NGO-Business Hybrid

NESsT Learning Series

the ngo-business hybrid Is the private sector the answer?

NESsT

Nonprofit Enterprise and Self-sustainability Team

The NGO-Business Hybrid: Is the Private Sector the Answer?

By Lee Davis

Co-Director, NESsT

1997Johns Hopkins Universitv Paul H. Niue School of Advanced International Studies Program on Social Change and Development Washington, DC 20036 @

All

rights resmted

Foreward view of the fact that many nations have received large amounts of development aid have failed to realizethe hopes and expectations which that assistance carried with it, it is not surpris-

Jn

I

ing that foreign aid agencies have had their budgets cut throughout the 1990s. So have government prograrns

within our own

and other societies. This prompts us to find new, alternative strategies,

structures and tools for real development.

In early tgg6TheProgram on Socid Change and Development, of theJoh:rs Hopkins Universiry's School of Advanced International Srudigs (SAIS), set out to ad&ess these basic questions about the landscape once foreign aid or central government assistance has declined - questions such as: \Who or what will replace external assistance? To what extent will new "Southerners" become more active players instead of passive recipients? Can they develop profit-making enterprises to generate needed funds?

\fhat

are the prospects for the expansion of domestic philan-

thropy in other countries? How and how much can the for-profit sector increase its role? And fitrlly, with Northern agencies having less control over development programs, will the indigenous cultures of local peoples find greater expression?

To address these basic questions andprovide the starting points for discussion, our planning commirtee spent one year canvassing hundre& of practitioners and other experts in virnrally every

"industry.'In viewing their reports, we held what they proposed as 'new'to a high standard: for example, we did not deem the interest in "civil society" to be new;

sector of the development

nor integrated pest management; nor the Public Health field's concern over the changing patterns of disease; nor even urban water and sanitation engineers' discovery that participatory approaches

work best. At the same time, we came to recognize that there is linle or no thinking in the field that can be characrerized as entirely new-rather, certain ideas are now receiving a new respect or emphasis. Also, of course, they may be new to some parts of the developing world while well recognizedin others.

After inviting proposals for papers, we ultimately commissioned three that were presentd to an international workshop in the spring of.1997 and that comprise this publication series. They are: "The Unit of Development is the Organiz-ation,Not the Projea-Strategies and Strucnrres for 'Sfork Sustaining the of Southern NGOs" by Richard Holloway; "The NGO-Business Hybrid: Is the Private Sector the Answer?' by Lee Davis; and, "Sening the Development Agenda: Develop mentvs. Democraryl" byAnnHudock. Thesepapen are dl availableupon request.

Frondo{

Christine Jsper, Makan& Kioko, Jose Ravano Phil Roberuon for conceptuali'ing the workshop, developing its potentials, bringing together Special thanks go to Margaret

and

:

participants for the workshop, and for editing and producing this volume.

Grace E.

Goodell

Professor and

Director

Program on Social Change andDevelopment

i

Acknowledgments would like to thank Dr. Grace Goodell of the Program on Social Change and Development atJohns Hopkins SAIS for providing the oppornrniry to pursue this research. he author

Thanks dso to Margaret Frondorf, Jose Ravano, Phil Robenson and all the members of the New Directions team for their valuable comments on previous &afts and for help in the preliminary research. Nicole Etchart and Katalin Zsamboki, codirectors of NESsT provided invaluable

sup

port and assistance in dweloping the internationd case material. Thanks also goes to colleagues and frien& at the Regiond Environmental Center in Szentendre for their assistance and supporr during the research. Panicular thanks and gratitude go to all of the

contributed countless hours in relaying their experiences.

llr

NGO

leaders around the

world q/ho

AbouttheAuthor Davis is currently codirector of NESsT (Nonprofit Entelprise and Self-sustainabiliry ifeam), an NGO he co-founded to strengthen the capaciry of grassroots communiry orgaruzaee

tions around the world to develop self-financing strategies. Since L993,Mr.Davis has worked on issues of. organizational development, training, and public panicipation with NGOs in Central and

with both theJohns Hopkins Third Sector Projea and the Regional Environmental Center in Budapest. He formerly worked in tle New York headquarters of the international relief and development agency CARE, and in 1988-89 was aFellow of the ThomasJ. '!tratson Foundation in Switzerland andJapan. He holds an M.A. in Poliry Studies from theJohns Hopki',5 University and a B.A, rrlagna c14rn kudc,in snrdio art from Connecticut College.

Eastern Europe

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Table of Contents

Abstract 1.

......................

........... l.l Problem Statement l.2Methodology 1.3 Caveats

.................. 2

Self-Financing... .................

2.lDefiningNGO Financial Sustainabiliry 2.2 Sources of NGO Financing

.................10

Introduction

...... .......

..........

CurrentTrendsinNGOSelf-Financing...........

2.4

Defining aModel of NGO

SustainableFinancing

Practice 3.1 Motivations for Start-up 3.2Capiral,for Self-Financing Start-up 3.3 Types of Self-FinancingActivities...........

3.4 Levels of Self-Financing..........

3.5 Internal Obstacles to NGO Self-Financing ...........

3.6 External Obstacles to NGO Self-Financing ...........

NGO Self-Financirrgit

.........

11

................12 ............

15

.................

19

................21 ..................23 ........26 ......32 ...........33 ..........41

....................55

Biblography Appendix: International NGO Case Srudies

8

........... 10

2.3

4. Conclusions.

2

............... 5

2. Foundations of

3.

1

.................60

..............

..... A-1

Abbreviations CEE

Central and Eastern Europe

Clubes 4-S

Fundacion Para laJuvenrud y la Mujer Rural Fuaac 4s (Costa Rica)

CRS

Catholic Relief Services (USA)

GY

You (Itrdi") Development through Self-Reliance (JSA)

DSR

Child Relief

Es

FLO FUNREDES

Fundacion Redes y Desarrollo (Dominican Republic)

cc\ro

Greater Grace

HL]F

ICNL ICRC

IRED NELC MFD

Foundation-Like Organization

Vorld Otrtreach (USA)

HungarianForint International Center for Not-for-Profit Law GJSA) International Commiaee of the Red Cross (Switzerland) Insrirute de Reseaux et Development (Switzerland)

National Environmental Law Center (USA)

MFDI

Media for Development @imbabwe) Media for Development International (JSA)

NC.O

Non-governmental Organization

NIS

Newly Independent

PIRG

Public Interest Research Group

OELF

O rgantzacao de Ajuda Fraterna (Btazil)

SIQL

Sociery for the Improvement of the Qualiry of Life (Croatia)

SNF{F SOS

Societatea Nationala Handicapatilor Fizic fr.omania) Share Our Strength (USA)

UBIT

Unrelated Business Income Tax

IIN US PIRG

UnitedNations United States Agenry for International Development United States Public Interest Research Group ffJSA)

VAT

ValueAddedTa>r

USAID

vl

States

Abstract ftt. concept of "organizational sustainabiliry" for grassroots communi ty organtzations in I developing countries has generated mounting interest in recent years in light of both diminishing development resources and increased expectations for Southern NGOs. Generating a sufficient source of income for NGO prograrnmatic activities is one of the oldest and greatesr conundrums

for NGO leaders around the world. NGOs have become increasingly dependent on project-based donor funds which limit their abfities to plan strategicdly and independently.

The intention of this snrdy is to critically exar,nine the idea of NGO *self-financing" as one comPonent of a strate gy for NGO financial sustainabiliry. The study closely examines an inrernational group of over 15 NGOs attempting to generate their own sources of income through commercial ventures, and sales of services or products. The intention is to identify some of the key issues and obstacles that exist in

implementing self-financing approaches to supplement traditional public and private project-based donor fu"di"g.

l.Introduction 1.1

ProblemStatement the last decade increased amention amongdomestic andinternational development

fiver

\-/practitioners,

researchers, donors, and policymakers from all points of the political and

ideological spectrum has been devotedto the importance of avibrant "civil sociery.'The acive engagement of "civil socieryorganizations" is now more often recognized as aprecondition for effective grassroots development, poverry alleviation, and social service delivery. Non-governmental

organizations (IlIGOs) 1 are increasingly present in nearJy all stages of governance and public service, not merely as observers or passive recipients of state mandates or directives, but as planners and implementors of domestic andinternational policies and programs alike. On the international level, the growing presence of the

"third sector'as averitable economic, political,

and moral force

significant impact on nearly all issues and areas of global concern humanitarian relief, environmental and development efforts, human rights monitoring, and all forms of health and has had a

social welfare.

These trends are having an increased impact on

NGOs which, although their legitimary is not universally recognized, areincreasingly seen as effective alternatives to direct government service delivery. NGOs are seen as useful channels for reaching the "grassroors' and poor populations with needed social and economic resources and services, and as conduits for delivering these services efficiently and cost-effectively.

NGOs

are perceived and promoted as more flexible and innovative than large government bureaucracies. \flhether or not these claims are true, howwer, the increased artention translates into increased expectations for NGOs. Although a welcome

oppornrniry for many, this presents a tremendous challenge for both NGOs and their advocates ro prove the legitimacy of their organrzations and to illustrate their capaciry to effectively manage and sustain their activities.

The challenge of building truly sustainable NGOs is a multidimensional issue entailing both internal factors of developing and strenghening organizational capaciry, as well as external facton of establishing

a

more secure and supportive resource and regulatory environment for them.But

while enstrtnginsitutiaral srsta;lrrabiliry requires far more than simply ensurin gfinatrciat susi:rrabiliry, the question of how to generate a stable source of financing is indeed one of the most universally recurrent and confounding obstacles for NGO professionals, fundraisers, and poliry analysts around the globe. As the public sector role in society recedes and NGOs increase in both number and size, professionalize, and expand and diversify their activities, there is an increasingly urgent

need to address the very basic question of how to

financidly susrain and supporr these initiatives.

The current paradigm of NGO financing has created a "socid Darwinist'environment whereby NGOs are simply "sharing in the poveny' of an already-limited but decreasing and restricred pie of donor resources. NGO initiatives are 'nrlnerable to three limitations surroundi.,g traditional foreign assistance and project-based donor fulding: Jimind avaikbiJtq ofraourca:NGOs are vulnerable to the limited availabfiry of existing, traditional sources of public and private project-based funding. Depending on the political and economic realities of the day, donors mayshift priorities or simply eliminate funding altogether.

Jimiud duration ofraourca; Time restrictions are also placed on NGO grants due to donor-defined project rycles. The short-term nature of most funding contributes to

NGOs' inabiliryto plan long-term strategies and sustain donor-funded projects beyond a terminal project rycle.

Jirnitingranictions onr6ourc6: Both international and indigenous NGOs face ob stacles in weaning themselves from dependence on donor, project-based fuodi"g and run the risk of being'donor driven'versus 'mission driven'

org:nizatisor. limitedin determiningtheir oq/n progranrmaric priorities and long-term strategies due to restrictions or priorities attached to donor funds. Donors reserve the right to influence projects they fund and often limit funds to projecr-related exPenses' leaving linle oppornrniry for NGOs to find supporr for on-going proNGOs

are

grarns or oPerational expenses.

Effons assisting NGOs to achieve sustainable financing have rypically relied on educating NGOs to diversify their donor resources and decrease dependency on any single donor. Many

NGOs are still forced to "go where the money is," however, regardless of whether the project priorities identified by a perspective funder suit the NGO's long-term strategic plans. This approach has led

NGOs into

an endless rycle of resource dependency whereby they remain p urely consuntas

of resources rather than gencrdtors of additional resources.

Mounting frustration with t"he current funding status quo and the desire to help NGOs function more "autonomously" or independently has increased anention among development Practitioners, researchers, and poliry makers on the concept of NGO 'seU-fir,ancing." Self-financing activities involve some form of direct for-profit, income'generating activity conducred by the

NGO to create new rsources for programmatic activities or operational expenses. Discussions of NGO self-financing cost-recoveryhave beenpopularizd,recentlywithin ttre micro<redit and microenterprise sectors in efforts to dwelop financially self-sustait i.g financial intermediaries for the poor.2 The tggT lvlicrocredit Summit in Vashington focused significant atrention on analyses of the financial sustainabiliry models of organizations like the Grameen Bank in Bangladesh and BancoSol in Bolivia. But, as Cheryl Lassen of Lassen Associates suggests, many individuals and

institutions who have "jumped on the micro-credit bandwagon have missed the boat.o Vhile many

from the micro-credit sector and the conversion of NGOs into private sector financial institutions for extending loans and credit to the poor, the challenge now is to extrapolate these lessons into other sectors and to smaller communiry organizations.l Critics remain skeptical of both the philosophical and practical problems of a self-financing approach for NGOs. Some critics fear self-financing approaches will "contaminate' grassroors, community initiatives with market philosophies and distort organizations' charitable missions in lessons have been learned

favor of profit-making priorities. Others simply doubt the organizational capaciry of NGOs to develop sufficient human or financial resources to effectively employ self-financing approaches.

Meanwhiie, self-financing advocates argue that traditional resource generation methods merely redistribute existing donor resources rather than create streams of new "wealth." They are calling

for a compietely new breed of NGO "entrepreneurs'to stimulate the creation of a larger, susrainable pool of resources for NGO initiatives. Going beyond traditional donorgrantee relationships, they propose

new organizational hybrid

nonprofit in purpose and for-profit in approach. Bill Shore of Share Our Strength (SOS) in $Tashington, DC recently referred to this nonpr ofir/f.orprofit hybrid as a "Communiry\7'ealth Enterprise": "Now the time has come . . . to turn the tables and do it the other way around.

Instead of a business deciding what nonprofit causes to support with some of its excess profits, nonprofits need to decide what line of business they can devise to create the profits needed to suppoft their public-interest efforr. To meet the a

-

challenges of the future, nonprofits must be thoroughly reinvented ro create new

thatis,nonprofitsforprofit.. . This new rype of entrepreneurial hybrid is what I call a Community\flealth Enterprise. A Communiry\Tealth Entelprise creates wealth by selling something that people want to buy for reasons independent of their charitable intentions. But the wealth it generates is rerurned ro rhe communiry in the form of direct services or grants to communiry-based service providwealth

-

ers.'4

This approach is not an easy one to undertake, since it not only entails a significant reevaluation of traditional fundraising methods, but questions the fundamental division berween the for-

profit

nonprofit sectors. The concept of an enterprising approach to NGO financing is a rwopan problem, requiring both practical and philosophical paradigm shifu. NGOs must question their dependence on public and private giving for both its practical limitations and ir philosophical consequences. Philosophically, NGOs are usedto being dependent on the "easy money'of outright grants. They have little motivation to look elsewhere for sources of income. The self-financing and

paradigm requires

fundamentai change of anitude and penpective about resource options. Piers Campbell and Fernand Vincent of the Institute de Reseaux et Development G.ED) express rhis a

philosophical shift: "Instead of seeing themselves

as a

charitable activiry dependent on 'generous'

benefactors, INGOs] must, in [the] future, become enterprises that produce goods

qualirythat they can be 'sold' at a realistic price and hence lead rapidly to financial autonomy. 'W'e are not arguing that NGOs have to change into businesses and to be governed by the profit

and services. Such products should be of sufficiently high

motive. But we do believe very strongly that NGO executives should become qttrryenenrial md thxNGOs shoul dfuorne derxlaptent mtnyiw.a

Adopting a self-financing approach, however, involves reexamining prejudices and entrenched beliefs among NGOs as well as public and private donors themselves. Stimulating selffinancing requires a forward-thinking attirude among donors who must work to develop more longterm, strategic par:tnerships with NGOs by investing in their institutional development and offering flexible resources for building management, resource generation, andprogrammatic capacities.

Some believe that a mentality of "dependence"

withi'' traditional donordonee relations

is much

the same as that criticized regarding nationd "welfare dependenry." Current donor policies have

stunted the abilities of NGOs to apply themselves to the task of looking beyond traditional forms of funding and identifying creative alternative financing sources.

The purpose of this research is to document and examine the self-financing approaches

from a selection of NGOs around the world, to evaluate the effects of their work, and to examine the feasibiliry of replicating such approaches in otler communiry organizations. First, the snrdy examines the extent to which NGOs around tle world generally, and develophent NGOs particularly, are utilizing self-financing approaches to generate income for their programmatic activities.

Second, the studypresents a definition of

NGO

sustainable financing of which self-financing is

one component. The study then explores avariety of self-financing models and identifies the key obstacles in implementingvarious approaches to resource generation. Cases

from international rypes, and economic conditions are examined to assess the

NGOs of varying locations, sizes, internal and external obstacles and effects of self-financing activities. .1.2

Methodology

tTt* trudy explores the self-financing activities of sixteen NGOs in thirteen countries I around the world (see Map 1). Appendix A contrins detailed descriptions of each NGO's self-

financing activities, compiled by the author from organizational information and personal interviews with NGO sraffand others familiar with their work. The

cases

identified for this research

(presented in detail in Appendix 1: International Case Studies and zummarized in Table 3.1) were

chosen to represent avariery of different rFpes of organizations:

distrihatoz' NC'O of the world. geogrdphic

cases are

drawn from thirteen colrntries in seven regions

oarietyofeconombconditions: NGO cises are fromtle "developed" North, "develop

ing' South, and emerging democracies of Europe and Asia, ail with varying per capita GNP incomes. Cases also come from avariery of highly-populated countries and less-populated island nations.

qpically organizations formed within the last 20 years, from older internation aJ, organtzations to NGOs formed within the last 2-

-oariery of ages:

but range

NGO

cases are

5 years.

-variety of sizes: NGO cases vary in size from no fuIl-time staff to one of the largest

international humanitarian NGOs. Cases also vary in budgetary ternr, from multibillion dollar operations to smdl local NGOs with annual operating budgets of less than $25,000.

-variety of sectors: NGO

cases

were seleced from avarieryof sectors, including

communications, community andrual dwelopment, culture, employment and job

training, environment, humanitarian assistance, media, and othersocial welfare organizations working with mental and physically handicapped, rural women and

yout!, the homeless, and tle elderly.

-variety of seffinancing modzk: the self-financing approaches employed by the

NGOs

vary in both nature (i.e. related or unrelated toNGO mission) and form [.e. through program activities, a separate subsidiary, or a joint venture with businesses

orNGOs).

The original data and case studies for this research were collected by the author in Budapest during 1995-g6through personal and telephone interviews and electronic communications. Appendix B contains the International Case Study Questionnaire used to guide discussions on issues, in6ludingthe background, management, staft-up, regulation, andeffects of self-financing activities.

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1.3 Caveats

FFn.

purpose of this research is to examine the self-financing approach to NGO resource

I

g"rr.r"tion and to identify the primary internal and external obstacles to such an approach.

Vhile the study raises a number of critical challenges facing NGOs, there are limitations: -The international cases are of preselected NGOs already undertaking some form

notnec*s.ribrqresenaiue. If statistical rates of small business failures are any indication, for each successful case presented herein there are probably hundre& of failed NGO amempts at self-financing. It is also not of self-financingactivityandare

possible to make conclusions beyond limitedspeculation abouttrends in any glven

country or region as to the scale of self-financing activity.

-The objective of this study is to extract key lessons from the NGO self-financing models, not to analuatc tlte motitw or mission ofearhcase. The self-financing approach can be used equally as well for questionable, even offensive, motives - whether to support a particular fanatic or extremist agenda or perhaps purely for personal monetarygain.

-A great deal of anention has been dedicated in other research to the financial sustainabiliry of micro-finance/micro<redit NGOs. This snrdy intenrionalJy discussion of mtnoftrwnce NGOs , since ttre challenges facing

awi*

NGOs in non-financial

sectors, particularly in social welfare and grassroots communiry development, are

often overlooked.

-The purpose of this that

snr

dy is nat

to

promate tln cornmscializatinz ofNGas or to

sug6t

xlf-firwncingis apanacea for all financially troubled organizations. Self-financing

models are not appropriate for all NGOs, nor can they be uniformly replicated.

-NGO self-financing is meant to serve as an add.iti.onal stpplnnent to - not in lieu of traditional sources of funding. Self-financing does not reduce or eliminate the responsi-

biliry and role of donors in supporting NC;O initiatives but

does

require a change in

theirpolicies.

-Finatlnthesnrdyisintenddtofwrsontheelf-fnancinganivitisoflacal"s?Tall"rnttprofx organizations serving the needs of communities in the developing world and emerging

world'are included for illustrative purposes more tha:r fortheir direct applicabiliryto local organizations. Each case provides insight into aunique model of self-financingthrough enterprise activities. democracies. The cases from the "developed

Notes rThe rerm "non-governmental organization" (NGO) captures only afraction of the wide diversiry of iadividuals and

formal and informal institutions which fdl within the category of "civil sociery organi'alions.o

N@

is also

often used

interchangeably with "private volunt ary organi?:rrion" (PVO) or nonprofit organizarion. Technically the term NGO may include organizations and instirutions within the private, for-profit sector

as

wdl

as

private, voluntary, nonprofit

organizations.

Vith

the hope of minimizing unnecessary confusion, for the purposes of this paper the terms

and nonprofit organization

will

be used

NGO

interchangeably to refer to both formal and informal associatioos of citizens

functioning outside of goverrunenr and business. rSee'

for example, Elaine Edgcomb, Candace Nelson andJulie Redfern, e&. Moving Forward: Emerging Srategies for

Sustainabiliry and Expansion. (I.,Iew York The SEEP Nerwork, 1996). rValuable work regardingissues of NGO financing local philanthropy, and foundationJike organizations (FLOr)

supporting rural and communiry development NGOs has originated in recent years from organizations like the Synergos Institute and the South-Nonh Dwelopment Initiative in New York,

Institute

de Reseaux et

was staned by

CMCUS in Vashington, DC,

and

Development (IRED) in Geneva. In 1995, the Sustainable Development Service Projecr

USAID in a cooperative agreement with the Inaitute for Development

Research

(SDS)

@R), Freedom from

Hunger, and Lassen Associates to help NGOs and field staff identify innovative approaches to creating more financially sustainable development services, especially in the areas of health, nutrition, and population. aShore,

Bill. Revolution of the Heart: A New Strateg for Creating !(edth and Meaningful Change. ${ew York:

Riverhead Books, 1995) 83. sVincent, Fernand and

Piers Campbell, eds. Toward Greater Financid Autonomy: A Manual on Financilg Stratâ&#x201A;Źies

and Techniques for Development NGOs and Communiqe Organizations (Genora; IRED, September 1989).

2. Foundations of Self-Financittg his chapter first defines the concept of

NGO sustainabiliry

and financial sustainabilily more

specifically. Second, rypical sources and trends in dwelopment NGO financing are examined, as well as the degree to which NGOs in different regions of the world are utilizing self-financing approaches. Finally, the chapter introduces an alternative model for sustainable NGO financing, and the integral role self-financing plays in

2.1

promotin gorgartizational selfdetermination.

Defining NGO Financial Sustainability

tTtf. concepr of "sustainabiliry" is a vague and elusive one. Sustainabiliry has many definitions, I itr.l.tditrg environmental, economic, social, and politicd sustainabiliry. \Tithin the international

development field, sustainabiliry often refers to the degree to which benefits flowing from

a

devel-

opmenr program or project will be able to be maintained after exrernal interventions or donor

funding has been withdrawn. Sustainabiliry in these terms is dependent on the degree of selfreliance developed in target communities and on the social and political commitment in the wider sociery to support the continuance of self-reliant communities.l

NGO "interventions' or

"projects' are often seen as temporary measures in which grassroots people themselves become sufficiently empowered and self-reliant to be able to make progress without outside help, or in which self-supporcing institutions or the government are able and willing to assume functions that were introduced or modeled by the NGO. The current donor enthusiasm for project-based devel-

tlan on sustainin gthe organi.zations themselves. Institutional or orgarizational development 1s6ain5 a low prioriry in practice. Few donor resources are given to develop the capaciry of Southern NGOs to initiate and manage large-scale development prograrns in the long-term. Flowever, in the case of this research, "sllsgainxffigy' opmenr puts the focus on th e afiiaitias of NGOs rather

refento otganizztiaral%sai?Tabilitygenerallyandf.rancialvsairubilitymorespecifically.Inboth insrances, this refers ro rhe sustainabiliry of an NGO itself and its abiliry to continue to pursue development goals with or without reduced dependence on outside support.

abiliry consists of a number of different elements, including the internal capaciry and preparedness of an organization to meet the oppornrnities or threats the organization faces in the surrounding external environment. The issue of financial sustainabiliry

NGO organizational

sustai'''

with in isolation since it is interdependent with the organizational capaciry in other terr$, including the NGO's human resource capability and skills. How an NGO can generate and maintain an adequate source of income for its activities is one of the central determinants of its cannot be dealt

10

abiJiry to act effectively, independently, and on an on-going basis. \Tithout the human resource skills

howwer, a financially rich NGO can remain re' source-poor. Access to greater financial resources is not the precondition of, but a component of, NGO sustainabiliry. Likewise, self-financing is not a precondition for, but a component of, NGO financial sustainabiliry. NGOs need to diversify not only their donor fun& but also their overall and capabilities and an enabling environment,

revenue sources.

2.2 Sources of

f\ t-,/

NGO Financing

iagram 2.1 illusrates that revenues of development NGOs (both Nonh and South) come

fro^three rypes of sources: externd resources,local

resources and internally-generated

resources.

Diagram2.l Sources of NGO financing

f-fr

c/

SOvenrtrrâ&#x201A;Źnt

I-ocal

l,ocal

cqpratc

tratrt-

dft" lucrnaional

rnrking

-I-ZIIILF ir l,/

Interaarionrl

q*trnking louDdruoDs

Source: NESsT There are three potential donor sources for NGOs:theprivatc sctor (ncluding grants and donations from private corporations and foundations); the gmnalpu&irr fncluding philanthropic gifts/donations from private individuals in the form of both funds from direct requests, meilisg5, and advertising, and indirecr funds

from national loneries, etc.); and gaurnrtent/public edor fncluding

11

grants, contracts, and payments from locd or national governments). For Southern NGOs, these

exttnal [.e. international) public and private donors or from local (i.e. domestic) public and private donors. Finaliy, NGOs may utilize some form o{ internal

three sources may originate from either

(i.e. self-financing or income-generating) acrivities to generate their own resources, including sales

of services or products, or earnings on NGO-owned or invested assets.

2.3 Current Trends in

NGO Self-Financing

fh.t. is a relative dearth of comprehensive quantitative data available on NGO income around I the world to indicate the degree to which NGOs utilize internal, self-financing approaches to resource.generation. One international study, however, lends some insight into the current global

A recent comparative research projea at theJohns Hopkins Universiry Institute for Poliry Srudies colleced data from rwelve countries (seven 'developed" and five 'developing") *d includes information on the distribution of NGO income within the three broad classes of nonprofit revenue.2 lJnfornrnately only comprehensive data for the seven develtrends in nonprofit financing.

oped nations were collected:

Table2.2 Sources of NGO Revenue

(7-CountryAverage)

PrivateGiving

Toal i0

Public Sector

43

Private Fees and Payments

47

h0@

% of

Source: Anheier and Salamon (199a).

To the surprise of those who assume the largest share of NGO financing generaily comes from government or private sector charitable giving, the study suggests that the largest single source of revenue is from private fees and payments.

NGO

fees and payments

from investments accounred

for nearly half of NGO income among seven of the welve countries. \fhen examined individually, five of the countries included in the snrdy ftIungary, Itdy, Japan, the UK and the US) display patterns of NGO finance in accord with the over-all country average. For each of these counrries, the major source of NGO finance is private fees and payments. Earned income accounts for 57 percent, 53 percent, 50 percent, 48 percent and 51 percent of NGO finance in these countries, respectively.l

In six of the ten sectoral fields examined, private fees and sdes income is the dominant source of NGO income. Fees and sales account for 50 percent or more of NGO revenues for organiza-

12

tions in the business and professional, cultural and recreational, education and research, housing and development, and environmentd fields. Thus, for example,

NGO

business and professional

from their members, culturd and recreationd organizations charge fees for their services, and colleges and universities collect tuition payments from srudents and receive research grants/contracts. The authors conclude that the heavy reliance on private fees and payments reflects the market context within which NGOs operate in most of the developed countries associations receive dues

considered in the srudy.a

In the case of internationally-active Northern NGOs, howwer, income from fees and paywell below the international average in other ments accounts for only 30 percent of total income

-

sector fields, and second to last

-

followed only by the health sector.

Table2.3

Revenue Sources of Internationally Active NGOs5

("hby country) Source of Reoenue

Country

hiwrcGfuing

France

6

Germany Hungary

Public

kctor

Pri'uate Fees

22

12

T7

v

6

73

0

27

It ly

5

81

L4

J"P*

t3

24

63

UnitedKingdom United States

39

38

23

54

28

18

Total

35

35

30

Source: Anheier and Salamon (199a).

Others estimate

a

much lovrer level of internal, self-financing activiry among Northern interna-

tional dwelopment NGOs. Alan Fowler of Sussex Universiry esdmates that some 55 percent of

Northern NGO fu"di"g comes from private grning, 42perce*from government sources, and only about three percent from NGO "market interaction."6 Data from 27 NGOs registered with the US Agenry for International Development (USAID) to provide internationd relief and develop ment assistance indicate that over half (54 percent) of yearly revenues came fromprivate giving, 28 percent from government sources, and 18 percent from earnings from sdes.7

Closer examination of the sources of revenues of several large Nonhern foreign aid NGOs

only avery small percentage of their annual revenues come from self-financing activities. The &ta in Table 2.4 illustrate that many of the largest and more prominent international indicates that

13

relief and development organizations receive the largest portion of their income from government sources alone.

Table2.4 Sources of Revenue (Select

International Relief and Development NGOs) bth6

abc Organization

or Bil4teral

Domestic Muhi-

Cntt

Pripate

Giaing

Sonrct hwco CARE(iJS)

cRs

(rJS)

75

Feafor Swice,

Membusbip Fees

kla,ac

11

t2

74

24

Odam(tlK) Pact (JS)

16 87 SavetieChildren(uS) a + b lTorldkaming (uS) 47 l7orldVision OS) 20

ef

d

44 <L0 32 4.7

18 10

=

64

0.7

18

1.3

0.8 47

79

Yw Other (Interest

Invest)

3.0 _ -

2.0

1996

2.0

1995

0.7

1995-96

t.2

1993

1.4

1996

0.4

1996

0.9

1995

t:incladsallgowmrnentxtpprtitrcludingagrioiarralcomnditisandwznfoigbtcasbgraaadcontrd& Source: Estimates compiled from most recent public balance sheets rePorts.

as

reporrd in agenry

annual

Four of the seven organizations, CARE, Catholic Relief Services (CRS), Pacr, and Save the Children, obtain the majoriry of their income from government sources. In rwo instances, Oxfam-

IIK and'Sflorld Vision,

Irorld Vision, a church-based NGO is able to rely more heavily on contributions from congregarions. Save tie Children's child the largest income source was private g"itrg.

sponsorship program also helps it to boost its private grving.

These selecred data indicate that while some Northern developmerr NGOs are involved in income'generating activities, it is on a small scale and constirutes only averys..all percentage of overall revenues' panicularly in comparison with the over-all trends in fees and paymenm among

NGOs in other sector fields. Only in the instance of I7orld Learning were fees for service and product sales the largest source. \forld Learning attracts nearly 50 percent ofits revenues from

tuition

at its

higher education subsidiary

the School for International Tr:in ing - and from international exchange program fees. A number of Northern NGOs have artempted to engage in some other form of enterprise activiry. Oxfam-tlK generates nearly 20 percenr of its income

-

through self-financing activities, panicularly through its chariry shops. CARE and Save the Children,

14

for example, both have attempted catalog sales of crafts produced in developing countries with mixed success. Pact is now involved in a venture to provide health insurance to nonprofit and for-

profit organizations. Pact Publications is also attempting to generate surplus income through development-related publication sales. These are generally relatively smdl-scale ventures, however, and Northern development NGOs continue to remain largely dependent on public sector funds.

Heay dependence on large, multi-million dollar government contracts, grants, and food aid has led to criticisms that some are simply donordriven extensions of the state foreign assistance apparatus and are heavily occupied

with

issues of self-preservation.

Few data are available regarding the revenue sources of Southern NGOs, dthough clearly the dependency trends are largely similar.

\flhat

data were available from developing countries in the

Johns Hopkins research (i.e., Brazil, Et)pt, Ghana, India and Thailan{ indicate a heavy dependence on foreign aid as an overall source of revenues.8 A report published by the \florld Council

of

NGO furdi"g situation in Zimbabwe confums this trend: " The conclusion can be drawn that program organizations are predominantly dependent on foreign funds for their development activities. In other wor&, all these organizations would collapse or would have to stop most of their develop mental activities within a period of about ayear if foreign aid q/ould stop. This conclusion is valid for both church-related program organizations and for non-

Churches analyzing the

church-related organizations.

A Pact report suggested

a

a

similar trend in Bangladesh, and the impact reliance on foreign aid

funds has had on some Bangladeshi NGOs:

"The largest and most effective of the Bangladeshi NGOs have been heavily sup ported by foreign funds and this has been both their blessing and their curse.

-

Their blessing - because such resources have enabled NGOs to grow and increase their impact on the lives of the poor and oppressed in Bangladesh - to such an extent that they have attracted the anention of the world; their curse - because their use of such

foreign funds has suggested to many Bangladeshis that the NGOs are

not a home-grovrn product, are not imbued with Bangladeshi values, and are not therefore in Bangladesh's best interests.olo Similar to critiques of some large Nonhern NGOs,

mml Southern NGOs have been criticized

for their dependence on external donor funds. Many locally-based organizations have grown

"artificially," heavily subsidized by external resources and growing at a pace and scale hyond the capaciry of the local philanthropies and economies to suppon. The "culrure of dependency' on foreign aid has uprooted them, financially and culturally, from their community. This disconnect

NGOs

bythe emergence of an entire body of what have come to be referred to as "DONGOs" (donor-organized NGOs) berween Southern

and iocal communities has been accelerated

NGOs founded expressly to capnrre Northern funds. Increasing resource self-reliance therefore

15

only a question of financial and organizationaJ.independence, but also a question of politicd and cultural selfdetermination. becomes not

2.4Defining a Model of NGO Sustainable Financing rninimize

an Q ustainable NGO financing relies on a diverse base of funding sources to rJ organization's dependenry on any one source and its nrlnerabiliryto both shifu in fund avail-

abiiiry and donor preferences. A sustainable NGO financing

st rategy

consists of diversifying

public and private resources, and external, Iocd, and internal sources. The Institute de Reseaux et Develop ment S.ED) in Geneva developed a model of financial sustainabiliry for Southern NGOs that

sources of income along both resource dimensions introduced in Diagram 2.L

-

identifiesthe bdance between internd (locd anddomestic) andexternal (foreign) sources of funding.lr

Diagram2'5 Models of NGO Financing Model B:

ModclA:

Susuinab Ic N G O Financing Mo fuI

TraditiorulNGOFinawrgMdd.

Donor-Funded

Flexible Funds from Externd

hojects

Donors

Smdl

Dooor-Funded Projccts

30 20

l0

lm

0

Thnc (Yeas)

Sâ&#x201A;Źlf.Finu.i.g

Sclf.Fmno'rg Incorne

lncorne

Sourcq Adapted from IRED (1989).

