Creating an endowed community foundation in the city of Leon, in Guanajuato, Mexico, was a wedding of capital and philanthropy, arising from the marriage of a Canadian foundation executive to a women from Leon. First contemplated in 1996, the Fundación León became operational in October 1999. What has it achieved to date?
Today, Fundación León has an initial fund of only US$32,500, a limited amount of funding that, by US standards, barely qualifies as a foundation-like endowment. No money has flowed to local NGOs to date. The president of Fundación León hopes that by 2002 they will have raised approximately $215,000 for its endowment and begun putting some money out to local non-profits. If in year one the Fundación reaches its endowment target, a generous 10 per cent spending level (in addition to administrative and investment costs) would generate $21,500 in grants for NGOs.
Is the payoff worth the effort? Is endowment building for local foundations in developing countries a worthwhile strategy? Is it really sustainable? It can be, according to some major US foundations, international NGOs and development institutions that have talked about supporting, incentivizing, and even helping capitalize such endowments.
The need for sustainability
For the past two decades, development strategies – implemented by the international development community in collaboration with national governments – have focused mainly on promoting economic growth in developing countries. Increasingly, however, observers are concluding that building social institutions and civic participation is a crucial element of a comprehensive development strategy.
Historically, social development in many traditional societies has been in the hands of the state and the church, specifically in the form of assistance and charity, with scarce opportunity for nurturing a non-profit civil society. None the less, faced with unsolved public needs, increased social unrest, and the limited ability of governments to address social problems, people in developing countries have recognized the need to strengthen civic participation and their organizational capacity to work towards social well-being – a component of which is bolstering the non-profit sector. In the past two decades, NGOs in developing countries have multiplied enormously. In Mexico, for example, according to the Mexican Center for Philanthropy (CEMEFI), there were 608 registered non-profit organizations in 1990. As of today, this number has increased to 7,098.
But developing country NGOs are hamstrung by resource constraints, with little of the philanthropic and charitable infrastructure that supports the vibrant non-profit sector of the US and many other industrialized countries. Consequently, NGO leaders in many countries have begun to look to the US model of endowed philanthropic grantmaking institutions as a means of providing sustainability and continuity to this emerging sector.
The concept of an endowed foundation
The concept of a philanthropic organization that raises funds for an endowment and distributes grants within the local community from the income earned on the funds originated in the United States with the creation of the first community foundation in Cleveland, Ohio in 1914. The main objective of the community foundation was (and in many cases continues to be) to raise funds from local donors, invest these funds effectively and distribute them to address community needs, with local residents participating in the decision-making process. Today, more than 600 community foundations exist in the US, and they are regarded as an effective and flexible mechanism to provide permanent support for community initiatives.
There are, however, some important issues that need to be considered before adopting this endowment-building strategy as a one-size-fits-all remedy, particularly as applied to foundations in the developing world.
Community foundations in the US have witnessed remarkable growth. Their combined assets now total $29.9 billion, a 19 per cent increase between 1998 and 1999. Total giving by community foundations reached $1.9 billion in 1999, 26 per cent more than the previous year. Today, 11 community foundations are among the 100 largest foundations in the US. The creation and growth of these foundations has clearly been aided by the existence of attractive tax incentives for charitable giving, an enabling regulatory framework, an often stable economic and political environment, a long tradition of private philanthropy and a culture of giving. This supporting environment does not exist in many developing countries.
Latin America, for example, is the region of the world with the highest income inequality. Mexico is among the most unequal countries, with the richest 10 per cent of the population receiving 40 per cent of the income while the bottom 30 per cent receive less than 15 per cent. The development of an endowed model under these circumstances has faced serious obstacles, some of which are described below.
Obstacles to endowment building
Lack of capacity to establish and manage endowments
Building and sustaining an endowment requires specific financial and managerial skills, as well as timely and adequate access to information. The non-profit sector in many countries is still in its early stages of development and it is often difficult to find professionals willing to work in a sector that does not offer many of the advantages found in the business community.
Unstable investment environments
Many developing and transitional countries do not have stable macroeconomic policies or proper regulation of their financial sector. They are thus subject to recurrent economic and financial crises. When these crises occur, there is an immediate cutback in investment and consumption, and an aggravation of fiscal problems. This carries inflationary pressures, making it extremely difficult to increase or maintain the value of endowed funds. The Mexican, Brazilian and Argentinian financial crises of the nineties, to name but a few, demonstrate not only the volatility of Latin American economies but the difficulty of investing funds in such a way that endowments generate investment returns that simply keep pace with, much less surpass, inflation. Where US equities have generated huge returns in the stock market in the past decade, there is little likelihood that comparable returns will be generated on the main Latin American bourses in the foreseeable future. To protect against the erosion of endowment assets in such unstable economic environments, endowments could be put into equities in the US stock market, but that would deprive developing country economies of vital investment dollars.
Limited or non-existent legal framework
As Jorge Villalobos, Director of CEMEFI, has repeatedly observed, current regulation of the non-profit sector in many countries is patchy and variable. Only some NGOs working for the public benefit are recognized as tax-exempt organizations. Many others, such as NGOs working on community development, environmental issues, human rights, advocacy, and/or civic education and participation, are excluded. In addition, legal frameworks are not comprehensive and lack specific definitions and regulations for different types of non-profit organization, such as public and private foundations. This makes it even more difficult for community philanthropy organizations to develop and operate.
