The degree to which the NGO potential is realized depends on many factors. Arnparamount factor is the nature of the relationship between the NGO sector and the state.rnGovernment policies and attitudes have a pivotal influence on the capacity of NGOs tornoperate and grow. A better understanding of factors affecting the rela tionship betweenrnthe two actors at local government level, where NGOs are operational, helps maximizernthe development inputs by NGOs, the development of policies regulating the sector asrnwell as shape the direction of future action for smooth relation in developmentrndiscourse. This research work, therefore, endeavors to generate ideas that would bernuseful for smooth management and incorporation of resources the sector brings into therneconomy by fostering enabling policy environment. To this end, investiga tion of policiesrnthat regulate the operation of NGOs, major areas of complaint by both parties, otherrnsubsidiary factors such as institutional arrangements, economic and political factorsrninhibiting smooth operation of the sector in the region are dealt with in detail.rnThe study was undertaken in National Regional State of Oromia. A stratified samplingrnprocedure was employed to collect primary data from government institu tions at allrnlevels (federal, regional zonal and district levels) believed to have direct relevance withrnthe issue at hand. Respondents reached include high government officials; professionalsrnworking on NGO related posts and NGO project personnel from 35 NGOs, bothrnindigenous and international. The survey result indicated that, though the commitmentrnof the government to regulate, coordinate and encourage NGOs is reflected in variousrnpolicy documents, adequate effort and due attention has not been given to translaternpolicy sta tements into action. The government lacked institutional capacity to enforce itsrnown making. Furthermore, the policy regulation and its guiding procedures for legalityrnare found to be tedious, tiresome, bureaucratic, apart from being obsolete to conform tornpresent realities on ground.rnThus, identifying and understanding the various elements that are responsible for lackrnof smooth rela tions between the actors in regions like Oromia, where almost a third ofrnNGOs operational in the country are stationed, deserves urgent research undertaking.rnThe research find ings, will for sure contribute immense input in guiding policyrndecisions, and improvement in the management of the NGO sector at sub-regional,rnregional and national levels