Foundations’ role in development cooperation

The role of foundations in the complex landscape of development is unclear. On the one hand, the number of foundations is constantly rising and mega-foundations like the Bill and Melinda Gates Foundation dominate the public imagination.

On the other hand, foundations generally have relatively limited financial means at their disposal. How can they apply their philanthropic capital in the most effective way? This article argues that foundations need to focus on their strengths in order to become meaningful players and that their biggest strengths are their freedom from political and economic constraints and their freedom to take risks and be innovative.

‘Every contribution counts’ said the ant and spat into the ocean.

Development problems are great, and the financial power of almost all philanthropic foundations engaged in development is exasperatingly small. Despite media attention, the Bill and Melinda Gates Foundation is not representative of the foundation world. The Gates Foundation is unique. In 2006, it disbursed approximately US$1.7 billion on development,[1] more than the amount spent by eight of the 22 major donor countries on official development assistance (ODA) in the same year and equal to the development spending of Switzerland.

As to the rest, the tens of thousands of foundations active in development cooperation, not counting Gates, in total spend between $1.3 and $3.3 billion on myriad projects and initiatives in all developing countries, in all sectors, at all levels – money which brings better lives to many people.

But very little money when you see the whole picture: ODA is around $100 billion per year, and then there are private flows to developing countries – especially foreign direct investment (FDI) and remittances – which add up to $647 billion.

So are foundations a negligible quantity in development? In terms of sheer numbers, the answer has to be yes. However, this article argues, there is real scope for qualitative significance. Development needs to be fuelled from many different sources. And yes, every contribution counts.

Given the relative insignificance of foundations, foundations need to be fully aware of their particular strengths and opportunities. Each foundation needs to leverage its respective ‘unique selling proposition’ – about which more will be said below.

The role of foundations among other actors in the development circus

Shaping one’s profile and finding the most effective way to operate is difficult in general but particularly so in development matters. The market for development assistance is huge and complex. Foundations are one single (and minor) group in an increasingly complex configuration of actors. Bilateral and multilateral donors are still the most important and their number is growing (for example, China) but their motivations fluctuate. There are small and large NGOs, some of which raise funds in developing countries and disburse them to local activities, while others implement their own projects. Corporate giving is another growing segment of the aid market. And there are hybrids, working at the interface of business and charity (for instance, social ventures).

Foundation weaknesses ...

A strategic approach to foundation activities in developing countries requires a full understanding of the strengths and weaknesses of foundations. One major weakness of foundations, as we’ve seen, is their lack of financial power. They cannot ‘buy’ policy changes and they cannot implement country-wide roll-outs of proven concepts. The average foundation can only help generate new ideas (which bigger forces need to scale up) or focus on a relatively small geographic area or topic.

Another major weakness of most foundations is their lack of human resources on the ground in developing countries, often leading to a lack of understanding about local circumstances. It is almost impossible to influence the local debate if one is not present.

Foundations – or, to be more precise, foundation boards – tend to be very conservative and risk-averse. Foundations are, by their very nature, the vehicle for the philanthropic ideas and visions of their founders. This means quite often that it is not the – objective – ‘best solution’ that guides decision-making but rather subjective, individualistic wishes and ideas. On the other hand, being innovative has become an imperative for certain foundations and philanthropists,[2] and the mantra of incessant innovation can also lead to negative effects or at least inefficiencies.

... and strengths

The most important positive feature of foundations is their freedom. They are free from external political and economic constraints. They are free to invest their funds where they are needed most or wherever they like to invest them (within their given endowment purpose). They are not politically accountable nor do they have to produce any shareholder value. This is why they can take far greater risks than any governmental or corporate entity ever could. Foundations are the ideal provider of social ‘venture capital’, that is, providing money to develop and test new concepts.

Some foundations are also good at public relations and communications: the public thinks of foundations as having an importance quite out of proportion to their resources – even to those of the Gates Foundation. Foundations with a founder who is still alive and who is an influential person in society (or even a celebrity) possess convening power – in other words, the power to bring together decision-makers in order to discuss development issues. Klaus Schwab’s World Economic Forum and the activities of U2 singer Bono are prime examples of the convening powers of individuals.

Foundations do not have to please anybody, nor do they have to ask anybody for money – unlike most charities (most of which depend on state money). Being independent, foundations could be great observers and critics of what is done in ODA. They could ask the inconvenient questions, for instance, about current trends in official aid delivery.