In Model A, self-financing income is minimal and staguant over time while donor project-based

funding is obtained in increasing, but terminal "boom and bust" rycles. In Model B, NGOs maintain a diverse self-financing funding base, such as membership suppott, product sales and service

16

or returns on investments, and a growing capital resen/e. Donor-funded project cycles continue - but as a much smaller percentage of overall NGO resources - thus posing a minimal risk to organiz-ational sustainabiiiry. Finally, it is important to note that externd support is not ehmi' fees, interest

nated in the sustainable financing model. It would be both unrealistic and ill-guided to assume that all NGOs

will or should

become completely self-financed. Instead, Model B promotes

a

modei

whereby external resources become more balanced and flexible. Large donor project-based resources are exchanged for rnore flexible funds in the form of longer-term, joint investments in the

NGO's institutional development and srategic planning.

It is important to point out that a sustainable approach to NGO financing is an approach designed to avoid dependenry on arry single source of revenue, whether external or internal. Thus "NGO sustainable financing'is not (necessarily) synonymous with "NGO self-financing.'In other words, Model B above is not advocating a purely incomegenerating approach based on an NGO's interaction with the market as the formula for sustainabiliuy. Nor does "NGO sustainable financing" necessarilyequate

with "NGO profitabiliry,'since the objective of NGO self-financing

can

simply

be cost-recovery, rather than generating surplus revenues. Though surplus revenues may be an

added benefit in this case, they are only a means to a greater end

-

to sustain and potentialiy

extend the impact of the organization's activities.

NGOs it is impossible to prescribe any formula for the percentages that need to be derived from various sources to constitute a "financially sustainable NGO.'Achieving bdance between externally and interndly generated resources is necessary to allow the NGO to meet its operating and administrative expenses while at the same Since circumstances and realities differ dramatically among

time providing it the liberry to determine for itself the programmatic priorities and projects

it

important, irrespective of donor preference. A standard argument is that an NGO should raise sufficient funds from internal sources to cover its basic operating costs, but approach exrernal funding agencies for its program costs.

It would be unredistic to aszume that either Northern or Southern NGOs, or donors, could change their habits overnight to allow all organizations to operate as in Model B above. The realiry is that both by definition and character NGOs face a number of limitations which make the generation of resources difficult. The goal of sustainable NGO financing as presented in Model B above is aparticularly difficult one to achieve since it advocates a significant constitutional shift.

deems

Vhile a self-financing it also represents

-

approach may represent an integral component of organizational autonomy,

both theoretically and realisticdly

-

a

tremendous challenge for both Nonh-

ern and Southern NGOs. As the following chapter illustrates, howwer, it is not an impossibiliry.

Notes

rlovell, Catherine H., Breaking the C)'de of Poverty: The BRAC Strateg

17

(West

Hanford Kumarian

Press, 1992) 185.

2Anheier, HelmutK. andLesterM. Sdamon. TheEmergqtsector: An Overvieq/. @altimoreJohnsHopki"s[Jfiv.

Insritute for Policy Studies, 1994). The twelve countries zurveyed indude Brazil, Eg;'p,, France, Germany, Ghana" Hungary, India, Italy, Japan, Thailan4 the United Kingdom, and tle United States. rAnheier,51. aAnheier59.

5The NGOs included in the category of "international activities" induded NGOs involved in the following activities:

exchange,/friendship/culturd programs, development assistance, international disaster and rdief, international human rights and peace, support and serwice, auxiliaries, councils, standard-sening and governance.

6Fowler, Alan F. "strengrhening the Role of Voluntary Development Organizations: Policy Issues Facing Officiat Aid Agencies." Paper prepared for the Internarional Conference on "Strengthening Financing for the Volunmry Sector in

Development: The Role of Official Development Assistance." (New York The Synergos Instirute, August TSdamon, LesrerM., America's

ln5)

7.

Nonprofit Secton A Primer (New York Foundation Center,1992).

sAnheier.

eVincent, Fernand and Piers Campbell. Toward Greater Financial,Autonomy: A Manual on Financing Stratâ&#x201A;Źies and Techniques for Development NGOs and Communiry Organizations. (Genwa IRED , 7989) 33.

l9Holloway, Richard. Supponing Citizens Initiatives: Bangladesh's NGOs and SocierF. (l.Iew York Pacr Publicarions, 1ee6) 1.

I

rVincent and Campbell.

18

3.

NGO Self-Financing in Practice

F

fh.r. are a grear number of. intqnalln*itutiond andatn'na/ environmental obsracles that make I th. process of NGO self-financing a risky and challenging method for generating supplemen-

tal resources. This chapter examines the vrork of several NGOs around the world, so as to extract key lessons from their experiences regarding the start-up, regulation, management, and impact

of

self-financing activities. The chapter addresses the following key questions regarding the implemen-

tation of an NGO self-financing approach:l

-\fhy did the NGOs decide to utilize a self-financing

approach to revenue

generation?

-\fhat issues/resources are involved in starting up NGO self-financing activities?

-Vhat rypes of NGO self-financing approaches are being used?

-lUfhat level of self-financing are NGOs hoping to reach?

-lVhat key obstacles exist to NGO self-financing?

As Table 3.1 indicates, the cases in this research represent the self-financing experiences of various rypes and sizes of NGOs from around the world.2 On average, NGOs were about fifteen

from 4Gyear-old organizations in Brazil to one- or rwo-yearâ&#x201A;Źld organizations in Azerbaijan and Hungary. On average, the orgenizations maintained staffs of approximately 40 fnil-time employees (ranging fromz-eroto over 200). Annual operating budgets ranged from

years old, but ranged

$21,000 to $3.5

million.

19

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3. 1

Motivations for Start-up

fh.r. are three rypic"l reasons the NGOs included in the study decided to develop a selfI fioancing approach to resource generation: 1.

hite

n mnain or

bttu

tiurc brdrytdmt

NGOs expressed a desire to reduce or eliminate completely their dependence on o<ternal resources @oth public and private) in order to maintain control over the direction and priorities of their organizations. Some also believed the project-based donor approach forced them to work less efficiendy. For example, Child Relief Ec You (CRY) India receives no direct suPPort from the Indian government. CRY staff expressed the concern 1f,x1 'leking grants from the government would inwitably lead to operating with in 5gr policies" which would limit CRY's abiliry to determine ia own

Several

priorities. Similu'ly, fie Narional Society for the Phpically Handiopp.d (SNItr) in Romania initiated its seU-financi''g activiries not to completdy replace orternd funds but 'to achieve a sgnein level of economic independence' from internationd aid funds. The Mel Nathan Institute in Jarnaise v/eff so far as to refuse some fundi"g from donors who wished to provide the funds with

Likewise t[e Fundacion Para laJuvennrd y la Mujer Rurd Funac #S (Clubes +S) h Costa Rica is attempting to reach out to additional enternd (local and internationd) donors, but is comniaedto identifying only sources that dlow it se 6aistoin a 'sustei"able' approach to its programs Q.e. those that dlow it to generate anached conditions on the Institute's other incomegenerating programs.

income in addition ro meeting other prograrnmatic objectiva).

Pre&rcrmined priorities, bureaucrary, aud other inefficiencies associated with donor funds encouraged the founders of Development through Self-Reliance (DSR) to begin their own selffinancing activities. DSR's foun&rs' complete disenchantment with the traditiond doaordonee reladonship was reflected in this cosunent from its vice president: ...

donors weren't able to support our project, otler than for short periods.

Fu-

rhermore, the donor suppon was pulling us towards establishment of a center where the process of what we were doing was more imponant than the oulput

aaivities and accomplishments. !7e realizecltlat we could get more accomplished with a lot less cost, if the burden of non-output<rhicd regulations and paperwork and activities was lightened . . . Finally, we

reli'ed that it was easier to fund our own

activities."

2 Lack of acrc to r& t tce,, ur drcteasing lewl of aistinsf"n&.

Another primary reeson for many NGOs to adopt a self-financing approach was the simple economics of need. The founders of the Bolt Gallery in Hungary, for example, found that self-financing through a convenience shop was their oniy option for resource generation. Traditional state :rylenq funders of ans and culture

would only fund a ponion

(e.g. publications) of

their activities.

FewotherdomesticphilanthropicsourcesexistforcrrlturalorganizatiglrsaPartfromthestate.The market for fine photography has not yet developed in Hungaryto suPPort independent photogra-

21

phers. Asklepyos experienced

a

similar problem when internationd aid orgatiz-rtions shifred their

attention from Romania to other countries and regions. As international aid agencies wittrdrew, there were not sufficient domestic philanthropic sources to maintain the NGOs'services to the Poor.

The St. Lucia National Trust (National Trust) rurned to self-financing in light of a 10-20 Percent annual cut in its funds as a part of the national government's agreement to decrease its suPPort over

a

six-year period. The Trust had few local options for identifying resources apaft from

government support and self-financing activities. The Board of Clubes 4-S in Costa Rica made a conscious decision no longer to focus attention on seeking donor funding done, but to approach its resource-generation activities in

more businessJike fashion. The decision came as a result of poor luck in attracting international donors, its fear of increased domestic government curs, and the inflexibiliuy of donor granting. The Fundacion Redes y Desarrollo (FUNREDES) in the Dominican a

Republic turned almost immediately to

a

self-financing approach with its computer technology

services after anticipated donor support failed to materialize. The International Federation of Red

Cross and Red Crescent Societies (International Federation), like many international relief and

development agencies, faces increased *donor fatigue," which forced it to seek supplemental sources of revenues through self-financing activities.

klffnarcinganiairyisanintqralprtorwintmddbn$ttofpogranntaicprinitis.

At least five of the NGO cases involve some form of jobtraining or employment<reation component. In mary of these instances, the self-financing activities are both an integral part of the organization's programmatic work and a source of income. The toymaking activities of the Gondviseles Foundation in Hungaty,for example, serves the dual pu{pose of being an incomegenerating activiry for the NGO as well as providing productive and rewarding employment for the NGO's mentally-handicapped constituents. In Romania the passage of a new labor law providing S.

incentives for private businesses which hire a minimum of T$.percent physicdly handicapped employees encouraged SNI{F to undertake self-financing activities. Similarly, the Organizacao de

ta:<

Ajuda Fraterna (OELF) in Brazil, Clubes 4S, and the Mel Nathan Institute utilized their selffinancing aaivities to further their own programmatic objectives in vocational training and employment generation. OELF was able to offer hands-on job training for poor and at-risk yourh while fulfilling lucrative tarment production contracts for the government. Clubes 4S was able to do the same for rural women and

youth through its agreements with the Ministry of Health to provide 80 Percent of the country's hospitd clothing. The Executive Direaor of the Mel Nathan Instirute sees the self-financing activities as an integral part of the Institute's'holistic'approach to communiry development: providing job training and leadership development alongside income,generating oppornrnities provided for the communiry and the organization itself.

T7hile not the initial imperus for its self-financing activities, FTINREDES stafffound that providing computer technology and Internet services to the private sector allowed them ro furrher their mission of providing such services and nerworking suppon to NGOs and universities in

22

developing countries. In the process of negotiating agreements to launch its enterprise activities

through its for-profit subsidiary,

FT

IREDES has also managed to arrange deds for funding some of its nonprofit nerworl$ with locd, for-profit telecommunications operators.

\7hile not a developingworld case, Eanh Tones in the U.S. presents an interesting model of a self-financing initiative begun to provide a "model business." The primary rationale for starting Eanh Tones was to promote the mission of its parent orgarization, the United States Public Interest Research Group (US PIRG), to promote environmentally and socially responsible business practices. Earth Tones was intended to illustrate that

a

for-profit company could provide qualiry

longd.istance telephone service in a responsible fashion. Several other

NGO

cases also

indicated a

desire to start self-financing activities for ideological reasons, although not necessarily direcdy

connected to their programs. For example, one reason SNF{F leaders began its self-financing

activities was out of principle

-

to "test the skeptics" and prove that

a

Romanian NGO could

function with all or most of its resources generated domestically. Through

ir

work, DSR also hoped to illustrate that it is possible to 'do well and do good' at the same time. Self-financing was therefore used by several organizations both as a revenue-generating activiry and as a tool for furthering their program or ideologicd objectives.

3

.2 Capital for Self-Financing Start-up

(-

anering the necessary capitd (financial, material, and human) to launch a self-financing \Jactiviry is a significant obstacle in many of the NGO cases. As summarized in Table 3.2,

NGOs

avariery of creative solutions to generate needed funds and equipment.

The rwo most conunon self-financing start-up sources are in-kind donations and personal contributions from NGO boards, staff, members, or friends. Eight of the NGOs indicated having use

received some donations of equipment or pro-bono services. In most of the instances the dona-

tions were solicited, but in the case of Asklepyos, the trucVvanrental and student laundry services evolved spontaneously following unsolicited equipment donations. In several cases, eitler directors or presidents used their own personal money for self-financing start-up. The third mosr common source of start-up funds was internally generated resources. In rwo instances (Clubes 4.S and Asklepyos), the NGOs shifted earmarked project funds to start up self-financing activities. Few used any government or small business fund loans, although the Gondviseles received panial resources from the Hungarian Labor

Ministry,

and the National Trust received a granr from the

Canadian government.

Only rwo orgnizations (the Mel Nathan Institute and the National Trust) used commercial bank loans; others receivedinformal loans from organizational or rffiliatedmembers. SNI{F borrowed

third of its needed start-up funds from its membership

National Societies of the Red Cross pooled its resources to provide risk capital to the International Federation to launch its international advertising sales/brokering through its subsidiary HelpAd Ltd. In only rwo instances did NGOs receive pan of their start-up fuu& from commercial partners. The a

23

dues pool. The

Gondviseles Foundation entered

partnership with

for-profit company which provided some inkind and capital resources. Other NGOs, inclu.li''g the Mel Nathan Institute in Jamaica indicated that donors were "often resistant to or compietely opposed to such revenue-generating ap proaches," and were unwilling to provide resources for self-financing aaivities.

The cases indicate that most self-financing start-up funds were rypically derived from individual financial contributions, persond contacts, or in-kind donations, rather than from formal public or comrnercial loan or enterprise development sources. In some instances, NGOs were nor eligible for these small business development or loan funds due to their nonprofit starus or lack of credit history with local formal, private financial institutions.s Few organizations had any internal a

surplus income to begin their self-financing activities.

24

a

Table3.2 Sources of Self-Financing Start-up Capital Co,-try NreO

Azcrbaiian

kircben

Cbis'

equipmeot

Kirchen bakeryand

OELF

garment

Clubes +S

Dorn"Rep. FTINREDES

Hrhgary Bolt Hungary Gondviseles

India

GY Jemaica \,{61 lrf:rhen

Romania

:nd

Asklepyos

wrshing machircs;

voluncer student

hbor

Lsrl serviccs; comPtEer equiprneor and

pniling St. Lucia

Nt'lTnrc

Internariond Federxion

rjs DSR,

USA

USPIRG

25

3.3 Types of Self-Financing Activities f n. NGO cases utilized a number of creative self-financing activities. NGOs appeared to I choose different rypes of self-financing activities for four primary reasons: to make use of inkind donations of equipment, to capitdize on existing staff knowledge of or expertise in a particular activity, to capitalize on a market niche or inefficiency, or to provide to its constiruents or members: 'MahingUse ofln-KindDorutinns ofEquipntent: In some

cases,

a

specific benefit or service

donations caused

NGOs to choose this rype of self-financing activiry. In the case of Asklepyos, for instance, the unexpected donation of washing machines and trucks from international aid organizations resulted in the development of the NGO's srudent laundry service and truclc rental service.

-

Capiulizing on

Saf Expertise:

FLTNREDES recognized

a

In the Dominican Republic, the president of

somewhat paradoxical siruation

possessed technological expertise beyond that bf many

-

that the NGO'S sraff

for-profit instirutions.

FLTNREDES was therefore able to capitalize on this capability in the profitable comPuter technology market. In India, the friends that came together to establish cRY had a rich background in art, design, copywriting, photography, adverrising, and marketing. CRY's multi-million dollar greeting card and paper product sales industry has grown fromthat initid source of talent. This approach has had a tremendous influence on defining CRY's operational philosophy of putting to use everyone's skilis toward its mission of assisting poor children: CRY acts as a link bet'ween people who have many skills, materials, or time, and development workers

who need these resources to work with deprived children and women. ' Capiulizrng on a Markzt Nicln or Market Severd NGOs selected their selffinancing activity in recognition of a local demand for a service not provided by

lffiimq:

public or for-profit institutions, or because of a need for additional services. In Jamaica, for example, the Mel Nathan Institute recognized that the car rental and

it was providing for its NGO and church guests could also be a lucrative means of capitrli"ing on Kingston's boomingtourisr indusrry. Similarly, the National Trust b.g* renting outdoor wedding venue space in the national park it manages to capitalizson the growing market for tourists coming to the island for romantic weddingp and honeymoons. All three of the US and tIK cases were guesthouse services

created based on market research or a lucrative

oppornrnity in the market: DSR's

sde and repair of Toshiba laptops, Eanh Tones' longdistance telephone service,

HelpAd Ltd's brokering of advertisemenrs.

- hwiding a Spafrc Aerzeft m btsire n Menrbs or Conxiarcr*: and

Some

NGOs selected a

self-financing activrry in an effort to provide an additional benefit to their consdrLrents and members. This is the case

for most of the vocational-training and job

26

creation NGOs discussedearlier (like Gondviseles, SNFIF, OELF, Clubes 4S and the Mel Nathan Institute). This is also the case for organizations like the Sociery

for

the Improvement of the Qualiry of Life (SIQL) in Croatia, which opened a health foo& shop and vegetarian restaurant to provide a venue (the only nZagreb) for such items. SNFIF also began to offer atransportation service, for a small fee, to its disabled members.

The distinguishing factor among the different rypes of self-financing approaches utilized by the

NGO

cases is

the degree to which they are either related or unrelated to the mission-related

activities of the NGO. Table 3.3 presents a

a

method for identifying NGO self-financing activities in

spectnrm ranging from those closely related to the organization's programs to those completely

unrelated.

Table3.3

Spectrum of NGO Self-Financing Aaivities Related to Program

Aaivities

Program Revenues

ProgramRelated Spin-off

Selling

Asset

NGO Name

Downtime Extension

Marketing

k Li6

Earned

Aai"rry

wfid

income

related

indt

dir*rly

Program

N@

from

&aar arblow

Related

Unrelated Extension

Income

Extension

Business

derived

of regular

venture

through

from

N@

totally

activities

product

use,/rennl

activities

unrelated to

Program

offered to

sdes

of NC'O

to public

delivery

NGO

NGO

assâ&#x201A;Źts

for-profit

constituents

constiruents

dudog

dients

orthepublic

downtime

Source: Adapted from

to

of

Crimmins/Keil

NGO

to

or

any asPect

of theNGO

(1983)

The spectrum illustrates the variety of approaches that exist for NGOs to underrake some

form of self-financing activiry depending on both the required or anticipated outcome. It also rePresents a scale of risk. Those resources generated from program-related activities tend to carry with them a far lower level of risk, since the NGO is working with in its sphere of knowledge and

liule or no additiond infusion of start-up resources. As the spectrum moves gradually toward activities less related or completely unrelated to the NGO pro expertise and, presumably, requires

27

grams, risk increases; NGOs enter sectors and markets beyond their mandate and expertise,

require additional resource investments

and-

and

,

likely-

additional human resource experrise.

Table3.4illustratesthesPectrumofself-financingapproachesemp1oyedbyeachofthe

international NGO

cases.

Although mo$

most

Nrcs

were involved in more than one form of self-

simultaneously.

Seven of the international cases utilized some formo{.prograrnreuentlesas a self-financing

financing activity, none engaged in all forms on tle spectrum

: "

technique. SIQL charges fees for its seminars in human ecology and the environment; the National

Trust charges atr entry fee forthe national park it maintains; and Clubes 4S charges tuition fees for its international youth exchange progranrs. The Mel Nathan Institute's Consultanry and Economic Development Service Depar:tment assists other NGOs to start communiry enterprises for fee.

28

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For organizations established for the stated purpose of providing needed assistance and services to thepoor, it seems difficult to rationalize how an NGO might in turn charge a fee for its work.

Fees for services

by development NGOs carry with them a large risk of public criticism, in

light of concern that these organizations are exploiting their constituents to sustain themselves

(see

section 3.6.1, below). For example, SNFIF's door-todoor transportation services for its disabled members was not meant to generate resources beyond recovering the costs of operating the van

M*y

NGO's members, however, are unable to afford the weekly fee forthe service. The fees FLINREDES charges its NGO consdruents for Internet services is considerably less lucrative than the services it provides to for-profit clients. As a result of these rypes of limitations, program revenues are often not the largest source of self-financing income for the NGOs in comparison with other more lucrative dbeit more risky - self-financand paying

a

part-time &iver.

of the

ing approaches.

NGO cases implemented some form of.program-rehted Ein-of selffinancing activiry. These were rypicdly activities either,directly related to the NGO's mission or provided as an added benefit to or extension of its prograrns. All of the self-financing activities of organizationsproviding jobtraining and employment{reation activities are included within this category, although it could be argued that these are simply program aaivities which just happen to Ten ofthe sixteen

simultaneously generate income. Telek Vilmos, director of the Gondviseles Foundation, advocates this position,

as

do Father Piazz-aof OELF and Reverend

Villiams of the Mel Nathan Institute.

The distinguishing factor berween these and, say, fees for Clubes 4S exchange programs, however,

that the employment and jobtraining programs aren't by nature income'generators - they have just been packaged as such. Similarly, the National Trust's ecotours are not a direct conservation is

program revenue-generator. Although the tours also serve the mission of educating the public on environmental issues, they are an incomegenerating extension of the organization's mission. This is also true of SIQL's shop and restaurant and

added benefitto the

Asklepyos' supermarket, both of which provide an

NGOs' constituents.

kllingthe NGO narne, or licensing, was one of the rwo least-used approaches, and is clearly not one of the priority or lucrative self-financing options. This option exists primarily as an added marketing benefit to the NGO. Only in the case of CRY India's paper products and greeting card sales

andthe National Trust's souvenir shop were NGO-labeled products used

as a

resource-

generator and marketing tool. HelpAd Ltd. is attempting to market its services with the added

"halo" benefit of having the Red Cross-effiliated HelpAd logo appear on a company's product.

Meanwhile, SNFIF intentionally avoided connecting its name and mission with its self-financing aaivities.'!7"hile SNHF believes ttre computer and accounting services it offers NGOs and for-

profit organizations are at least as professiond as that of its competitors, the director fears that potential customers often assume the qualiry and efficiency of work by disabled workers is less

with no mention of SNFIF or its socid mission. The limited use of this approach may indicate the reladvely low name recognition of NGOs within their good, and therefore markets the services

30

communities,

as

well

as

the limited recognition among the public of the added social benefit that

NGO entelprise activities provide.

Self-financing activities through the use of existing

ratul of asses duingdountimc hxproven to be a lucrative

facilities or equipment. This is the least resource-intensive of Asklepyos' self-

financing activities, since the trucks donated by international donors to distribute international aid

would otherwise sit idle. The ottrers (.e. Clubes 4S, the Mel Nathan Institute, and the National Trust) are also simply renting facilities or space when not in use for their own prograrns.

The rekted extensions were the second of the rwo least-used self-financing techniques among the

NGO

cases.

The rwo related exrensions used are responses to a particular market niche or

FIINREDES, the self-financing activity was an extension of its services or activities into the private, for-profit sector. The fac that the NGO has a service and skills much in demand (and beyond the capaciry of many for-profit providers) was of particular advantage in extendi'''g into an otherwise unfamiliar self-financing arena. The Gondviseles Foundation's child<are equipment rental shop was dso a direct resporse to a market niche. No other such shop existed at the time in Budapest. In addition, the shop senres as a venue for selling the Foundation's toy producs and for reaching a wider public with its name. Chris' Kitchen is related to the mission of Marhamat only in so far as it is within the food industry, generates resources to feed the poor and elderly, and capitalizes on the existing skills of the NGO's staff.

The unrekted extmsinns ltilizad by eight of the sixteen cases is second only to programdemand for services. In the case of

related spin-offs

as

the most common self-financing approach. These extensions are technically the

most risky of the self-financing ventures since they bear no relation to a:ry NGO mission-related

activity (although in some cases they relate to an area of NGO expertise). In the case of Asklepyos, the self-financing activity resulted from equipment being donated to the NGO. In the case of the Bolt Gallery, the local vlningregulations provided linle other option than to open a small convenience store. Decisions by SNFIF, DSR, Eanh Tones and the International Federation to pursue new ventures were based almost purely on the availabiliry of lucrative and timely markets. SNFIF's wholesale business activities, while smdl-scde and

short-livd capitalizrd on a lucrative market for

household appliances at a time when the Romanian market was based almost completely on blackmarket deals. SNFIF and OELF, however, both expressed very clear concerns about venturing into any potentially rislry business dealings. FatherPiaua,of OELF believes that, unlike for-profit

NGOs are not in the position to undertake risky business dealings. Instead, OELF relies on pre-arranged contracts and agreements with government agencies for its self-financing income.

SNI{F leaders expressed a similar wariness since, trnlike for-profit businesspersons, NGO leaders businesses,

are responsible

for generating the limited resources on which the zurvivai of an organization may

rely. They are not in a position to risk what linle resources they may aiready have loss affecs not investors but the poor, children in need, and other

31

-

since such a

NGO constiruents.

3.4 Levels of Self-Financing

fable 3.1 indicates the percentage of the total annual operating budget that each NGO generI ated throu$ its self-financing activities. On average, the NGOs included in the research generited nearlyhalf of their annual operating budget from self-financing activities of some kind.

Only a few generated over three-quarters of their resources through self-financing. Few of the

NGOs anticipated or aimed

at becoming 100 percent self-financed.

In fact, several intentionally

avoided this. The Gondviseles Foundation in Hungary, for example, has purposely attemprd ro

iimit to

30 percent

the portion of its revenues generated from self-financing for fear of scaling up

its activities at the expense of the qualiry of its programs. CRY India's objective is to generate enough resources from seif-financing activities to cover its operating expenses, leaving other pubiic and private sources to support its programs. The Mel Nathan Institute in Jamaica enough inernal income to coverrhe salaries of its professiond sraff.

hopo ro

Benerare

The direaors of SNFIF in Romania do not believe that the objective of self-financing

activities should be to generate 1OO percent of an NGO's operaring expenses, but to achieve a "certain level of conomic independence.o The rwo believe that complete self-sufficienry of NGOs is not the answer, since it sends a message that public and private donors no longer have a responsi-

biliry to

fud NGO initiatives.

They therefore recommend that self-financing initiatives should be matched with simultaneous lobbying of donors to increase grant and conrracr supporr to NGOs.

FLINREDES is able to generate nearly threequarters of its resources from its self-financing accivities. This high percentage is reflective of the fact that the skills it markets in the compurer industry

in great demand in a highiy lucrative market. Those other organizations currently generating 9G100 percent of their resources from self-financing activities (i.e. Mel Natlan lnstitute, are

OELF) hadsomeform of vocational-training or employment-generarion objective to their mission.

The only other oqganizations generating nearly 100 percent of their resources from self-financing, the nonprofit Chrjs' Kitchen and the

for-profit DSR, do so for the sole purpose of generating

profits for hneficiary NGOs. Asklepyos has worked toward the ultimate objective of becoming 100 percent self-sufficient

through ia self-financing activities. The tremendous internal rurmoil the organizatisn is going through at a levelof only 30 percent self-financing income, however, indicates that this high objective may tle simply beyond

ia capaciry. As will

be discussed later, those organizations engaged

such a high level of self-financing activiry may be bemer off establishirg a separare

in

for-profit

subsidiary under independent managernent, 5saling down the activities to a more manageable level using existing staff, 61qr61king to balance self-financing resources with those of other public,/ private donor sources.

Since

thecirculrutances of all cases varytoo much,

it

is impossible

to cdculate an oprimal

It may be safe to speculate, however, that the range of :+SO percent self-financing is an optimum balance - depending upon the size and capabilities of the NGO. Beyond this amount, self-financing may push NGOs into a managerial and philosophical Prcentage of self-financing income.

32

crisis

(as was

the case with Asklepyos). Even this percentage is anificial, however, since SIQL

(which generates approximately 40 percent of its resources from seff-financing) has been criticized

for behaving too much like a for-profit organization. This may be more indicative of the individual organization's approach or motivation for self-financing activities, however, tha" of ttre magnitude of its acivities.

3.5

Internal Organizational Obstacles to NGO Self-Financing

tTt. obstacles faced by NGOs in implementing self-financing initiatives can be categorized as I both internal (those relatedto the management of human and financial resources and organizationil,capaciry) and external (those related to the surrounding policy, regulatory, and generai

public environment in whichthe organizations funaion).

3.5.1 Conflict of Cultures One common internal obstacle in the self-financing cases is the philosophical clash ber,ween non-

profit and for-profit cultures.M*y NGO program staff possess a set of values and principles which may be fundamentally at odds with a self-financing approach. Many who have chosen careers in development or social change have done so for the purpose of linking their work to a "greater good." Accepting private sector, market-orientd approaches to generating NGO resources may therefore seem simply unethical - the veritable antithesis of NGO values. NGO activists or practitioners may simply be personallyuncomfortable with the environment and culture of commercid endeavors, fearing that the vdues inherent in pursing commercial success are at od& with the values underlying the NGO's social mission. This is particularly an obstacle for those who maintain that reliance on the market is the cause, not the solution, of global i".g"iry.

The introduction of formal corporate m2nagement styles into an NGO for the purpose of

maximizing profits through greater efficiency sray not only disengage the N@ and its staff phiiosophically from their organizational vision but, on a very practical level, may dso lead to an irreconcilable contradiction ber,ween two organizationd objectives: mission and resource genera-

tion. As Richard Holloway of.PraZurtbia observes, the central mission of money-making can significantly change the internal dynamic of an NGO: ''$7'hen the main pu{pose becomes making

will

for the work of the organization - a new set of attitudes starts creeping in; and many organizations become concerned that they will lose their internal cohesion which comes from a sharedvision of a better and less exploitative sociery.'a The international NGO case srudythat most reflects this internd debate between for-profit and nonprofit mentalities is that of Asklepyos in Romania. As the organization's self-financing money

-

albeit that the money made

be used

activities accelerated, the small staff became overwhelmed with the day-today management of a

truck rental business, and a laundry service. The social programs, including food and clothes distribution for the poor, were put on hold. The volunteer support the organization reiied on began to dwindle as students became disenchanted with the organization's focus on maintaining

supermarket,

a

33

its business activities at the expense of its services to the poor. Unfornrnately, this siruation has not

yet been remedied

but some staff members believe the current organizational crisis is just a short-term fall-out as Asklepyos aftempts to make a dramatic shift from complete dependence on

-

internationd resources to complete self-financing. FUNREDES may face future problems in this resPect, as *aff members express concern about entering the for-profit sector with their computer services for fear of losing sight of their NGO mission.

Clubes 4-S in Costa Rica has had just the opposite experience. As the NGO's self-financing activities have expanded rapidly, the director believes the business acrivities have had averypositive

impact on the Foundation's mission. Vhile generating much-needed resources for the Foundation's Prograrru, the ventures have also allowed the NGO to provide employment to hundreds of youth and rural women around the country

direct programmatic objective of the NGO. The other job trainingprograms, including SNFIF, the Mel Nathan Institute, and OELF, expressed similar

-

a

satisfactions.

Several organizations expressed concerns similar

-

albeit less alarming

-

ro those of

Asklepyos about the conflict berween mission and self-financing activities. The Nationd Trusr's executive director believes that it is necessary for the staff to develop a business-oriented mindset in order for the self-financing activities to succeed. The staff must recognize that the self-financing activities are for the benefit of their programs. The execnrtive director believes, however, ttrat a mental and strucnrrd distinction musr be made so all staff are not "rainred" by the profit-making activities and do not lose sight of the organizational mission. She has, therefore, created physically

for the conservation prograrns and the self-financing activities. But Trust Board Member Marcus Day believes these rwo sides are not completely separare: "The business seParate departments

with the mission side for resources, both human and financial." This member further believes that an obstacie to successful self-financing at the Trust is the hesitancy or "shame" NGO st#f have toward generaringprofit fromtheir work: side is at loggerheads

"Businesses succeed because

their goal is to make a net profit. NGOs have other goals (mission statements), and profit is not high on their list. In fact, a major challenge is that if an organi zationwants to make a profit, they need to call it 'profit,' make it their goal, and not be ashamed of it. The organizations I have worked with are afraid of the word'profiq' like it's some Lind of dirry word."

The director of the Mel Nathan Institute developed

a

specific $raregy to avoid these

internal conflicts. Early in the process of developing the Institute's resourcs.generating activities, Reverend Williams moved to "strategically employ *aff who had no commitment ro the dwelop ment mission of the organization." He believes that some of the most importatrt Instirute staffare those who only

see

what they do "as a job.' As in the private sector, for specific self-financing

hitirg "tle best man for the staffwill uitimately'capture the vision of the Institute;' if nor, "hopefully

activities Reverend'$7'illiams hlieves NGOs must be more concerned with the job." He hopes

they will simply generate

a

comforrable profit to further [our] mission."

34

The vice president of DSR, Steve Smith, is happy to be in a for-profit environment that is

"NGO mentaliry" which he believes can easily ruin any prospects for success in selffinancing. But he doesn't believe the nonprofit/for-profit mix is impossible. DSR's efforts to free of the

channel profits from its computer sales to social filmmakers and distributors in Africa represents his

attempt to resolve the traditional disco''nect between profit-making and social causes. He believes

strongly that "NGO people are divorced from rediry" and "have no concept of what it means to be self-supporting, of the bonom line, of efficiency." But he also believes that some of the success of his business has to do with his roots in the nonprofit sector. His customers return to him because of his

NGO background and trusrworthiness. In the management of DSR business,

however, he does not believe that his technical computer staff need to be "mission-driven." Most DSR staff pay linle aftention or only vaguely understand the purpose or significance of the company's suPpoft for filmmaking work in Africa. The staffs primary motivations are to provide high qualiry computer services, and to receive competitive sdaries and benefits from the company's profi t-sharing program.

The cases indicate that the organizations that maintained the most internal peace berween mission and resource'generation didso in one of Fwo ways: 1) byseleaing aself-financing activiry that was directly related or panially related to the NGO mission or; 2) by establishing a clear dis-

tinction berween, and realistic expectations for, the NGO mission and its resource.generation activities. To succeed, it must be made clear that the self-financing activity and the mission are nor incompatible. In the case of the Nationd Trust, it was important to illustrate to program staff the contribution the self-financing makes to the mission. In the case of DSR, the values of the mission were important in attracting and retaining customers, but largely irrelevant to maintaining

a

quaiiry

computer business.

3.5.2 Management of Self-Financing Activities For decades, academics and aspiring entrepreneurs in the business sector have artempted to disdll the essence of entrepreneurid behavior the characteristics which distinguish successful enrrepre-

-

neurs from others and the attributes and skills which constitute the secret of creating and managing

qpically achievement-oriented, take responsibiliry for decisions, and dislike repetitive, routine work. They are creative, possess high lwels of energy, and know how to lead an organization and give it momenttrm. In addition, most agree that successful successful enterprises. Entrepreneurs are

enterprising requires

combination of both an enterpreneurial spirit and panicular and practical business management skills and experience. The same can be said for managing NGO self-financing enterprises

-

a

which requires

bo th

motivation and skill

Motivationfor SelfFirancing Vblethe field of social change and development often anracts creative and strategic thinkers, and natural and dynamic leaders who found new NGOs, develop and implement new programs, sen'ices, and problem-solving approaches, and empower and organize -

individuals and communities, they are not necessarily motivated or skilled in self-financing activities.

