Prešov Community Foundation faces financial ruin and closure because the country’s Ministry of Education has reneged on a contract it made with them to deliver a programme, forcing them to foot the bill for virtually the entire project. The following tells the story with excerpts from open letters written by Katarina Minarova, director of Prešov Community Foundation, and by the Association of Slovak Community Foundations. Opposite, Jenny Hodgson comments.
In December 2006, with funds from the European Social Fund (ESF), the Slovak Ministry of Education contracted Prešov Community Foundation to carry out a two-year programme to improve access to education. In partnership with a local university, the foundation launched a programme in January 2007. This was completed in November 2008; the total budget was €375,000.
However, under the terms of the arrangement, the community foundation had to fund the initial costs against later reimbursement by the ministry, forcing it to use its reserve funds, as well as those of other partners, which placed a severe strain on its finances. Compounding this, the government reimbursed virtually nothing in either 2007 or 2008, which resulted in Prešov Community Foundation having to take out a bank loan of €135,000 to complete the project. The final blow, however, came in April this year when the foundation received a letter from the ministry telling them that the contract had been cancelled because one of the consultants employed on the project had been late in submitting project monitoring reports, and that no expenses would be reimbursed for the entire project.
Unless the ministry relents, this decision is likely to be disastrous for the foundation. Its inability to pay off its bank loan is threatening it with bankruptcy, which would result in closure. In an open letter to community foundation colleagues in the country, Prešov Community Foundation Director Katarina Minarova traces the root of the matter to what she calls the ‘basic incompetence’ of the Ministry of Education and its maladministration of projects. Faced with the imminent obligation to account to Brussels for the projects, she believes, it is seizing upon any excuse to terminate contracts.
The Board of Prešov Community Foundation has found a way to sustain its legal existence so that it can pursue the matter through the courts, although its programme work will be suspended. This has necessitated changes in the board composition and the foundation leadership – Katerina Minarova is to leave the foundation in August but will stay in touch to see how things develop. If the case is successful, and provides more money than is needed to repay the loans, the remainder will be used to relaunch its programmes.
Excerpts from open letter written by Katarina Minarova on 23 June 2009
On receipt of the Ministry’s letter cancelling the contract: ‘The letter said that, because there had been a delay with some of our monitoring reports, no expenses would be reimbursed at all for the entire project … this is an unbelievable injustice and says a lot about how the government has always treated civil society organizations who work to improve people’s lives in our country …
‘To those in Slovakia familiar with the poor state of affairs and general inefficiency at the Ministry of Education, this kind of termination of contract seems to be just a way for them not to have to deal with contractors. But at a more profound level, it is also indicative of the high levels of corruption associated with EU funds in Slovakia …
‘The emergence of community foundations in Slovakia in 1996 marked a period of excitement and optimism around the role of citizen participation and civil society in general in a healthy democracy, which is slowly being undermined in the current political climate in which we find ourselves.’
Excerpts from open letter from the Association of Slovak Community Foundations to Prime Minister Robert Fico
‘…we voice a unanimous protest against the procedures of the Ministry of Education related to cancellation of contracts with the Prešov Community Foundation. It is understood that mistakes were made during the administration of the project. However, we are convinced that since the goals of the projects had been met, cancellation of the contracts was not an appropriate step…
‘…This is an appeal to you to ensure investigation of the administration procedures of these projects on the part of the Slovak Ministry of Education, and to fulfil the state commitment to refund the projects’ costs to Prešov Community Foundation.’
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A sobering tale
The story of Prešov Community Foundation is a sobering one, with implications both for civil society in Slovakia and for community foundations and local grantmakers more broadly.
Prešov Community Foundation was one of that wave of community foundations established across Eastern Europe and Russia after 1989 that offered a new model for multisectoral collaboration and nurtured a new spirit of local giving and civic participation. Over a period of 13 years, Prešov Community Foundation disbursed some 12 million Slovak crowns (the equivalent of €400,000), all raised from local sources, in small grants to over 900 community-based organizations. It also raised a modest endowment fund, again from local sources.
The EU contract has put all this in jeopardy. What does the Prešov case mean for grantmakers and civil society organizations, in Slovakia and beyond? What are the lessons?
Changing temper of Slovak politics
The annulment of a contract due to a minor infringement is apparently not an isolated occurrence. Viewed in the context of Slovakia’s shifting political landscape –nationalist and xenophobic tendencies have emerged in mainstream politics, corruption in the administration of public funding has increased, and there are warning signs of a deterioration in the legal environment – the Prešov case seems much more insidious.
The introduction of stringent rules regarding the European Social Fund in Slovakia, which were meant to prevent corruption, have in fact perpetuated it, giving power to a small bureaucratic elite that has the ability to abuse those rules, both in the procurement process and in the application of sanctions (cancellation of contracts, etc), where the contractor has very little recourse.
State contracting: the case against
Prešov’s case also raises the wider question of whether, and under what circumstances, community foundations and other civil society organizations should take on big government contracts, domestic or international.
The perils are many. The first is the very practical question of cashflow: EU contracts, for example, are usually managed on a reimbursement basis, so it is not uncommon for an organization to take on a bridging loan, particularly when it does not have other resources to fall back on. Although some of the risk of non-payment might be mitigated by taking out an insurance policy, the exposure, both financial and reputational, is significant, as was the case in Prešov.
Second, the process can involve enormous amounts of bureaucracy. The EU requires that each expense, including those of any subgrantees of a community foundation, must be verified (and kept for seven years), which can create a huge administrative and financial burden for a small or even medium-sized organization. Third, and perhaps most fundamental, is the question of the impact of such contracts on an organization’s autonomy, when programme parameters are predetermined by the donor.
Adding value to state aid programmes
So, given the downsides, why would a community foundation take on such a contract? Arguably, community foundations and other local grantmakers that have strong roots in the community possess a number of non-financial assets that can add value to the delivery of government aid programmes: legitimacy and credibility as grantmakers; local ownership (particularly where they have raised local money) and knowledge; a track record; a multi-stakeholder governance structure; and competence in the administration and disbursement of funds. In many developing and transitioning contexts, where civil society organizations are weak or small, a local grantmaking foundation may often be the only credible local partner able to act as intermediary between big funds and communities. Particularly during these difficult economic times, when civil society organizations of all kinds are starting to feel the pinch, shouldn’t community foundations be proactively seeking out new funding opportunities?
Although its own future may now be in doubt, the case of Prešov Community Foundation is a stark reminder of the importance of social contracts, such as the UK’s Social Compact, in mediating relations between government and civil society, as well as the need for effective feedback mechanisms to large institutions such as the EU. Within the community foundation field itself, it highlights the need to strengthen practice and develop information resources to help those community foundations that see a role for themselves in both implementing and adding value to public funding programmes.
Jenny Hodgson is director of the Global Fund for Community Foundations. Email firstname.lastname@example.org