SESSION: Sustainability of the Macedonian Civil Society - Alternative funding possibilities

 

PLANNING FOR NGO SUSTAINABILITY – SELF-FINANCING STRATEGIES

Robert Atkinson, Head of Programmes, REC, Hungary
 

To start I would like to thank the organisers of this session for asking me to speak here today. I am particularly grateful to be asked to cover an issue that I think is crucial to Civil Society development in Macedonia. As someone who has worked within and for NGOs for the past thirteen years, I am acutely aware of the pressing question of how to sustain civil society in all countries, but more so in transitioning nations like Macedonia and in developing countries.

 

Overall I feel that there are three main factors that influence the sustainability of civil society:

1.      The organisational capacities of the Civil Society institutions and people;

2.      The financial resources available to those institutions and people; and

3.      The regulatory, cultural and legal environment of the society as a whole.

 

Naturally there is a complex interaction between these factors and to look for sustainability, or perhaps better durability of Civil Society, will need a whole range of conditions and actions to ensure this development. As this session is targeted at looking towards alternative funding possibilities I want to concentrate on issues related towards ensuring the viability of Civil Society institutions or NGOs; and how we as a grant-making organisation are trying to address this issue through self-financing initiatives.

 

Understanding NGO financial stability
Since 1989, Central and Eastern Europe (CEE) has seen phenomenal growth in the number of active non-governmental organisations (NGOs). This growth resulted from the desire of individuals to support their society and environment along with the newfound freedom of developing democracies. After a long imposed silence, people were again able to freely express their opinions and to assemble. In addition the region was suffering manifold environmental and social problems that government was unable or unwilling to address. Finally, the influx of foreign money to support the burgeoning civil society fostered the further development of civil society organisations and NGOs.

 

The development of civil society – and NGOs therein – in these transition countries has always been held as an important and necessary step towards a fully functioning democracy. Indeed, there have been many organisations and programmes orientated towards this development and a great deal of these efforts have been supported by international donors.

 

Nevertheless the international foreign assistance in the CEE region is disappearing while the availability of local philanthropic resources remains insufficient to fill this gap; there is still no strong culture of philanthropic giving in CEE nor are their sufficient local regulatory and tax incentives to help stimulate such activity. Furthermore, the NGO financing resources that are currently available typically also come with their own limitations and restrictions.

 

Funding Challenges

The limitations of NGO funding in CEE is really a combination of two limitations as outlined by Davis in 1997:

1. QUANTITY (Limited Availability of Resources)

The current paradigm of NGO financing has created a “social Darwinist” environment whereby NGOs are simply “sharing in the poverty” of an already limited pie of charitable resources.  Particularly in the “more developed” Central European countries, resources for NGOs from international donors are waning.  Whether from state or private sources, public charitable giving, or locally endowed philanthropies, domestic support of NGOs remains inadequate.  Individual donations are low because little disposable income is available, particularly as unemployment rates rise.  The “culture” of philanthropy in the region is also nascent. 

2. QUALITY (Limitations of Existing Resources)

Many of the donor resources currently available to Central and Eastern European NGOs often come with certain limitations or restrictions.  These include:

- short term project cycles: the majority of funds currently available for NGOs are for short-term projects only, making it difficult for NGOs to plan longer-term, strategic programs;

- prescribed themes/priorities: some donors shift their funding priorities, resulting in “donor-driven” projects rather than those based on NGO realities and decision making;

- restrictions on expenditures: some donors allow expenditures only for specific types of project costs, leaving little resources for NGOs to cover core operating or administrative costs;

- limited number of instruments: the type of financing tools available (i.e. grants) do not necessarily provide the varied types of financing required by NGOs at different stages of their development. 

Excerpted from Davis, The NGO-Business Hybrid (1997).
 


 

Finding a comfortable balance between the need for continued foreign/international assistance to CEE NGOs and the desire to decrease such dependency by encouraging local philanthropic activities remains a significant challenge in the region. However, there are some trends underway that indicate opportunities for shifting away from international dependence to greater local diversification of NGO financing. In 1997 REC conducted a needs analysis of environmental NGOs that revealed that: “the overwhelming majority of NGOs need [or demand] external support. Almost all NGOs believed that external support is either critically necessary (forty-one percent) or somewhat important (fifty-three percent).”

 

Interestingly, there was close correlation between an NGO’s financial status and the composition of its financial resources. REC found that “about nineteen percent of NGOs obtain more than one-quarter of their budgets from sources such as fees, research and consulting.” Characteristically, organisations in this bracket were in ‘good’ or ‘very good’ financial condition. It appears – and is logical - that those organisations with a wider funding base (including self-generated income) are more financially sound and that if the number of NGOs in this bracket were increased, the sector as a whole would be more financially stable.

 

These findings are not uncommon. Non-profit organizations around the world have consistently sought ways to diversify their funding base so as to provide a greater cushion for financing uncertainties.

 

CEE NGOs traditionally have had four general sources of revenues:

·        foreign aid from official development assistance (ODA) agencies and other external public and private donors;

·        contributions from domestic foundations, business, and individuals;

·        domestic government subsidies and payments, including grants and contracts; and;

·        earned income from fees and other self-generated income and investment earnings.

 

It is the last of the above four NGO revenue sources that has been left largely unexplored by grant-makers and donors. How can “traditional” grant-makers help facilitate the diversification of NGO funding sources through self-generated (i.e., “earned income” or “self-financing”) strategies?