35

indicatedthat NGO staff, board members, andvolunteers were, at least initially, zup porrive of undertaking some form of self-financing activiry- but the choice was not always a preferred course of action as much as aperceived necessiry.In the day-today management of the

Most

cases

NGO self-financing activities, however, a number of motivational obstacles arose. For example, Marcus Day of the Nationd Trust, who had worked previously in the private sector, expressed concern that an entrepreneurial mentdity and capacity was lacking in the NGO's staff: " I do not think that the organizations I have workedwith have the strucnrres necessary to be entreprenzurial. I have dso wondered if the people who gravitate to fthe nonprofit] sector are also capable of giving what it takes to make an NGO a financially zuccessftrl enterprise.'\tr0'e have asked NGOs to be more entrepreneurial but, when the clock strikes 4:30, sparks are flying from the soles of the employees' shoes asthey hit the pavement on -

ttreir way home."

Busina Management SkiJk and Exptience: One of the most repeated prerequisites for zuc-

NGOs in the cases was the need for strong leadership and business acumen. In some of the more successfully managed cases (e.g. OELF and Mei Nathan Instirute) the NGO leaders hadprevious training or experience in for-profit business management. In Bvazil, for example, Father Pi azza, of. OELF was trained in Italy as an economist and businessman prior to cessful self-financing among the

entering the ciergy. Although many of the staff of OELF are skillsd in panicular vocationai or social service areas, most lack business management skills. One remedy for this has been to seek assistance

from universiry professors and other volunteers. Reverend \flilliams of the Mel Nathan

Institute had asimilar experience. He too was in business priorto enteringthe clergy. Few other staff members of the Institute, however, have any business background. As

it

has taken

time to

train a professional middl+management staff, Reverend'\Tilliams has only recently felt able to delegate day -to4zy management tasks.

NGOs had no previous business experience prior to launching their selffinancing activities. lvfs. Telek of the Gondviseles Foundation says she felt like "an elephant who Several of the

was blind and dea{" when starting the

NGO's self-financing activities. Her background

was in social

work and education, and she admits having read boots on law and small business management at night "instead of novels.' She relies heavily on guidance and advice from her sons and friends who

Ca"''on of Chris' Kitchen in Azerbaijan also found that it took a great deal of time to train staff in needed business management skills in order to scde-up the NGO's professional catering service. As the only staff person with previous catering experience, Cannon's need to trein others slowed down the process in its early montls. She admits that the business is now growing at a speed beyond current management capacity, but severd locd staff have business knowledge and skills. Chris

members have risen to managerid positions.

Severd NGOs expressed concern about both retaining skilled staff members

with

business

experience andanracting new ones. SIQL in Croatia learnedthat additional professional business management experience was necessary. In the fi.rst months of managing its vegetarian restaurant,

36

SIQL was able to rely on volunteers and members. As the business grew and professionalized, which the NGO however, volunteers and members demanded competitive salaries and benefits

-

OELF discussed the difficulties in attracting new business-experienced staff members to its venture because of the NGO's inabiliry to be competitive with the salaries in the private sector. To remedy this, OELF has relied heavily on universities and institutes to provide volunteer management experience. Clubes 4S has dweloped similar relations with a number of specidized institutes and university facultia. CRY India had litde business expâ&#x201A;Źrwas unprepared to offer. Fath erPiazz-aof

initial years, and also found it difficult to offer competitive salaries. CRY has relied on an "extension of the volunteer idea" by appealing to business peoples' desire to utilize their skills for a social cause. The NGO has succeeded in attracting a number of youngMBAs and other business people to its staffand board.

- Phnning and Allocatinn ofHarnan and Finatrcial Rsourca: A common obstacle among the tise in its

NGO self-financing cases also appears to be the inabiliry of organizations to accurately estimate the NGO's internd capacity to manage the self-financing activities. Assessing the NGO's internal resource capabiiity - both financial and human - to undertake a self-financing activiry is a critical concern. Few of the NGOs underwent any comprehensive preliminary assessment, and few developed any business plan for their self-financing aaivities. Chris'Kitchen and the Bolt Gallery have no business plans or cost-recovery or profit projections. Asklepyos had no formd business plan, but did establish targets for generating a profit. Clubes 4-S also had no formal business plan, but did create clear monthly goals for each NGO program aaiviry. The Gondviseles Foundation created both business and marketing plans for its shop and toy-making activities which called for a

profit. The International Federation conducted great deal of market research and consumer surveys prior to launching HelpAd Ltd. ^ US PIRG created a business plan for Earth Tones, but used privat+sector projections from'Work-

three.year start-up period before the venture would generate

a

ing Assets and other for-profit telephone service providers to calculate income targets. In light of

ia limited investments in operating and advertising the business, Earth Tones soon found the figures to be far too ambitious. The executive director of Eanh Tones feels the company has been "managed too much like a nonprofit" to meet its profit projections: 'You have to spend money to make money,' he says, referring to the importance and necessiry of reinvesting in the business to maintain and expand a standard of services.

OELF does not have a business plan. Instead, each project area has its own independent planning process. Father Piazza,admits that OELF's self-financing activities could be more efficiently planned and become more profitable, but the worhshops are deliberately run "inefficiendy' due to the NGO's prionry on teaching and apprenticeship functions. FatherPiazzais concerned about scaling up the aaivities at the expense of individual attention and the "communiry based" nature of the organization. Clubes 4S maintains a similar philosophy in its manufacnrring q/ork.

Although demand and skills permit, the Gondviseles

37

has also resisted expanding its activities

to be

more profitable, since it fears zuch

a

scale'up

will

damage the personal aftenrion given to its

young

i

members.

The strucnrre seleded by each

NGO to manage its self-financing activiry was also signifi-

cant. NGOs established three rypical methods of strucnrringthe internal management of their self-

financingactivities:

i

-ranagedaithintheuistingNGOstnnurc

Q.e.NGOmanagementandpersonnel

manage and conduct the self-financing activities in addition to their

NGO

i

manage-

ment, project, and operational responsibilities); -managedtbroilgbde?ardedEartmenta)ithinilxNC:OTTaTugoTEntstt'ncture

Q.e.

aseparate

unit or department for commercial acdvities or resource generation is established to conduct the seif-financing activiry, separate from the program activities of the

NGO); and/or esablished d sepctrdtc sukid.iarT (.e. a separate

nonprofit or for-profit legal eniny/ company is established institutionally and physically separate from the NGO for the sole purpose of conducring the self-financing dcdviry) -

Table 3.5 summarizes the techniques used by the international

38

NGO

cases.

:

International NGO CounOy

N@

Table3.5 Cases: Management Structures for Self-Financing Activities Managed within

existingNGO

Managed through separate

Established

NGO

separate

structure

subsidiary

Azerbaiian Chris'Kitchen

Brazil OELF CostaRica Clubes 4-S

Croatia Dom. Rep. FLINREDES

(Telesinergia, Inc.)

H*9".y BoltGailery

Hungary

x

Gondviseles

(Gondviseles

KHT)

India CRY

Jamaica MelNathan

0,

Romania

-

aica Jour:neys

Ltd.)

x

Asklepyos

(limitedcompany)

Romania

x

SNI-IF

(llandiprod Ltd.)

St. Lucia

NationalTn:st

UK

x

International Federation

(FI.l AdLtd.)

IJSA DSR T]SA US

PIRG

39

Most NGOs used a combination of management approaches (i.e. establishing a separate for-profit subsidiary but relying on existing NGO rnanagement staff and oversight), but nearly ail

forpurpors of management, regulation, or taxes, some or all of the organization's seif-financing activities should be managed panially or entirely separately from the mision-related activities. In eleven of the sixteen cases, the NGO established a separate for-profit subsidiary to carry out its self-financing activities (with the exception of Chris' Kirchen, which established an IRS sot(c)(3) nonprofit organization in the US). Most NGOs continued to control the management oversight for these subsidiaries through their existing managemenr srrucrures. Most subsidiaries were established for regulatory (egal or ta:<) pu{poses. Nthough legally separate entities, few were fully sraffed or indepen&''tly functioning corporations. Telesinergia, Gondviseles KHT, Jamaica believed that

Journrys Ltd, Handiprod, HelpAd Ltd, and Eanh Tones, all registered for-profit, commercial small businesses, were accountable to the management of their NGO mothe r organi"ations. None established

a

separate governing board or shareholders. FTINREDES is the

sixteen that activeiy pur*res shareholders for its

only NGO of the

for-profit subsidiary.

Other NGOs, likc Qay, the Mel Nathan Instirute, and the National Trust, have resrrucnrred to inciude separate departments responsible for the self-financing activities. In the case of CRy, the Resource Generation Division responsible for most organizational fundraising, including paper

product sales, is located in Bombay, while its Program Supporr Division is in Delhi. Reverend Villiams is restrucnrringthe Mel Nathan Institute to better balance the self-financing and programmatic activities. \filliamsbelieves that a clear and distinct deparrmenral division is necessary. The Econornic Activities Dq>artment

wiil

be one of three

NGO departments, each of which will have NGO board of directors. Patricia

its own managing director but still be accountable to the same

Charles, director of the National Trust, shares'Wiliiams'philosophy, and has created a separare

&parment for managingthe NGO's outdoor weddiog, concert, and festival venue rentals, and its ecotolur. To Charles, this clear division of responsibiliry is a "prerequisite" to zuccessful selffilmcinginitiarives.

Organizations like SIQL and Asklepyos that did not create any separare managemenr &parrment or subsidiarJ'- and relied instead on existing staff, volunteers andlor members complained about the difficulties of managing self-financing activities in tandem

-

with mission-

work. This is not to say that others did not also indicate some management overload. The directors of SNIIF and the Mel Nathan Instirute expressed concern that their self-financing manrelated

â&#x201A;Źemetrt responsibilities took them away from tleir mission-related work. Reverend'S7illiams mggested he initiaily speot "160 percent' of his time on self-financing activities - bur, as his staff hcame befter trained, be was able to delegate more and reserve more of his own time for programrnatic work. SNFlFDirectorFrancisc also expressed fnrstrations about spending'too much

time' (about 30 percent) on seif-financing managemenr

issues.

The Asklepyos scaff, meanwhilg, admicted to having grosslv underestimated the amount staff tiure that would be required to manage its various self-financing ventures. Bureaucracy, the

40

of

time and investment required to manage and stock the supermarket, fire code regulations, health regulations, and logistical planning absorbed an increasing amolrnt of staff and volunteer time.

Even the executive director was pulled into pumpiog g"r for the truck renral business, stamping

price labels on shop products, cleaning the shop floors, and more. Likewise, the direcrors of the Bolt Gallery, unable to afford a full-time staff member for the Gallery or rhe shop, were forced to rise each day at 6:00 am to purchase products

to stock the shop before running to their full-time jobs elsewhere. Balancing these responsibilities of full+ime work, managing the shop, and making all arrangements for the Gallery exhibitions became logisticdly impossible.

Beyond the start-up funds discussed earlier in this chapter, new infusions of financial resources were required throughout the management of the NGO self-financing activities. Several NGOs admined to having significant cash flow problems in maintaining the self-financing venrures (as well as other NGO activities and programs), leadi"g some to establish some form of endowment or cash-reserve fund. Clubes 4-S found that the rapid expansion of its self-financing aaivities had caused its cash reserves to dwindle; in particular, the scale of the garmenr business has presented atremendous cash flowproblem. \7hi1e the rural women with whom it subcontracts require immediate payment upon delivery of their work, the government often takes 3G35 days to pay Clubes 4-S. In response, the Foundation has begrrn efforrs to create a $500,000 reserve fund which

would allow it to cover such gaps in income and payments. The Foundation is also seeking to renegotiate its contract with the government to require a percentage of payment for its services up front.

The Mel Nathan Institute believes that some level of liquidiry is essential when conducting

self-financing activities, and has tried to build its own asset base in "preparation for the unexpected." Since 1987, the Institute has worked to establish a trust fund large enough to generate revenue to cover the salaries of the Institute's staffand to provide some surplus for its communiry

development progranrs. The Institute hopes that this stabiliry will enable it to retai', its professional staffand to take some added initiatives in its programs.

CRY has also started an endowment fund intended to "ensure the stabiliry of CRY as an organization." CRY is seeking donations from individuds, compat'ies, tn$ts, and associations to build the fund. The donations are not used for direct CRY projects, but instead are invested in government-approved securities. The interest from the fund is then used to supporr CRY programmatic activities.

3.6 External

Environmental Obstacles to NGO Self-Finan.itg

tl-tt. challenge of undertaking self-financing activities for NGO revenue-generatior also requires I a.dittg with a number of potential exrernal threats or obstacles. The use of enterprise activiNGOs to a potentid redefinition of their relations with: - thepublir (including the general public and NGOs'constituents or benefici*io), regarding the perception of NGO enterprise and its porenrial abuses;

ties opens

41

-

the state, regarding the regulato

enterprise;

-

ry

-

particularly

rar<

-

treatmenr of

NGO

the prioatc,for-profx xctor, particularly regarding claims of "unfair

competition' by NGOs in their entelprise activities; and - rhepublirandprivatcdonors,parttcularlythose withtight restriaioru onprojecr expendicures and those who may not agree with (or may attempr ro influence) selffinancing activities.

3.6.1 Relations with the Public One exrernal obstacle for NGOs in implementing their self-financing activities was rhe public relations or public education difficulties associated with introducing such an alternative approach to traditiond NGO resource-generation. Public response to NGO self-financing generdly feil within three categories: 1) ambivalent or skeptical public perception; 2) negative public perception; and/ or 3) positive public perception.

- Public Arnbiaabnce or Sfupticisnt Some

N@s

indicated that simply educating or convincing

an ambivalent or skepticd public of the oppoffunities of an

NGO self-financing model required

signficant energy and patience. Chris Cannon of Chris' Kitchen, for example, found that the Azerbijantpublic initially considered the idea of matching profit-making with benevolence an impossibiliry. There was a general mistrust in the country of any form of hybridization. Chris' Kitchen's self-financing model was unprecedented in Azrrbaijan, and brought initial skepticism of the NGO's motivations forprofit-making. \7hile Cannon's affiliatioru withthe church allowed her some benefit of the doubt, skepticism remained high

Gondviseles Foundation faced

until the venture

was

functioning. Telek at the

similar challenge in opening the NGO's child car equipmenr rental shopin Budapest. She believes that due to the perceived "disconnect" berween purchases in the shop and helping those in need, the Hungarian public was simply not prepared for the idea of a

"chariry shops." Telek noted that after years of public mistrust of state agencies and corrupt profiteers, Hungarians are only comfortable making direa contributions ro the needy, and are thus more likelyto give to a homeless person b.gtrog on the $reer than to contribute indirectly (..g., by purchasing products in a chariry shop).

In Brazil, FarherPiazzaadmined similar frustrations in trying to convince the public and poliry-makers of the benefits of a self-financing approach. His policy work as a member of the state's advisory committee on the problems of street children in Brasilia has been devoted

to

increasingpublic understanding for an enterprising approach .FetherPiazzaargues with his NGO colleagues that a self-financing approach can work and does work ar OELF. SNFIF's Director

-

Francisc has also explained the correlations between self-financing activities and advocacy work to state policymakers and

fellow NGO colleagues. Francisc promores the self-financing approach throughout Romania as a model for decreasing dependence on exrernal international aid furds, while at the same time calling for increased state support for NGO social initiatives.

42

-

Negatioe Public Prceptioa; Just

as

the perception among staff, members, or volunteers

within

NGO may be negative toward NGO self-financing activities, the perception of the public-atlarge also poses a significant obstacle for NGOs to overcome. There are rwo dimensions to this problem: the increased public scrutiny resulting from the use and abuse of NGO tCI(€xemptions *cash in'for personal gain; and, the idea that the NGO may be using self-financing activities to either at the expense of its constituents (e.g. its members or the poor) or at the expense of its an

mission-related activities.

\(lary of public association of their activities with the countless examples of exploitative and corrupt enterprises that exist in nearly dl countries, most NGOs carefullyscrutinize their own selffinancing activities. Many NGOs fear that their name and reputation could be vulnerable to accusations of unethical profit-making, ta:(€vasion, or corruption. ln several countries, high-profile nonprofit hx-exempt stafus for personal gain have damaged the reputation and accountabiliry of nonprofit organizations. In North America, abuses by individuals personally profiting fromtheirpositions inside tax€xempt organizations hpve been widely documented.s Throughout Central and Eastern Europe, such abuses have become commonplace as profiteers mask for-profit business venrures under the veil of tor-exempt foundations. In 1991-92,rhe Sapio Foundation in abuses of

Bulgaria, under the mask of a public service enterprise, generated nearly $8 million in taxexempt trade activities for

a

government minister. The

case has

left the Bulgarian public with

a

very skepti-

NGOs. In Romania Dorel Sandor of the Center for Political Studies and Comparative Analysis in Bucharest suggests that public trust in NGOs has suffered due to the poor regulation of such abuses. He suggests that there are three rypes of organizations in Roma''ia - "nonprofit, for-profit and 'not-enough-profit,'" - indicating the many organizations established to look for loopholes in the laws and avoid to(ation of profits.6 It is also worth noting another more general phenomenon reflected in many of the NGO cases which has ied to public unease with nearly any form of hybridization or crossing of the functional boundaries becween the nonprofit, for-profit, and public sectors. In recent years, a number of zuch hybrids have emerged in the form of NGO-like organizations in many countries.

Referredto as QUANGOs (Quai-NGOs), these organizationshaverypicallybeenusedinvarious manners by government or business leaders in the form of either GANGOs (Government NGOs) or BIINGOs @usiness NGOd. \fhile some of these orgeni2slions have been effectively cal image of foundations and

used by governments to privatize the delivery of public resources or services, many have been

lobby or raise funds for a particular parry, progr2rn, or agenda. This hybridization of the public and for-profit sectors with the nonprofit sector in the abused by government and business leaders to

form of GONGOs and BUNGOs masking profit-making or politicd acdvities has led to public confusion and mistrust of the motives of all NGOs, howeverwell intentioned. Common abuses are

primarily polluting for-profit businesses - establish NGO-like organizations with environmentally friendly names to either improve their environmentai image or to further an ulterior agenda by attempting to create evident in the form of "green scams,'whereby antienvironment interests

43

-

Tobacco interests have also abused the NGO status to create "grassroots citizen coalitions" to buttress their causes.8 Even the greatest critic of foreign assistance, SenatorJesse Heims, has recognized the benefits of utilizing a nonprofit entiry to avoid the very "a patina of good guy-ness.'

7

campaign finance regulations in the U.S.

which forbid contributions from foreign governments and

foreign individuals.e

SIQL faced the most outright public criticism and scrutiny of its primarily by other NGOs. One activities. SIQL was criticized for its business-related activities NGO leader inZagreb described SIQL as "distant and elitist," and said, "They come across as a Of the international

cases,

-

bunch of businessmen. They are non-governmental, but they are FOR profit. . . They love to organizeexpensive happenings and produce fancypublications, but . . . the main purpose of ail these is

â&#x201A;Źain - money."

rU7hether accurate or not, this perception of SIQL's

public relations ramifications for self-financing initiatives in general and

work has dangerous the NGO in panicular.

An obstacle of particular concern to internationd relief and development organizations is the potential perception of any enterprise activlty as "cashing in on the poor' - that is, building "self-perpetuatinB enterprises" on the backs of the poor constituents NGOs are supposedly serving. At least theoretically, the constituents of most development organizations are those marginalized populations not in a position to purchase goods or services. As many development organizations have, u a central pan of their mission, to work to improve the qualiry of life for those most in need, self-financing activiry ca:r easily be misperceived

as a

means of.capitalizing on

or profiting from thepoor. Both Nofthern and Southern NGOs face the potential pâ&#x201A;Źrception by the public that their investments in time and resources to enterprise activities deflects these resources from the critical needs of

their constituents. This reflects

an unresolved question

in the

minds of both the public and NGO professionals about whether the prioriry should be placed on meeting immediate needs or on ensuring future sustainabiliry of program initiatives.

Vhile investing

in the future stabiliryof the NGO through investing in enterprise activities may, atleast in theory, appear to be a bener strategic approach, the public may perceive such activities to be motivated

pureiy organizationd self-interest

-

by

moving to maintain the NGO for itseif rather than for the

long-term benefit of the organization's constituency.

Other than those described above, none of those involved in the international cases expressed direct experience with zuch negative public perception, but rwo deserve mention for their concerns. Asklepyosstaffexpressed some concern that its focus on self-financing activities, and *erode the very strong problems in simultaneously maintaining its mission-related work, would

reputation the organization developed over the years wittr the loel public and international donors." The other visible concern in this respect came from the National Trust in St. Lucia. The Trust's numerous conservation projects have been pardleled by development of the national park for the purposes of increasing revenues from public festivds, *gddings and concerts. The Trust's work to enend the eiectrical grid to smaller islands could easily be misconstrued by the public as an anempt to develop

-

for purposes of profit-m"ki"g

44

-

the very lands the Trust is said to protect.

\flhile the executive director made no mention of this public concern, the case indicates an important consideration for pubhcprceptian regardless of the NGO's benevolent intentions.

Telek of the Gondviseles Foundation has utilized

a

very direct approach to stave off. any

potential negative public scrutiny of the Foun&tion's self-financing activities. She immediately exrends an invitiation to any critics or skeptics to visit her office personally and to

see

the NGO's

work first-hand. Those who visit are asked to compare the Foundation's work environment for handicapped employees with those factories andprograms run by other for-profit and state agencies (where conditions andprograms areof.averylow qualiry). NGOs should, therefore, clearly delineate the appropriate degree to which they should engage in self-financing activities in order to

avoid being perceived by the public

as

little more than a busines masquerading as a nonprofit

enterprise.

-

Positive Publb Perception; Since ttre public is far more vocal when something is wrong, it is

much harder to document positive public responses to the self-financing activities of the NGO

A few organizations, however, expressed the faa that their self-financing activities provided public relations benefits. As mentioned earlier, CRY's card sales serve a dual purpose of generating income and promoting the NGO and its mission. In effect, each of CRY's cards is a free public advertisement. The Bolt Gallery found that its shop was a primary attracrion to visitors; indeed, for many regular visitors, the shop was what made the Gallery such a unique venue. ($7hen the shop closed, the Gallery lost this qudiry and namesake.) DSR's trustwonhy and qudiry service image has also attracted additional customers - many NGOs and missionaries - to purchase its computers and hire its repair services. Eanh Tones also sees a large pan of its enterprise role as providing a cases.

positive model of a socidly and environmentally responsible company. The business of attracting new customers relies almost completely on the legitimary among environmentalists of this public image.

3.6.2 Relations

with the State

The state regulatory environment in which NGOs funcdon has a dramatic impact on the levels to

which NGOs in various countries engage in self-financing aaivities. There are rwo primary factors that affect the relationship bet'ween self-financing NGOs and the state: 1) legal status and 2) ta:r treatment.

NGOs differs fromcountryto countr)r, depending on both the rystem of law itself, andthe legd treatment of nonprofit, charitable organizations. Legal status for NGOs exists in most countries, and is currently an area of -

Legal Sutas ofSelf-FinzncingActivitizs: The legal status of

tremendous attetrtion and deliberation in emerging democracies in Central and Eastern Europe.

One particular obstacle manyNGOs found in initiating self-financing aaivities was in understanding their treatment under the law. In Azerbaijan, for example, Chris Canon was unable to register

nonprofit business due to a lack of legal clariry and what seemed "minute-byminute" changes in the laws governing associations and nonprofit organizations. Establishing a legal

Chris'Kitchen

as a

45

framework for NGOs is still considered

a

secondary or tertiary concern in Azerbaijan.

'$Tithout

official legal status, Cannon found that few corporations would support the Kitchen's work, panicu-

larly since they were unable to take ta:r deductions for charitable gifu. Cannon instead rurned to the US, and incorporatedthe Kitchen as'Meals forthe Global Village," an IRS 501(c)(3) rax-exempr

nonprofit orgarrrzation registered in the state of Maryland.

SIQL expressed similar frustrations with the Croatian law on associations. rVhen SIQL and its restaurant decided to separate into two legal entities, the staff were unable to determine how to register the unique mix of for-profit and nonprofit activities. According to SIQL staff member laalatovicZorica: "The independent registration has still not happened because the legal requirements for registration as an institution are sdll unknown. As a transitional country which still is going through big social changes, there are some doubts about registration, so we have to wait until this is clearer . . . the model of SIQL

has gone and

such

a

unknown in our country and in this part of the world. great confusion.'

and especially Makronova is

It therefore causes In addition to state regulations, SNF:IF and the International Federation found that their own internai bylaws limited the nature of their self-financing activities. The bylaws of SNFIF permit the association to engage in economic activities either directly or through a for-profit subsidiary so long as they benefit their handicapped constituency.'Sfhen establishing its limited subsidiary,

Handiprod Ltd., SNFIF also established itself

as

the sole shareholder. This same technique was

used by the International Federation in establishing

HelpAd Ltd. in London, and by US PIRG in establishing Eanh Tones in Boston. Because the Federation's constitution forbids it from owning shares in a for-profit venture, it established a separate limited company, and a foundation was ser up in Geneva to receive any generated income. US PIRG was also limited by its internal bylaws, which only allowed it to establish a wholly-owned commercial company for the purposes of promoting its primaqymission.

'

Tax Treatrnsnt of klfFinancingActivrrres' Most countries of the

world allow NGOs to legally engage in some form of economic or corunercial activiry. There is a wide variation in the tax treatment of such activities, as well as in the levels of monitoring and enforcement of tax regulations. As the scale of NGO self-financing acrivities in developing countries expands, however, governments may increasingly recognize the potential ta:( reverues, private for-profit businessmen may increase claims of 'unfair competition," and stricter regulatory rnqsures may be introduced.

Those governments around the world which do have regulations governing the economic

activities of NGOs udlize

a

diverse combination of instruments, each reflecting equdlyvaried

socio+conomic conditions, legal traditions, and legislative/administrative conditions.lo Table 3.5

world to regulate and these aaivities, as described by the International Center for Not-For-Profit Law (ICNL): describes the three most rFpical methods used by governments around the

46

ta:<

Table 3.6

Methods of State Regulation of NGO Economic Activities l.CnrmcrcialTmTtwntent

2Dath,wionoflrrcome

3.Unrclad&ainsIntorne

TmTrcanent

Tax(UBQTreatment

Under the commercid ta:r

Underthe &stination of

Under

approach, the state

income approach, the state

income ta:r treatfirent approach,

reco gn zs5 i

ao distinction

recognizes

a

disdnction in how

tle

unrelated business

the state focuses not on the

berween income generated

NGOs utilize the income

d.atinztion of the ea:ned income

by for-profit commercial activity

they generate through econ-

but on the sozrce. If

income they and nonprofit

omic activities. The state

commercial acdvities

exempts those resources

as

commercial acdviry.

AII

profits raised by for-profit and

used

nonprofit organizations

are taxed, irrespective of

for'statutory" pulposes

those resources chatr eled " or invested ba& into the NGO

source or destination of the

for its charitable pulposes.

income.

Resources used

are defi:red

"related'to its mission under

that law, then income derived

-

the

tle NGO's

fromthese activities will be o(empted

for'non-

statutory PufPoses other than the charitable activities of the

NGO's tt'ision,

are

not

exempted. Some countries place an upper

limit on the amount

of income that is exempt under this xppsexqh.

Source Adapted from ICNL (L99 6).

Some counries also utilize

combination of models. For example, both Croatia and the Czech Republic utilize a combination of instruments Q*d3) to regulate the commercial activities of NGOs. The Croatian government has instituted no regulations that limit the commercial activities of NGOs per se. make

a

a

NGOs may therefore legally conduct direct

business activities. The state does

vague distinction, however, beween related and unrelated acdvities; the latter are taxed

"with the possible exemption of up to 50,000 kunas if that money

is used

for the NGO's srarutory

purposes.'ll Similarly, in the CznchRepublic, 30 percent of the profits from NGO commercial activities, or 3 million CzK, (approximately US$100,000) whichever is less, which are 'related'ro rhe NGO's primary mission activities are exempt, while all income considered "unrelated" to the mission is fully taxed. Another combination of tax treatments exists in Estonia where the income tax law provides

NGOs on a taxâ&#x201A;Źxempt "list" with

47

an exemption for related activities. One of the

criteria used by the Ministry of Finance in compiling the list is whether an NGO is engaged in commercial activities

-

thereby diminishing the distinction made between related./unrelated

activities. Instead, the Ministry uniformly taxes those NGOs not "1isted."12 Table 3.7 rndtc*es the tax treatments applied by select countries around the world, including those international cases srudied in this research.

Table3.7

Regulatory Provisions for NGO Enterprise in Select Countries Commercial To< Treatment; 2 : Destination of Income Treatment; 3 : UBIT Treatment)

: Coumf (1

Regulatory Approach by Treatment

123 Azrbaiiryt

Brail

x

Bulgaria

x x

Canada

CosaRiu

x

GMia

xx xx

CzechRepublic Denmark

x

mmAA*q.Ulc Estonia France Germany

x x x x

Iiagy btda Ireland

]anaiu Uthuania

Netherlan& Poland

Rnrwb Russia

St Lucia

LMI{doln UnitdStac * Note: International case-srudy countries are

x x itdicized. Countries utilizing a combination of

models have multiple marks.

Source Compiled from ICNL (1996) and from international NGO

48

case

materids.

Indicative of the fact that there is no generd international consensus on which of the three regulatory approaches is most optimal for NGO self-financing activiry, the models utilized by select countries are relatively evenly dispersed. The choice of a regulatory approach is largely dependent on the relationships berween the sectors, and the on priorities the state places on generaring rev-

from the enterprise activities. Approaches vary from closely regulating these activities, simply forbidding such enterprises altogether, or stimulating NGO self-financing activities through light enues

regulation or limited ta:<ation. The regulato ry approach selected by each country grves some indication of its relative poliry objective, since each provides a different level of benefits or burdens.

Table 3.8 examines

number of the practical policy implications of each reguiatory ap proach, using five criteria established by the ICNL: 1) simpliciry or complexiuy of adminisrration; 2) effects on revenue collection; 3) effects on the commercial sector; 4) fiscal effects on NGOs; and 5) practical concerns about implementation. D a

Table3.8

Policy Implications of NGO Enterprise Regulatory Approaches Ginrid

Rqildory AppM& by Trcarnerx (1: Commercial Income; 2:Destination of Income; 3:UBIT)

TlwrciulRaionale

1. Reduces

concerns of "unfair comperition" by placing NGOs

for-profit organizations on equd footing in the marketplace.

2. Promotes the use of tax exemprions to help subsidize acrivities with apublic benefit. and

3. Promotes creation of additional revenue

byNGOs,

as

well

as

incentives to provide certain producs or services in place of govern ment or in absence of other provider; limits concerns of "unfair

Adninisraion

competition " with linle incentive for'unrelated' enterprise.

1. Simplicity - uniform application to all enterprises.

Simplicity - necessa{f only to monitor e4renditures.

3. Complicated - diffi cult differentiation berween "related' and

2. Relative

"unrelated."

EfuonRarrueAllrctialt

1.

Highest level of tax revenues of three oprions.

2. Lowest level of tax revenues of three options.

3. Less tax revenues

than

1,

but does tax unrelated activities exempt

under 2; careful drafting can limit loss of ta:< revenue.

EfuonConmercialktsr

1. Creates fewest concerns

over "unfair competition.'

/ advantage over for-profit organizations.

3. Provides no tax advantages over for-profit organizations in 2. Provides tax benefits

49

"unrelated" fiel& and "related'activities of liale commercid interest to for-profi t organizations.

Ftscal Efects

on NGas

1.

Most restrictive, least favorable to financid status of NGOs.

suppoftto NGOs. 3. More restrictive than 2, limits income to 'related' activities.

1. Rarely problematic once standards of ta:<ation are established.

2. Difficult to establish what constitutes "statutory purpose," often 2. Provides greatest financial

hartiul Imflanamion Is,rc

must be determined on case-by<ase basis.

3.

Difficult to define 'related'

and 'unrelated,' and to apply

definitions.

Source: Compiled from ICNL (October t99 6).

From the international NGO

cases

it

appears that most

NGOs

are unclear about both

their

government's regulations and ta:r treatment of self-financing activities. It seems that either the scale of

NGO economic activiry

is

still relatively underdeveloped, or it

is

simply overlooked by

policymakers in some countries. Some countries have, however, taken hard lines on regulating

NGO enterprise activities. In India, for example, the government passed a regulation n 1976 (amended in 1985) to regulate NGO self-financing activities in light of its concern about NGO political activities and to make sure that NGO development activities do not restrict the growth of the for-profit sector. The act allows the government to ban the receipt of funds from abroad for "politically suspect nonprofit organizations,o and rernoves all tax exemptions for income'generating activities by nonprofit orgaanzations. CRY benefits from ta:r exemptions on contributions and customs dury waivers, but must payt,u(es on its commercial sdes. CRY US, however, is still unclear

about the "relatedness" of its card and paper product sales to its organizational mission, and is now consulting anonprofit lawyer regarding its UBIT status.

includingthe Bolt GalleryandsNFlF, q/ere grantedtax benefits by state and local governments fortheir self-financing activities. The Bolt Gallery developed a close relationship with the district government in Budapest. The district mayor provided added ta.x Several other organizations,

incentives for Bolt to expand

ia acdvities. The locd government recognized the communiry revital-

izationbenefits of the Gallery's presence in the neighborhood, and provided subsidized rents and ta:r relief

to attract other artists and galleries. SNFIF received similar benefits through the Romanian

Finance Ministry. The Parliament passd

a

law to encourage private businesses to employ the

physicdly and mentally handicapped in "protected jobs," whereby companies could receive tax incentives by esrablishing special workshops employing a minimum of 70 percent disabled workers.

In rerurn, a company is exempt from the Value Added Tax (VAT). This ta:r relief helped SNF{F to

profit and hire additional full-time staff members in its restaurant, bar, and shop.

The incentive, therefore, both generated income and helped fulfiU the NGO's mission to create generate a quicker

employment oppornrnities for the physically handicapped.

50

3.6.3 Relations with the Private Sector A significant obstacle to self-financing is the effec it can have on the relationship berween NGOs and the private sector panicularly small businesses. The issue of "unfair competition' berween

-

nonprofits and for-profits has, for example, been a topic of heated debate in the U.S. Small businesses have organized under the umbrella of the Coalition for Fair Competition to make rhe case to lawmakers and the public that nonprofit organizations are entering an increasing number of pri-

with comparative tax advantages (and shielded by their nonprofit charitable debates have brought the UBIT regulations which govern NGO self-financing

vate'sector fields status). These

activities in the U.S. onto the tax reform agenda on several occasions.

