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As Executive Director of the Foundation for a Sustainable Society, Inc. between 1996 and 2002, and as a free-lance consultant now, Eugenio Gonzales has spent the last six years providing technical and financial assistance to small and medium enterprises that are community-based and environment-friendly. Mr. Gonzales is a Synergos Senior Fellow. |
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This paper provides an analysis of the experiences of organizations in Southeast Asia in creating, building, and managing endowments as mechanisms for their financial sustainability. The organizations studied are:
- Foundation for the Philippine Environment (FPE)
- Foundation for a Sustainable Society, Inc. (FSSI), Philippines
- Jaime V. Ongpin Foundation, Inc. (JVOFI), Philippines
- Yayasan Keanekaragaman Hayati Indonesia (KEHATI), the Indonesian Biodiversity Foundation.
The basis for this paper's analysis comes from case studies written on each organization as well as interviews with staff and trustees of each foundation. While each case study presents details on the history, mandate, and programs of the foundations studied, this paper draws lessons on the financial policy and strategic aspects of endowment building across all four cases. It also makes recommendations useful for organizations and official and private donors in similar circumstances. This study does not intend to compare and assess the performance of the four foundations' endowments.
In the first section, endowments are generally described, defined, and illustrated according to the basic flow of funds and components. Summary information on the four case studies is then presented in the second section. The main body of the study analyzes the basic requirements as well as the influencing factors involved in setting up an endowment. Lessons and insights are drawn from the analysis, particularly those related to success factors and challenges. Finally, the paper makes recommendations and conclusions on the potential role of private and government donors in building the financial sustainability of such organizations.
Endowments for Financial Sustainability
With the decrease in worldwide official development assistance (ODA) starting in 1993-94 and the Asian financial crisis in 1997, Asian nongovernmental organizations (NGOs) have had to look for more creative ways of generating resources to sustain their mission. While governments and donors recognize civil society's increasing importance in development, this has not been matched by a commensurate increase in financial support for civil society organizations. Endowment building is a strategy that more and more organizations have thus been exploring as a long-term financing strategy.
Winder (1998) defines endowments as "permanent assets -- money, securities, or property -- that are invested to earn income that is used to support an organization's activities." Horkan and Jordan (1996) clarify that the terms "trust," "capital fund," "sinking fund," and "endowment" describe similar financial arrangements. For the purposes of this paper, an endowment refers to a capital fund managed by an organization for the purpose of supporting activities that help achieve its mandate.
In 1997, The Synergos Institute conducted a survey of 77 organizations from Indonesia, Singapore, Malaysia, and the Philippines. This survey demonstrated that about half of the respondents have created endowments. Sixty-four percent of the endowments were less than US $1 million in size. The largest of these were established by grants from ODA agencies and are among the cases discussed in this paper: KEHATI, FPE, and FSSI.
Endowments have historically been set up to provide a continuing stream of funding for a specific purpose or activity. In universities, professorial chairs are supported by individual or corporate donors to honor selected professors or to enable them to conduct academic work in a specified field. Research endowments provide grants for applicants to conduct specific studies. Some of the largest private grantmaking institutions have their own endowments that provide funds for their grants and operating expenses.
In an endowment, a definite amount of funds (or assets) is invested for the purpose of generating income that is later given to a recipient. The recipient may be a grantee (such as an NGO, or people's organization, PO), an honoree, an awardee, or, in some cases, a borrower. The approval and release of funds to a recipient are usually governed by guidelines or programs adopted by a body, often a Board of Trustees, to whom the endowment is legally entrusted. Laws, rules, and regulations governing endowments may differ from country to country. In most cases, however, the board is legally responsible for the endowment.
Part of the income from an endowment is also used for administrative activities to ensure that programs and guidelines are implemented properly and that the endowment's finances are accounted for. Sometimes, the income can fund program activities implemented by an endowed organization's own staff. This is the case with operating organizations that provide services in addition to grants or credit.
The initial contribution that establishes an endowment usually comes from external sources. Bilateral donors, private foundations, corporations, wealthy individuals, and the general public can donate to endowments (Winder 2000). ODA donors can potentially get more long-term public relations mileage from contributing to an endowment than to a finite project. Not only are the donors forever a part of the endowment's history but they are also contributing to every project that the endowment supports, in effect. While these external sources are often emphasized in the literature on endowments, internally generated savings and repayments from previously disbursed loans to beneficiaries may also serve as initial capital for an endowment. For organizations engaged in investing and lending, especially through microfinance programs, these repayments can be substantial. In this paper, repayments will be called reflows.
Figure 1 is a simplified diagram of the flow of funds in an endowed organization.
Beyond Sustainability
In addition to enabling grantmaking, an endowment allows for:
- autonomy: an endowment can increase an organization's independence from funding trends outside of its control
- leveraging: an endowment can be used as a basis for acquiring additional funding (Winder 2000).
The empowerment that an organization feels as a result of these realities springs from the fact that an endowment serves as a substantial and tangible financial asset from which additional resources can be generated.
Organizations in Southeast Asia have historically been funded by grants specifically for delivering services to their beneficiaries. This meant that they were not allowed to set aside any funds to start building their own reserve of financial assets. Moreover, when the grants dry up, the organizations may be forced to shut down. With a properly managed endowment, however, organizations can sustain their services even after their donors stop funding them. In the context of declining ODA, the four cases demonstrate how their endowments can carry them through hard times and even increase funds available to their beneficiaries through leveraging. This would have been impossible if they did not have such a financial asset. They have become legitimate co-financiers through the income created by their endowment assets.
Dependence on grants can also threaten the autonomy of any organization as grants are not reliable long-term sources of funding. All four foundations studied in this paper can deal with donors from a strong and independent position precisely because they have an endowment. One changed its long-standing investment advisor that its donor had selected, for example. Another stipulated that its endowment donors cannot hold voting positions on their board. Because they have an asset to fall back on, these organizations are not forced to give up their autonomy to donors just to access funds. Of course, dealing with the original donors required more skill and caution during the negotiations.
Weatherly emphasizes that endowments are empowering even as they build local capacity (1996). Through them, stakeholders are provided a means to participate in the management and decision-making over significant funds intended for their society's development. He also envisions strategic roles for organizations with endowments; acting as conveners of participatory dialogue on critical priorities and as policy advocates at the national level. This is consistent with what we shall see later as the long-term nature and mandate of endowments. The performance of these roles, however, depends ultimately on the financial, technical, and social resources that an endowment is able to marshal.