Approaches to a solution

There are a number of ways that foundations can raise their qualitative significance and apply their strengths. They could focus on what is politically inappropriate for official donors (for instance, investing in projects in strategically irrelevant countries or in countries with bad governance), or on what appears to official donors to be too small and irrelevant.

Foundations could focus on what is too difficult for charities to market (for instance, capacity building for the charity itself, complex or long-term projects, initiatives in unpopular developing countries). Or they could focus on what would be a killer for charities (which depend on state money), like criticizing ODA.

They could focus on the search for the new (anticipating new developments, discussing new mega-trends, fostering innovation), or make use of their convening power (if they have any). They could use their ‘jester’s licence’ and pursue unconventional paths.

Let us have a deeper look at how, ideally, foundations can design their development activities in order to raise their qualitative significance. There is of course no one-size-fits-all. Looking at six types of foundation, I want to make recommendations as to how foundations can best apply their specific strengths. (Of course most existing foundations will not easily fit into one of the six categories. Many will first have to define their profile.)

• Traditionally led foundations that are either not willing or not able to innovate should seek and rely on the guidance of the charities they fund. Those without much know-how in the field of development assistance should not try to act like an NGO themselves. However, foundations could try – more than is the case now – to focus on projects that actually target the poorest. For example, least-developed countries have not received much foundation funding yet.[3] Foundations should also understand that project visits in the field always mean a great burden to the partners and should be confined to the necessary minimum.
• Foundations with a charismatic founder or board president could focus on their convening power and bring together decision-makers in order to push the debate on development matters.
• Foundations with a board that is willing to take risks and who might also be led by business ideals could focus on providing capital and know-how for the testing of new models (the allocation of social venture capital). As they will not be able to roll out these new models themselves, they should think of seeking alliances with official donors right from the beginning. The typical obsession for measuring project results, common in this species of foundations, will bring no further leverage. For this type of foundation it could also make sense to invest in financially sustainable social enterprises or in financial products on which the return goes to charities.
• Smaller foundations do not really like to throw their (small) funds into the big pots of big charities. It could be an interesting alternative for them to focus on small (and often privately run) development initiatives. Small charitable initiatives often have a hard time raising funds; here a foundation can make a big difference, even with relatively little money. Foundations could both fund projects run by small charities and provide capacity-building for the same charities. Small foundations should also attach great importance to project quality and be knowledgeable about development cooperation. There are too many well-meant projects around, like development projects which establish parallel systems instead of strengthening the public system, the delivery of outdated computer hardware to schools in developing countries, etc.
• Foundations with a board that favours unconventional activities are in a position to think up new and creative approaches that would be unthinkable for public donors, dependent charities or companies. For example, a foundation could offer an award among politicians in developing countries for the best governance (as has been done by the Mo Ibrahim Foundation). They could also choose to invest in individuals whom they think will bring about change (investing in individual change agents).
• Foundations with a more ‘political’ agenda, ie foundations that want to push forward opinion-making, could focus on controversial issues. They could adopt the role of observer and subject the current activities of the development community to critical analysis and comment. This type of foundation could focus on facilitating relevant research or initiating think-tank projects.

Conclusion

There are numerous ways for foundations to make meaningful contributions to development even with their comparatively limited financial power. But they need to gain a better understanding of their role in the concert of development actors and of their specific strengths and weaknesses.

It is the nature of foundations to be free and independent. They will not easily submit to the harmonization agenda that is currently absorbing both donor and recipient countries.[4] Nevertheless, foundations that have reached a certain size should actively seek dialogue with governmental actors (both in the home country of the foundation and in the developing countries where the foundation is active).

Foundations should invest as much as they can in their own know-how in the field of development cooperation. Specifically, they should gain a clear picture of the structural reasons for development problems and they should be well informed about the current debate on development issues – both internationally and on the ground.

Dr Ann-Veruschka Jurisch is head of philanthropy and foundations at Spectrum Value Management Ltd (SVM), a Swiss-based family office which manages the financial and industrial investments of the Swiss industrialist Thomas Schmidheiny and his family.

1 For the calculation of this figure see Robert Marten and Jan Martin Witte (2008), Transforming Development, GPPi Research Paper Series No. 10, p12

2 Marten and Witte, p17

3 Ibid, p9.

4 Numerous donor and recipient countries agreed under the Paris Declaration on Aid Effectiveness of 2005 to harmonize their contributions to developing countries, to better coordinate and cooperate and to adapt to the systems in the recipient countries.