Few of the NGO cases reflected any significant clashes or concerns over competition with the for-profit sector in their countries. In fact, some NGOs sought out for-profit companies as donors, shareholders, or p:rtners in joint ventures. FTINREDES, for example, hopes to franchise its computer services throughout the region by attractingvenrure capital from private investors. The NGO intends to identify mutu"lly beneficial partnerships. The FLINREDES president does nor anticipate claims of unfair competition since the foundation is "competing as an equd parrner in the market." This does not mean, however, that conflict or competition does not or will not arise

as

NGOs self-financing activities increase and expand. Currently, NGO self-financing may be ar such small scale in some countries that it simply has been overlooked by policymakers and the business communiry. It could also be that so many of the NGOs examined herein established for-profit

a

subsidiaries that businesses and the public in generd could not distinguish them from other forms of private-sector enterprise. There were a number of cases, however, that suggested a future poten-

tial for conflict beween NGOs and businesses.

Chris Cannon in Azerbaijan indicated that some locd businesses were "jealous'of Chris' Kitchen's success in attracting international customers to its catering service. She believes, however, that knowing of its social mission, most business people were pleased to see the organization's success. Eanh Tones believes that its for-profit comperitors are watching its progress more out of curiosiry than out of competitive concern. AT&T is interested in observing whether Eanh Tones is successful in attracting a consumer marlcet by marketing itself as an environmental telephone

comPany. The International Federation has no concerns about claims of unfair competition even though HelpAd competes direcdy wittr other advenising brokers in London. The National Trust comPetes

with othertourist

agencies on St. Lucia, but has

cooperatedwith the National Tourist

Board and other agencies to attract international tourists by marketing the island's environmental attractions.

Perhaps the most

potentidlyvolatile

that of Clubes 4S in Costa Rica. The NGO currently generates nearly 50 percent of its annual income from one governmenr conrnct to manufacnrre hospital clothing. Under current regulations, private, for-profit conrracrors must comPete for contracts through

a

case is

rather lengthy and bureaucratic bidding process which requires

significant paperwork, causes significant delays, and results in added costs. As

51

a

nonprofit organize-

tion, Clubes

to avoid all this. This fact, combined with the added social and communiry development benefits provided by Clubes {S, gives litrle incentive forthe governmenr ro rurn higher percentages of its production over to private, for-profit manufacnrrers. '$7'hile this arrange4-S is able

ment is currently lucrative and dependable for the NGO, it could be cause for objection by forprofit manufacturers who wish to compete for contracts on an equal footing.

3.6.4 Relations

with Public/Private Donors

The self-financing approach to resource-generation by NGOs calls for a fundamental reassessmenr of the traditional relationship berureen NGOs and both public and private donors. It also has significant ramifications for the traditional roles bet'ween Northern and Souttrern NGOs. As mentioned earlier, most NGOs pursued a self-financing approach to resource.generation out of a philosophical desire to seize greater control of their resources, a desire to determine the strategic

direction of their organization, and a practical need to generate additional revenues. Nearly every NGO case called for a significant change in the curreqt donordonee paradigm from one of paternalism and restrictions to one of partnership and flexibfiry. Several self-financing NGOs have succeeded in

redefining themselves

as

equal partners in joint venrures

with public and private

donors.

Publk Donors.' The self-financing approach of numerous NGOs has dramaticatly affected the traditional pamerns of NGO dependence on public sources of support. At least three of the -

NGOs examined in this research have developed professional industries to provide manufacruring services to government ministries and administrations. By fulfilling governmenr conrracts, Clubes 4 S, OELF, and the Mel Nathan Institute have all contributed significantly to rhe processes of privatizngstate industries and services. Clubes 4S now manages the production of approximately 80 Percent of the hospital clothing manufacnrred for the entire counrry. OELF receives no direct suPPort from the government, but has large manufacnrringcontracrs with the Ministry of Education to produce school furniture and with the Ministry of Health to provide hospitd garments and equipment. The Mel Nathan Institute has shifted from being an NGO almost g0percent dependent on government suppoft to

a

nearly gGpercent self-financed organization which fulfills govern-

ment contracts for the police and schools. These cases make clear that self-financing activities take place not only by engaging the private marketplace, but also in relationships with the public secror.

hhtate Don ors.' The self-financing activities of NGOs have also dramatically changed the nanrre of the traditional NGO relationshiF with private donors. Several of tfie NGo cases reflect a belief that donors should serve more as partners or investors in their work and support their -

-

efforts to become more independent and self-sustaining. Through its self-financing aaivities, Chris' Kitchen hopes to attract more flexible donor furds to expand the Kitchen's activities in support of Marhamat. Chris Cannon believes that donors should be anracted by the sustainabiliry of the project, and the fact that the NGO is not only begging, but doing good work. Clubes 4-S has adopted a similar philosophy toward donors. The Foundation has developed proposals ro targer

52

international donors to attract contributions to purchase the equipment required to launch new self-financing initiatives. Clubes 4S Director Arias believes that his organization's approach is

unique in Costa Rica since most other NGOs look to foreign foundations and governments for project grants. The Foundation views these donor contributions donation.

'In

as

more of an investment than a

five years, after manufacturing 10,000 school uniforms and providing needed employ-

ment to rural women across Costa Ricq'says Arias, "that one million dollars Reverend

Villiams of the Mel Nathan Institute

will sdll

also believes self-financing

be here."

NGOs provide

an added benefit to potential donors, but he has noted that shortsightedness has prevented some

donors from investing their resources in sustaining long-term prograrns. Villiams believes donors

validiry of the income-generating approach, if they really want prograrns to be sustainable. 'TrIo matter how laudable the program may be, donors must recognize that they can't donate in perperuiry. It is only sensible, and an added advantage to their donation, to define their donations in a way that stimulates resource'generating approaches need to adopt a long-term view and recognize the

among NGOs. They can then take their resources elsewhere to meet other needs,o he says. Both

SNHF in Romania and OELF in Brazil have also made efforts to advocate this approach with donors and policymakers.

-

North-Soath NGO rehtions: Theself-financing approach to resource-generation also has

ramifications for the traditional relationship bet'ween Northern and Southern NGOs. Three NGO cases

provide insight into

a

number of self-financing models that could define new relations be-

rween these organizations.

'While

the partnership between DSR in the U.S. and MFD in Zimbabwe ultimately ended,

it

useful model of a Northern self-financed donor channeling resources to a Southern NGO. The case also provides a unique insight into the difficulties of maintaining Nonh-South enterprise parrnerships between for-profit and nonprofit insticutions as the partners become increasingly independent in their decisionmaking processes. \7hile the relationship berween MFD provides

a

and DSR began to deteriorate as both organizations matured independently of one another, the

relationship was initially based on close personal contact and regular communication about MFD decisionmaking. DSR sent regular transfers from its computer business income to support MFD, and

MFD

setrt

films for DSR to distribute and sell. As MFD matured and

as

the president of DSR

became increasingly absorbed in the management of the company, however, the relationship became more estranged. DSR contributions decreased, and then stopped

while,

b.g*

dtogether. MFD, mean-

amracting other international donors and government funds for its programs. Steve

Smith, president of DSR, has atremendous amount of personal angst about the deterioration of the partnership, but also feels strongly about never returning to else's

work with DSR resources." The DSR-MFD

case is

a

model of 'propping up someone

unique for both its North-South relation-

ship and because of the evolution of the financial relationship berween the Fqro organizations. The relationship devolved from

a

sustainable arrangement for funneling self-financed resources to a

more traditional corporate philanthropic relationship. Since the relationship was based on informal

5J

personal contact,

MFD no longer

has any formal vested interest in DSR and vice versa.

MFD now

relies almost entirely on external grant support for its programs.

The Chris' Kitchen-Marhamat case reflects much the same dynamic

as

the DSR-MFD case.

The Chris's Kitchen-Marhamat relationship was also based on the informal relationship berween a self-financing NGO and a for-profit business which chennels its resources to ciary. Marhamat, like Chris' Kitchen, expanded its activities

a

single

qoi&ly. Unlike MFD's

NGO benefi-

increased es-

trangement from DSR, however, Marhamat's executive director came to Cannon with plans for scalingup theNGO's activities. Thetqro agreedthat Chris'Kitchen andMarhamatwould continue

"to grow together"

-

the Kitchen would work to increase donations to support the NGO's

expansion. The current relationship berween the Kitchen andMarhamat is not formalized in any

written contract; rather, it is based on mutual trust, open communication, and the respect Cannon has for the director's abiliry to manage the NGO's work. Origina[y an offshoot of a church mem- . bership initiative, it remains affilissgd with the locd church - but the NGO's activities are mostly autonomous. Elders of the church are involved in large NGO decisions, but the governance structure is informd. Likewise, Chris'Kitchen stays completely out of Marhamat's internal decisionmaking. rVhen contrasting this case with that of DSR, there should be some cause for consideration of the "sssleinxlfity" of informal relations between funding and beneficiary NGOs. The model of CRY India and CRY USA is a third variation of this North-South model

-

with a Northern counterpart. CRY USA is a unique example of a Norchern affiliate of a Southern-based NGO conducdng self-financing activities to generate resources for its mother organization. It is an interesting model to illustrate effons of a Southern NGO to tap into Nonhern markets for resourcegeneration. The approach, however, one which eliminates altogether the association

raises some questions about the

long-term "sustainabiliry" of self-financing activiry in the Nonh

with those to build local philanthropic resources and markets. In August 1991, CRY India incorporated an affiliate in the United States to try to generate additional revenues among the Indian-American communiry and, subsequently, the American public at large. CRY USA has relied on supplies of paper producs shipped to the US directly from CRY India for its sales. In 1995, CRY USA distributed 90 percent of its surplus income (totaling $81,900) to CRY India. In keeping with its charter to support programs for underprivileged chil&en in the U.S. with 10 percent of its funds, CRY USA also donated a total of $6,000 to and the need to ensure such efforts are balanced

several organizations in Trenton, NewJersey.

Notes tSee

Appendi-B: lnternationd

Case Srudy

Questionnaire, for

a

more detailed view of the questions asked of each

N@.

2Nore; The

US and

IIK

cases are

included more to illustrate unique self-financing models and the iszues involved in

self-financing for Nonhern darelopment NGOs than for their panicular relevence to grassroots NGOs working with the poor in developing countries.

54

rOne unique loan guarantee program used by NGOs to overcome this obstacle is currently provided by Research and

Applications of Alternative Financing for Development (RAFAD) in Geneva. RAFAD provides bank guarantees which enable Third

\forld development NGOs to have access to credit from

banl<s in

their own countries. RAFAD's bank in

Geneva issues a letter of credit or letter of guarantee in hard currency in favor of the

NGO. The NGO

manages rhe

credit line itself in accordance with the terms it has negotiatedwith the local bank.

'Holloway, Richard" "Income Generation," inMichaelNonon, TheVoddl7ideFundraiser's Handbook A Guideto Fun&aising for Southern NGOs and Voluntary Organizations. pondon: DSC and IFRG, L996) 5See,

L17 .

for example, Shepard, Charles, E. "Pedrs, Privileges andPower in aNonprofit !7orld." lTashington Post (February

t6,1992) AL 6"Budapest Hosts Third ICNL,/Soros Conference.' NGONews 3 @udapest: National Forum

Fouo&tion, June

1996)

2.

TSee

Fritsch, Jane. "Ecologists Spy Faca&: Do Pillagers Hide Behind Cute Names?" International Herald Trubine

(March 26, 1996) 2. tSee

Marcus, Ruth. "Smoke Gets in Your Eyes." Internationd Hgrdd Tribune (Ocrober

l,

1996).

eSee

Marcus, Ruth. "How to (Legally) Get Foreign Gifu." International Herald Tribune (October 28, 1996) t.

TTCNL. "Economic Activities of Not-for-Profit Organizations." Paper prepared for "Regularing Civil Sociery"

Conference, Budapest, F{ungary,May 1996. (!flCIhington: ICNL, October L996)7. rrRutzen, Douglas B., ed. "Seled Legislative Texts and Commentaries on Cenral and Eastern European Not-for-Profit

Law." (Sofia ICNL/EFC/L|BF, 1995) C7. uRutzen E-6. l3See

ICNL

7.

55

4. Conclusions that self-financing can be a successful method for generating much-needed resources to supplement traditiond projectbased donor support. Self-financing, however, is far from a magic bullet or panacea for NGO financing, and it is difficult to replicate specific experiences with the method.

Just as it is impossible to provide an equation or formula for overall sustainable NGO financing, so roo is it impossible to he cases examined in this study provide some evidence to suggesr

estabiish an optimal level or rype of self-financing appropriate for all organizations. Self-financing is

not an appropriate approach for all NGOs and for those which do implement self-financing activities, it is far from asolution to all their fiscal diffiiulties. Self-financing requires a considerable dedication of human and financiai resources, which is sometimes beyond the capaciry of NGOs.

-

As with any other resource-generation technique, ir is a question of weighing the costs and benefits within given circumstances. Byusing self-financing, someNGOs examinedherein considerably reduced or completely eliminated their dependency on donor funds, and were able to expand their Program activities exponentialll, provide securiry for permanenr or professional staff salaries, establish endowment funds, and provide oppornrnities and zupporr ro their constinlenrs. At the same time, however, some NGOs lost not only staffmembers and volunteers, but also large quanri-

money. They were also overwhelmed by logisticd and management issues, and were distracted from their program acrivities.

Using the model of sustainable NGO financing presented in Table 2.5 @4odel B) as a basis for analysis, few of the NGO cases examined were able to reach an oprimal level of resource ties of

distribution without surmounting significant internd and e:rternal obstacles. The primary internal and e*ernal obstacles that NGOs faced in implementing their self-financing initiatives were:

Iffi"ul - conflict berween mission-related and profit-making merraliries - lack of business planning and./or management skills - insufficient organizational capaciry Etu ?ul - lack of access to sufficient financial resources for both starr-up and on-going activities

- unclear regulatory environments both for the registration and the tax trearment of self-financing activities

56

:

- competition, or potential competition, from the private for-profit sector - ambivalent or negative public perception In order to overcome these obstacles and stimulate NGO self-financing on a broader scale, a fundamental reassessment of the traditional relations bewreen NGOs, public and private companies, and donors is necessary.

1.

NGOs: NGOs

need to recognize the opportunities presented by self-financing activities, but be

realistic about what benefits such approaches can provide and their organizationd capaciry to develop and manage them:

-NC'asmast(rdrenryiA4identifywlffnatcingdctiviti6uhith and/orfurln thirrnission-relaudorprogranttnaticactiztitis. ThoseNGOsthatpurnreself-financing activities

as a

method of funhering their mission are bemer prepared to reconcile

the potential philosophical disconnect between these activities. In these cases, self-

financing seryes the dual purpose of meetingthe organizational project objectives and generating income.

-NGCs$ouldbrealisticahattlnhumznandf.rancidlrsourcathatwillbenecessaryto invest in making

a

self-financing activiry successful. They must not underestimate

the need for good planning in starting up self-financing approaches, and the need for strong business, financial, and management skills to dwelop and maintain them.

-NGOsshouldlntorHstiTTTatEtlxbtefsofxlffiruttcingapprurlrc.Self-financingruns the risk of being misperceived

as

the magic bullet for financial independence.

NGOs must be careful not to create expectations too high and too soon. Selffinancing is a long-term investment and, like any business activiry, takes years to become sustainable.

-NGOssltouldoieut*lffnarrcingasstpplenterzulndonorwppranatus4htifrntefort. Selffinancing is not synorymous with sustainable financing and NGOS musr avoid the mistake of recreating a pattern of dependency on any single source of income

-

including self-generated income. The ultimate objective of NGOs should not be to generate 100 percent of their income from self-financing, but to generate an amount sufficient for

a degree

of independence in determining strategic directions.

'NGGJM,MnnrbxlffmancAgactiaitiswitha&ntqattdfumionactiaitiatogenerare increased public understanding and support for self-financing approaches among the public, donon, policymakers, and private.secor instirutions.

2. Government and Policymakers: Governments and policymakers need to recognize the effectiveness

of self-financing

as a

method of reducing NGO dependenry on state sources

to recognize its potential social and communiry development benefits:

57

-

and need

-PolicynakersnedtockrifythelAalandt*,tTedtnlcntofNGOselfftnancing.Govemmenrs must develop and clarify nonprofit legislation which provides legal benefits to

NGOs which

engage in commercial and economic activities. Regulations must be

clarified and balanced with poliry implications for other legislative priorities to prevent abuses, while providing sufficient incentives.

'Gotnnmmtagncismtsruognizztlxoppramilisandbnefisofu,orbingatiitNGas not only as recipients of public donor suppoft but also as qualified service deliverers.

State agencies should explore new ways to develop professional contractual agree-

mentswithNGOs. -Polirymake?sslmtldrcognizzdnptmtial

financing.Nco

economic and commercial acdvities generate resources for NGOs,

while also providing social and economic benefits to the communiry.

-NGOelffitancingapprcadrcda/nt?e&/EtlxrcWn{nbif iryofgownnwnstosupprtNco initiztioes. Government donors should remove restrictions to dlow for more longterm strategic investments in NGO institutional development andprogram longevr,y.

3. Private Sector: Private, for-profit secgor institutions must reassess their preconceived notions of NGOs and recognizsthebenefits of partneringwith andsupportingNGO self-financing acivities:

-for-pro7irbr:sinessesshouldrcqgzizztlnpotentialforlanartxpmtosbiparithNGO counterpd.rt and the added social benefits these ventures provide.

-hhnchsittrecanprwideuefulbusinarnanagententand.pknningd$isffietohelp strengthen and improve self-financing activities.

-I+ivdteqeditirctfunionstmldreeuhaclxiruistingpolicisnprwideacrcntwrrcafor NG G see king surt-xp and inrrctntent cnpital for self-financing activities.

4. Private

Donors: Private donor agencies and foun&tions must fundamentally reevaiuate their current donor policies to recognize the added long-term benefits of supporting NGO self-financinginitiatives:

-hnsrs slnilA

Wfrun a p,neb prcjnt-bad deJ

n prutide untid twt cta,including

Program grants, institutional BrmB, and otherunearmarked fundswhich allow NGOs more flexibiliry to meet their long-term, mission-related objecdves while developing their organizationd capacity for ongoing activities.

-h?TorsslntUintlnirgrafinahtngrcogt izztlaaddduhrcofst*pprtingelf-fr7ald?g actiaitics. Self-financinghelpsto guaranteethe zustainabiliryandlong-termimpact of donor-supported projeas.

-Nortlrrn NC,O do?wrs slm'tU rcdefiru tlnir re l^aion s uith tlrir hutlnm Ns to ncolporatâ&#x201A;Ź methods to stimulate self-financing initiatives. Nonhern NGos can assist their

58

Southern counterparts to develop their management capaciry for self-financing, to help NGOs gain access to credit for self-financing start-up and investment, and to develop joint venrures with NGOs to capitalize on international or local market possibilities.

Supporting self-financing initiatives of NGOs calls for notling

less

than a fundamental

reevaluation of the traditiond relationship between donors and donees, nonprofit and for-profit 'While this research appears to indicate that selfinstitutions and Northern and Southern NGOs. financing does provide some opportunities for greater financial autonomy and organizational independence, self-financing is not so much an end in itself and benefits of

NGO self-financing

as

it

is a tool. The oppornrnities

deserve and require far greater systematic attention

for

from

development practitioners, polirymakers, and researchers to determine the most effective ways to both stimulate and nurnrre zuch initiatives.

59

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RAFAD. "lrIGO Profile: Research and Applications forAlternative Financing for Development."

Environment and Urbanization. 4.1 (April L992) 125-133.

Rose'Ackennan, Susan. "Competition Beween Non-Profits and For-Profits: Entry and Growh."

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Voluntas

1. 1

NI"y t990) L2-25.

Skloot, Edward. "Should Not-for-Profits Go lnto Business?" Harvard Business Review $anutry/ February t983)2625.

6l

Yaron, Jacob. "'!fhat Makes Rural Finance Institutions Successful?" Vorld Bank Research Observer 9.1franuary 1994)49-70.

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Brodhead,

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Vhat

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Financing Organtzations in Developing Countries." New York: IDR and Synergos Instirute (I.{ovember 1996).

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a

Community-Based NGO:

CAB.'New York: The Synergos Institute (April t994).

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(ree6).

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(Aoril 19.t995]r.

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Pact, and SEEP Neou/ork. "Small Enterprise Development and Income Generating Activities through Indigenous Nongovernmental Organizations: Towar& a Strategy.' New York: Pact and SEEP Nerwork pecember 1989).

Pact, "The Corporate Communiry Experience in Communiry Investment: Report on a Seminar

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Pires, Sheila A. "Competition Berween the Nonprofit and For-Profit Sectors.o \fla5hington: National Asembly of National Voluntary Health and Social \Telfare Organizations ffanuary 1e85).

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1ee1).

Shepard, Charles E. "Perks, Privileges and Power in

a

Nonprofit'ttrflorld."

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february 16,1992) Al. Shore, Bill. "Charities Change Roles by

Turning aProfit." USA To&y (March 26,7996)

Commentary.

'Apostle for aNew Gospel of \fedth.'The Chronicle of Philanthropy (December I4,L995) t0.

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'Wade, B.try. "Practical Traveler: Coalition Sees Unfair Edge byNonprofit Groups.'

Stehle, Vince.

NewYork Times (December 23,t990)

5.3.L.

64

Appendix:

International Case Studies Azerbaijan

Chris'Kitchen

................... A-2

Brazil Organrzacao de AjudaFraterna

-,

(OELF)

............... A-6

Costa Rica

FundacionParalaJuventudylaMujerRuralFunac4S (Clubes+S).........................A-9 Croatia .. A-i4 Sociery for the Improvement of the Qualiry of Life (SIQL) Dominican Republic ......A-18 FundacionRedesyDesarollo fIINREDES) Hangary TheBolt Gallery ............... L-22 The

GondviselesFoundation

..............A-25

India ChildRelief andYou Jamaica TheMel Nathan Rornania

(CRYI

................A-30

Institute

.. ,4.-36

Asklepyos

........A41

National Socieryof PhysicallyHandicapped St.

(SNlf)

............. L44

Lucia The St. Lucia National

Trust

.. ..

..

... . .. . ..

A49

United Kingdotn International Federation of Red Cross and Red Crescent

tlnited

Societies

.......... A-54

States

Development Through Self-Reliance

United

States

(DSR)

Public Interest Research Group

A-1

GJS PIRG)

......... A-59

/EuthTones

..

A65

International Case Study 1 Former Soviet Republics/Newly Independent States (NIS)

Azerb aij anz Chris' Kitchen Since its independence in Augu st,

1

lggl,Azerbaijan

has suffered periods of

significant instability.

Political volatility was aggravated by a three'year war with Armenia until the May , t994, cease-fire took effect. Nearby fighting in Georgia and Chechnya has resulted in nearly 20 percent of 'STorld Azerbulan's national territory coming under control of foreign forces. According to the Bank, about

9O0,OOO

people or !2percent of the country's population of.7 .5 million are refugees or

internally displaced persons (40 percent of whom live in the capital of Baku). Azerbaijan is, however, a country rich in untapped oil resources. It is one of the oldest oil exporters in the world, and was one of the largest oil capitals at the turn of the century. Now, with a stabilizing political situation and the reopening of wartime-severed export transportion links, Azerbajanis set to become a leading oil exporter. State agreements with international oil consortia have resulted in the rapid development of domestic drilling.

The social and economic realities of war and oil in Azerbaijan form the backdrop for the story of Chris' Kitchen. The collapse of the social q/elfare system in Azerbaijan resulted in a tremendous need for immediate assistance to thousan& of people in Baku, parricularly the poor and

elderly whose state-provided food services halted. A group of people from the local Bible College in Baku, including Azerbaijanis, Russians, and American Chris Ca'''tton, decided an immediate 'Sforking response was necessary. out of their own kitchens, the group began to cook and deliver food to about rwenry elderly invalids around the ciry on a datly basis. The scale of the activity began

to grov/ and need became more prevalent. Efforts by the small group to c rry cases of oatmeal and hot food from their kitchens on the metro to the homes of the ciry's elderly became increasingly unmanageable, both financially and logistically, and impossible to sustain.

misionarywith Greater Grace'S7orld Outreach (GG\7O), a Christian organization headquartered in Bdtimore, Maryland. GG\flO maintains outreach offices throughout the world. Along with members of a GG\7O church congregation, Cannon recognized the need to generate resources to increase the capaciry of the volunChris Cannon, an American living in Baku, worhs

as a

teer effort to meet the demand for food aid for the poor and elderly. Cannon had an extensive

background in the food industry obtained from years working with fivestar country inns and bed

&

breakfass in New England. She recognizndanoppornrniry to create an income.generating activiry

which would capitalize both on her skill as a cook and the signifient market demand in Baku for 'lfestern-sryle cuisine. The tremendous influx of expatriate nationals developing the local oil indus-

try provided

a

large and lucrative consumer market for'$Testern-sryle cooking.

A-2

Vith

an

initial invest-

of Cannon's own money, Chris' Kitchen was born. The catering serwice began on a small scale, providing otherwise unavailable preseryes and baked goods to oil industry employees and developers in the capital. The venture began with strawberry jams, spagheni sauces, pickles, and

ment of

$2OO

rolls. Since Cannon worked out of her own household kitchen, the venture required linle overhead. The service soon became highly popular and quickly expanded into an effort to provide lunches to over 120 workers from offshore drilling companies.

Chris'Kitchen became profitable almost overnight, and Ca.'t'on was able to make periodic contributions to support the group's chariry work while simultaneously investing in additional equipment and supplies for the burgeoning business. Soon the chariry work also formalized, and the pecan

nonprofit organization. Called Marhamat (Mercy"), the NGO was intended to continue the "meals on wheels" service to the elderly, run a soup kitchen in central Baku, and provide financial assistance, food, and other supplies to refugees on the Iranian boarder.

Relations between Chris'Kitchen andMarhamat are based on principles of mutual autonomy and group formally registered

respect. Cannon and the

as a

NGO

staff sat together soon after Marhamat was formed to define the

relationship between the two organizations. The rwo created

work, identifying what resources would and supplies. Cannon agreed to cover

be required

a

monthly budget forMarhamat's

to cover salaries, food, transportation expenses,

dl of these expenses from the Kitchen's profits,

and to

provide additional money for financial and medicd assistance to the elderly and poor.

Approximately one year later, Chris' Kitchen and Marhamat are celebrating their respective anniversaries. Both organizations have grown considerably. The Kitchen now employs 24 people, nearly all of them fuIl-time (some of whom were hired from Marhamat to assist with purchasing

with equipment donated by a Turkish business in Baku. The business caters to consumers' desires for foods and products other-wise unavailable in Azerbaijan. Cannon has had to rely primarily on seasonal fruits andvegetables available in the country, but also travels often to Turkeyto find unique food and supplies). In

April Lgg6,thebusiness moved into a fully operationd kitchen

space

items. The staff struggles to meet the ever-increasing demand from oil companies, embassies, and the growing expatriate community to cater special events, receptions, and parties.

Running the catering business she had once

is

very time conzuming and demanding. Cannon admits that

thought there would be a closer working relationship bet'ween Chris' Kitchen and

Marhamat, and that she would have more time to dedicate to charitable work. The kitchen, however, has absorbed all of her time and energy. In addition to the daunting task of staning and

managing an expanding business, Cannon has had to train an inexperienced locd staffto manage all

isthe onlyexpatriate andthe onlystaff person with catering experience working in the Kitchen. She admits that it has taken a lot of 'blood, sweat and tears" to train what is now a strong professiond team. M*y of the local staff have risen to managerial positions. "Unfornrnately we are not as well organtzsdas I would like; we have grown at such a aspects of the catering. Cannon

speed I can't keep up

with it,

and do

not have dl the office/administration people I need to

orguttznd," she says.

A-3

be

well

Cannon also admits that there was a great deal of skepticism among colleagues, friends, and the public at rhe starr of the venture. No model existed antswhere in Azerbaijan, and many believed it would be impossible to run a profitable business to support charitable work. Although many in the expatriate comrnuniry were supportive of the idea, she has been relatively alone in working to prove the idea is more than just a "pipe dream.o Three shifts now work through the night to meet the demand for the Kitchen's food and services. According to Cannon, the Kitchen is now in a "new phase of development.' To scale up its aaivities the Kitchen desperately needs

a

new and larger space, with professional kitchen facili-

ties and storage. Cannon and her staff are currently

looki"g

at purchasing a larger

properFf, nearly

would require approximately $120,000, including $35,0@ to purchase the space, an additional $35,OOO for renovations, and $50,000 or more to purchase and install professional kitchen and catering equipment. Cannon admits difficulry in weighing the long-term 113 square meters. Such a move

prioriry of investing in equipment to scale up the Kitchen's activities and increase profit against the short-term prioriry of providing immediate resourcesto Marhamat for the needy of Baku. The Kitchen is now able to contribute'a large chunk'of its profits - approximately $1000 per month to cover all of Marhamat's operating expenses and its eight-member staff. The move, and investments in a larger kitchen space, would allow the busines to increase its profits and meet the

-

constantly increasing consumer demand for its services.

Meanwhile, Marhamat is also growing. The NGO recently moved into a larger office space, and its executive director recently came to Cannon with plans for 5seling up the NGO's activities. the The two agreed that Chris' Kitchen and Marhamat would continue "to grow together"

-

Kitchen would work to increase its funding to support the NGO expansion. The current relationship berween the Kitchen andMarhamat is not formalized in any written contract, but based on murual tnrst, open communication, andthe respect Cannon has forthe executive director's ability

to manage the NGO's work. Although largely autonomous, since Marhamat was an offshoot of church members' initiative, the NGO remains affiliated with a local church. Elders of the church involved in major NGO decisions, but the govemance structure is informal and not rigidly strucnrred. Likewise, Chris' Kitchen remains completely clear of Marhamat's internal are

decisionmaking.

Cannon has had tremendous difficulty legally incorporating the work of Chris' Kitchen.

"nonprofit business.o There are a number of NGOs in Azerbaijan in the aftermath of the war wittr Armenia. As in many NIS countries, however, there is a lack of clarity and consistenry in Azerbaijan's nonprofit law. ''We're Cannon has without success tirelessly tried to register the Kitchen

as a

tax exempt now, but the law changes minuteto-minute,o says Cannon, 'and there is no precedent 'We're pioneers in this area, and [tax administrators] don't know where to put for what we're doing. us. They have no frame of reference in the law." Instead, Cannon has had to rurn to nonprofit

registration in the United States. Chris' Kitchen is now registered in the State of Maryland 50f (c)(3) raxâ&#x201A;Źxempr

as a

nonprofit organization under the name of "l\4eals for the Global Village.'

A4

Cannon hopes this status and the board she plans to assemble will help the Kitchen to attract additional tax deductible contributions from U.S. sources to provide working capitd for the opera-

tion of the business. Several multinationd companies, including oil and food industry companies, have already approached Cannon regarding donations. Two oil companies have already donated approximately $2500 each. Cannon has sent out a few proposals, and copies of Marhamat's newsletter, to prospective donors, but in light of her heavy work load at the Kitchen has had little time to do public relations or fundraising work. She has succeeded in attracting

of

a

a

few additional donations

few thousand dollars. Cannon hopes donors recognize that the Kitchen is "not just out beg-

work," and will invest resources to allow her to expand.

The Kitchen does not market itself in a waythat may "exploit the poor" to generate additional business. The Kitchen's business cards and letterhead reads "A Business Born of Compassion.o Cannon is confident that Chris'Kitchen is preferred over other catering services among most Baku consumers purely as a result of the quality of its product and its professiond reputation.

She does not believe this populariry has caused any problems with other local restaurants or businesses beyond "jealousy'they may feel toward her abiliry to ettrald international customers.

Cannon believes that "the sky is the limit," andthat the Kitchen is now in avery unique position in light of the Azsrbilanoil industry's boom. She hopes the Kitchen will branch out into gtng, but doing good

other areas of charitable activiry. She and the staff have staned drafting plans to start a vocational training center to capitahzn on the market's increased demand for professionally trained office and administrative staff in multinational corporations. Cannon plans to offer vocational training in computer and secretarid skills wants to wait

as

well

until Chris' Kitchen

as

in culinary arts. Cannon feels the time is not yet right; she

is able to complete the next phase of expansion of its catering

Although the relationship bet'ween Chris' Kitchen and Marhamat is a unique one in Azerbaijan, Cannon hopes it will serve as a model for other organizations to capitalize on their own services.

creative abilities and skills.

Note rSpecial thanks go to Chris Cannon for herpersonal account of the effort to begin and

dwelop Chris'Kitchen. Also,

thanks to KentJames for helpingto identify this case and to the Greater Grace'!7odd Outreach Mission Office for additional information.

A-s

International Case Study 2 Latin America and Caribbean

Br azil : Organ izacao de Ai

u

da F rateffra (OELF)

1

Vhen Father Clodove uPiazzaanived from Italy at the Organi Tac o de Ajuda Fraterna (OELF) in Salvador, BraziI,he found an orphanage providing shelter for abandoned and homeless street children. Vhile OELF had been providing much-needed services and housing for young people since the 1950s, Father Piaz zawusfrustrated that the children in the orphanage were neither workjuvenile offenders. ing nor *udyrng. Mrny of the children were abandoned, victims of violence, or Few had ever lived in a family environment with role models to introduce the values of education and work. Instead, mo$ were exposed only to orphanage life itself - where everything vras Provided for them and the ethic of dependency was pervasive. Father Piazzafelt that OELF could do more for the young people to prepare them with the knowledge and professiond skills necessary to become independent, leave the orphanage, and improve their own quality of life.

'lfith vinually no

financial supporr from the state, Farhe rPiazzarealized this evolution could only mke place if OELF generated its own resources.

Today, OELF is a differenr rFpe o{ organizarion. It still provides shelter and housing for approximately4OO youth. OELF matches some with families who adopt the children; others live in "recreared families" with new "brothers and sisters" in OElF-provided housing. Father Piazza also up a training and education program, which now includes over 1500 youth who live with their families. These adolescents are selected for the program based on their poverry level and other risk factors. Some may already be prepared to attend public schools while others may be too young or

set

result of physical or mental abuse. OELF provides financial assistance for those attending public schools as well as for those youth in its own professional vocational and

require special atrention

as a

technical training prograrns.

The OELF program has several components and is intentiondly decentralized to meet the needs of different young people. First, OELF maintains a literary school for physically or emotionally abused children living in OELF housing. The school integrates the teaching of music, art, and

history for school levels 14, preparing the children to enter the public schools at the 5th-grade level. The Brazilian stare currently provides no such program. Second, OELF provides introductory and advanced technical training for adolescents in computers and comPuter repair, auto mechanics, office skills and administration, electricd engineering and elecrronics, small enterprise development, weiding and metal works, and video and computer graphics. Finally, for those adolescents who graduate from vocational training prograrns, OELF offers a six-month aPPrenticeshiP rhrough its five "workshops" in communiry cenrers throughoutthe ciry. Srudents who enroll work

A4

four hours per day in pracdcd, hands-on learning environments, including metal works, industrial mechanics, silk screening, computer graphics, bread makittg, furniture making and carpentry, and garment

production.M*y of the students are invited to stay on as teachers, or pursue careers

as

instructors in other schools.