Lack of tax incentives and fiscal discipline
Latin American countries have long suffered from inadequate tax collection/allocation systems and widespread tax evasion. If developing country governments recognize that non-profit organizations serve the public interest, they will have to provide adequate tax protections and incentives. This can be accomplished only with an accountable tax system that utilizes revenues for the purpose for which they were raised, restores trust in the system, and eventually leads to minimal evasion (by both corporations and individuals). Tax revenues in Latin America as a share of GDP are 17.5 per cent on average, compared to 30–50 per cent of GDP in developed countries. In such circumstances, it is naive to think that tax incentives will encourage giving. If people do not feel obliged to pay taxes, there is no reason for them to feel compelled by a tax incentive.
Corruption and lack of trust in institutions
In many developing countries corruption is widespread, even more at local levels where abuses are more difficult to monitor. This, as well as the lack of accountability mechanisms, has caused deep mistrust in institutions. People also doubt their ability to deliver on their mission and promises – they are tired of waiting for assured aid and improvements, with no result. Raising money for locally established and run philanthropic institutions is clearly a huge challenge in these circumstances. It is difficult to conceive of building trust for non-profit institutions without acknowledging and addressing the lack of public trust in other local institutions such as government and business.
Weak civil society and scarce philanthropic culture
A culture of philanthropy is possible only when individuals recognize the importance of acting together to address common needs and their responsibilities as citizens to the less advantaged segments of the population. Citizens in countries with long traditions of government assistance and paternalism tend to feel that solutions to social problems must come from the state, limiting their own capabilities to participate for the well-being of their communities. Citizens in totalitarian states are basically discouraged from doing so. This results in a weak civil society where participation and giving are not the norm. Again, convincing people not only to contribute, but to do it for a permanent endowment, might take an enormous amount of time and effort that could be used instead to promote other forms of more direct participation.
Long-term vs immediate needs
There is always a strategic question about raising charitable funds for long-term asset accumulation vs using resources to address immediate problems. Building an endowment takes a long time. One sometimes has to question whether a charitable fundraising effort for an endowment such as Leon’s, which generates only $21,500 after three years, makes sense rather than using the funds to address more urgent social and economic needs in the community. Faced with this dilemma, Fundación Comunitaria de Puebla in Mexico has opted to raise money for a temporary fund to solve immediate needs while continuing to build the permanent endowment. But, once again, the ‘immediate use’ funds are limited, and developing and managing two fundraising strategies requires even more energy and resources. Endowments can provide some NGO stability, but the length of time needed for generating endowments of any critical mass and the trade-off against solving immediate problems must raise questions about the universal viability of the strategy.
Sources of endowment funding
Finally, there is the issue of the source of funding for charitable endowments in developing countries. Without significant charitable tax incentives, foundations in these nations must turn to local elites and local corporations – or local arms of multinational corporations – for capitalization. In many cases, these institutions have not been significantly progressive socioeconomic forces in their host nations. None the less, corporations and business leaders are a very important source of philanthropic money, if not the main one, in developing countries. Non-profit organizations must be aware of the constraints that this relationship might entail in the future. Relying on corporations for charitable capital – and for their guidance as donors on the uses of their capital – could end up giving more power to economic and political forces already dominating the social structure in less than benevolent ways.
As a positive example, many point to the growth of the Puerto Rico Community Foundation, which received significant capital support from pharmaceutical companies that had been attracted to Puerto Rico by the Section 936 tax incentives. Section 936 also required some element of corporate reinvestment in Puerto Rico. The combination of incentives and politics led many pharmaceuticals to charitable giving on the island. However, the structured incentive was a component of the US Internal Revenue Code, and the corporate donors were regulated and closely overseen by the government of a nation that elsewhere in Latin America is hardly looked upon as a developing country. A comparable scenario without the scrutiny and controls of tax and regulatory schemes might generate charitable giving and control by somewhat less charitably minded corporate players.
In Leon, San Juan, Puebla and elsewhere, these issues are all known and recognized; they are part of the calculation in creating and operating any foundation that raises and distributes funds for non-profit purposes. The challenge is inevitably greater for the promoters of the US model of endowed charitable foundations.
- For a more detailed analysis of recent trends in development efforts, see ‘Reforming Development Cooperation to Attack Poverty’, in World Development Report 2000/2001 – Attacking Poverty World Bank, Washington DC, September 2000.
- Directorio de Instituciones Filantrópicas 1990-2001, CEMEFI, Mexico, 2001.
- Villalobos Grzybowicz, Jorge, Las Organizaciones de la Sociedad Civil en Méxcio: Visión General, CEMEFI, Mexico.
Rick Cohen is President of the National Committee for Responsive Philanthropy (NCRP), based in Washington DC. He can be contacted by email at email@example.com
Almudena Ocejo is a policy researcher and analyst at NCRP. She can be contacted by email at firstname.lastname@example.org
The authors wish to thank CEMEFI, as well as Mireya Suárez de Villalobos, President of Fundación León, and Pedro Reynoso, Executive Director of Fundación Comunitaria de Puebla, who kindly agreed to share their experiences of endowment-building initiatives.