had
     b e e n fu n d e d ;

--   $ 6 .6 m illion           in   m icroenterprise                  loans h a d b e e n m a d e ,          but      m ission
     records          s h o w e d th a t      th e      a m o u n t w a s $ 7 .2 m illion:            and

--   5,891      m icroenterprise                      loans    h a d b e e n m a d e o n th e project,
     w h e r e a s th e m ission              records          w e reviewed          s h o w e d th a t     6 ,5 7 2 loans
     had      been     made.

We were told               by mission             officials              that,     after         the     reply           to
questionnaire                was prepared,                 the mission             hired         a contractor                   to work
with       the PVOs and NGOs to                      improve             their     information                systems.               The
documentation                we reviewed             was based on the                      improved           information
developed           with       the    assistance              of        the mission's             contractor.

We were also               told      by    mission          officials             that      the       loan     data           reported
to AID/Washington                    included          funding            from     sources            other         than        AID.
The PVOs and NGOs do not                           keep track               of microenterprise                        loan
information             by     funding       source.               The mission             made note                of    this         in
its       reply     to the         questionnaire,                  and an AID/Washington                            official            told
us that           the Honduran             information                  was adjusted             to account               for       this
problem.            Without          more detailed                  information             readily           available,                we
believe           the adjustments                 were appropriate                   but        may    have         contributed
to     the apparent               errors      in the          reported            data.

The Honduran               mission         also      did      not        report      the number of                   loan
recipients           and amounts             to the           poorest            50 percent            or 20 percent                    of
the       population.              Mission         officials              stated         that     they        did        not     have
criteria           to determine             whether           the        loan     recipients            were in these

In Senegal,             we found           a discrepancy                  in the mission's                    calculation                   of
the       average       loan       size     for      one microenterprise                         project.                The project
also       highlights             how the missions                      had to rely             on estimates                  and
assumptions             in replying               to AID/Washington's                      questionnaire.                        Under

In view of           congressional                  interest          for     better      oversight            of    Its
microenterprise                assistance              program,             AID awarded        a contract                to the
consulting           firm      that         compiled         the March           1990     report        to conduct              a
feasibility           study       on whether                an information               system        could        be
designed         to track        AID's             microenterprise              programs           and produce                the
type     of    information             requested             by the          Congress.         A draft          of       the
study     was recently                submitted             to AID.

We reviewed           the draft              study         and noted          that      the   system      proposed              by
AID's     contractor            would         have the          ability          to systematically                   track          and
report        the    funding          sources          and beneficiary                  characteristics                  of AID's
microenterprise                loan     programs.               The study             proposes         to use data              and
reporting           structures              that     should        already           be in place         at the            project
level.         However,         as noted              in the       study,        a number of matters                       need to
be resolved           before          the      system        can      be     implemented.              They include

--   How can AID-provided                          funds     be separately               identified            when PVOs
       and NGOs have multiple                        funding          sources         and funds         are commingled.

--   How should             fluctuating              or multiple              exchange        rates      be     treated.

--   What criteria              or parameters                  should         be used or developed                       to
     establish          income percentiles                      and poverty              levels.

--   How shoula             non-financial               microenterprise                  activities,            and their
     contributions,               be accounted                 for.
In     summary,     we believe      AID has improved              its    management of            the                 R
microenterprise           assistance         program,       and is      attempting         to    implement
the     congressionally          recommended         program     guidance.           We also          believe         R
                                                                                            accurate            and   1
that     while     AID desired      to provide          the    Congress       with    an                              I
reliable         report   on the microenterprise                program        in March         1990,     full
disclosure         of the    limitations          AID   encountered           in accumulating             the
data     would      have improved          the   report's      credibility.

This       concludes      my prepared        remarks.         We would        be pleased         to

respond       to any questions             you or members of your               Subcommittee             may