OELF is now one of the largest organizations of its kind working qrfth homeless, poor, and at-risk youth in Latin America. The organization assists approximately 2,0@ children and adolescents and employs a fuIl-time staff of about 65 people. Much of its growth has taken place in the last ten years as a result of Father Piazza'sefforts to make OELF a self-susteinin gorganization. For the last five years, OELF has been dmost 1OO percent self-financed through the revenues it generproducts and serwices of its five workshop centers. This is no small task, since OELF required nearly $10,000 per day (about $3.5 million per year) to maintain its aaivities. OELF receives less than 10 percent of this from external sources. Beyond a small $50,000 grant from the ates by selling the

Inter-American Development Bank, earmarked for vocationd training prografi$, OELF receives no international support for its prograrns. Other thap a $10 per month stipend for the homeless children, the Brazilian government provides no direct support. Ironically, however, the Ministries of Education and Health have themselves become some of OELF's largest "customers." OELF now has large contracts

with both Ministries

-

producing school furniture for the Education Ministry

and public hospital garments [.e., clothing, towels, sheets) and equipment (including intensive care

unit machinery, and incubators) for the Health Ministry. The Ministries are quite satisfied with OELF's work, according to Father Pi*-z-a,borhfor its quallry and low cost. OELF is able to produce at below-market prices resulting in significant savings to both agencies. OELF also main-

-

tains

a

small store in Salvador's shopping market to sell the products snrdents produce in the

workshops. The shop is popular among the public both for its qualiry and for the appeal of social benefit.

\f'ith demand currently high for most OELF products

and services,

tle organizationis

able

to generate enough (ta:r-exempt) income to maintain its non-income-earning programs. In the

dal, but capaciry exists to nearly double that. Fathe rPiazz,ais concerned about scaling up the activities at the expense of individual attention andthe "communiry-based" nature of the organization. Production could be more efficient, but he says this "inefficienq" is intentional. Although he was trained as an econofurniture-m"kirrg center, for example, output is about 1,000

mist and businessman prior to entering the clergy,

OEIf

pieces per

worhshops deliberately funaion ineffi-

ciently due to the prionty gt*o to teaching and apprenticeship functions. Many students are still learning their trades, which takes additional time away from production.

OELF does not have a business plan. Instead, each project area has its own independent planningprocess. Unlike for-profit businesses, OELF takes minimal risk in its income-generating activities

-

i.e., it does not develop products and services for sale in open markets and does not

publicly market or advertise its services. Instead, OELF relies on prearranged contracts or agreements, typicallywith government agencies.FatherPiazzaadmitsthat OELF's heavy reliance on

A-7

government contracts is potentially "highlyvolatile." Government contracts are not entirely reliable in Brazil, since they are subject to budgetary pressure. Ministries are often slow to paytheir invoices

-

or sometimes entirelynegligent. Budget

cuts hit heavily, andthe government often goes

with-

our resources for months at a time, leaving many of OELF's bills unpaid. This has caused a cashflow problem for OELF the organization currently ovres approximately $350,000 to its suppliers.

-

repayment plan with many suPPliers to allow Payment in instailments over a period of three to six months. OELF is also working, however, to strengthen its links vdth the private secror and to find additional private market possibilities for its enterprises to supplement FatherPiaz.zahas negotiated

a

its dependence on government contracts.

FatherPiazza identifies several additional obstacles and difficulties in starting up and managing OELF's numerous resource-generating aaivities. First, OELF is in need of more people with business sense and experience. The 1G15 people currently employed in each of OELF's "workshop

centers' are highly skilled in specific technical areas, but few have business experience. It has been difficult for OELF ro anract business professionals, primarily due to its inability to match private, for-profit secror salaries. OELF has some agreements with professors at universities to provide periodic pro bono senrices, but the organization has not benefited from much volunteer suPPoft.

Ap"n from a few international volunteers who come for short three to six month visits, there are no volunteers in OELF's programs. Father Piazza is sceptical of these international volunteers' capacity: "The volunteers need to be here for ten years or more to truly understand the situation in Braz.tland to be truly useful and productive. " F{e laments that, unfornrnat ely,Sraz,itans don't volunteer."

Identifying starr-up resources was a challenging and gradual process. Father Piazza"re\ied heavily on his own personal international contacts. He was ableto attract an initial $40,000 cash donation from a friend, found individuals in Belgium and Italy willing to donate and ship used machinery for OELF's bread baking and garment centers, and found an Italian organiz-ation willing to provide support for offices and aparrments.

Father Piazza.also faces a tremendous obstacle in convincing the general public and the state of the necessiry and benefits of initiatives like OELF's. Although he believes OELF's programs are important and suited to generating income, he does not believe that this resourcegeneraring capaclry should provide an excuse for insufficient government support. He believes that

the state is at least 5O-percent responsible for the education and support of needy and at-risk adolescents. As a member of the state's advisory committee on the problems of street children in Brasilia, F ather Piazzais working to change government policies.

Note rspecial recognition goes to Nicole Etchan for her hard work in gathering information for this case and for conducting the personal interviews in Ponugpese. Thanks also goes to Father Clodov otPiazza,executive director of OELF,

for

his personal accounr of OELF's work. Also, thanks to Lara Goldmark of the Inter-American Development Bank

for

helpingto locate this

case.

A-8

International Case Study 3 Latin America and the Caribbean

Fundacion P ar ala Juventud ylaMuier Rural Funac 4-S (Clubes 4'S)t

C o sta Rica :

The Fundacion Para LaJuvenrud y la Mujer Rurd Funac *S (Clubes 4S) was founded in 1960 in San Jose, Costa fuca. Vhile sharing a similar name and set of principles to the 4H Clubs common

in other parts of the world, Clubes 4S is a fully independent NGO with its own governing struc' rure, including a 15-member national commirtee and a board of directors. The Foundation was established to provide training and employment oppornrnities to youth and rural women throughout the country. The Foundation conducts its activities solely in rural Costa Rica, where it organizes agriculture and rural communiry development projects, small enterprise development assistance; leadership, volunteer, and civic education training programs; and youth seminars on drug prwen-

tion and sexualiry. One major programmatic objective of the Foundation is to offertraining, education, and employment oppornrnities to rural youth to provide the incentives and conditions necessaryto allow them ro sray and make a living in their communities. In addition, the Foundation works to provide smdl business training and resources for rurd women, including traini"g in accounting, empowerment, equipment use and paingsamce, and budgeting and economics. Clubes 4S estimates that its programs reach nearly

1O,OOO

young people and 5,000 rural women through-

out Costa Rica. The Foundation currently has an annud operating budget of $300,000 and maintains a staff. of.25 full-time employees and at least 250 volunteers.

For the first rwenry years of its existence, Clubes 4S was heavily dependent on government resources primarilythe Ministry of Agriculture to support its program activities. By 1975-76,

-

-

the Foundation began efforts to alter this trend as a result of its own concern about resource dependency andthe increasingthreats of reduced government grant support. The Foundation approached the Inter-American Development Bank

@B)

and international private foundations

for

program support with linle success. According to Clubes 4S Executive Director Bernal Mendez Arias, the Foundation's board made a conscious decision to no longer focus attention on seeking

donor funding alone, but to approach its resource generation in a more "business-like'fashion.

Now, Clubes 4-S no longer receives any government grant support for its prograrru. The Founda-

tion does, however, have a five-year agreement with the Ministries of Agriculture and Education to pay the salaries of all the professional staff (which amounts to nearly one-half of Clubes 4S's annual operating budget.) This zupport for personnel comes under annud scrutiny by the Ministries, which plan to reduce this support by 25 percent

the saiaries of all of its support and technical staff.

A-9

nl997.The Foundation, meanwhile, PaIs

The Foundation has been able to capitalize on the trend vrithin many Costa Rican government agencies to privatize state services, and has focused attention on developing agreements under which it fulfilis conrracts for numerous government agencies. The Foundation approached the

Administration (Casa de Seguros Social) in 1980 with what it considered a'win-win' proposal. The administration wished to pivatrznits hospital clothing manufacnrring industry, and Ciubes 4S had a group of skilled rural women whom it could readily contract to perform the work' The administration agreed to a relationship whereby Clubes 4-S would initially take over approximately 2-5 percent of the administration's hospitd garment manufacturing. Under the agreement, Social Securiry

the adminisrrarion would provide the fabric, buttons, thread, and other materials and the Foundation would manage all aspects of the assembly of nearly 200 different patterns (including pajamas,

Foundation approached several foreign embassies, including those of which in Canada andJapan, which donated sewing machines and equipment to the Foundation turn donated the equipment to rural women to allow them to become "subcontractors.' The sheets, and

pillow

cases). The

-

Foundation also provides small loans to a number of rural women to allow them to purchase sewing equipment. Clubes 4-S dso provides training in sewing, machine sleinlgpaace, and accounting. In rurn for their services, the Foundation pays the rural women workers a fixed price per garment.

Over the past fifteen years the administration has continued to incrementally increase the percentage of its hospital garment manufacnrring it contracts to Clubes 4-S. The Foundation currenrly manages approximately 80 percent of the hospital glslhing manufacnrring for the entire

counrry (the remaining 20 percent is contracred to private for-profit organizations). This contract has ailowed the Foundation to provide employment to approximately 500 rual womenin26 shops (ulleres) in some of the poorest rural areas of Costa Rica. In addition, Clubes 4-S now generates approximately 50 percent of its own annual operating budget from this contract alone. Clubes 4-S Executive Director Arias believes that this lucrative source of revenue is very stable both in the short- and long-term: "J.{o one would touch this program," he says confidendy. According to Arias, the large percentage going to Clubes 4S reflects the administration's satisfacdon

with the

Foundation's iowerproduction costs, higher qualiry, rural development benefits, and reduced bureaucracy. llnder current regulations, private, for-profit contractors must undertake a rather lengthy

for contracts. As a nonprofit organization, Clubes 4S is able to negotiate its contract directlywith agovernment controller at tle administration and avoids the lengthy, costly and burdensome bidding proces. This fact, in combination with the and bureaucratic bidding pro ces (apello) to bid

communiry development benefits provided by Clubes 4S, provides linle incentive for the governmenr to turn higher percentages of its production over to private, for-profit manuadded social and

facnrrers.

In fact, the reverse trend is underway. The success of its â&#x201A;Źreement with the Social Securiry Administrationhas openedup oppoffunitiesfor Clubes4-S forothergovernment agreemena. The Administration is now encouraging the Foundadon to take over the entire garment production

A-10

process, including the supply of raw materials. This

will allow Clubes 4-S to increase its current

per-pajama price, for example, to approximately $5 per piece, providing

a

sig''

ifi6stly

$1

more lucra-

tive profit margin for the NGO. The state hospitals were also so pleased with Clubes 4-S's garment production work that the government has now approached the Foundation to coordinate hospital

laundry facilities. Clubes 4S has already taken on this added responsibiirry in a few hospitals, purchasingstate-ownedlaundryequipment andhiring many of the hospital's existinglaundryperson-

Ministry of. the Foundation to take over its staterun school uniform production

nel to continue the service under the Foundation's management. In addition, the

Education has approached industry.

In addition to its government agreements, Clubes

4-S has

sought additional entrepreneurid

activities to generate income in support of its program activities. In 1990, the Foundation proposed to the Universiry of Costa Rica to convert an under-used, universiry-owned ca$le farm in

a

beauti-

ful area outside SanJose into a training center for youth. Under the agreement with the university's rector, the Foundation would renovate the buildinB, rnanage it, and channel25 percent of the training center's income to the universiry. Clubes *S sawthe oppornmiryto use the space for both revenue-generation and for its youth prograrns. The Foundation "redlocated'government re-

in renovating the Clubes *S offices into the renovation of the center's meeting rooms, dining room, and kitchen facilities. In addition, the Foundation built ten additional small "chalet'Lrfpe buildings on the properryto house up to 120 guests. The Centro de Capitacion Para laJuventud ("Youth Training Center'), a scenic, five-star, mountain hotel faciliry, sources

originally intended for

use

now generates approximately 30 percent of the Foundation's annual operating budget through its

tuition

fees

for workshops, seminars and camps for youth leadership, small business development

training, and health and education prograrns.

'$?'hen

not in use by the Foundation or the universiry,

the Center is also rented out to universities, private companies, and state agencies for independent meetings and conferences. Ten percent of the Center's revenues go for Clubes 4-S administration

with its management, 40 percent for operation, maintenance, and upkeep, 25 percent to the Universiry of Costa Rica, end25 pâ&#x201A;Źrcent in net profit to the Foundation. The costs associated

Foundation has also opened caps, decals and

a

small shop on the faciliry grounds that sells t-shirts, key chains, hats/

bumper stickers, pencils, pens andpaper, and other small items. The shop currently

generates approximately 5-10 percent of the Foundation's annual budget.

Clubes 4S also manages an internationd youth exchange program in conjunction several internation

year living

aJ,

with

organizations. The program allows snrdents from rural Costa Rica to spend a

with a family in rural

areas of the U.S. and Europe.

\7hile srudents must pay a fee for this

program, the Foundation assists them in developing entrepreneurial adivities to generate the needed funds. This

activiry generates between 1G15 percent of Clubes 4-S's a'''ual operating

budget.

The success of Clubes {S's resource-generating activities is a result of a number of factors working in its favor. The Foundation receives a large amount of donated serwices and in-kind gifts.

A-11

In addition to donated equipment for its garment manufacnrring business, the Foundation enjoys a pool of nearly 2lOactive volunteers rhroughout the country. The Foundation also has relationships with other organizations across Costa Rica which donate in-kind gifts from management exPertise to repair and maintenance services for its sewing machines. The Institute for Economic Sciences, the Institute for Inter-American Agricultural Cooperation, the Institute for Agricultural Develop ment, and the Ministries of Culture and Sports and Naturd Resources, all donate exPertise and excePt the sales volunteer assistance. In addition, all of the Foundation's income is tax exempt

-

tax the Foundation must pay on products of the Youth Training Center shop. As a part of its agreements with various government agencies, the Foundation is exemPt from all taxes since the

into its charitable programs.

Managing the resource-generating activities of the Foundation has not been an easy task' Most of the activites are nor redly profitable; rather, accordi''g to Arias, the Foundation operates at a ner loss. The activities generate just enough surplus to cover the 25 percent of the Foundation's budget required for operariotrs and administration. The rest goes to developing and maintaining its profit from its aaivities

is channelled

prograrns. The Foundation has created a business plan with clear monthly goals. Arias hired additional staff for the initiatives and relied on these volunteer human resources to manage the venrures. Arias believes the business venfures have had

a

very positive impact on the Foundation's

mission, providing dual benefits to the organization. Vhile generating much-needed resources for the Foundation's programs, the ventures have also allowed tle organization to provide employment

to hundreds of youth and rural women around the country - a direct programmatic objective of the NGO. These venrures, have simultaneously put a difficult financiai strain on the Foundation, however, since they have to generate

a

surplus beyond that which the Foundation requires to

reinvest in maintaining its programs. The rapidiry with which the resource'generating aaivities have

grovrn in recent years has also strained the Foundation's cash reserves. Indeed, the scale of the '!flhile the garmenr business has presented a tremendous cash-flow problem for the Foundation. rural women it subcontracts require imimediate payment upon deliveryof theirwork, the government often takes 30-35 days to pay Clubes +5. In response, the Foundation has begun efforts to

would allow it to cover gaps in income and payments. The Foundation is also seeking to renegotiate its contract with the Social Securiry Administration to require a percentage of its payment up front.

The Foundation is also hoping to hire two additiond staff members to focus on develop creare a $500,000 reserve fund vrhich

menr issues for the organization. These fwo persons would be responsible for reaching out to government agencies, internation d.organizations, and foundations for progra^m funds. In seeking

"traditional' funds, however, the Foundation is commined to identifying only those donors who will allow the NGO to maintain a "sustainable" approach to its programs, (i.e., those that will allow it to generate income in addition to meeting other programmatic objectives). The Foundation has, for example, developed proposals to taryetd international donors to attract $1

these more

million in contributions ($200,000 per year over five years) to purchase the fabric, buttons, thread

A-t2

and additional equipment required to launch the school

uniform manufacturing agreement with the

Ministry of Education. Arias believes that Clubes 4-S's approach is unique in Costa Rica, since most orher NGOs look to foreign foundations and governments for project grants. M*y of these organizations are quite comfonable with these donations, and perceive linle to no immediate threat to their existence. The Foun&tion, however, views donor funds more as a long-term "investment" than as a "donation." "In five years, after manufacturing 10,000 school uniforms and providing needed employment to rural women across Costa Rica,' says Arias, "that one million dollars will still be here.'

Note tspecial recognition and thanks go to Nicole Etchart for her considerable effon in dweloping this case and for

conducting the personal Spanish interviews. Thanks dso goes to Bernal Mendez Arias, Executive Director and Miguel Vargas of Clubes 4S for taking the time to give their personal accounts of the Foundation's

Goldmark of the Inter-American Development Bank for helping to locate this income,generating activities throughout the region.

A-13

case

work. Also, thanks to Lara

and for her insight into iszues of

International Case Study 4 Central and Eastern Europe

Croatia; Society for the Improvement of the Quality of Life (srQL)1 The Sociecy forthe Improvement of the Qualiry of Life (SIQL) qias formed tnZagreb, Croatia, in 1987 andlormally registered as a Croatian NGO in 1988. The Sociery was established for the purpose of raisingpublic awareness about environmental issues through the promotion of ideas and practices of individud ecology, social ecology, and sustainable development. Since 1987, over

individuals have been reached by SIQL's programming in these three areas. First, the Sociery organizes educational seminars, lecnrres, and workshops regarding individual ecology and provides

7,OOO

advice on healthy lifesryles including diet, recreation, and environmental health. Second,

SIQL

works to bring current local and global environmental problerns to the public's attention. The Sociery publishes brochures andpublications, offers lecnrres, orgarrizs5 environmental events, sponsors an annual environmental award in environmental protection, hum"nitarian, and peace

work, publishes a green consumer handbook series, and initiated an Eco-library project. Third, SIQL aims to improve ecological and ethicd business practices through a number of national gatherings, including Eco-technology, Ethical Business and Health and gatherings of nonprofit and for-profit leaders to encourage environmentally sound production and services.

SIQL has a full-time staff of six, approximatelyrwenryvolunteers and 300 members. Its governing system is rather complex: the Sociery's overall direction is determined by the SIQL Assembly, consisting of all organizarionaJ,members, who together elect members of SIQL's three governing boards: the Supenisory Board, the Coordinating Board and the Advisory Board. The Superwisory Board consists of members elected at the annual SIQL Assembly, and convenes twice a year to monitor and evaluate the als possessing

NGO's activities. The Advisory Board consists of elected individu-

particular expertise related to SIQL's various program areas

-

and convenes

as

needed. Finally, the Coordinating Board consists of representatives of SIQL's seven "Forums," and

works directly with SIQL program staff to coordinate and gurde the NGO's various projects. SIQL forums include the Art Forum, the Sport Forum, the Scientific Forum, the Business Forum, the Spiritual Forum, the Media Forum, and the Political Forum, each of which is composed of prominent public figures in the related fields who convene cwice ayear, or as needed, to advise SIQL in particular topic areas.

The Sociery's annual budget is approximately $100,000, the largest single source of which (40 percent)

SIQL generates for itself from products,

A-14

fees, and services.

Income of SIQL (1996) @ercent of total by source)

Product Fees/Services

40.0

International Sources

30.0

Domestic Private Giving

20.0

Domestic Government

9.0

MembershipDues

1.0

Source: SIQL

A year after it was established, SIQL began a series of educational seminars in individual ecology as a paft of its program activities. Charging minimal entrance fees, SIQL was able to generate a minimal amount of resources initially, but,slowly b.g* to generate enough income from the seminars ro pay rhe salary of a coordinator and secretary. Despite the breakout of war in the former Yugoslavia, interest and attendance in the seminars grew and SIQL recognized the potential for creating a permanent center for its activities to meet three organizational objectives: 1) to generate sustainable resources to cover and expand its projea activities; 2) to funher its public educational mission; and 3) to provide needed products and services to its members. As a result, in 1988, upon approval of its Coordinating Board, SIQL decided to establish the Makronova Club, a permanenr center for education in individual ecolo W anda restaurant and shop to provide vegetarian and macrobiotic food, products, and other services to support its members. Through the club,

SIQL hoped to expand its educational activities while generating additional funds for its other projects and activities. At the decision of its Coordinating Board, SIQL borrowed from its mern-

hiring a professional chef for the restaurant, the activities of the club were managed entirely by existing NGO staff (who bers the approximately $35,000 needed to start the enterprise. Other than

managed the restaurant, served

as

waiters/waitresses, organized educational acdvities, and more).

The entire operation was overseen bythe Sociery's executive director. The NGO made connections

with local organic farmers to provide the food for the restaurant, and distributed its NGO publications and environmental information in the restaurant.

Until 1995, the profits generated from the club seminars and restaurant (ta:< exempt under Croatian laws on social organizations and civil associations2) were used to cover other SIQL project costs. The objective of the club was not to generate large profits, but to conribute to the organizationd objectives and to make the club financially self-sustainable. According to the program coordinator, AnaJanjat ovic-Zonca, "It is important to say that the Makronova Club is a not-for-profit unit which uses the profits it generates to stren$hen its activities." Janjatovic-Zoricaalso believes that the resource-generating approach at the club has provided the added benefit of helping to improvethe Sociery's overall management capabiliry. The added business management responsibili-

A-15

ties helped SIQL move toward a "more professiond approach" in all of its programming,

including

its abiliry to convince and assist for-profit companies to shift to more environmentally-sound production approaches. In addition, the resource-generating activities of the club have increased

'

the Sociery's public visibiliry, although some other Croatian environmental NGOs have been critical

NGOs the

of SIQL's approach. "The public has a positive impression, but some persons from other perceive it negatively,'saysJanjat ovic-Zorica. She believes this criticism is caused by the fact that

Makronova philosophy and approach "is litrle known or understood" in the country. Ffowever, one Croatian environmental NGO activist confirms that SIQL is criticized for its business-related activities:

that not that many people know about the organizxllsn as they keep themselves quite distant and sort of elitist from the other NGOs . . . some other NGOs do not look positively on them. Pan of the reason is that they "The problem with SIQL

is

know how to ger money offpeople and companies . . .They come across as a bunch of businessmen with a lot of stories and promiges. A lot of people 'buy it,' but only later realize the truth . . . SIQL is NOT a representative NGO. They are nongovernmental but they are FOR profit. The restaurant they run is not very much known, even though it is popular (but extremely expensive) among a ciosed circle of people. They love to organizeexpensive happenings and produc efaaq publications, but that is not very user-friendly for the others and the main purpose of all these is

again- money."

Initially, SIQL staff, board members, volunteers

and members supported the idea of devel-

oping the club's resource-generating activities to contribute to the Society's other prograrns. However,

as

the club's activities institutionalizrd, the problems of channeling its profits into SIQL's

environmental programs became more difficult and caused internal conflicts. "That starred to threaten the club itself,' says Janjatovi c-Zoica. "Giving money from Makronova to other projeca of the Sociery at one point endangered the very existence of the Makronova. It must be clear that it is not easy ro manage a vegetarian, macrobiotic club... As the activities grew, SIQL needed the resources to become more professional,o she said. As the club's activities matured and

professionali zed, for example, SIQL could no longer rely purely on volunteers and staff members for labor. The labor and investment requirements of the club were all<onsuming. In addition, staff members and volunteers working in the club

-

particularly the restaurant

-

began to request

employment and steady, competitive salaries. Added investments were also needed to upgrade, manage, and improve the Center iaelf. As a result, the club could no longer invest in its own progranr and infrastrucnrre and at tle same time make contributions in supporc assurances of permanent

of other SIQL programs.

The decision was ultimately made to register the rwo entities separately and continue their so that the club would no longer finance ttre NGO's progranrmatic activiwork independendy ties. "The reasons for independent registration is to legally justify the facr that Makronova has

-

A-16

, :

grown into an independentorganzation.It will, however, maintainstrongprogrammaticlinkswith SIQL," saysJanjatovic-Zorica. (Others indicate the reason forthe split had more to do with personal rivalries between the organization's two leader$. The connection in the future will be purely progranrmatic, and each organizationwill be responsible for its own fundraising. The other projects of SIQL are therefore trying to survive by applying to foundations and other sponsors for support.

Janjatovic-Zoica,"Now we don't have our own office, and not enough money for core activities.' This independence has also presented legal problems for the club. As a rarher unique organizational mix of for-profit and nonprofit activities, there is nothing in current Croatian law to clarify how it should register. 'The independent registration has still not happened because the legal requirements for registration as an institution are still unknown. As a transitionai count{f, which has gone and still is going through big social changes, there are some doubts about such a registration, so we have to wait until this is clearer . . . the model of SIQL, and especially Makronova, is unknown in our courtry and in this par:r of the world. It therefore causes great "That is not ezs/,"

confusion,"

says

saysJanjatovicZorica..

,

The lessons SIQL has learned in this venttrre are ones it is eager to share with other NGOs

in Croatia. The Society applied for funds to develop an NGO handbook to educate other Croatian NGOs in the legal, managerial, and financid background needed to successfully conduct their work.

"If you want to do business, there are many books; business, accounting, and legal consulting '!7hat we need is a book'FIow to do somethingcompanies; conferences, seminars, schools, etc. else.but-business in Croatia'

or'How to nrn a nonprofit organization," SIQL argues. The book is

intendedto be in the form of a loose-leaf manual which can be edited and changed to reflect the constantly evolving legislation and tax regulations in Croatia. One chapter of this resource handbook is intended to focus solely on fundraising with special aftention to 'FIow to perform a profitmakingactivity.'

Note rSpecial thanks go to AnaJanj atovic-Zorica.of SIQL for her many correspondences, and for taking the time to relay

relevant information for the case. Thantrs also to the Regional Environmental Center for Centrd and Eastern Europe (REC), and panicularly Olinka Gjigas for rwiewing the case and providing personal insight.

2There are currently no regulations in Croatian law which

NGOs only pay income tax on "related'

limit NGOs from directly conducting commercial adivities.

business activities (i.e., basic activities of public interest are not taxed).

"IJnrelated" business acrivities (i.e., commercial activities)

are ta:<able,

with apossible exemption for up to

kunas (approximately $10,000) if that moneyisusedfortheNGO'sstatutorypurposes.

"related" and "unrelated" activities is very vagpe in practice. (Rutzen, ed. 1995).

A-r7

50,000

The distinction between

Internationd Case Study 5 Latin America and the Caribbean

mini c a n Rep ub li c : F undaci o n Redes y Des arro ll o (FUNREDES)1

D

o

The Fundacion Redes y Desarrollo FTINREDES), the 'Net'q/orks and Development Foundation,"

from the transformation of an entire department of the international organization Union Latina, 11 lgg3in Santo Domingo, into an international nonprofit' nonâ&#x201A;Źovernmental organization. FUNREDES began as an efforr to develop and disseminate new'information technologies in dweloping countries, primarily in the Caribbean and Latin America. FUNREDES' founders believed that the rapid spread of information technologies around the world had overlooked Southern nations. They feared this lack of access to technologies would continue to marginalize developing counrries and threaten their independence. FIJNREDES was established for

was established

the purpose of facilitating and accelerating the spread and access of information and communication technologies throughout the region by supporting the development of national nerworks, and by providing access and training for potential users from a variery of fiel&, including NGOs, universities, scientific communities, and government agencies.

FUNREDES was founded by Daniel Pimienta, a mathematician and computer specialist who had worked for t2years in the computer field as an employee of IBM in both the United

FUNREDES was created as a result of a decision by Pimienta's previous employer, Union Latina, to expandthe activities of REDALC S.edparaAmericalatinay el Caribe, or "Nerwork for Latin America andthe Caribbean") a comprehensive regional project for academic and research ner'working in Latin America and the Caribbean. REDALC had been executed in collaboration with UNESCO/CRESALC and the Latin American Science Academy (ACAI) and coordinated by Pimienta from the offices of the Union Latina in Santo Domingo since 1988.

Building on rhe accomplishments of REDALC, the idea of FUNREDES was to create an autonomous organization which would not be restricted to aaivities in Spanish-speaking Latin America. working as an 'Internet FLINREDES was formed to promote "Information without Barriers" States and France.

-

peace

Corps'to

assist

in the development of communications technologies and to

assess

their

impact upon scientific, economic, cultural, and social matters.

FTINREDES received seed support from Union l:tina and ACAL to begin its activities in 1993. The organization now maintains an international head office in Santo Domingo, a European

Latin American and Caribbean office in Caracas, Venezuela. Pablo Liendo, Regional Director of FUNREDES is based in Caracas and has worked with Pimienta to concepftalize and develop the Foundation's work. A full-time staff of four (an executive director office in Nice, France, and

a

A-18

$affmember and, about five volunteer members conduct the NGO's activities. Staffare assisted by a group of FTINREDES consultants and national correspondents throughout the region with expertise in documentation, computer science, satellites, multimedia, and telecommunications. A governing General Assembly of Members consists of and three staff), one additional part-time

individuals or organizztions dedicated to disseminating the newer information and communications technologies. An informal "consultative board'made up of "outstanding personalities," interna-

tionally renowned in different fields related to FUNREDES activities, worls to ensure scientific and ethicd quality in the NGO's work.

The current annual operating budget of FTINREDES is approximately $100,000 - of which 30 percent comes from private sources (15 percent from domestic individuals, foundations, and corporations and 15 percent from international private sources). The largest single source of organizationd income (approximat elyZO percent) comes from fees for services, product sdes, and other consulting. The organizationreceives none of its resources from government sources (domestic or international) and none from its membership (apart from in-kind donations). Over 50

percent of FIJNREDES' earned income is from consulting and contract activities.

Income of FTINREDES (1993-1996) @ercent of total by source)

Donation of Equipment

13.640/o

Donation of Funds Donation of Services in exchange for consultation Financing of travel in exchange for consultation

27.22

Connrlting contracts

54.86

of Services

0.49

Sale

Expenses associated

3.34 3.72

with contracts

2.73

Source: Analisis de ingresos FUNREDES en 36 meses, August 1996

FTINREDES' income from

fees is a

relatively novel source of revenue. Receiving panial

cooperative funding for the first phases of its activities from Union Latina and

ACAL,

FTINREDES began its work in anticipation of future cooperative funding from a commitment by during which time an international donor. After nearly fwo years of activity, however

-

FTINREDES' activities were zubsidized heavilythrough the personal contributions of Pimienta himself the NGO determined its chances of receiving additional donor funds were slim.

-

Pimienta felt there was no alternative but to undertake some form of revenue'generating activity.

Vith the execurive director

facing

a

critical financial situation, the decision was made in mid-1996 to

A-19

offer the services of the NGO to

a

broader market of clients, including private sector businesses in

NGO had never before provided services to the private for-profit but widening its offerings to include Internet training, Vorld \fide \?'eb site design, and

the Dominican Republic. The secror,

hosting services to private companies qras a natural extension of its existing areas of expertise.

The urgenry of generating income was so great that FUNREDES began offering services ro corporations almost immediately. The Foundation already maintained an Internet node donated

StIN Corporarion and arranged a mutual profit â&#x201A;Źreement for Internet connectiviry q/ith a local carrier. Members of FUNREDES contributed the additional start-uP resources. The existing staff were designated to manage the new enterprise activities. No additional staff were hired. The Foundation staff hope the extension of their activities to the private sector will be only a temPorary by the

change, but feel this is largely dependent on their abiliry to identify bilateral or multilateral funders

to support their ongoing nonprofit projects.

InJune 1996, FTINRLDES proposed the idea of establishing a separate, for-profit subsidi^ry -TELESINERGIA ('Telesynergy") - to e*paird and manage the private sector activities of the Foundation. The original concept for TELESINERGIA evolved from a cooperative project with initial commitments for funding from Programa Bolivar in Caracas. F{owever, after nearly two years of waiting in vain for the promised funds, FTINREDES decided to ransform the projea into a mixed commercial joint venture to create a Caribbean information market. In a paper entitled

FTINREDES) presented to the Foundation's Board of Directors, Pimienta discussed the "paradoxical situation' no'w facing many NGOs which, like FUNREDES, possess the technologicd expertise and "know-how" that many for-profit insticutions have not yet developed. Pimienta arguedthat the exponential growth in the Internet field presents a ripe oppornrniry for NGOs with technological expertise to capitdize on their skills in a "very 1uiq," (rrury jugoso"), profitable market as a method of overcoming the financial difficulties that hinder progress in their nonprofit programmatic work. Pimienta proposed that the TELESINERGIA project be an avenue for FUNREDES to engage in business partnerships with for-profit institutions that would be mutually beneficid for both sides, and tremendously lucrative for FLINREDES. He stated clearly, however, that a set of clear operational, institutional, and commerciai criteria are required to assure mutual respect in TELESINERGIA's business parrnerships while at the same time preserving the primary objectives of FUNREDES. \fhile the Foundation would continue to maintain its nonprofit goals and objeaives, and continue to try to caprure resources through business activities in the short-run, TELESINERGIAwouId simulta"Perspectivas Finacieras Para FUNREDES" ("Financing Perspectives for

try to attract private partners to become shareholders in long-term, program-related venrures. Any profits generatd by the activities would be used fimt to reimburse the loans made to neously

the Foundation by the executive director and the members, second to fittance the FTINREDES

projecr porrfolio, and third for distribution to shareholders. FUNREDES developed a business plan for the business activities which includes plans to seek $ 150,000 in additional vencure capital in an

A-20

efforc to "franchise" the Foundation's enterprise activities in association

with for-profit companies

in other countries.

number of for-profit competitors providing similar Internet services to the private secror in the Dominican Republic, but to date FIJNREDES has not had any direct prob lems with comperition. In attracting partners, FIINREDES argues that its knowledge and skills in There are

a

rhe Internet field and website design are superiorto those of manyprivate sector service providers and that, in this respect,

TELESINERGIA will

be competing as an equal

player in the market. In

the process of negotiating agreements to launch its enterprise activities through

TELESINERGIA,

with local telecom operators.

The process of buildingFLINREDES and TELESINERGIA has been atremendous learning process for the Foundation. The initial failure to receive commiaed funds from Program Bolivar illustrated to FIINREDES the problems with its original funding situation. The Foundation intends to document its experience in adopting a self-financing approach for public benefit. The FL|NREDES web site has provided a unique instrument for diseminating FI-INREDES' institutional experience. The site provides a public venue for maintaining the Foundation's institutional memory, marketing its serwices and programs, and voicing its editorial opinion on iszues of related the Foundation has also managed to arrange funding deals

concern.

Note lspecid rhanks to Daniel Pimienta, president of FUNREDES, and to Pablo Liendo, regional director of FUNREDES in Caracas, for their diligence in providing such detailed information about the organization's acrivities for this

case.

Also, thanks goes ro Alejan&o Mendoza for his help with the Spanish translation of materials associated with this

A-21

case.

International Case Study e Central and Eastern Europe

Hungary : The Bolt Galleryl As its narne in Hungarian points out,

a

part of the Bolt Gallery

is

just that, a 'bolf (a shop or

District VItr of the capital ciry of Budapest could buy soft drinks, coffee, candy, and cigarettes. In fact, the establishment of the bolt asa commercial entiry preceded the opening of the Bolt Gallery ayear later. In 1993, with no money and a big dream of starting a venue devoted exclusively to the work of conremporary Hungarian photographers, Jeno Deway and his wifeJudit Hangyal opened the smdl corner shop in the basement of a small building on Budapest's Leonardo da Vinci Street. Their

store), where until December !996,Hungarians in the poor and dilapidated

intention was to generate enough income to rent and renovate a gallery sPace.

