In our view

Funding policy changes push non-profits into business field - 28 Sep 2011 - Business Report

By Gabrielle Ritchie

The recent flare-up between the government and the non-profit sector over changes to policies governing state funding of non-profit organisations (NPOs) has reignited the heated debate around how best to fund our social welfare services and social justice work in South Africa.

The hastily arranged meeting a few weeks ago between the Department of Social Development and a handful of NPOs did little to calm fears over the future funding of the more than 100 000 non-profits who between them deliver more than half of the welfare services government is obliged to provide.


Very few NPOs were invited to or even knew about the meeting at Parliament, which was apparently set up to address growing concerns over the lack of consultation and failure of the government to appreciate how its proposed policy changes will affect the work we do on their behalf.

One of our ongoing frustrations is that the government appears to see its funding of NPOs as the generous granting of gifts and awards, rather than paying for services rendered or ensuring funding for organisations that provide basic and essential social services. It seems to see itself as our benefactor rather than our partner in delivering the critical services promised to the poor and vulnerable.

Another problem with these policy proposals is that they are trying to impose the use of business practices and measurement tools on the non-profit sector. This is being done without much thought to the appropriateness of these practices for the sector, or to the vital work and services we provide.

This growing pressure on non-profits to operate more like businesses and generate “earned” income is being felt worldwide as governments make massive spending cuts and philanthropic giving falls in the face of global recession.

The problem with the income-generation imperative, however, is that NPOs are established to deliver services that do not generate income. They are inherently unsuited to business as they have social development priorities that limit profitability.

A recent Harvard Business Review article goes so far as to argue that the pressure on non-profits to become more entrepreneurial by generating an income and becoming self-sustaining is a dangerous trend that could distract non-profit managers from their core social missions and, in some cases, even subvert those missions.

The article goes on to insist that a company’s mission is primarily to generate profits, whereas a non-profit must generate impact.

The two don’t, and shouldn’t, mix. The difficult challenge for today’s non-profit leaders is increasingly around how to manage these multiple outcomes – to ensure that mission is accomplished by ensuring that the means exist to accomplish it.

The belief that “social enterprise” and “social entrepreneurs” are the way to go when it comes to tackling social problems is also gaining currency in South Africa. Although social enterprise is not a precise concept, the term is generally understood to define organisations that operate in the open marketplace while also addressing social goals.

I suppose you could say that social enterprises are revenue-generating businesses with a social twist. Whether operated by a non-profit organisation or by a for-profit company, a social enterprise has two goals: to achieve social, cultural, community, economic or environmental outcomes; and to earn money.

A non-profit’s sole aim is to create social value, whereas the objective of a social enterprise is twofold: financial and social.

I am not implying that it is a bad thing for non-profits to, well, generate profits or income. Such objectives must be part of an NPO’s sustainability strategy. However, it is what is done with these profits that defines the difference.

A non-profit cannot distribute its surplus (or profit) to the personal benefit of anyone involved in the organisation, whereas a for-profit group can and does. In fact, maximising and distributing profit is often the bottom-line objective of a for-profit social enterprise that needs to generate an income to sustain and develop an initiative. A non-profit social enterprise can’t distribute the profit, but its focus is still on generating income and surplus.

Although there is much to admire about the non-profit social enterprise business model, I believe that importing it wholesale and imposing it on to the non-profit sector in South Africa will not ensure non-profit sustainability. Any expectation that this is possible, viable, feasible or reasonable demonstrates a fundamental lack of understanding of the values-driven nature of non-profit work.

A key factor here is that it is close to impossible to establish a fully operational, successful income-generating enterprise and an effective non-profit organisation at the same time (unless the purpose of the non-profit is “to generate income”, and these are few and far between).

Starting an enterprise and an NPO each takes total dedication and commitment from the entrepreneurial founder. As most enterprise start-ups fail within the first couple of years, it is best to focus on the success of one approach. Not both.

Most non-profit work will always require levels of donor funding where the core products, such as a school feeding scheme, simply don’t have consumer targets outside of the donor market.

In any event, non-profits are critical partners in social development, providing opportunities for individual and corporate commitment to social investment, along with the space where people are able to realise their own social commitment and to recognise themselves as active citizens responsible for society around them.

While some non-profits, such as craft projects, are established to generate income, jobs, skills and sustainable livelihoods, there still exists a range of non-profits that will always rely on philanthropic giving regardless of the innovative ways in which they are able to generate income.

Take the Right to Know campaign, which has so actively resisted the passing of the Secrecy Bill. How would such an organisation deliver on its mission to defend the right to access information and the freedom of expression while running a successful income-generating initiative to fully fund the campaign and make a profit to sustain the organisation?

All NPOs, whether classed as social enterprises or not, are always concerned with their financial sustainability and are constantly involved in devising mechanisms to ensure they are able to generate the support to meet their organisational objectives.

But let’s face it: it is easier to make profits than to make justice.

That is not to say that non-profits cannot benefit from the skills and practices used to run successful social enterprises. The concept of applying proven business techniques when it comes to serving real human need is a significant step forward in our quest for social justice.

But we cannot insist that those NPOs dedicated to ensuring and securing social justice in South Africa can only do so if they are able to fully fund their own work.

Inyathelo will hold an open discussion on social enterprises and the non-profit sector at its training centre in Woodstock, Cape Town, tomorrow. For more information, call (021) 465 6981/2 or visit Gaby Ritchie is the programme director for Inyathelo, the South African Institute for Advancement.