NGOs undermining the welfare state

While doing research for my literature review, I read about how NGOs can ultimately undermine the welfare state by providing services that should be provided for by the government. This was talked about in 115 and 105 a little bit, and I'm sure you are all familiar with this critique of NGO work. I wanted to see if anyone wanted to volunteer a critique of their own PE organization, or any NGO, in terms of its potential to undermine the welfare state.

First I will describe this argument in greater detail. One article I read was specifically related to educational NGOs, so I will use them as an example. The author of the article argued that educational NGOs, particularly in developing countries, should almost never provide formal education. The argument was this. Educational NGOs go to developing countries and find where the educational system is failing or inadequate. They then open schools or programs to replace the existing (or non-existent) government run educational system, using donor money. This donor money can be from a variety of sources, but it is generally not from the developing country itself. Once the NGO starts providing this formal education, the government can then disinvest in this area. Because the NGO is a private organization, the NGO has led to the privatization of education, and therefore undermined the welfare state. The author then argues that educational NGOs should only document failures of the educational system and report them to the government and to the World Bank, which has leverage over developing governments with its funding.

While this is certainly a specific example, I think it is important to consider how it applies to all of our organizations. For those of you working in the health sector, how do you think free clinics could be part of undermining the welfare state and encourage privatization? The county is ultimately responsible for the development and maintenance of community health centers as a last line of care for those who cannot pay. Does the construction of free clinics with donor money, or even national government money, ultimately free the the counties from a responsibility they should uphold?

The key piece I have not yet mentioned is sustainability. In much of the research I have done, there is extensive talk about how NGOs must be sustainable. Generally this means that NGOs must be self-sufficient, and not dependent on donor or government funding. Do you agree? Can an NGO be sustainable while still dependent on donor funding? Are there certain situations where this dependency allows NGOs to provide important services at a below market rate, such as BRAC does through microfinance plus, or conditional cash transfers? Are there situations where undermining the welfare state and privatizing a service is worth it? Who decides if its "worth it".
Sorry for all the questions, just some food for thought!