However appropriate Leonardo da Vinci Street rnay seem, it was an unintentional choice, since District VItr is neither in a heavy pedestrian traffic area nor at the heart of the ciry's tourist secrion. As the Budapest'Sfeek stated: "It would take even an extremely imaginative real e$ate agent an awful lot of hard work to present the [Eighth Distria] in a positive light without phrases like 'urban decay' ."2 But real estate in Budapest's more-tourist oriented districts or in other more heavily trafficked, developed districts of the city was unaffordable for Deway and Hangyal, as was the option of renting existing gallery space. The District VIII local government, on the other hand, was offering decreased rental rates and ta:r incentives for people to move and either rent or purchase properry and undertake renovations.

into the neighborhood

\flith rent as low

as 10,000

HIIF

a

month (about $70), there seemed no other option. Local zoning laws in the deteriorated neighborhood did, however, come with some limitations. The space was not eligible for the liquor license or health permit required to open the winery or cafe the couple had envisioned as compatible with a gallery. Instead, the couple seffled on opening a shop, since the permit limited sales to non-alcohoiic, perishable items on asmall scale.

Initiatly the boltbroughtin

a

modest

ment ro renovate the basement area into

a

profit, enough to purchase materials and rent equip

makeshift gailery space. Deway,

a

photographer and

painter by training, and Hangyal, a cultural secretary at the Hungarian Nationd Theater, did all of the renovations themselves. A year later, in Lgg4,thecouple registered the Bolt Gallery as a seParate

exhibition of ten Hungarian photographers in the newly-renovated space. The exhibition area was limited, since it shared a sPace with the small shop near the gallery's basement entryway. The opening exhibit, howwer, attracted a highiy receprive crowd: "There were people in the street waiting to get in to sâ&#x201A;Źe the work," recalls

nonprofit organizetion under Hungarian law,

and planned their first

A-22

Deway. The gallery published postcards and a catalogue of the show with money from the Nemzeti Kulturalis A/ap ${ational Culturd Foundation) and donated printing from friends in a printing shop.

In both its second and third years, the boh generated approximately $2,000 annually enough to complete the gallery renovations and to cover the gallery's operating expenses. The

-

income of the shop was taxed

as

regular commercial income under Hungarian tax law, despite the

nonprofit beneficiary. After taxes, there was no additional money forDeway's andHangyal's salaries, both of whom continuedto work full-time in their jobs while organizing exhibitions and managingthe shop.'!flith some costs offset by the donated printing and the National Cultural Foundation grant revenues were enough to cover the fact that the income was dedicated solely to

a

cost of publishing postcards and catalogues for each of the gallery's eleven shows in its first year.

I994,rhegdlery hired a part-time staff person to work in the shop and gallery

@aid

In

from shop

income).

After three years in operation, however, Deway and Hangyd determined that the shop financing approach was not

a

good one and decided to close the shop in December

,l996.The

change occurred for a number of reasons. First, for the amount of work and time necessary to keep the shop stocked and open, the return was not adequate. Nor was profit growing rapidly enough to indicate that the shop would generate sufficient income to maintain all of the gallery's expenses, including staffsalaries. Deway was rising at 5:00 am each day to buy products for the shop on his way to his full-time job. Every evening and weekend he was absorbed in arranging the

gallery exhibitions and managing the shop. As one of the few local businesses in the District

VItr

neighborhood, it was an easy target, reinforcing the view that it was more trouble than it was worth.

Despite bars on the gallery windows, someone broke in and stole cigarettes, chocolate, and coffee

from the shop. The shop was robbed for a second time in 1996. During the first break-in, one of the exhibition photos was knocked from the wall and trampled upon, but no photos were stolen.

Only months later, someone entered during gallery hours and held up the part-time anendant, forcing her to hand over all of the shop's cash. Again no photographs were stolen. This panern led Deway and Hangyd to the conclusion that the gdlery was not the target of the break-ins on either occasion. Instead, the presence of the shop was a continuous threat to the safety of the arr q/ork.

The decision to close thebohwasnot an eaqy one. There were few alternatives for raising local funds. The National Cultural Foundation grants are restricted to use for publications.

\7hile

there is a growing market for Hungarian art and ceramics, photography has yet to be recognized

as

form by the Hungarian public, limiting significantly the pool of domestic buyers for Bolt pieces. To date, only five photographs have been sold (of which Bolt gets only a small percentage), an art

and those mostly to Deway's Parisian friends (and the author's friends). The

position to become financidly sustainable from its exhibition

sales.

Bolt

is therefore

in no

Funhermore, for many reguiar

visitors to the gallery, the shop was what made the Bolt a unique venue. In addition, while regular local shop customers were largely disinterested in the gallery when it first opened, it had become

almost

as

frequent

a

stop for them

as

visits to the $ore to buy cigarenes and coffee.

A-23

Meanwhile, the shop and the gallery had together b.gut a small trend toward neighborhood revitalization in District Mtr. This was inspired by Deway's decade in Paris and his many visits to

full of galleries and culrural activiry that fifteen years â&#x201A;Źo was not much different from the present-day Leonardo da Vinci Utca in Budapest. There are already over a dozenartists who have moved into the District VIII area since the Bolt Gallery opened. Deway would like to form an association with them in order open more galleries, organtze efibits, fund scholarships, and fill the neighborhood with other culrural activiry. Without the shop, however, the Bolt willshift from an economicproducertoan economicconsunzer-dependent otr an already limited pool of grants and charitable gifts from the stete or local cultural foundations. In addirion, Deway believes that the shop brought a working<lass element to the Bolt, which by itself would be somewhat detached, too elite for the poor environment in which it resides. According to the city's Rue de la Roquette,

a

street now

Deway, the only other option for self-survival is to reiocate the Gallery completely and make it more "upscde' to appeal to Budapest's new yuppi e, now.teau ricbe. This, he believes, is the only way to make increased income offthe sale of the photos tlemselves, or to open small theater to support the gallery: "But

it

has

a cafe,

bookstore, or

to be a'snob'place to attract the wealthy,

" says

Deway.

Vhile Deway admi* the best practicd solution vrould be to move to another District, prices are prohibitive. Meanwhile, the District VItr Mayor has decreased the Bolt rent to only $35 a month as an incentive to keep the gallery in the neighborhood as a "magnet' for other artists. The Mayor has agreed to donate studio space for artists in the neighborhood if Deway succeeds in organizing an arrist's association, and its members agree to renovate buildings in the district. A printer also agreed to donate a printing press and faciliry to Bolt to dlow the gallery to produce its own exhibition catalogues. The boh/Boltmodel has thus generated potential community vitaJtza-

tion, as well as encouraged local artists and photographers to move into the district. One Hungarian photographer who had exhibited at the Bolt believes that the shop and gallery are an essential first step in Hungary toward having artists support themselves from their art rather than from assignments

as

photographers in advertising or at newspapers and magazines.

'It

is a first step toward

accomplishing the aim of every photographer who is also an aftist: to live from his art," says one photographer. Until the moment that the domestic market for photography develops, however, small culrural NGOs in

Hungarywill

have to rely

ontheir own resourcefuiness to support their

work Notes lspecid thanks go to Jeno Deway andJudit Hanryal of the Bolt Gdlery for their hospitdiry and time in providing

a

detailed account of their work. Also, thanks to Sylvia MagTar for her patience in translating from Hungarian during the

persond interviews.

:Gorondi, Pablo. 'l$florking Class Heroes." Bu&pest Ifeek (l'Iovember 2l-27 , 1996) 12.

L-24

International Case Study 7 Central and Eastern Europe

Hungary : The Gondviseles Foundation

1

The Gondviseles AlapiwarLy, or "Caretaking Foundation," began work in L992

as a

private, for-

profit,limited companyto provide employment and labor opporn:nities foryoung, mentallyhandicapped persons in Hungary .ln t994,in iight of increased pressure from the \Telfare Ministry to utilize the newly legislated "public benefit company" entiqf to privatizethe provision of social seryices. Gondviseles re'registered as a nonprofit organiz.ation. This change dlowed the Foundation to come into compliance with Labor Ministry regulations governing employment prograrru for the handicapped and to operate related for-profit activities. The organization has since evolved to include a full-time staff. of.25 (18 handicapped persons and six other staff, including one education specialist, an administrator/manager, administrative assistant, bookkeeper/accountant, shop man-

rwo care-takers). Gondviseles works only in the capitd ciry of Bu&pest. Its annual operating budget n 1996 was approximately 9.5 million HUF ($65,500). Approximat ely 3?percent of the Foundation's income n L996vras generated through its own rsvenue.producing activities, including a child care equipment rental shop and the production and sale of children's toys. ager, and

Gondviseles serves the nee& of mentally-handicapped youth (18-30 year olds) and their families through smaIl, groupbased care. The Foundation applies a rather novel approach in Hun-

it

from the traditional state-run and reguiated system. The Gondviseles approach combines day<are and employment to create a supportive and productive environment to allow the handicapped an oppornrniry to build self<onfidence, become more independent and integrated into gleinsllsxal socief,y, and lead rewarding, productive garian social service for the handicapped, sening

lives. In fact, the

Foun&tion's office is less like

aparc

an office than

a

private apartment with

a

kitchen,

living area with couches, wall hangings, exercise equipment, and music pl"yios on the stereo. Handicapped employees are provided supervised physicd and recreational activities, learn personal hygiene and care techniques, and take part in other daily activities (like shopping, eating in restaurants, and using public transportation). In addition, the handicapped employees receive regular medical

check-ups from neurologists/prychologists. Family members also receive training and counseling to

their handicapped loved ones with general aspects of life management and home care.

In addition to providing professiond &y care and health and counseling serwices, Gondviseles provides limited daytime employment. The employees work to assembie and package *logic children's toys and sets." The work itself has a fundamental pedagogicd value for the handiassist

capped employees, intendedto improve their logical, threedimensional, and numeric recognition

through enjoyable, playful, colordrl, creative, and productive work. Meanwhile, tle employees earn

A-25

their own living expenses, receive medical insurance coverage and, most importantly, contribute to rheir state rerirement pensions. Furthermore, the income derived from the sale of the children's toys supports the Foundation's activities.

The financid stabiliry of Gondviseles is secured through a combination of resourcegenerating activities, taxdeductible contributions from families of the handicapped employees, and

In 1996, Gondviseles received 650,000 HLIF ($4'300) from the Hungarian'S7'elfare Ministry, nothing from international sources, 1.2 million HttF ($8'000) in contributions from families of the handicapped,and2.6million HUF ($17,000) from foundations supporting employment prograrru for the handicapped. In 1995, the Foundation created a granrs from state and private organizations.

for-profit limited company, Gondviseles KHT, to manage the rental shop for baby and home care products. Gondviseles KHT's total income v/as approximately 5 million HltF ($33,000) in 1995, for a profit of t.5 million HUF ($1O,OOO) from equipment rental and toy sdes (1 million HUF and 2 million HtlF respectivelr, all of which were directed to the Foundation.

The Foundadon srarted the equipment rental phop (the first of its kind in Budapest) "by accident" according to Executive Director Dr. Telek Vilmosne. In discussions with the Hungarian local, private Entelprise Development Fund designed to assist small- and medium-sized businesses, Dr. Telek recognized the possibiliry of receiving start-up capital for a profit-making venture to support the Foundation's programs. Telek hoped to encourage the develLabor Ministry and

a

opment of a market alreadywidelydeveloped in the'West, whereby consumers could choose berween the products of regular for-profit companies and those of chariry shops. The idea was

initidly ill-received by the public,

according to Telek, because it is not yet in the Hungarian mentaliry

for individual consumers to help others through purchases in chariry shops. Philanthropic giving and charity shop purchases are minimal, since Hungarians tend to believe that they themselves need assisrance, or that such assistance should be provided by the state. As a result, the public tends

to

donate only to those seen begging in the streets.

Telek recognized early in her work at the Foun&tion that few oppornrnities existed for

obtaining domesric philanthropic gifts, and that funds from international foreign assistance agencies or privare foundations were too difficult, time'and resource<onsuminB, and short-lived to obtain.

didn't want to "b.g" for money from donors. Instead she wished to promote a productive feeling in both the administration and activities of the organization, and have the Foundation stand as a model for serving the mentally handicapped - while simultaneously being self-supporting. ln addition, the child care rental shop would provide an added public relations benefit by presenting a caring image of the organrzation. Inexpensive shop space became available at sreet level below the

She

Foundation's office building. \7ith initial capital fromthe LaborMinistry and The Enterprise Development Fund, the Gondviseles Rehabilitaclos Kolcsonzobolt (rental shop) was opened.

None of the Foundation staff members had any business experience. Telek was forced to rely on her own creariviry, and the generosiry of friends and family providing in-kind donations and professional advice. "I was like an elephant who was blind and deaf," she recalls of her eariy days in

A-26

setring up and administering the business activities of Gondviseles. "I started to read business

management and law books instead of novels, and had to work i 8 to 20 hour days instead

of. 12

to

14.'Her background and doctoral snrdies were in the field of social work and education - not business and she lacked even the most basic of computer skills. Her two sons, one a trade and

-

marketing professional and the other a doctor, were indispensable in assisting in getring the Foundation's business activities offthe ground and, dong with their friends, helped Telek create

a

Foun&tion's shop and toy-making activities. The business plan called for a three.year start-up period before any profit would be generated. Now in its secondyear, the shop has produced disappointing returns. This is due largely to cotrstnrction in a nearby parking lot which rerouted pedestrian and sreet traffic and made it difficult for consumers to reach the shop. The shop has, however, already generated enough resources to cover the initial investment business and marketing plan for the

and meet its expenses, even generating

a

surplus

n 1995 of approximately

$10,300.

Gondviseles'toy-making activities started in 1992. \)fhile they would grow into a resourcegenerating activiry, their primary purpose was educationd. One of Telek's colleagues at the Founda-

tion, a specialist in education forthe handicapped, knew that it was important to provide some activiry for the handicapped which would also be interesting, beautiful, not monotonous or repetitive, creative, colorful, and involve various levels of skill and abiliry. The Foundation started by creating puppets and dolls - which required a certain level of expertise with cutting, sewing, and gluing. The initial designs for the dolls became too complex and expensive to produce (some costing nearly $700), and required too many detailed cloths, yarns, and stitched pieces. In order to

simplify the design for the employees and to increase producion, Telek realbedthe need for suPPort.

Telek approached the Enterprise Development Fund for additional investment funds. She

iliustrated the qualiry of the work and the marketabiliry of the toys, and appeded to the Fund director's 'capitdist and public service side' by claiming that Hungary had been "robbed by communistso and by describing the added social vdue of the Foundation's producs. The Fund

committed met

a

1

million HUF (approximately

$7,000) in starnrp capitd. In the medrtime, Telek also

philosopher who was embarking on his own for-profit ventures in the toy business to gener-

ate resources

to fund his academic research. He had established

a

growing and lucrative business

million HUF or $275,000 ayear) cdled "Flexi-Build Ltd.' The company ceated a felt-like material that could be inexpensively fabricated in any shape, color, or form to make a variety of simple, playful children's toys. The Foundation established an informal partnership with the philosopher. Vith donated design services and the Fund's investment, the rwo developed a series of toy kits which children could assemble to form cats, snakes, casdes, and other designs while also (nearly 40

learningskillsinryingknots,braidingyenr,gloitg,andstitching. T ikewise,theassemblyandpackaging of the toys provided the same training and stimulation to the handicapped employees.

By for-profit busines management standards, the Foundadon's toymaking business is not considered efficient or profitable. The assembly process is lengttry, intemrpted, delayed, and time-

A-27

consuming. Machine assembly could be far faster

but efficiency is not the prioriry, according to

-

Teiek, since "healthy people" are far more productive. The qualiry and potential of the business was successful enough to attract an additional 3-million-

HUF

($21,000)

commitment from the Enter-

prise Development Fund to expand the shop and toy line and to fund technicd and administrative

support and equipment costs. The Foundation now markets and sells its toys through its shop, at trade shows and craft fairs, through free advertisements in scholarly journals, and through a net-

work of four for-profit shops throughout H*t.ry which carry it's products (six other counties across the country have distributors). A few larger toy companies, including Flasbro, Happy Box, and the department store Centrum, also carry Gondviseles toys. Around Christmas, the Foundation employs additional part-time staff and volunteers to market and sell the toys to schools and other '!f'orld groups in Budapest. International organizations, like the British Council and'Women's Banking in the U.S., also order or sell the Foundation's toys at conferences and other special events.

The Foundation hired agraphic designerto develop newtoydesigns usingFlexi-Build Ltd. materials, but the increased business and internationd anention has become too much for the

current staff to handle. There is discussion within the Foundation about hiring an additional professional business manager. A number of obstacles, however, have arisen. First, the most qualified business persons

with appropriate background and experience require salaries far beyond the

Foundation's capaciry. Second, Gondiveles staffdo not anticipate or aim to generate all of the Foundation's operating budget from its resource.generating activities. Instead" they hope to gener-

from self-financing activities in the coming years - and the staff is unanimously opposed to "scaling up'the activities of the Foundation (which they believe would be at the expense of program qualiry and effectiveness). They fear that the organization's reputation for personal attention and a warm environment would be lost if it were to grow beyond its current level. The Foundation hopes to maintain the current ievel of ate an average of 30 percent of the Foundation's budget

funding from public and private sources. Third, the staffis uncertain about the regulatory environment for their activities. Although the ta:r laws that govern nonprofit economic activities for Public Benefit Companies is somewhat clear, theirta:r treatment (given the complexiry of their nonprofit and

for-profit activities)

is

not. Telek has visited at least four different til( offices and various Vel-

Ministry offices to clarify the Foundation's tax $anrs. Even withpro bonolegal xsistance and a full-time bookkeeper/accountant, however, she remains uncertein of whether the Foundation is in compliance with the plethora of ta:r rules and regulations. One articie of the law governing Public Benefit Companies, for example, makes reference to an undefined level of income-generating activities permissible for NGOs. The Gondviseles staff fears that scaling up their activities beyond current levels will bri"g additional afiention and scrutiny by state auditors. Fourth, the Foundation staffhas been wary of the public relations effects of its resource-generating aaivities. There were many scandals in the late 8Os and early 90s regarding the abuse of nonprofit tax exemption for personal gain by individuals and organizations in H*g"ry. In addition, in the field of employment and care for the handicapped, there is a great potentid for abuse and exploitation of fare and Labor

A-28

for personal profit. Vhile neither of these has been an issue of alarm for Gondviseles, the staff has awempted to preempt any such public criticism of their work.

Telek invites any critics or sceptics of the Foundation to visit the Foundation's office personally and see their work firsthand. Those who have visited are also asked to comPare the work environment either ro that of for-profit agencies (where prioriry is given to efficienry and productiviry) or to state-run labor programs for the handicapped (where employees are forced to do cheap labor

largely monoronous, even harmful, labor with little clinical value). But regardless of the obstacles the organization faces in managing its income.generating employment activities, Telek argues that the activities must be maintained irrespective of their profitability. "The handicapped cannot just sit

around andplay cards all day,' she says, "the difference berween our resource-generating activities and those of other NGOs is that our employees don't just make the toys to sustain our NGO, they make them to sustain themselves. They are an integrd part of our prograrnmatic mission."

Note lspecial thanks go to Dr. Telek Vilmosne and her staff for their generosiry in providing Gundel Palacin

ea

a1l

the time, information, and

necessary ro record rhe details of this case. Also, thanks to Zsuzsa Kovacs for her excellent Hungarian

ranslarion during the personal interviews, and to Mag& Toth Nary for her help in arranging the interviews.

:Nonprofit organizations in Hungary may register in one of four different ways. The Public Benefit Company

legal

form was created with the primary goal of facilit arngpivatization of public services through nonprofit service' providing institutions. This form

is

appropriate for organizations that purnre a public benefit activity with an accomPa-

nying economic activity, any profit of which may not be distributed among its members. Public Benefit Companies are generally regulated by the same set of rules

as

limited liabiliry companies in the civil code. Public Benefit companies

"may only pursue business activities complementary to their public benefit aaiviry and are entitied to corporate tax reiief only on the portion of their revenue derived from service agreements with locd governments, ministries, or rhe Social Securiry Fund." $.utzen,

ed

1995).

A-29

International Case Study

8

Asia

India: Child Relief & You (CRY)1 Child Relief & You

(CR!

is an independent, non-governmental, public trust established in India

in

initiative by Rippan Kapur, an employee of Air India who gathered a group of six frien& to respond to the unjust conditions in which he saw Indian children living - conditions he could observe directly from his high-rise apartment building in Bombay.

The group Kapur brought together came from avaiety of professions and included artists, copy 1979. CRY was started as a small

writers, photographers, graphic designers, accountants, and advertising and marketing experts.

Kapur and his colleagues began by producing and selling greeting cards to raise resources for children's programs. In so doing, Kapur hoped to illustrate that collective effort among individuals could make

a

difference without government assistance. He believed that anyone's contribution and

talents could be translated into support for impoverished children. Initially, CRY was able to rely on

the donated products and services of artists, paper merchants, professional advertisers, and publicists to

print and market its car&. The

sales served

rwo purposes: to raise resources for programs

supporting children, and to increase public awareness of the problems facing impoverished children.

More than a decade and ahalf later, CRY has grown from a single-office operation in Bombay to a national mainstream NGO with approximately 200 staff and offices in five cities across the country - Bombay, Bangalore, Calcutta, Delhi, and Madras - and an international affiliate in the United States (CRY USA). Over the last 16 years, CRY has disbursed over $3.5 million, supporting over 550,000 children through 188 child development projects around the country. CRY operates as a'foundationlike organization" @LO), direaing the resources it generates from its fundraising and revenue-producing activities to voluntary organizations throughout India dedicated to helping underprivileged chil&en. CRY believes that, released from the burden of fundraising, these grassroots NGOs are free to concentrate on their child and communiry develop-

mentwork.

The CRY Program Support Division channels both fina-ncial support (i.e. grants) and nonfinancial support (i.e. training, materials, information, communication materials, professional expertise, consulting, and networking opportunities) to local organizations assisting needy children. The table below indicates the percentage of CRY's !995-96 resources that went to various project and

operational expenses:

A-30

CRY Expenditures by Program Area (1995-96) hogramExpdiana

Education Health Income Generation2 CommuniryOrganization

Other Pto;..tAdministration Source:

'A

40.0 2L.0

6.0 5.0 8.0 20.0

Story of Flope." CRY, 1996.

After a few years of card sales done, CRY hoped to raise funds through local donations to its programs. CRY's Resource Generation Division RGD) of approximately 100 people is divided into rwo areas: Corporate Partnership (which raises money from companies and businesses through product sales and donations) and Individud Parrnerships (which raises money from individual donors). In 7996, CRY was able to generate 48 percent of its income from individual and corporate donors. RGD also utilizes a number of other fundraising metlods to generate local donations; including child sponsorship, special events, in-kind donations, and cause-related marketing.

CRYRevenues (1994-96) (percentage/source)

hLvlrefuae Products Income Individual/CorporateDonations

Interest/Dividends Material,/In-KindDonations

199t-96 49.0 48.0 2.0

29.30 60.44

5.29

1.0

-

Corpus

199+9t

4.97

Source: "A Story of Hope." CRY (1996\ and CRY Annual Reoort 199495 (1995\ 6.

h

|996,the paper product

sales generated4g percent

of CRY's annud income

single source of income. CRY's early greeting card sdes have now grown

-

its largest

into a multi-milliondollar

paper products business. An in-house team of four marketing and sales representatives actively develops and tests new products to enhance CRY's existing produa line. CRY's team of designers

solicits donated arrwork from artists throughout India for its products. From L979 to 1990, the only

CRY products were cards and calendars. As these products became popularized in India, CRY's

A-31

work attraded international attention. Following aspecial request from a famous French an gallery for made-to-order CRY items for a special India \7eek event, CRY began to diversify its product line, adding telephone-number and address books and other office paper products. The CRY product line now includes a wide variery of office and stationery items ranging from desk calendars, "scribble" pads, presentation folders, postcards, chil&en's books, mobiles, puzzles, andpapertoys to several new lines of exclusive greeting cards. CRY also offers "exclusive products'- special, large'quantiry, made-to-order requests for paper products. All CRY products are made of 100 percent recyclable "wood free" paper imported from Germany. The CRY products are now stocked and sold by a net'work of independent retailers throughout India. CRY does

not operate any retaii

outlets of its own.

As CRY introduced new product lines and entered new markets around the country, product income jumped from29 percent to 49 percent of total revenue berween t994 and t996.The percentage of CRY income from product sales has rypically grown each year despite

a

number of

difficulties, including riots in December of tggZwhichaffected production. According to Seema Gandharva of CRY's Resource Generation Division, in L996 card sales represented 90 percent of

CRY's total product sales. Card

sales have

consistently remained the largest source of revenues for

CRY, although their proportion of total revenues has flucnrated, in response to the market and to the success of CRY's other fundraising efforts.

CRY Card and Calendar

(unit Yw

Sales (1990-95)

sales)

Cards(tniniDns)

Almdar(tlwNrds)

199691

2.95

20

t99L-92

4.20

3I

t992-93

4.70

44

t993-94

5.20

t994-95

4.20

n/a n/a

Source: CRY Annual Report 199495 (1995) 6.

Sales

of cards did drop from 5.2 million to 4.2 million from 1993-94 to t99495

as a

result

of a price increase of a few rupees per card, resulting in a reduction in volume of sales, but an increase in value terms. Figures for other product lines are either unavailable or incomplete, al-

though sales of calendars have also appeared to increase since 1990. CRY has started a Child Deveiopment Fund, a "corpus' intended to serve as a tnrst fund or endovrment to 'ensure the stability of CRY

as an

organi z-ation." CRY is seeking donations from individuals, companies, trusts, and

A-32

associations to build its fund. The donations are not used for direct CRY projects, but instead invested in government-approved securities. The interest from the fund is then used by CRY

to

support its activities.

In Augusr 1991, CRY also incorporated an affiliate in the United States to generate addi-

tional revenues among the Indian-American community and the American public at large. Two years later, CRY USA received its IRS 5Ot(c)(3) tCI(â&#x201A;Źxempt status. Beyond some occasional parttime help, CRY USA is a wholly-volunteer organization that has succeeded in generating over $35O,OOO

since 1991.

InI995,CRY USA

generated 10 percent of its $102,000 in revenues

from

greeting card sales. CRY USA has relied for its sales on supplies of paper products shipped to the U.S. directly from CRY India. This procedure has become expensive and timeconsuming. CRY

USA

is

therefore developing its own paper products and t-shirts to appeal to the general American

with its charcer to use 10 percent of its fun& to support progranrs for underprivileged children in the U.S., CRY USA has donated to several organizations in Trenton, NewJersey. In 1995, CRY USA donated a total of $6,000 to U.S. NGOs serwing children. The remaining $81,900 was remitted to and distributed by CRY India. CRY public

-

and using the Internet to advertise. In keeping

USA is not soliciting resources from the U.S. government, but has approached private foundations,

with mixed

success.

Managing the growing products industry has been

a

"process of learning" for CRY, accord-

with CRY India for *Ve before coming to the U.S. learned as we went along," she recalls. The early staff

ing to Nomita Abreu. Abreu is finance coordinator for CRY USA, and worked eleven years

members were not business professionals, but learned on the job

as a

result of their interest and

dedication to their work. They found out quickly, however, that there was a great need for business

fromthe corporate, for-profit sector. Gandharva, herself aformer corporate employee, says that many of CRY's employees now have for-profit management experience or MBA training. Initially, retaining these $aff members was difficult. Since CRY could not offer competitive salaries, it relied on an "extension of the volunteer idea" to keep employees in the organization. Most of the organization's five tnrstees spent much of their working careers in the and marketing experrise

commercial sector, including

a

managing director of an advertising/communications company, an

architect/designer, ala'wyer,and group with

a

a

financial consultant. Likewise, CRY's management comprises a

mixed professiond background. Many managers have been with CRY for

a

number of

with strong backgrounds in the social sciences, others with marketing or other business expertise. Most staff in the Program Support Division are professionals in the field of social

years, some

development.

The division berq/een CRY's Program Suppoft Division and the Resource Generation

Division is both strucnrral and physicd. Following the death of CRY's founding director in 1994, CRY shifted its administrative headquarters and Program Suppon Division from Bombayto Delhi.

The CRY product accorrlts, manufacuring, distribution, and stock warehouse are all managed from the officeinMumbai.

A-33

CRY receives no support fromthe Indian government. Abreu believes NGOs are rypically "left on their own.' CRY believes this independence dlows it to set its own policies and direction. It does, however, receive some indirecr benefits from the government in the form of tax exemPtions.

CRY receives a sales tax exemption/dutywaivers on imported paper, a lOGpercent til( exemPtion for donations to certain prograrns, and a 50percent til( exemption on all other donations. Tax exemptions from custorrs dury resulted in savings of approximately $105,000 for CRY in 1995.

Typicdly, the Indian government is wary of NGOs, panicularly those with international connections. The Foreign Contributions Regulation Act of lgZO (amended in 1985) was meant to regulate

NGO activities in light of government concern about outside interference and the use of NGOs for political ends. The act allows the government to ban the receipt of fun& from abroad for "politically suspecr nonprofit organizations.o Ta:r exemptions for resource'generating activities by nonprofit organizations'were completely removed to make sure tlat the nonprofit self-financing activities would nor compete with the for-profit sector. This has restrided many NGOs' access to income, and potentially limited their role in promoting economic development.r CRY USA also faces uncertainties about its tax status regarding its card sales, and is consultingataxlawyer on how "unrelared business income tax' regulations apply to its product sales in the United States.

Abreu believes CRY's product sales are a useful approach to extending the organization's fundraising and public awareness objectives. The fundraising and public relations asPects of the product sales "go hand-in- hand," she feels.'$fhen btytog a CRY product, people are basically "payingfor a CRY ad," says Abreu. *Sfhen people see the card, it reflects the organization.'We try to make the purpose of our sales clear, and dways send program information along with card

All promotional materials for products dso come with information on CRY's rffork and encourage the buyer to make a donation to or participate in other ways." CRY's objective is to continue to generate enough resources from product sales to cover operationd costs and to allow

orders.

all project funds to be dedicated to program activities. Gandharva believes that in addition to raising awareness, product sales are imperative to retaining CRY's independence:

"The sde of products has been one of the instrumental aaivities that helps CRY generare awareness about the plight of deprived Indian children . . . thereby also seffing an example for organiz-arions and individuds to do whatever litde they can rather than just be onlookers of the situation. Also taking grants from the government would inevitably lead to operating within set policies. This could be a limiting

factorin what CRY aimsto achieve and how.'

Abreu warns, however, that the resource.generating approach may not be appropriate for all organizations. "Smaller NGOs should be left to do tleir work," she says, '[CRY's] job is to provide the funding and sometimes ro encourage [small NGOs] to make products throughvocational programs, etc. But their focus should not be to focus on product sales and development. [Business enterprises] can easily detract them from their progralnmatic work and objectives. However, we

A-34

should work to provide them the funding to get an education, learn a craft, or develop an abiliry to generate their own income."

Notes lspecial thanks go ro Nomita Abreu, Finance Coordinator for CRY USA, for her dreless account of the history and

current work of CRY and for helping to obtain additiond details about CRY's resource-generation activities. Also, thanks to Seema Gandhan'a of CRY Delhi for her assistance.

:Income Generation figures rderto CRY'sprogrammatic activitiesto fosterincome.generation amonglocd commu-

niry groups or individuds. This

is

not to be confused with CRY's own resource'generation ventures to earn income for

CRY through its paperprodud sales. rSiddhartha Sen in Anheier and Salamo n (1994) 94.

A-3s

Internationd

Case Study 9

Latin America and the Caribbean I L

,

Jarnaica: The Mel Nathan Institutel The Mel Nathan Institute was established

in

1978 under the auspices of the St. John's

United

Church inJamaica. The Institute was registered as an independent nonprofit, nongovernmental organization in 1982. The Institute has a national mandate for its community economic develop menr programs, but focuses primarily on improving the conditions in communities in inner<iry Kingsron. According to Reverend A. Villiams, the Institute's executive director, the organization has adopted a "holistic'approach to communiry development. The Institute provides human dwelopment and leadership development training in addition to providing practical, vocational

training in a number of professions, including agriculture, carpentry, automotivs rnggf,"''ics, and sewing/embroidery. By providing oppornrnities to learn skills and gain individual confidence, the Institute hopes to provide income-generating activities and foster economic development in Kingston's poorer communities.

Since

it opened its doors eighteen years ago, the Institute

from an organization that was

90 percent dependent on excernal

has

worked consistently to move

fu1ding sources to an organization

that is novr 90 percenr self-financed. The process has been a gradual one, incorporating a series of small "conage-fype" industries and several fuli-scale industries. Together, these enterprises generate approximately 90 percent of the Institute'sJ$35 million annud operating budget. The Institute now employs 106 full-time workers and program staffin its income'generating enterprises.

Lritially, the Instirute was almost entirely concerned with establishing its educational and academic teaching prograrns. In its secon dyeat,however, the organization had already started to investigate small resource-generating activities to supporc its programs. Each of its resource-generating activities serves a multiple pu{pose: earning income, and simultaneously providing hands-on

vocational training and employment opporrunities. The Institute's first for-profit enterprise arose in response to the constant challenge of identifying and paying for adequate accommodations for the many guesrs, trainers, and educators who visited the Institute in Kingston. The Instirute learned that the church owned a nearby house which was vacant and in need of renovation. The Institute

completelyrefurbishedthe buildinginto afully-functional guest house, includingkitchen anddining facilities and fifteen double-occupancy rooms. The guest house novr has its own management staff' and is registered as a for-profit entity separate from the Institute. It is regisrered with the Jamaican Tourist Board, and serves special Institute and church guests as well as tourists and visitors. A11 revenues

fromthe

guest house are chantteled into the Institute's operating budget.

A-36

The Institute has expanded into the tourist business in other ways formed

a

full-fledged limited liabiliry company,JamaicaJourneys Ltd.,

a

as

well. The Institute

group tour and car rental

and car hire company. JamaicaJourneys grew out of the Institute's need to provide transportation for the many guests and panicipants in its and the United Church Office's programs. The company has

grown into

a

lucrative and profitable business since offering the service to the general public,

thereby capisxlizing onJamaica's large tourist industry and inadequate public transportation system.

However, Jamaica Journeys faces some difficult times ahead for a number of reasons. First, the influx of usedJapanese cars has flooded theJamaican market. MoreJamaicans are also purchasing

their dependenry on taxis and other hired cars for alternative transpon. In addition, a large number of unlicensed car services with lower overhead costs and low prices have entered the market and present formidable competition to the Institute.

A third resource-generating activity aims to expand the Institute's vocational and job training programs in carpentry and woodworking. The Institute invested in equipment which would also second cars, reducing

provide employment for students by offering ca{pentry seruices directly to private customers. These activities would simultaneously generate income for the Institute. The Institute's fourth resourcegenerating aaiviry linked its vocational training programs in automotive repair to employment

opportunities. The Institute aimed to provide auto repair trai"ing in the hands-on environment of

a

fully functional, for-profit auto repair center serwing the public at large. The garage now employs three full-time mechanics (one as a tutor for students) and periodically employs additional subcontracted mechanics when demand requires.

A fifth resource.generating aaivrty of the Institute, the Oppornrniry Shop, is a small novelry shop in Kingston dedicated to the sale of traditionalJamaican crafts made by small-scale, primarily rural, Iocal crafumen. The shop was intended to provide an oppornrniry to build a market for the craftsmen's goods. The Instirute also augments the shop's crafts with other items

as

the market

demands.

