Insurmountable financial obstacles faced by NGOs

NGOs play a major role in the global effort to reduce poverty and suffering. Traditionally, these organizations are not-for-profit, and they focus mainly in the delivery of critical services in education and healthcare. Lately, some NGOs have been engaged in projects to create livelihood for poor people through job training, assistance in starting small businesses, and direct employment. These efforts complement programs run by governments and assisted by international agencies and donors.

There is much to be said about the contribution that the NGO community has made over the past several decades. However, it is also true that, for a variety of reasons, their efforts have not brought about sustainable results on a wide scale. In this brief article, I shall offer my thoughts on why NGOs have not been sufficiently effective in poverty reduction.

1. Heavy dependence on donor funds: Practically all NGOs carry out their programs with grants from governments, international agencies and/or private donors. These funds are for specific projects within areas denoted by the donor, with disbursements usually made on an annual basis. Donors prefer to set small goals, and hence, grants are often in limited amounts for a given period. NGOs submit their proposals tailored to grant amounts, and consequently, the resources that are made available seldom meet what is needed to do a good job. When each approved project period is over, there is no assurance of continuity. Donor fatigue sets in after a few years, requiring NGOs to seek new or additional “partners.” Neither the NGO nor the beneficiaries are assured of assistance to see through the completion of projects. When funding stops, projects simply end. Results are seldom complete, permanent, or sustainable without additional assistance.

2. Misplaced focus on compliance reporting: As recipients of donor assistance, NGOs are greatly concerned about keeping the donor “happy.” Inordinate amounts of attention and time on the part of senior management at NGOs are spent on preparing reports that show compliance of grant conditions, and in preparing for the next application for grant renewal. The bureaucracy at donor institutions offers the recipient very little room for innovation or divergence from previously agreed upon terms for project execution. Often, it matters less what has been accomplished in the field, and more what is put on paper. Demonstration of success is usually a function of quantity (number of beneficiaries) as opposed to quality (sustainable outcomes).

3. Lack of institutional infrastructure to deliver services: Donor funds are mostly assigned for operating needs and seldom toward capital expenses. For example, grants may be available to purchase medicines and supplies but not for constructing medical clinics or purchasing major equipment. Similarly, an NGO might receive donations to buy books and supplies for students from poor families, but the school itself might have to operate without functional classrooms and toilets. This bias toward meeting on-going operational needs without the necessary physical infrastructure results in major inefficiencies. The long-term viability of projects depends greatly on institutions and their underlying organizational structure to deliver services efficiently on a continuing basis.

4. Inability to attract good staff: Most NGOs cannot offer a stable work environment where assurance of continued employment is not dependent on renewal of current projects. Cost overruns are commonplace, and consequently, staffing may have to be reduced during the course of the project to remain within budget. Tight financial constraints and inability to raise sufficient funds for a project force the organization to hire employees at below-market salaries or to rely on volunteers. NGOs usually refrain from offering their employees long-term compensation in the form of pensions and other benefits. The result is that NGOs usually attract less competent people than their for-profit counterparts. A quick survey of even major NGOs will show that, except for the founder and a few top managers, the remaining staff does not have adequate background or training. The absence of competent staff results in inefficiencies and failure to accomplish goals.

5. Inadequate seed capital and endowment: Often, it is one individual or a small group of people with a common vision and ideal who are responsible for establishing an NGO. They contribute their own savings or seek seed money from others to get started and carry out the mission for a year or two. In most instances, initial capital received is far less than what is needed to establish a sound base in terms of staffing and required material resources. The first project undertaken may not have been sufficiently funded. In such situations, the NGO is forced to function in a survival mode right from the very beginning of its existence. Even those NGOs who are able to overcome their initial financial constraints may still have to rely on external funding each subsequent year. Only a small number of NGOs are able to attract adequate external resources to establish an endowment fund, the return on which might cover some or all of the future operational needs. Donors seldom provide the capital as seed money or endowment funds. Unlike for-profit companies that operate with adequate initial investment, line of credit, and subsequent reserves, NGOs are forced to function with little or no certainty about future cash flows. The result of insufficient funding is serious inefficiencies and subsequent failures.

6. Absence of internally generated funds: Not-for-profit NGOs seldom generate any income of their own to meet their capital and annual operating needs. Their reliance on project funding from external sources alone makes them financially vulnerable. Very few NGOs operate within a self-supporting financial model. They are reluctant to charge fees for services provided to the poor. The general assumption is that the poor are entitled to free services or they are incapable of paying even a small portion of the costs involved. Further, most NGOs do not have the managerial skills or resources to start and run revenue generating businesses, even when poor people can be employed. Without an endowment fund or business income, NGOs perpetually function by the benevolence of donors. This is not a self-sustaining situation in the long run.

Recognizing the above financial obstacles, The George Foundation has been attempting to cover its annual operating expenses from internally generated funds. As the founder of the organization, I made the investment to meet initial capital expenses (to build Shanti Bhavan, Baldev Hospital, etc.) and most of the annual operating needs for the first 10 years. During this period, the foundation invested in several acres of farm land, most of which is being used for agriculture to employ poor people. The surplus income from farming and fee revenues from a journalism school run by the foundation are being ploughed back into its other humanitarian initiatives.

Since 2005, the foundation has been seeking donor funds to meet its capital expenses and to set up a permanent endowment fund that would cover a portion of the operating expenses. Several generous individuals – visionaries – have come forward so far to assist us. If our income generating activities also succeed, the foundation will have increasing financial resources to widen its services in the years to come.

Good work is not possible without financial stability. Donor funds will never be sufficient. A pure form of social entrepreneurship might be the best financial model for those NGOs who can tap managerial talent and sufficient “investment capital.”

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