By: Febe Rahellea (Accounting 2014) | Editor: Prisca Lidya Patty
Foundation or NGO is neither a governmental organization nor a conventional for-profit business that gives grants to individuals, governments, corporations, or other foundations. Say, a person needs funding to get into a university abroad, he/she may apply to a particular foundation and ask for support. It may also work in different areas, such as sanitation, children protection, and other social projects. Whatever their objectives are, there is one main problem faced by all non-profit leaders in the world: how to get funded.
It is clear that a philanthropic foundation gets funding from donations, whether it is from an individual, corporation, or government. The mechanism seems ideal. Parts of the wealthier societies donate segments of their income to those in need, and equality (might be) created. The thing is, there is no such thing as an ideal world and relying on someone’s generosity has never been sustainable.
Most of the people assume the donation they made should be used for the stated and clear cut objectives. If someone donates 1 million rupiah to pay for a student’s tuition, usually he/she expects the whole amount to go towards paying the tuition. This assumption breeds another misconception that charity workers don’t get paid a normal salary because they should accept the fact that they are social workers. However, as a system, a charitable foundation behaves like any corporation. Therefore, they have to provide their employees with salaries of normal rate and have expenses such as operational costs, marketing costs, etc. They also need to gain yearly profit in order to expand and achieve other objectives. This fact may leave donors disappointed since there are parts of the donation that seem to be spent on unnecessary activities. The result? Donors might be more reluctant to pledge money to a charity due to distrust.
The invincible power lying within those who donates gives them the right to set conditions. Merlin, a UK based charity foundation with more than 4500 staff across 18 countries and donor funding in excess of £69m, came under severe financial distress as it was relying almost exclusively on governmental donors for funding. The trouble lies in the fact that government funds cannot be used to finance certain important supportive operations such as reporting, training and situational analysis, causing Merlin to become severely underfunded. This example shows that donors can set certain restrictions and it is very hard for a foundation to reject a donation even with a lot of restrictions attached to it.
Moreover, it is all about hidden agenda and it is more than just a tax reduction. It is generally known that donation can be claimed as an expense, resulting in lower tax payable. This approach has been used by various corporations. However, corporate tax avoidance is less harmful than personal motives of the entity (the owner). According to The Internationalist, Bill Gates, Microsoft’s former CEO, has made a record-breaking donation to global health programs through the Bill & Melinda Gates Foundation. In 2010, the foundation gave $2.5 billion in grants – 80 per cent to international projects. In total it has disbursed over $26 billion, most of it to global health. However, many are concerned about the power it gained through such contributions. Gregg Gonsalves, an experienced AIDS activist and co-founder of the International Treatment Preparedness Coalition is skeptical, ‘Depending on what side of bed Gates gets out of in the morning, it can shift the terrain of global health.’. He further remarks, ‘It’s not a democracy. It’s not even a constitutional monarchy. It’s about what Bill and Melinda want. We depend on them learning, and it’s not as if there are many points of influence for this.’ Another commentary came from the WHO’s head of malaria research, Aarata Kochi, who accused Gates Foundation of running a ‘cartel’ that suppresses diversity of scientific opinion, claiming the organization to be ‘accountable to no-one other than itself’. Well, it is actually true. With the rise of health partnerships, the proportion of global health funding channelled through the UN fell from 32 to 14 per cent between 1990 and 2008, placing major limits on the possibility for poorer nations to influence international health policy. Although the Gates Foundation provides a considerable support to the WHO, the money is, as with much of the WHO’s funding nowadays, earmarked for preconceived projects rather than the decisions of the World Health Assembly. Projects reflect the objectives of the donors alone and they become inefficient by neglecting the actual goal of the foundation.
Many are aware of these externalities. Thus, there has been a major shift on their funding strategy towards a more self-sufficient method. The solution is to transform a foundation into a social enterprise. Social enterprise behaves like a profit-oriented company with social objectives. Financing structures are diversified not only by equity and loans that relies on investors but also by receiving aids from donors in insignificant amount that allows the main institution to limit donors’ influence. Harvard Business Review suggested some new forms of financial instruments that can be created by a social enterprise. There are Loan Guarantees; Quasi-equity, a financial vehicles that combine properties of equity and debt; Pooling Funds; and Social Impact Bonds that acts like securitized bonds issued against microloans.
With such mechanisms in place, the benefits are not limited to social enterprises, but financial markets will also enjoy the premium, and most importantly a more equitable world.
Febe Rahellea (Accounting 2014) is a Senior Analyst at B.O. Economica. She is primarily interested in observing how social behavior impacts every realm of the world in which we live in today.
Bowman, A. (2012). The flip side to Bill Gates’ charity billions. New Internationalist. [online] Available at: http://newint.org/features/2012/04/01/bill-gates-charitable-giving-ethics/ [Accessed 20 Apr. 2016].
Bugg-Levine, A., Kogut, B. and Kelatilaka, N. (2012). A New Approach to Funding Social Enterprises. Harvard Business Review.
Mbom, K. (2012). AN INVESTIGATION INTO THE PARTNERSHIP BETWEEN DONORS AND NGOs IN AFRICAN COUNTRIES. Master Degree in International Social Welfare and Health Policy. Oslo and Akershus University College.
Mzn.ac. (2014). Thinking about aid & development | NGO financial sustainability. [online] Available at: http://mzn.ac/financial-sustainability/ [Accessed 20 Apr. 2016].