The Institute's final resource'generating activiry,

garment faaory started in September 1990, is its largest. The factory is also a multipurpose initiative, providing job training, employment, and job creation and income for the Institute. The garment factory now has a staff of 18 fulI-time a

workers (it has a capacity for 30). The faeory currendy has agreements with several schools in Kingston to produce school uniforms. It also has a contract with a dry goods company to produce all the white blouses for school uniforms on the island. In addition, the Institute recently signed a

contract with theJamaican government to produce dl the police uniforms. The factory also pro-

It is also the sole producer of clerical garments inJamaica. These products are cheap to produce due to their high volume. The demand for orders is so great now that Reverend lfillir'','s estimates the factory will duces other seasonal garments, including sports wear, swim suits, and shons.

need to

implement

a

double work shift by April or May, L997 to satisfy custorner contract de-

mands.

A-37

of the income generated by these various enterprises is channeled into the Institute's program operating budget. There are no shareholders in any of the Institute's independent enterrVilliams, all revenues have been prises and no profit-sharing agreements with staff. According to

All

fully ta:r exempr underJamaican law since the Institute became officially registered and independent of the church n t982.The Institute still maintains close relations with the chwch, which Villiams says has been a useful source of support.

Reverend'S7'illiams says that managing the numerous resource'generating activities of the Institute consumes "150 percent" of his time. Prior to entering the clergy he was a trained businessman, and he has applied much of that expertise to his current work. A few other staff members also have business backgrounds. Early in the process of developing the resource'generating activities of the Institute, Villiams believed it was important to "strategically employ staff who had no '$?'illiams believes that some of the commitment ro the development mission of the organization." most impoftant staff members are those who only see what they do "as a job." Just as in the private sector,'$7i11iams believes that for specific enterprises one must be more concerned with hiring "the best man for the job." Thereafter, he hopes they "will capture the vision of the Institute, but if not,

comfortable profit to further our mission." *things have After a number of years of rapid enterprise expansion,]trfilliams says that leveled off.'Now that a trained, professional management staff is in place to take over most dayto4aymanagement tasks, \Tilliams has more time for the Institute's progrirnmatic activities. In the current economic climate ofJamaica, \filliams believes that the Institute is in a period of consolidahopefully they will simply generate

a

tion ratherthan expansion. This does not eliminate the possibiliry of seizing an oPPoffuniry for a '$flilliams is now concentrating his efforts new venrure should a viable one present itself. Howwer, on an internal restrucnrring process to better balance the organization's resource'generating and programmatic acrivities. \0illiams believes that a clear and distinct demarcation is necessary berween these rwo areas. The new Institute strucfure

will

have three separate departmentd branches. Be-

poliry formation, and the Board of Directors, who are involved in operational and management oversight, three sections will exist: 1) nearh the Institute's Board of Trustees, who are involved in

Consultancy and Economic Development Services (primarily responsible for managing the Institute's consultancy services provided for a fee to government agencies, quasi-governmental organizations, and other NGOs and communiry organizaaons); 2) Programs and Administration; and 3) Economic Activities. Each section will have its own managing director, superisors, and staff.

In addition to providing a clearer manâ&#x201A;Źement system for the Institute, \7'illiams believes the new organizationd strucnre will be useful in dealing with external donors.'lfilliams believes that while supporr was unanimous within the organization for the Institute's resource-generating activities, donors are often resistant to or completely opposed to such a revenue'generating aP proach. In his experience, rmI funding agencies have expressed concern that an innate conflict

dwelopment program work and resource-generating activities, to the detriment of the progranrs. As a result, Villiams has hadto refuse some funding from donors who develops in an

NGO

bet'ween

A-38

wished to provide resources conditioned on the Institute limiting or eliminating certain revenue' generating components of its work.

Villiams

considers this donor shon-sightedness

as

the greatest

obstacle to resource-generating, since it places NGOs in the difficult position of using their own funds to invest in sustaininglong-termprograms. \Tilliams believes donors, if

theyreallywant programs to be sustainable, need to adopt a "long-term view" that recognizes the validiry of the resource-generating approach. "No matter how laudable the program may be, donors must recognize that they can't donate in perpetuiry. It is only sensible, and an added advantage to their donation, to define their donations in a way that stimulates resource'generating approaches among NGOs. They can then take their resources eisewhere to meet other needs,o says lTilliams. '!flilliams says the Instirute has utilized a number of methods ss ellain sta$up funds for its resource-generating activities. First, the Institute anempted, with limited success, to use its international contacts to affract international supporr from fraternal organizations abroad and from the United Church in Australia. Second, Ifilliams says, the Institute tried consistendy to build its own asset base in "preparation for the unexpected." \Tilliams believes that some level of liquidiry is essential. Since 1982, the Institute has worked consistently to establish a tnrst fund for the Institute.

Initially, the Institute prepared an application to an international Christian aid organization for aJ$2 million donation to start the fund. The money was intended to generate enough interest revenue ro cover the salaries of the Institute's staff and provide some surplus for its communiry development

programs. The hope was that this stabfiry would allow the Instituts 1s sslein its professiond staff, and to take some added initiatives in its prograrns witlout worrying about fi"a''cial ruin. The

Institute does not contribute regularly to the fund. The process is, instead, a gradual one whereby the Instirute contributes only when there is a surplus or windfall of resources from one of its ventures.

The Institute has also utilized commercial bank loans for enterprise srartup. In 1990, for example, soon after Villiams was hired bythe Institute as a business manager, he sought to close

down an inefficient, small-scale sewing and clothing assembly project. By strict accounting rerrns the project was a loss, but the employment and raining it provided to the women participants was too valuable to end. Instead, the project was continued, and \Tilliams determined the best solution was to expand it. \Tilliams learned of a Church congregation member who was plan n i'' g to sell a garment fadory. Although the Institute managed to negotiate

a

competitive price, it only had

J$50,000 to invest in machineA,fu less than required for starting up the business. The Institute approached a colnmercial bank for the additiond funds. Vittr no credit or collateral,'S7'illiams argued that the Institute's demonstrated track record of success and its

potential contribution to communiry development served as the guarantee. The faaory is now the Instirute's largest and most lucrative resourc*generating aaiviuy.

According to l7illiams, no other NGOs inJamaica are utilizing resource'generating ap proaches on the same scale

as

the Institute. \7illiams believes that there is a trend among NGOs to

adopt a more economic approach to their work. \Tilliams recognizes that resource'generation is

A-39

for some NGOs, panicularly those which can match their training and job creation activities to resource-generarion. One other organlzation working to provide employment for the disabled in Kingston, for example, is involved in papermaking and woodworking business activities. He believes, however, that welfar e orga,tizations should adopt a more enterprising approach to their easier

programmatic and organrzational work and shift from a mentaliry of promoting dependencyto one of self-sufficiency. Villiams sees that the Institute's experience can be of tremendous use to other organizations, and he says that it "has propelled us to the point of being seen as a model in Jamaica-"

the chairman of the Jamaican Association of Communiry Economic Development Organizations, the island's Council of NGOs, andthe lnstitute's Consultanry and Economic Development Services Department, \(illiams is assisting other NGOs to start commu-

Through his work

as

niry enterprises. He is, for example, now assistingthe Association in developing atourism-related snrdy tour package to generate income for its programs. "\7e still face many problems," he says, "but these problems impel us to work harder. There i9 a tremendous feeling among us to leave behind some legacyto help others."

Note rSpecial thanks go ro Reverend A.

Villiams for taking the time from

his very bury schedule to discuss the details of

the Institute's acrivities. Also, thanks to Yvonne McCalla Sobers of Creative Enerry Company Ltd. in Kingston

identifying this and other

cases and

for

assistance

in finding initial information.

440

for

International Case Study 10 Central and Eastern Europe

Romania: AsHepyosl The Romanian NGO appropriately named Asklepyos (afrer the Greek god of medicine) was

in 1989 by a group of approximately 50 medical, engineering, and social work srudents at the University of Cluj. The snrdents recognized an immediate need to deiiver medicine and other assistance to poor - primarily gypry - families in the community.

Almost overnight, the group organized an effort to channel deliveries of international aid to the needy. In the first years of its existence, Asklepyos focused attention on distributing the large influx 'S?'estern of donated materials from assistan ce orgariz-ations and on opening a local pharmary where donated medicines would beprovidedfreeto thepoor.'Workwas initiallyinformal, with established following the revolution

scudents volunteering to distribute and coordinate the arrivals of the aid deliveries, and medical

students operating the pharmacy. However, Asklepyos quickly formalized its strucnrre oped

a

reputation among donors

as an

as

it devel-

effective conduit for international aid. Romanian law allowed

the NGO to sell 10 percent of the donated materials it collected to generate resources for its administrative costs. Overhead remained low, however,

as

the majoriry of the

work

was conducted

by approximately 3O35 snrdent volunteers, and only approximately three percent of its resources went to cover Asklepyos' operating costs. Trucks with donated goods continued to pour daily into

until 1993 when'$?'estern interests and media artention shifted from Romania to other pans of the world. By this time, the NGO had grown to comprise a fuIl-time staff of four, including a managing director, secretary, accountant, and driver. As the aid from abroad continued to decrease, and resources for both programs and administrative costs dried up, Asklepyos was faced with the daunting task of identifying alternative sources of income to sustain

the ciry from across Europe,

its services to the poor communities that had grosrn to depend on its assistance.

The NGO's alternative income options were few. None of the Asklepyos staff had the

fundraising experience necessary to attract international grant sources

-

and those funds that were

linle or no support for operational or administrative costs. The availabiliry of funds from private locd sources was minimal. 'What local sources did exist were absorbed by "NGO Mafia" in the capital ciry of Bucharest. Furthermore, the few contracts or grants available to NGOs from the public sectorwere controlled by the well<onneaed NGOs, and rypically distributed on the ba^sis of nepotism, favoritism, or other poiitical connections. The staff and volunteers of Asklepyos turned their anention to available came with very explicit limitations on their expenditure and provided

the only apparent remaining option: revenuegeneration through enterprise activities.

441

Asklepyos first recognized anopportuniry to generate income through a niche provided in one of its other ongoing programs. Through a project funded from a UK-based Christian organization, Asklepyos was involved in providing coupon vouchers to poor families in the region to use in designated local shops to obtain food and other necessities. In return for participating in the

voucher program, local shop owners were allowed to keep 10 percent of the face value of each voucher collected. In an attempt to take advantage of this oppornrniry, Asklepyos decided to establish its own small local market to both provide food to its constiruents and to take advantage

within the t924 national law still governing the registration of NGOs, the shop was registered as a separate limited company. The law forbids NGOs from operating businesses within their exempt stanrs, but allows them to maintain a wholly-owned of the voucher income. Due to restrictions

subsidiary so long are returned

as

rhe profits (which are tured

as

commercial income at a rate of 45-50 percent)

to the NGO for its charitable purposes.2

It was difficult to identify outside income for rent and other staffup costs. Asklepyos was forced to shift resources from its earmarked projects tp meet the immediate funding needs of the enterprise. To initially stock the market, snrdent volunteers purchased products from suppliers, donated them to the shop, and vrere reimbursed after the products q/ere sold. In the meantime, the NGO received a donation of rwelve trucks and small vans from an international aid organization, from a donor in Germany. Seizing the oppornrniry, the staff began operating a truck rental service, and opened a student laundry service by installing the washing machines in a nearby universiry dormitory.

Asklepyos developed no concrete business plan for its enterprise operations; the staff did,

and numerous used washing machines

profit. In the first years of operation, the shop barely broke even. The truck rental service, howwer, generated nearly $400500 per month from the *art

however, establish at^rgetfor generating

a

due to the relative ease of managing the small fleet.

In an effort to manage the enterprise activities, the NGO staff grew (to a total of eleven), including new staff for both the truck rental and laundry services. The Askiepyos staff underestimated the number of state regulations and the bureaucratic requirements, time, and investment required to manage and stock

a

store. Fire code regulations, health regulations, and logistical plan-

ning absorbed an increased amount of staff andvolunteertime. Even the executive director be-

with the responsibilities of managing the various enterprise activities - including pumping gas for the truck rentals, stamping price labels on shop products, and cleaning the shop floors. The social programs for the poor, including both food and clothing distributions, 'were came preoccupied

put on hold.

Volunteer support

b.g*

to dwindle, and the NGO attracted no new members

as stLrdents

with the organization's focus on maintaining its enterprise activities. In addition, as students originally dedicated to the NGO's work began to graduate from the universiuy, became disenchanted

their ability to allocate time to volunteer activities diminished. There was and continues to be concern among the volunteers that the NGO's focus on enterprise activities at the expense of its

A42

q/ill erode the very strong reputation the organization developed overthe years with both the local public and international donors. As one student volunteer said, "In the short-term, this is prograrns

an endange red organization, an organization in crisis. However, I believe that in the long-term the

will be sufficient for us to overcome the uncertainry that comes with grants and donations.'The beliei orthe hope at least, is that followingthe initial chaotic years of developing its enterprise activities into profitable businesses, the businesses will begin to manage them-

self-generated resources

selves

-

and Asklepyos staff and volunteers can refocus their attention on the mission that

brought them together to begin with, this time with

a

much stronger, sustainable foundation for

supporting their initiatives to help the poor.

Note 1

Specid rhanks go to Dana Nicolescu of Opportuniry Associates-Romania for her help in collecting information

for

this case and for assisting with the interviews. Thant<s also to the staff of Asklepyos for their hoqpitaliry in Cluj and for their personal account of their self-financing activities.

2The Methodological Rules approved by the Romanian Minisrry of Economy and in Finance

October 9, 1991, divide sources of NGo income into two categories:

1)

Insruction No.

910

of

activities of an economic character, and 2)

economic acrivities. An NGO may engage in commercial/business/economic activities to the extent permitted by its byJaws or sratutes, provided that: 1) the commercial/business/economic activities do not dominate rhe ries; and 2) all gains from rhe commercid/business/economic activities are used by the

NGO activi-

NGO to achieve its nonprofit

goals. These business acrivities may be conducted either directly or through for-profit subsidiaries. (Rutzen, ed.

l^43

tfes).

International Case StudY 11 Central and Eastern EuroPe

R o m ani a : N ati o nal

So

ciety of Physically H andicapped

(sNHF)1 The Societatea Nationala Handicapatilor Fizic (SNFIF), or "National Society of Physically Handicapped,'is a national, nonprofit, non-governmentd Sociery of NGOs throughout Romania dedicated to (1) providing serwices, employment, and training oppornrnities for the physicaliy disabled and (2) to promoting awareness of handicapped issues among the Romanian public and polirymakers to ensure equal oppornrniry and respect for handicapped citizens. This case examines rhe resource-generating activities of SNFIF's Bucharest chapter, the largest and most active member of the sociery in the country, which serves both

as a

nerq/orldng umbrella for locd NGOs

as

well

as

offering its own direct prograrns and services for the physically disabled.

Together with the Study Group on Problems of the Handicapped, SNFIF works to bring about public anenrion to and understanding of the physically disabled. Since 1992, the Sociery has organized National Symposia of NGOs serving the disabled in Romania, as well as the first Na-

tional Conference of the Disabled. SNI{F has dso advocated equal rights for the disabled with local and central authorities , organizedfundraising seminars for its affiliates, and developed economic integration and professional training programs for its members. There are currently approximately SNFIF members throughout the country. Physically disabled members benefit either direaly through prograrns and services or indirectlythrough the society's advocary or education Programs.

Approximately 1OO of SNFIF's members are considered active in the NGO's activities, and 800-850 31OO

symbolic contribution which together accounts for only O'5 percent of SNFIF's income). The Sociery is governed by a board of nine officers, including the Sociery's president, vice president, a secretary of the board, and six members, who meet together quanerly are dues-paying members (a

to determine the Sociery's prioriry objectives and adopt a budget. A General Assembly, consisting of ali of SNFIF's 3,100 members, proposes and elects board officers. The Society currently has rwo fu|i-time paid staff members, a president and secretary, and provides employment for several hundred disabled people through its programs.

Funding for SNFIF'5 prograrns comes from a variety of sources. \7hi1e approximately 30 percenr of SNFIF's rotal operaring budget comes from international private and public donors (primarily from the United Kingdom and the Netherlands), the founders of the Sociery, led by current president Simon Francisc, have intentionally labored to attract domestic donations and philanthropic gifts. As a result, nearly athird of SNFIF's funds come from co{Porate sponsorship, including the Banca Comerciala Romana and the Banca Roman de Comert Exterior' The remaining

A44

third of the Sociery's budget comes from its own revenue'generating activities, which Francisc has worked since 1991 to develop. In fact, Francisc believes that the Sociery is a "pioneer" in this area.

Since its decision in the late 1980s to "test'the skeptics in Romania, SNHF has been working to prove that an NGO can function in Romania by relying on domestically-generated resources (rather than on international aid assistance). Although the Society had already developed rather lucrative contacrs in the United Kingdom and the Netherlands, Francisc recognized the short-term availabiliry of these sources and the "strings attached" to them. The President was dso realistic, however,

recognizing that generating domestic resources would require the Sociery to utilize market-based fun&aisingtechniques to supplement inadequate domestic philanthropic sources.

SNFIF's revenue.generating activities began n L99I when the Sociery established its own Handiprod Ltd. under the Romanian law regulating private limited for-profit company commercial organizations.2 SNFIF's bylaws permit the Sociery to engâ&#x201A;Źe in economic activities,

-

-

either directly or through a for-profit subsidiary, so long

as

they benefit its target group.r SNFIF

the bylaws of the comPany, dl the ".gslclingto profits reahz-edunder its work would be distributed to finance the programs of SNFIF or would be used to purchase and provide some form of material aid or supplies for the Sociery. The decision to establish the company v/as made during a SNFIF General Assembly meeting, at which time it was remained the sole shareholder in HandiprodLtd.;

companl, one third would be taken from the Socieuy's pool of individual donations and membership dues. The legal and court fees required for starnrp would be covered by cash donations, or provided through pro bono senrices. also decided that of the roral money required to establish the

the company was a legally separate entiry from the SNFIF, physicdly they were one and the

\fhile sarne

-

all Handiprod business was coordinated out of the Society's small, ciry-subsidized office

in the basement of the Bucharest CiryHall.

The first venrure of Handiprod Ltd. was a highly lucrative wholesale business purchasing household appliances fncluding refrigerators and freeznrs,and automobile accessories, e.g., tires and

space

forbid any other shareholders apart from SNFIF, the capital required to begin the wholesale business (including for rental of warehouse space, bulk purchases, and staf$ was acquired in the form of a six-month,

spare parts) and reselling them to the general public. Since the bylaws of the company

friend of the Sociery's president. The SNFIF president andvice president (a voluntary position held by Daniel Vasilescu) directed and managed the wholesde activities. \7'hile neither had any business experience, their creativiry and resourcefulness allowed them to rePay the interest-free loan from

a

loan and generate a sufficient profit within eyear to expand the Society's business aaivities.

In the summer of.!992,Handiprod entered into agreement with a locd landlord to rent a

it into a small bar, a 50seat restaurant, and a small shop for selling cosmetics, produce, juices, alcohol, and personal care items. These newvenftlres were motivated out of the desire to generare additiond income to support SNHF, and to further the Society's programmatic mission to provide employment oPPottunities forthe disabled.

vacanr car garage space and mrn

445

In Septembe r !992,the Romanian Parliament passed a nevr law through which the Finance Ministry is to encourage private businesses to employthe physically and mentally handicapped.* The law calied forthe creation of "protected jobs,'wherebyprivate companies could receive tax incentives by establishing special "workshops" in which at least Z0 percent of the workers must be disabled persons. In return,

a

company would be exempted from the Value-Added Tax

(VAl). \fith

this tax relief, along with the fact that no other shops or restaurarts existed in the area, Handiprod was able ro generate a profit within three to four months of opening the new faciliry. In addition, the company was able to hire nine additional full-time staff members, all but one of whom are physically handicapped.

As the business activities of the Sociery expanded, so too did the need for additional management assistance. The hiring of one new management-level staff member in Handiprod went sour, however, following "unresolved disagreements'with the

SNItr

leadership. As

Francisc and Vasilescu continued to manage the income-generating activities

-

a

result,

in addition to their

other full-time responsibilities at the Sociery and the Sqody Group. A subsequent, short-lived atcempr by the Sociery to move Handiprod into the business of clothing manufacnrring failed, due

primarily to a poor system of distribution and high production costs. The small company simply could not compete with large factories. The venture was therefore dropped, despite its potential for providing additional employment oppornrnities for Society members.

In !995,the Sociecy decided to expand its program activities to include additional professional vocational training for unemployed or recently graduated handicapped youth.

A srudy of the

Romanian labor market by the Study Group on Problems of the Handicapped revealed that the most-solicited jobs in the early 1990s were for accountants,lawyers, desktop publishers, salespersons, and construction workers. The Study Group reconunended that bookkeeping and desktop

publishing

-

both with computer-aided training

-

were the mosr appropriate and potentially

lucrative employment oppornrnities for the physically disabled. In March 1995, SNFIF and the Srudy Grouplaunchedthe Centrul de reOrientare inMuncasidePerfectionarein Tehnici

Computerizate pentru tineri cu Handicap (COMPTECFD (Crnter for Vocational Training in

Computer-AidedJobs for Young Disabled People') to provide computer training to young, physically and sensory disabled lSto 32year-old high school graduates.

COMPTECH opened its doors in four roorns on the ground floor of an apartment block in a poor neighborhood of Bucharest in what had previously been the building's laundry faciliry.

The space was donated by the Society CASA IOANA, an NGO working to refurbish the building to provide offices for themselves and adaycarecenter for mentallydisabled children. After the first

group of.2ltrainees completed the program and received a COMPTECH diplom4 SNIIF hired them as trainers for the program. In keeping with previous SNFIF policy, the only condition imposed on rhe program was that the first stage of the development of the Center be financed exclusively by Romanian sponsors. The only international donation accepted by SNF{F was addi-

tional computer equipment (donated by a Dutch organization). After r'wo years of providing

446

training, the success and demand for the program and the serwices of its graduates convinced the Sociery of the income-generatingpotential in extending COMPTECH's training and services in accounting and bookkeeping to the commercial sector. The Center now serves four clients, contracting out its accounting services to rwo private companies and rwo NGOs. The service has not yet become completely self-sustaining, but currently covers the salaries of its traitters while

Handiprod income covers the cost of all other operating expenses. The market outlook appears promising. If funds permit the purchase of a few additional Pentium computers, the Sociery beiievesthatthe COMPTECH initiativewill become completelyeconomicallyindependent andhighly profitable. The Sociery is also looking to create a nework of computer training services among all of the Nco-affiliated members around the country to share their income'generating experiences.

As demand for graphic design and desktop marketing services increases in Bucharest, the Sociery is also in the process of developing a printing and desktop publishing service

as a

part of

COMPTECH's ponfolio of services. One offset color printingpress has already been donated and the Sociery hopes to attract an additional printing preps in order to be able to launch the venture on a scale that would be competitive with other for-profit companies. The Sociery is also looking at making use of existing resources and equipment in its other program activities. For example, SNFIF has started

to charge

a

small fee to its "middle class" members in wheelchairs for its transport

service in an attempt to cover the costs of operating the van and prying

driver. Since not all members are in a position to pay the approximat e|y $2 a week for the service, this activiry has only limited abfiryto recover costs.

The number and variery of incomegenerating activities conducted by Handiprod and a

a

difficult to manage. Francisc and Vasilescu confirm that the process has had many obstacles. If all things were equal, the rwo leaders would prefer not to have to be involved in business activities at all. riltrhile the income'generating aaivities themselves directlycontribute to the SNFIF'S programmatic focus on the handicapped, Fraacisc and Vasiiescu would prefer to focus

COMPTECH

has become

their own attentions on what interests and motivates them. In addition, the revenue-generating aaivities have put both management and human resource streins on the Sociery. They estimate that

their time is absorbed by issues related to the Sociery's various incomegenerating activities - 'too much time,o they both agree. But they arewary of hiring a business manager. Despite the charitable mission of SNF{F, both Frensisc and Vasilescu believe a number of business persons would gladly abuse their position for personal gain. And while the addition of a nunager with business prowess would be a welcome relief, and potentially beneficial in the long-

at least 30 percent of

run, after the first failed hiring the rwo are not willing to take the risk.

Francisc and Vasilescu also feel constandy constrained by financial limitations. For-profit business persons are rnore in a position to take the risks necessary to invest resources

into their

link berween the income-generating aaivities and the survival of the its programs, the t'wo are not willing to risk what little resources they do have. In

venrures; due to the direct Sociery and

addition, the expansion of the income-generating activities has presented

A47

a

plethora of legd, ta:r,

and regulatory obstacles for the Sociery. The complexiry of the Romanian tax system itself is a challenge, but the combination of an

NGO

and

a

for-profit subsidiary with numerous ventures

bureaucraric nightmare. In addition, the fact that at least 70 percent of the Sociery's employees must be disabled persons has presented a public relations and marketing challenge to

presenrs

a

remain comperitive.'lfhile the staff is at least (if not more) hard-working and capable as nondisabled workers, potential customers often assume a lower standard in the qudiry and efficienry of

it necessary to either limit its potential client base to familiar with or sympathetic to their work, or to simply market their serwices with no mention

the work. The Sociery has therefore found those

of their social mission.

Finally, Francisc and Vasilescu do not recommend the business approach to income-generation for all NGOs. The two believe that the NGO must have a strong team able to ded with business management issues (marketing, human resources, and public relations) and pay close afiention ro the members or beneficiaries of the

nonprofit programs. It is imporrant, they believe, that the

NGO members and staff be involved in the decisionmaking

process regarding the income-generat-

ing acrivities, or the business aaivities risk losing sight of the constiruents' needs. In addition, Francisc and Vasilescu do not believe that the objective of such income-generating activities should be

to generate

1OO

percent of an organization's operating budget, but rather to achieve

level of economic independence. This level differs from

a

certain

NGO to NGO and circumstance to

circumstance.

Since 1991, the rwo leaders have been lobbying the locd and central authorities to provide

additional tax incentives for NGOs, and to increase the grants and contracts made to NGOs. Progress in this area vdll be slow, they believe, until the public becomes more conscious of the contributions NGOs make to sociery and encourages their decisionmakers to provide these sup poning mechanisms.

Notes lspecial thanks go to Simon Francisc, president of SNFIF, and Daniel Vasilescu, executive director of the Study Group on Problems of the Handicapped, Bucharest, for their persond accounts of SNFIF's activities. Also, thanks to Dana

Nicolescu of Opportuniry AssociatesRomania for identifying the

case and assisting

with the interview translations.

2lavr31/1990. rSee

footnote in Asklepyos

case

study regarding Romanian Finance lnstruction No. 910 of Ocober 9, 1991'

aLaw 57/1992.

A48

Internationd Case Study 12 Latin America and the Caribbean

St.

Lwcia: Tbe

St.

Lucia National Trustl

The St. Lucia National Trust was established in 1975 witha strong public mandate to protect the

flora and fauna and history of this East Caribbean island -a fully independent nation located approximateiy 1,300 miles southeast of Florida and 90 miles northwest of Barbados. The Trust is a

fully independent, non-govemmental, non-profit, ta:rcxempt organization under St. Lucian law.

Although it was created by * Act of Parliament and maintains'quasi-government" status ("when it suits its needs,' according to the Tnrst's executive director, Patricia Charles), it is often at loggerheads

with the government over environmental conservation

issues. The

Trust is a membership

organization currently maintaining approximately 500 "financial members" (those who have paid

their membership dues) and an additionilz}} "non-financial members" (those who have not paid dues). The Trust is governed by a board consisting of both private and public figures of mixed professional experience, onlyrwo of whom are government representatives.

The NGO sector on St. Lucia is very small. The National Trust is the only environmental

NGO focusing on island-specific preservation. One other, the St. Lucia Naturalist Sociery, focuses on animals, insects, and birdwatching. Another focuses on regional Caribbean issues. However, most environmental work on the island is conduced by government employees of the Department of Fisheries and, to a greater extent, the Department of Forestry and Lands. Agricultural Extension Officers also instruct farmers in environmentally friendly practices. Other environmental activities on the island are orgariznd through the voluntary, non-formal efforrs of communities and schools.

Although the island is only

moun

23 8 square

miles, it has a wide variery of terrain, including high

tains, forests, low-lying lands, and beaches. The Trust's programs are equally diverse. Its 42

fuIl-time staff operate prograrns from environmental protection and education to ecotourism and

Nationd Trust's primary management responsibilities center around rwo Nature and one National Landmark, and the development of at least three other sites not yet

advocacy. The Reserves

open to visitors. 'tD7hile

initial funding for the National Trust came almost solely from the St. Lucian government, its contributions have dwindled over the last decade. Int992,a financial agreement was signed berween the government and the Trust that called for a decrease over a six-year period in the government's share of contributions to the Trust

(a decrease

of

1OZO

percent in subsequent years

from its tgg2levelof approximately EC$1 million). The agreement was intended to reflect the government's wish that the Trust become more self-sufficient. The agreement allowed the Trust some rime, and ongoing financial support,

to build up its staff and organizational capaciry to attract

A49

funding from alternative sources. \7ith limited government aiternatives, the leadership of the Trust

own.

In 1993, a new executive director (Charles) was hired by the National Trust to examine new options for resource-generation and to guide the Trust through a period of transition from a

came to recognize the necessiry of generating additional sources of income on its

governmentdependentorganization to a more independent, self-sustaining one. The Trust combined resources from a major Canadian grant, some of the organization's own surplus cash flow

contribution coming to a total of approximately US$500,000, to undertake a complete "facelift" of the Pigeon Island National Landmark Park (PINL). The completion of renovation and conservation efforts, and the reopening of the PINL, provided a unique and significant monies, and

a

opponuniry for the Trust to increase its income'generating capacityby utilizing the park for activities both related and unrelated to its environmental mission. The Trust recognized the fac that tourism in St. Lucia is a burgeoning industry, with companies in the tourist sector and the St. Lucia Tourist Board catering to and anracting North American, European, and other visitors to the

In

National Trust had begun to offer limited ecotours throughout the island to capitalizeon this tourist market, but prior to the Trusi's major conservation effort, the PINL had not generated a surplus of funds. In the first year after the reopening, the Trust was able to double island.

1990, the

its income from entry fees. Soon thereafter, the Trust began to examine additional options

from

generating income from the park.

In addition to expanding its mission-related tours, the Trust built up agazebo and outdoor wedding venue rental service in the park and worked to moderni zs andexpand the park's open-air theater and public facilities for concerts, performances, and fairs. Since the Trust is very concerned

with the public carrying capacity of the PINL, it has been very selective in the scale of its activities and the events it hosts in the park. PINL is, therefore, used for large-scale public events only eight times ayear.

The largest practical obstacle to expansion is the fact that Pigeon Island is not connected to the main island's electrical grid. Gallons of diesel fuel must be transported out to the small island.

Negotiations are underway with the electric company and the government to provide

a

portion of

with the main electric grid to allow for upgrading of PINL's services. This would allow for insmliation of new high-tech interpretation the cost that would be required to connect Pigeon Island

facilities, light and sound equipment for the theater, and renovations and historical preservation of ruins and natural sites. Other possibilities for generating income have also arisen. A 133-acre site in the island was recently donated to the Trust, which is now developing it

as a

pubiic camping and

hiking site. The site will include a reception/interpretation center, space for 3 camping sites and 56 cabins, public facilities, and a hiking trail system. There is also tremendous potential for incom+ generating ecotours of the island's still-hidden archeological sites.

ln addition to its own marketing effons, the Trust has combined effons with the St. Lucia Tourist Board and private companies to attract tourists from overseas. In addition, the Trust has opened

a

tourist souvenir shop in the park, which has generated additional income for its prograrns.

A.50

ln combining all these mission-related and unrelated income'generating activities, the PINL now makes a profit each year which it is able to use to subsidize its non-income-producing program activities. All of these "surplus" fun& are taxâ&#x201A;Źxempt under St. Lucian law (as are contributions from private corporarions and individuals, and duties on imported goods), with the exception of those sales in the Trust's shop which are considered commercial income. Of the Trust's oPerating budget of $800,000 in Lgg6,approximately 55 percent came from domestic government sources, 5 percent from international assistance, approximately one percent from membership fees and donations ,and39 percent from its own income-generating acrivities.

This 39 percent had not come without difficulties. Although the National Trust did not develop a specific business plan for its income-generating activities, Charles observed that some

structurd and "mental" reorgarization was required in order to make the successfrrl shift to an income-generaring approach. The executive director found it necessary to make some internal reorganizational and staffing changes to administer these new and expanded activities.

Additional staffwere required in the wedding sedion to manage and administer the expanded program. In most orher cases, including the shop and PINL special events, existing staff v/ere urilized (with only added-support staffassistance). Of the 42 Trust staff, only about six dedicate the majoriry of their time to income-generating activities, including the wedding section, shop sales personnel, and tour guides. The majoriry of the other staff members dedicate most of their time to the maintenance, securiry, and conservation of the national park sites. The Trust has management team of ten, includingthe Executive Director, Director of Programs, Accountant,

a

Office Manager, Vedding and Tours Coordinator, four Area Managers, and one Site Manager. The rest of the staff are support technical staff at the Head Office or on sites.

In addition, the account-

ing and finance procedures of the organization had to be redesigned, and staff retrained to understand them. Third, the management $affhas to become rnore deeply involved in the budgetary process, and take greater responsibilrry for monitoring expenses and for the allocation of resources.

Finally, Charles believes that a "mental' shift was required for the organization to undertake income'generating activities on a zubstantial scde. Charles believes that a clearer distinction was required berween program and income'generating-related tasks and staff positions. Charles believes that this distinction, and the creation of physicdly separate departments, are necessary prerequisites to NGO enterprise success. According to Charles, it is necessary to develop and environment with a business-thinking mindset. Since existing *affwere not originally hired for their "business' expertise but, rather for their environmental or park maintenance expertise, they needed to be

trained in the new skills necessary to administer their added responsibilities. At the same time, Charles believes that, in order not to avoid losing sight of the organizational mission, not all staff should be "tainted" bythe income-generatirg activities. But she

sees

avalue in insistingthat pro-

gram staffbe more aware of the need "to foot the bill" and recognize the importance of the income-generating activities to the continued success of the Trust's work.

A-51

Vhile Charles

believes that there was more support among Trust staff for

income-generat-

;

ing aaivities than in herprevious NGO work, the support was by no means unanimous. One Trust Council member indicated that sometimes "the business is at loggerheads with the mission side for resources, both human and financial." Some staff had reservations about the Trust's business

development.

activities, and some have expressed objections to their expansion and There appeared to be more unanimous support for the income-generating activities among

i

the Trust's governing council, perhaps due to the faa that few other financial options existed to continue the NGO's programs. One council member, Marcus Day, indicated that NGOs often have a

difficult time adjusting to a business approach to resource generation: 'I come from the private sector...and chose to devote my time and energy to assisting NGOs with income generation and financid stabiliry. I have found the past six years very frustrating. I don not think that the organizations I have worked with have the strucnrres necessary to be 'entrepreneurial.'I have also wondered if the people who gravitate to this sector are also cap4ble of giving what it takes to make

NGOs to be more entrepreneurial, but when the clock strikes 4:30, sparks are flying from the soles of the employees' shoes as they hit the pavement on their way home...tNcos] struggle with issues of income generation all the time, but they have so many other consideran

NGO a financially

successful enterprise.