 

Understanding “self-financing”

In essence, self-financing relates to methods by which NGOs can generate a percentage of the funds necessary to carry out their mission. “Self-financing can be defined as the procurement of revenues by internal ‘entrepreneurial’ methods” or in other words “strategies used by NGOs to generate some of their own resources to further their mission.”

 

There are seven such self-financing strategies that might be used by NGOs for self-financing: 1) Membership fees; 2) Fees for services; 3) Product sales; 4) Use of ‘hard’ assets – e.g. rental of equipment, property; 5) Use of ‘soft’ assets – e.g. patents, copyrights; 6) Ancillary business ventures; and 7) Investment dividends.

 

The benefits of self-financing to an NGO are numerous and include: increased income; a diversified revenue base; greater flexibility of funding; improved organisational planning, management and efficiency; improved financial discipline and oversight; positive impression on donors; strengthened board of directors; increase in the organisation’s visibility; and increased self-confidence.

 

Despite many benefits to this approach, many NGOs are using these strategies with little expertise or resources, often at great risks to these organisations and mission and within very unfavourable legal and regulatory environments. The four main areas of potential difficulty that NGOs may face when implementing self-financing are:

 

·        Challenges to identity

·        Organisational challenges

·        Capital and financial challenges

·        External environmental challenges

 

The application of self-financing strategies was found by REC and it’s partners to depend on each NGO’s organisational and financial situation. To implement them, NGOs needed to develop new skills and review the ways they operate. The research thus revealed three main priority areas for support organisations to assist NGOs in self-financing:

·        Providing NGO venture financing

·        Supporting NGO capacity building in self-financing

·        Supporting efforts to address regulatory obstacles

 

A “venture philanthropy” approach

In 1999, REC partnered with NESsT[1] in an effort to integrate into the REC traditional grant-making approach an innovative “venture philanthropy” mechanism providing the capacity-building and financial support found lacking in the existing NGO funding world. The pilot project goal was to help build the capacity of NGOs to develop new or expand existing self-financing activities in an effort to diversify their financing base. The model evolved by REC and NESsT is a “venture philanthropy” approach of identifying NGO business (self-financing) opportunities, assessing them through a pre-feasibility and feasibility study stage, providing expert advice and support to the subject NGOs (through local business advisors and trainers), preparing and funding business planning and finally, if applicable, supplying financial and expert support for the implementation of the venture.

 

While the primary goal of the pilot project was to build the capacity of NGOs’ self-financing efforts, it also served to build the capability of SNFP partners and advisors to provide advice and support to self-financing NGOs, develop tools and practices, and explore a new approach in practice as well as in theory. The measurement of the results and a reflection on the process tried are described in the book Planning for Sustainability. Therefore, all who may like to appraise an approach to practical NGO self-financing can consider our experience of tying capacity building and organisational support to the supply of “venture funds.” From this work a number of these points should be viewed by NGOs considering the self-financing approach and donors that are considering it as a tool to support their clients

 

Recommendations for the field and future use of the approach

To a large degree the pilot project was successful in demonstrating that the funding combined with capacity building approach did work. For the venture philanthropy field the following main recommendations would be made from the SNFP partners experience:

 

Financial Support Recommendations:

Funds for ventures: There needs to be research into the types of funds that can be offered to NGOs in varying situations. Still the breadth of available finance for NGO self-financing ventures is limited. Without the development of a basket of financial instruments (loans, start up, etc) no amount of capacity building will overcome this deficit.

 

Improved legislative and tax environment: In Central and Eastern Europe many issues (such as allowing NGO economic activities) are still grey areas or unfavourable to NGOs. There needs to be either an improvement in the interpretation and clarity of NGO legislation and/or lobbying for its enhancement.

 

Acceptance of failure: A majority of small businesses fail, so venture philanthropists should accept at least the same degrees of failure as in the for-profit sector. In addition the funder should endeavour to ensure that the core NGO is not ruined by any failure.

 

Funder power over NGOs: It can be said that an overly intrusive donor/investor can threaten the NGOs independence. Self-financing allows an organization to raise funds that can be used for the agenda they deem important. The funder power situation however is still a potential difficulty for venture philanthropy. One recommendation is the development of a code of ethics for venture philanthropists.

 

Capacity Building and Organisational Support Recommendations:

Increased business training for NGO leaders: It has been quite clear that the majority of NGO leaders are (understandably) largely unacquainted with business principles and approaches. Traditional NGO skill trainings such as proposal writing and fundraising should be linked more to business practices. In addition to this learning, courses on NGO management should have an increasing focus on business administration for NGOs.

 

Training of business advisors in NGO issues: On the other side of the coin for the above point, there is a deficit in business advisors who are ready and able to deal with the business issues of NGOs. Training and materials for business advisors and experts would seem to be a more efficient way of providing the needed consultancy to NGOs than ‘training-up’ NGO support organisations staff.

 

Focus on an overall organisational development strategy: NGO support organisations should offer self-financing development to NGOs in the frame of a general NGO development plan or strategy and not in isolation. Self-financing would be just one option or component in that plan. This is the area where the REC as an institution is trying to develop its capacities and support programme for the future.

 

Perhaps it would be pertinent here to re-emphasise that the venture philanthropy approach of supporting NGO ancillary businesses is not the only form of self-financing strategy (see above). The other strategies mentioned there could be more relevant, might be more valid for and might be more easily implemented by the particular NGO, but such an approach could be an answer doe some. I look forward to hearing the experiences of the other panellists and the following debate. Thank you for your attention.



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[1] NESsT = Non-profit Enterprise Self-sustainability Team