\trV'e

have asked

ations that are rnore important to them that they can't avail themseives of the opportuniry presented in a timely fashion. They just seem incapable of moving

quickly enough to seize the moment. Businesses succeed because their goal is to make a net profit. NGOs have other goals (mission statements)-and profit is not high on their list. In fact, a major challenge is that if an organizationwants to make a profit, they need to call it 'profit,' make it their goal, and trot be ashamed of it.

The organizations I have worked with are afraid of the word'profit,' like it's some

kindof dirryword.o Balancing this need to become more entrepreneurid with its core mission has

difficult for the Trust,

since there is a concern not to appear to the general

public

as

become

too eager and

a

concern about losing sight of the organization's conservation mission in the face of incomegenerating oppoffunitiesto capitaliznonnaturd and heritage resources. There is added pressure to

competitive with the forprofit businesses which also capitalize on St. Lucia's naturai beauty. The Nationd Trust is in direct competition with its for-profit counterparts in the tourist industry. There be

are a number of other small, local businesses and international

tour agencies, including wedding

promoters and hotels, tour opâ&#x201A;Źrators, and special events organizers, vrhich operate similar activities.

The question remains: what is a comfortable balance berween the environmental mission of the

orgarization andthe scale of its income'generating activities?

A-52

-

Note rspecial thanhs for this case go ro both Marcus Day, council member of the National Trust, for his many correspondences and insights into

NGO self-financing activities on

St. Lucia, and to Patricia Charles, executive director of the

Naiond Trust, for sharing her frst-hand experiences in managing

A-s3

the Trust's activities.

International Case Study 'Vestern Europe

13

United Kingdom:lnternational Federation of Red Cross and Red Crescent Societiesl The International Red Cross and Red Crescent movement is one of the largest global nerworks of international and national institutions dedicated to humanitarian relief and developmenr, spending over $15 billion annually. The movement consists of the International Federation of Red Cross and Red Crescent Societies (International Federation) and its member national

[CRC). The International Federation, an international organizationfounded in !9!9,is composed of and represents the 120 national societies of Red Cross and Red Crescent member orgaAizations in nearly every country in the world. The national societies coordinate domestic relief and development prograrns forthe presocieties, and the International Comminee of the Red Cross

vention and alleviation of human suffering in the event of natural or man-made disasters. The International Federation, through its Secretariat in Geneva and its delegations strategically located in various regions, works to assist Red Cross/Red Crescent activities around the world. The ICRC is an independent, private, Swiss humanitari an organization

which works to protect and

assist

victims

of armed conflicts.

All of the institutions which

are part of the Red Cross/Red Crescent movement are tradi-

tionally heavily dependent on government support for their activities. The International Federation in Genevareceives approximately 80 percent of its $144 million annual budget from government sources, including contributions from its national societies, who in rurn solicit much of their funding from their governments. Inl994,for example, 50 per cent of ICRC's annual budget of approximately $528 mission came from some rwenty governments around the world, and an additional 20 percent came from "supranational organizations" (like the European Union and international organizations). To raise these resources, ICRC launches annual public appeals to governments around the world to explain the greatest needs for its field operations in areas of armed conflicts,

international disturbances, and natural disasters.

In recent years, ICRC's appeals have been plagued by "donor fatigt.." Low profile media coverage of some conflicts and crises around the world has lefr ICRC unnoticed by major donors, no political nationd interests or rational for supporting the organization. Furthermore, many donors earmark contributions for specific purposes or geographical use. As a result, ICRC suffered serious cash flow problems in t994 and 1995, closing its 1995 accounts with a deficit for its

who

see

field operations of more than $5.6 million. Mr. Christian Kornevall, head of ICRC's External

A-54

Resources Department, announced at

a press

conference in Geneva that

about its financing in the years to come and has taken certain measures

"ICRC remains concerned to broaden its donor base."2

For manyyears, the 170 national societies of the Red Cross/Red Crescent movement and ICRC managed their fundraising activities separately, with linle to no central coordination from the International Federation. In 1995, however, the International Federation launched an efforr to develop a corlmon policy framework for fundraising activities. At the November 1995 conference of the Federation of Red Cross and Red Crescent Societies, the International Federation's Revenue

Generation Department presented

Generation,"

a

document entitled "PoliryFramework for Global Revenue

project aimed at ma<imizing revenue for the benefit of all Red Cross,/Red Crescenr affiliates around the world. The document called for the establishment of a "New Revenue Project" a

to respond to the need for the development of a collaborative approach to fundraising that was *common based on a policy framework for fundraising activities that cross national borders."3 The General Assembly adopted the policy framework, and called on national societies around the world to support and implement the New Revenue Project strategy in their respective countries.

The policy framework identified "

Commercial Endeavors"

a

number of specific areas of collaboration, including

:

"National societies

are increasingly using separately incorporated and sometimes

independent cornmercial organizations to create profits which are rerurned to the national sociery to support its work. There may be broader opponunities for revenue generation in this area. They may aiso be [oppornrnities for] learning about

potendal negative outcomes of these ventures that would be useful to other national societies. The Secretariat should gather information from national societies for the Potential benefit of other nationai societies, and maintain this information resource to them.'a

as a

According to the Director of the International Federation's Revenue Generation Deparrment, Dwight Mihalicz,several national societies have attempted some form of income-generating activity. Some have attempted greeting card sales. The Turkish Red Crescent bomles and sells mineral water and markets houseplants. Some Scandinavian Red Cross Societies have artempted to use casinos and slot machines to generate income. Others, includingJapan and Germany, have devel-

oped cost-recovery prograrru for running clinics and hospitals. Through the New Revenue Project,

the International Federation hopes to build on these experiences and identify "new and innovative means of creating revenue in ways other than those resulting from traditional donordonee relationships."s The project is intended to generate new revenues through dealings in the private secror thar are, according to Mihali

cz,"apafi from corporate philanthropic gttittg." The strategy

is designed

to

capitalize on the multimilliondollar advertising budgets of corporations around the world. The concept is a "new advertising medium that builds on the successes of cross-market and cross-

product advertising.'6 Through HelpAd Ltd, a for-profit company esrablished in London by the lnternational Federation, the Federation hopes to develop its own income-generating porential by

A-55

adverrising "broker." HelpAd intends to capture one percent ($3.5 billion) of the annual advertising market for major national and internationai companies.

The HelpAd strategy to bring businesses together is based on the following scheme: One

serving

as an

participating company (the "carrier") offers advertising space on its product packaging, advertisemenrs, and other promotions to HelpAd. In cooperation with the carrier, HelpAd contracrs with anorher company (the "advertiser"), which wants to advertise at market value. All of the advertisemenrs include

a

small HelpAd logo that explains that the proceeds from the ad go to the Red Cross

to help people in need.z first launching its aaivities in the United Kingdom. During the 18-month test market period, some 500 British producers have made inquiries about partnering, and the International Federation is confident the venrure has tremendous potential for success. HelpAd is promot-

HelpAd

is

ing the "halo effect" as an added benefit to carriers (since they receive no fiscal benefit from participating). The company is pointing to consumer preferences, citing statistics that "an overwhelming

majoriry of consumers almost 80 percent are mo're likely to buy a product with the HelpAd logo on it.'8 HelpAd has sent appeals to an additional 500 British marketers, along with a sample of the loaf of bread representing the first HelpAd advertising partnership berween Hovis (a bread bakery), which allocated advertising space on its wrapper, and Anchor butter, which purchased the space through HelpAd. In another example, Tabasco bought space on the side of Del Monte tomato juice bottles. So far, HelpAds have appeared on seven producs, and three more product pairings are slated to appear inl997.American Express, News International, and Virgin have

miilion in advertisements a year in the IIK within the next rwo years. The vencure is novr generating enough income both to cover its own month-to-month operating costs andto generate a small profit. HelpAd projects its income will increase into the millions of dollars n1997.

All advertising revenues from HelpAd deals are earmarked for the Red Cross and Red Crescent. Since the International Federation's constirution forbids it from owning shares in a forprofit venture, the International Federation's Executive Council in April, 1993 and M ay, t994 called for the creation of a Swiss-based Foundation to oversee HelpAd's income. The Foundation of the International Federation of Red Cross and Red Crescent has been established in Geneva to receive the proceeds from all HelpAd operations. The Foundation is chaired by the secretary general of the Federation, and reports on its activities are made t}rough the secretary generd to the appropriate Federation governing bodies. The ten members of the Foundation's board are selected from the national societies who put up the risk capital to establish HelpAd. The income generated by already agreedto participate.e HelpAd's goal is to sell approximately $16

HelpAd and deposited in the Foundation

is exempt

from Swiss cantonal and federal taxes. The

revenues are either directed to national societies for use

as

into The distribution of

the Foundation board decides, or

Federation funds, where they will be available for use by national societies.

HelpAd profits berween the International Federation and the national societies is as follows: 50 percenr to the International Federation, and 50 percent to national societies in multinational deals,

A-56

and75 percent af,Ld2spercent respectively, for national societies andthe Federation in national

At the end of l996,thefirst profit distribution took place - a 50,000 British Pound (ap proximately $84,000) transfer from the Foundation to the UK Red Cross.

Success in the UK has encouraged HelpAd's plans to expand. HelpAd now maintains four offices in Europe, including its 5-person London headquarters. Plans are already under way for similar venrures with agents in six other countries in Europe, North America, and Asia, and in South Africa. Help Ad may also expand its activities to include senring as a broker for other charities, offering its service for a small percentage of the money paid for the advertisement.

Mihalicz identified a number of obstacles in starting up and managing the HelpAd program.

First, although he admits HelpAd has had "little drain" on Red Cros/Red Crescent resources, he says the initial investment was large and "comparable to starting up any new corporation." The *can't be as rislry specific figures are not publicly available. Mihalicz also admits that the Federation *we have to inch forward," he says. In addition to Federation as for-profit corporations." Instead, resources, in order to "spread the risk,' a number of tlre national societies contributed risk capitd to start up the venrure. As HelpAd prospers, this initial investment will be repaid through the deals.

Foundation (with interest) to the National Societies.

forHelpAd exists at the highest poliry level within the Federation, the implementation has presented a dif{icult challenge. Vith fittle money for research and development, a great deal of effort, time, and risk was necessary to te$ the market, "learn the field," "learn the language," and develop corporate contacts and clients. Mihalicz believes that it is easy, albeit foolish, to enter such enterprises in a"starry<yed'fashion. Instead, such enterprises must be approached from a purely business mindset: "It is necessary to have a good, solid board with strong business and enterprise experience in order to put in place the checks and balances necessary for success." \7hile the scheme is starting to catch the public's attention and attract "unusually positive correspondence,' according to Mihalicz, some companies are waiting to see how HelpAd's partnering relationships develop. One major obstacle in attracting companies has been the problem of brand<onscious parent companies resistingthe opportuniryto advertise on a related produd which may be a rival brand.

To date, the HelpAdventure has not generated any negative pubiic relations problems for the International Federation. Mihalicz believes this is because the operation is'so clean'and is ciearly going after money other-wise earmarked for corporate advertising. Mihalicz believes, however, that standards outlining restrictions on HelpAd's business practices will need to be developed as the venture expands. For example, he does not believe HelpAd should become engaged in any Second, Mihaliczsays that while unanimous support

corporate ventures related to tobacco sales or arrns manufacnrring.

HelpAd's work

has

not yet come into any direct competition with other for-profit advertis-

ing brokers. Mihalicz believes this is due to its current small scale. Furthermore, since HelpAd is a

for-profit company and mut pay ta:(es under British law (as opposed to its starus in the United States), there are no claims of "unfair competition" among for-profit competitors. Any registered

A-57

competition is conducted on an even playing field, accordingto Mihalicz. "It works both ways, too," he explains, "private companies are now bidding for contracts to deliver reiief and deveiopment

If they can do it cheaper and more efficiently, then fine. Likewise, if an NGO can start a company responding to a market niche or capitalizing on a market inefficiency, then fine. Frankly, the victims of disasters around the world don't ask where the money is coming from. It is the ultimate mission of the organization that we have in mindhere." services.

Notes tspecial thanks go to Dwight Mihalicz, director of the Revenue Generation Department of the International Federa-

tion in Genwa, and to Eigil Pedersen, director of the International Federation's office in New York, for providing detailed information and personal accounts of the HelpAd initiative.

2"ICRC's Financial Situation." ICRC News 95.5 (Geneva: February 8, 1996).

rlnternational Federarion of the Red Cross and Crescent Societies. "Policy Framework for Global Revenue Genera-

tion." Presented at 10s llbid 8.

Session of General Assembly (Geneva : November 27-30, t995)

3.

5lnternationd Federation 4.

6"HelpAd: Helpingto Meet IncreasingHumanitarian Needs." (London: HelpAdLtd., 1996).

lbid.

8"Vhat Research Tells Us About HeipAd." (London: Research International, 1996).

"Campaigning for

a

Cause." The Economisr (September 28,1996) 89.

A-58

i I

I I I

Internationd Case Study North America

14

United States: Development through Self-Reliance, Inc. (DSR)1 "Our name is our corporate philosophy: Third \Corld development people to help themselves," is the headline of

is best achieved

by helping

promotiond materials for Development through

for-profit company based in Columbia, Maryland. DSR's vice president, Steve Smith, believes that "it is possible to do well and to do good'at tle same time. He has atrempted to disprove his critics by mixing the nonprofit and for-profit form into a unique entity that generates a hedthy profit for a socid cause. According to Smith, DSR is an'unusual blend of a profit and nonprofit business" which has creatively managed to utilize principles of the for-profit Self-Reliance, Inc. (DSR),

a

world to generate income to support the efforts of two NGOs (one U.S.-based and one Zimbabwean-based), * independent filmmaker in Afric4 and a network of social impact film distributors throughout the African continent.

DSR is a small, for-profit business formed in 1980 by Smith and his wife Sally, both of whom have a number of years of professional experience in international development work.

During the L97}s,they spent several years in Southeast Asia and Africa with the Mennonite Central Comminee. She worked to develop markets for raditiond locd handicrafu, and he worked to establish sterilization and family planning clinics. Several years later, it seems ironic to Smith that the enterprise markets established byhis wife are still alive with multiple branches, while most of the family planning clinics he helped to establish have long since closed. The question of how 1e makg such projeas 'sustainable" has long troubled Smith, and brought him to ttre for-profit/nonprofit mix he now promotes.

After moving back to the U.S. from Bangladesh, Smith continued work in the development fieldfor ashorctime inpositions witlthe VorldBank andTheJohns Hopkins University. He grew increasingly frustrated with the nature of the work, and what he considered the tremendous inefE-

cienry of many NGOs.

'I

got so impatient with NGO people. They were so divorced from reality,'

he recalls. Smith decided to leave the

NGO field when

he realized what was coming

-

"Nothing.

I

During his years in the field, Smith felt more co"'tected to the realities of development work, but in the headquarters and bureaucracies of N@s in the U.S., Smith felt removed and out of place, despite a comfonable sdary. Smith recalls: "The evaluation of our work

was going nowhere.o

byhow well my boss thought Iwas doing orhow well my reportsv/ere written.

They had nothing to do with accomplishing our pu{pose. The nonprofit sector has a lot to learn from the for-profit world in that respect. People have no concept of what it means to be self-

was determined

A-59

supporring, of the bonom line, of efficiency. I'm too impatient. I felt like a square peg in a circular

,

hole."

to import and market handicrafts from Asia and Africa to the U.S. to support the income-generating projects of locd craftsmen. After returning to the U.S., Sally worked to build these aaivities into a profitable venture. Over a period of five years, DSR grossed

In

1980, the Smiths established DSR

approximately $75,000. She continued to work without salary, but the business still lost money. In order to be profitable, the venture needed to be conducted on a much larger scale. This scde-up was beyond DSR's capaciry at the time.

Intg}4,DSR

expanded its activities to support the production of "social message films'in

Africa, including videos and documentaries focusing on issues of teenage pregnancy, family planning, health, tr"i"ing, AIDS, andwomen's rights.Inparrnershipwith afilm-makerlivingin Harare, the Smiths helped support the production of numerous films and helped build

a

ner,q/ork of

distributors throughout Africa and the United States. The films were very expensive and time' consuming to create, and required a long-term commitment that many donors were unwilling to make.

Smith recognized they would need to identify some means of generating their own resources to support the social message film-making and distribution effons. The computer industry was just beginning to burst into the market in the 1980s. Indications were that it would be a highly lucrative field. Although Smith had linle understanding of or experience with computers (he'd

worked with rypewriters his entire career), he took courses andtaught himself. Smith soon began to sell desktop and laptop computers out of his basement. business

By 1986, DSR grew into a computer

sales

exportingto Africa" Latin America" andAsia.

As DSR began to sell Toshiba laptops and portable computer hardware, net losses quickly

shifted to net profits. DSR began selling Toshibas soon afterthey were introduced in the market, and became one of the first Toshiba-licensed dealers and repair shops. DSR "caught a wave,' to Smith. "Ve were l".ky. No one could replicate our success now. \ilfe happened to enter

"ggslding

the lucrative computer market early." DSR now exports shipments a

large customer base

of

$50,000 or more per week

to

worldwide (primarily in Africa), and provides individual consultation and

million in sales over the last sixteen years, at a current profit margin of approximately 4 percent - a figure Smith considers "fair to poor'in for-profit tenns.

service to its customers. DSR has made between $3040

A-60

DSR Growth: Net Profits and Staff (1e81- 1ee6)

Yw

Nu Profit(n

$)

swf

1989

+ +

t990

+

SA,OOO

8

199t

+

19,000

9

r992

25,000

12+2

1993

+ +

61,000

74+2

1994

+172,ffi

16+3

t995

+

L2+4

1996

+440,000

1981

1982 1983

t984 1985

1986 7987 1988

s000

1

6000

1

400

1

3000

4

5000

4

5000

4

3000

4

800

5

1000

6

25,000

17

*

Source: DSR

+7

Full-time + part-time

suf

in the sale of Toshiba laptops ,75 percent of its business is now in laptop repairs. DSR maintains a highly-trained, cerrified service department of seven technicians, and a large stockpile of nearly half a million dollars worth of spare parts for older and newer

Vhile DSR

has specialized

Toshiba models. According to Smith, this is alucrative venrure. Toshibapays $110 for each machine repaired under warran{, and most laptop customers are willing to pay almost anything to get their computers repaired quickly.

DSR has developed a dedicated customer base. Most of its customers are friends working overseas, staff of international NGOs or universities, and missionaries. Almost all are return cusromers and referrals. Aparr from

a

small ad in the yellow pages of the telephone book, DSR does

no public advertising. Because many of these international customers are working in remote or harsh conditions, they depend on DSR's service. The company has won numerous consumer awards and recognition from Toshiba for its high customer service satisfaction and turnover. DSR's prices are comperitive, but not much different from other resellers, and Smith believes his custom-

A-61

nore to do n-ith the fact that manv know him personallr' or know' of his "rcots" in the nonprofit *-orld - and therefore trust DSR to give gooci sen-ice. DSR has also begun to

ers' dedication ha.'

attract corporate-sector clients which maintain "fleets" of laptops.

for the compan,v, since NGOs and

IIN clients often take months

Sith

feels this is a good trend.

to pay invoices due to

a

lack of

funds or bureaucratic delays.

Smith believes that the largest contributing factor to DSR's success (aside from being in the right place and the right time) is the hard work and dedication of DSR staff. DSR's seventeen fulltime and seven part-time staff are primarily young, hardworking, self-taught computer technicians.

The hours are long and intense, but Smith does not believe the staff's dedication has much (if anything) to do with the social mission of the company. The staffprovide

a

good service, and

receive competitive salaries, bonuses, and profit-sharing benefits for their work. They are not, for

the most part, "missiondriven." DSR's salesmen travel to Africa several times ayear on businessrelated matters, but Smith believes most pay linle attention to or rarely understand the purpose or

significance of the social message filmmaking work of the company.

Smith believes he has maintained sight of his mission despite the commercial success of DSR. In L987, along with friends in Harare, the Smiths co-foundedMedia for Development Trust Zimbabwean chariry (w.o.2l/89). lvFD has since established

film production facilicy and is developing into a regional social communications resource. For the first years of its existence, MFD was fully financed by resources generated by DSR's computer sales. DSR also sold MFDproduced films through its African distribution network.In addition, in 1989, DSR established Media for Development International (lvfFDD, a U.S.-registered 501(c)(3) nonprofir agency. MFDI and MFD were both intended to "build the developing world's capaciry to communicate with its own people via the mass media." They were intended to assist African film producers, support local QV{FD),

a

media research and evaluation, and provide training and assistance to

a

Third'lforld

social develop

ment conrmunications agencies, film-makers, and production companies.

The relationship berween MFD and DSR took

a

new direction in the early 1990s

as

both

organizations matured independently of one another. Smith recalls that 7994 was a year of rremendous "personal angst.'In its initial years, Smith served as an MFD rrusree. He traveled toZimbabwe several times a year and spoke on the telephone at least weekly with

MFD,

assisting in the

organizational and programmatic decision making. DSR sent checks of support, and MFD sent films for DSR to distribute and sell. Cooperation was close and personal. As MFD matured, however, Smith received fewer phone calls and became much less involved in

MFD activities. Likewise,

Smith became increasingly absorbed in the management of DSR, the relationship between the two organizations became more a professional one. MFD began attracting international donors as

and government

fun& for its filmmaking programs and the DSR contributions

decreased,

until

they became only symbolic. Smith now only provides some of DSR's annual profits to personally support his filmmakinB partner in Zimbabwe. All other support to MFD stopped, although Smith believes

it may begin again in the future.

A-62

Meanwhile, DSR continued to subsidize the work of MFDI. lv{FDI was provided office while space and supplies in the DSR offices. In 1994, MFDI hired its first full-time Program officer still relying on donated time and assistance from the staff of DSR, a Part-time consultant, and a student inrern. ln its first three years of operation, MFDI grew quickly from an oPerating budget

in 1991to $266,000 in t992,to $385,000 in 1993. The initial resources to establish MFDI were provided directly ro the NGO by DSR in the form of a $50,000 interest-free loan of only $62,000

which MFDI paid off in full in 1993. MFDI has since secured its own line of credit with private banks for future use. In 1993, DSR donated a total of $7000 to MFDI, while the Smiths also donated nearly $5O,OOO. Through MFDI, DSR has sold about 1/,000 videos over the last rwelve years, and set up a srructure of commercial and noncommercial subdistributors. DSR is signing up new titles at the rate of 5-IO ayear and currently has 5O7O top African social message video titles, copies ayear. Copies of the films cost about $8-10 to make and rypically sell for $25-80 each. It generally costs about $1000 to sign uP a new title. The activiry consrirures only about one percent of DSR's annual income. Afterrwo years with a full-time coorof which it distributes about

15OG2OOO

dinator/fundraiser, MFDI attracted only one grant of $25,OOO - far less than the cost to raise it.

This funher added to Smith's frustration with donor approaches to financing project efforcs.

"Donors can inadverrently push local agencies from a for-profit way of doing business and attract them into a path of dependency. Both donors and local NGOs need to reaiize that donor suPPort is limited, and that projects need to focus on evenrual self-reliance," writes Smith. As a result, MFDI as a nonprofit entiry is slowing fading twa.f tbut its film distribution activities continue within DSR's for-profit strucrure.

As DSR's net profits continue to soar in !997 ,Smith is now able to delegate more responsibiliry for the management of the company to his staff. His schedule has become more flexible, with more rime to work ar home, be with his family, and travel. Smith feels that as DSR grows and professionalizes, however, it is being'gradually dragged into the commercial world." Smith admits being somewhat uncomfortable with this shift:

NGO world, I'm also a circular peg in a square hole in the for-profit world. It is sad to see the nonprofit part of the business dying. I'm not interested in making a lot of money. Our interest 'Ironically, although I'm

a

square peg in a circular hole in the

building the filmmaking industry in Africa. But the best films are feature films, not short films, and donors are hesitant to fund such large-scale projects. And despite our success here, it is still not possible to come up with the half a million dollars or is

project.'

Smith believes that he and his wife will soon rerLtrn to Africa to continue their filmm"kitg acrivities, but this time not within the NGO sector. "Our original plan was to return to Africa with MFD, but the commercial options may be much better to suPPort our work." more needed to fund such

a

Although the filmmaking activities of DSR now constitute avery small part of its overall work and less than one percent of its total income, the Smiths believe it is important to maintain,

A-63

since DSR is currentlv supporring the only functioning distribution ner**ork in Africa. The,t* admrt

their work could be more efficient: "Our film sales basically lose monev and couid be bener. But I no longer feel the need to do evaluations of our o'wn work to convince fdonors] what we are doing is imporrant. There is no longer any need. Sfe aren't taking their money' so v/e don't have to teli them anyrhing. I spent many years as a donor myself, but working in a profitable company has been far more important in

my'training."'

Smith summarized the lessons of the DSR venture in a recent memo to a colleague

as

follows: " Our experience over the last dozen years was that donors weren't able to suPPort our project, other than for short periods. Furthermore, the donor suPPoft was pulling us towards establishment of a center where the process of what we were '$7e

doing was more imporrant than the output activities and accomplishments. realizedthat we could get more accomplished with a lot less cost, if the burden of non-ourpurcritical regulations and paperwork and activities was lightened. Also, we realized the high cost of seeking donor funding. Finally, we reaiized that it was easier to fund our own activities with profits from the computer sales/service side of

profits fromvideo sales themselves. Not only did that save us the vast rime and costs of donor liaison, but also it put our project on a path to financial self-reliance. Now it exists as a self-propelled project that can exist forever without donor supporr. . . I believe that NGO projects have to realizethe impor-

DSR,

as

vrell

as

tance of the simple focus on excellence in business management as a means towards

continued exisrence of the project, and that eventual, at least paftial, independence from donor support should be an urgent goal."

Note tspecial thanks for this case go to Steve Smith, vice president of DSR, for'his personal account of the development of DSR, MFD and MFDI. Also, thanks go to Jose Ravano for his initial research on this case.

A-64

International Case Study 15 Latin America and the Caribbean

United States: United States Public Interest Research Group (US PIRG) and Earth Tonesl The United States Public Interest Research Group (lJS PIRG) was established in 1984

as a

national umbrella organtzation to coordinate the activities of 35 state Public Interest Research

Groups

eRGt.

The state PIRGs, active in more than 35 states across the count

U, are nonprofit,

nonpartisan, environmental and consumer advocacy organizations. The pu{pose of US PIRG is to

lobbying office of the state PIRGs, and to share resources and expertise in an attempt to more efficiently coordinate activities. US PIRG is also intended to provide technical assistance to the state PIRGs, assist and coordinate in fundraising, telemarketing, direct mail, and recruitment of new members, assist in providing start-up resources and management expertise to act as the national

aid in the establishment of new PIRGs in additional states, and more. Of US PIRG's 1994 income

of $363,000,74 percent came from state PIRG contributions,22percent fromcontributions from members, 2 percent from publications and other sales; and another 2 percent from interest income.

In the thirteen years since it was founded, US PIRG has established

a

number of nonprofit

md, more recently, for-profit spin-offs or subsidiary orgarizations to implement programs and further its agenda on particular issues. The National Environmental Law Center [ri-ELC), a US PIRG spin-offin Boston, for example, was established to take illegal polluters to court and to

-

\fatch in San Francisco, another US PIRG spin-off, organizes citizen groups to protect their communities from pesticides. ln the early 1990s, develop new environmental protection policies. Pesticide

US PIRG began an additional programmatic thrust into the economic development field in an

aftempt to encourage socially responsible business practices. US PIRG hoped to develop initiatives to serve rwo purposes: first, to educate the public and disseminate information about socially and

environmentally responsible business practices and to bring more people into the responsible business movement; second, to help develop successful models of socially and environmentally

responsible business ventures and, in so doing, identify alternative methods for generating resources

for US PIRG programs. One such initiative was Green Century Capital Management,

a green

mutual fund company formed by US PIRG to purchase company stocks of and encourage shareholder parcicipation in "bad" companies as a method to improve their social and environmental practices. US PIRG also purchased

a

home heating company, Fuel Buyers, Inc., in Pennsylvania in

an attempt to establish a model environmentally-conscious energy company.

Int993,US PIRG also entered the increasingly lucrative market of longdistance telephone service provision. In addition to the "big three" carriers - ATEaT, MCI, and Sprint - a number A-6s

of small service reseilers have sprung up across the U.S. Having seen the success of other organizations in generaring resources in the industry, US PIRG recognized an opPoftuniry. Several forprofit, long-distance teiephone service resellers have succeeded in marketing themselves as "sociall',-

portion (usually 1-2 percent) of their net profits or 'Working Assets, for exof total telephone charges to a seiect group of nonprofit orgarizations. ample, donates one percent of dl its telephone charges - about $2 million in 1995 - to a "pool" of non-profits regardless of whether the company makes a profit. Likewise, AmarVision Lifeline conscious" telephone companies by donating

a

Christian reseller headquartered in Oklahoma Ciry, gives 10 percent of all telephone charges (about 20 percent of its budget) to Christian groups (amounting to about $1 million in 1994 and about $Z million in 1995). Other companies had also formed to provide teleCommunicarions, Inc.,

phone services to

a

a

specific group of people, or members of an organization or association. Citizen

Action, for example, created a discount telephone service as an added benefit to its members.

Unlike these groups, however, US PIRG wished to create a company wholly-owned by nonprofit organizations to channel 100 percent of its,profits to special-interest causes. US PIRG also wished to reach a broader general public with its message, appeding to audiences outside its existing networks and membership with an environmentd message. The result was Earth Tones,

"The Environmental Telephone Company," formed by twelve environmental NGOs. Eanh Tones

"agent' of a long distance telephone service reseller, and distributes the profits from its sales to the followingorgarizztions: NELC, the Green Corps, Eanh Day 2000, the Campaign to Save the Environment, Pesticide'Watch, the Toxics Aaion Center, and the state PIRGs.2 The group is not a coalition per se, since all the NGOs are affiliated in some way with US PIRG or the state acts as an

PIRGs. Earth Tones has no formal board of directors. The senior management staff of US PIRG in Vashington serve

as

the ad hoc board, making important organizational, budgetary, and

poliry

decisions. US PIRG's Planning Department is responsible for tracking sales and consumer trends,

initial market research that went into determining the venture's feasibiliry and income projections. In fact, Eanh Tones is really only one person: Alex Maws, the company's director. Maws shares office space in the MASSPIRG and NELC offices in Boston. He is primarily responsible for the administrative and marketing aspects of running the business.

Maw came to Earth Tones with a background in PIRG activism in Massachusetts. He says and was responsible for the

he had the "entrepreneurial

spirit" that many environmentalists lack to undertake

Maws doesn't seem terribly over*rhelmed by the responsibility

-

such

a

venture.

Eanh Tones is now at a point

"it is running itself," he says. It requires little time from US PIRG senior management and a minimal dedication of resources. According to Maws, the Eanh Tones venture has not been a controversid one at US PIRG: "At worst, people see it as a nice, harmless project. At best, people

rx/here

incredibly excited about gening it going." Despite this relative complacenry, however, Earth Tones has been a"Catch-22" initiative for Maws and US PIRG. The dual mandate of the company

are

is sometimes

self-contradictory: to manage

a

profitable business in a socially and environmentally

responsible manner. Mavrs says that due to its roots in the nonprofit seclor, Earth Tones tends to

A-56

NGOs, Eanh Tones tries to work within a restricred "shoestring" operating budget. And although Maws admits that everyone theoretically understands the idea that "you need to spend money to make rlonâ&#x201A;Źf," this is a difficult philosophy to implement. lnstead, Maws feeis that Earth Tones artempts to try to "get something for nothing."

Its for-profir comperirors, like\forking Assets, are able to build a much larger client base for their be

"run like a nonprofit."

Because

it

is ovrned by

services through "cut-throat" advertising, (i.e., glossy four-color ads in magazines and newspapers).

Furthermore,'$?'orking Assets, conscious of Earth Tones'work, promotes itself

as

the "only

environmentally and socially responsible phone company."

Despite its heavy competition, Earth Tones spends almost no money on advertising.

it

relies instead on vrord of mouth and its nerworks of PIRGs to attract subscribers. In the long run,

Maws feels Earth Tones will suffer from the lack of investment in advertising, and will not succeed

wider audience of consumers. As it is, most of Eanh Tones' customers are college/ 'W'est coasts. Few universiry srudents or young professionals, mostly urban dwellers on the East and subscribers come from middle America (perhaps f ie in Arkansas versus 100+ in Oregon, according in reaching

a

to Maws). The advertising expenses it would require to reach new consumer audiences, however, are

beyond Eanh Tones' financial capacity. The struggles over ethical questions regarding large adver-

tising expenditures plagues Earth Tones' attempts to reach

a

broader public with its message and

services.

Maws believes US PIRG's initial income projections were "too ambitious - " if not completely inaccurate. The most significant error IJS PIRG made was to build projections based on the success of \Torking Assets and other small for-profit resellers.'Working Assets works on a much larger scale, invests far larger sums of money in advertising, marketing, and sales, and is able to take far greater risks in the market than nonprofit-owned Earth Tones. Earth Tones has not yet gener-

initial sums invested by US PIRG. It has, however, generated smdl surpluses beyond expenses (approximately $1,000) in its second andthirdyears of operation.

Now in its fourth year, Maws projects a small profit for Earth Tones tn 7997 - and an increase in the number of new customers. To any for-profit businessman this would appear to be a mediocre success, but Maws believes the intention of Earth Tones was not to generate large sums of money, ated enough resources to pay back the

but to show the potential for running

a business

responsibly. However, he also questions the

company's rabon d'Ltre: "If our intention is to serve

as a

responsible business model, do we do any

good by performing poorly financially?'

Maws does not believe the commercial approach is the most ideal one for NGOs to raise

it becomes increasingly difficult for NGOs to raise money through rypical methods, however, he believes such experimentation is necessary. He does not believe, however, that the Eanh Tones model is applicable to all organizations. Such aventure requires tremendous staffuP capital and strong managerial expertise, and can be highly risky. The greatest obstacle, he believes, is the unfriendly competition NGOs face in providing services similar to those provided by big corporations like AT&T, Sprint, and MCI. Nthough he recognizes that, to larger carriers, Earth resources. As

A-67

Tones is "not even a blip in the telecommunications industry," other companies are watching Eanh Tones closeiv to see whether it s'ill provide lessons to them about marketing in the environmental niche.

Notes rspecial rhanks for this case go ro Alex Maws, director of Eanh Tones, for his generous and detailed personal account of the developmenr of Earth Tones. Thanks also to US PIRG in \X/ashington, DC, for providing suppiemental

information,

and to Jose Ravano for his initial research on this case.

2There are several levels in the long disrance telephone service industry. "Frontier carriers," large corporations like

AT&T, MCI,

and Sprinr, own phone lines and transmit telephone calls. Smailer companies, called "resellers," buy long

distance telephone services in bulk from frontier carriers and pass these on to individual consumers' affinity grouPs' and other companies. "Agents" of resellers purchase these services, and market and sell them to individuals e:l..d/ or

affinity groups, sometimes relying on resellers to provide the actual service, and administer billing and customer services. Eanh Tones is an agent of reseller Telecare in Indiana" which administers the service.

A-68

Nonprofit Enterprise and Self-sustainability Team (NESsT) www.nesst.org