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Financial Sustainability and Funding Diversification ii Author As the International Desk Researcher for the NSSC research and design project, Ben Davis has provided targeted analysis on selected topics to inform the NSSC design and overseen a comparative analysis of donor programs. He wrote his thesis on advocacy NGOs, transnationalism, and political space in Indonesia and while working in Jakarta for Australia™s Department of Foreign Affairs, he managed a multi-million dollar program supporting local NGOs, think tanks and research institutes. His permanent email address is benjamin.davis@sydney.edu.au. Disclaimer This research was carried out in collaboration with the Government of Australia, but the analysis and findings presented in this paper represent the views of the authors and do not necessarily represent the views of that Government. Any errors are the authors™ own.
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Financial Sustainability and Funding Diversification iii Contents 1 Introduction .. 1 2 NGO Financial Sustainability in Indonesia . 3 2.1 Funding Sources: Dependency on Donors .4 2.1.1 International Donor Agencies 6 2.1.2 Earned-Income 7 2.1.3 Government Funding 8 2.1.4 Potential streams of government funding 9 2.1.5 Determinants and challenges of government funding . 10 2.1.6 Future potential for government funding 11 2.1.7 Private Sector and Philanthropic Funding. 11 2.1.8 Potential streams of funding from the private sector 13 2.1.9 Determinants and challenges of private sector funding .. 13 2.1.10 Future potential for private sector funding 14 2.2 Intermediary Support Infrastructure. 15 2.3 Efforts at Funding Diversification . 17 3 Implications and Recommendations .. 17 3.1 Recommendations for the Government of Indonesia .. 18 3.2 Recommendations for Funders (private sector and international donors) . 18 3.3 Recommendations for Indonesian NGOs . 18 4 Conclusions 19 5 References and Bibliography .. 19 Figures Figure 1 The NGO funding mix: two funding scenarios .. 2 Figure 2 Main financial sources for city / district, provincial, and national NGOs . 5 Figure 3 Government funding for NGOs 9 Figure 4 Private sector NGO funding 12
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Financial Sustainability and Funding Diversification iv Acronyms APBD Anggaran Pendapatan, dan Belanja Daerah (Budget and Expenditure) AU$ Australian Dollar CSIS Centre for Strategic and International Studies CSR Corporate social responsibility DFAT Department of Foreign Affairs and Trade, Government of Australia HIV and AIDS Human immunodeficiency virus infection and acquired immune deficiency syndrome HNWI High Net Worth Individual ICW Indonesia Corruption Watch IDR Indonesian Rupiah Kemitraan Partnership for Governance Reform ΠIndonesia NGO NGO Non-Government Organisation NSSC NGO Service and Study Centre PIRAC Public Interest and Research and Advocacy Center SMERU Social Monitoring and Early Response Unit ΠIndonesia NGO US$ United States Dollar YAPPIKA Organisation to Increase Participation, Initiative and Partnership of Citizens in Indonesia ΠIndonesian NGO
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Financial Sustainability and Funding Diversification v Abstract Like the NGO sector globally, NGOs in Indonesia face an increasingly challenging funding landscape that threatens their survival and ability to achieve their goals for social change. International donors are reducing their support for Indonesian NGOs. Donor programs have not meaningfully supported NGOs to build alternative resource mobilisation strategies and, despite some notable exceptions, local NGOs have not been able to access funding from emerging donors and private philanthropic organisations or develop creative strategies to access new sources for funding. This brief assesses the current NGO funding landscape, takes stock of efforts to adapt to this changing context and suggests some strategies for NGO directors, funders and the government
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Financial Sustainability and Funding Diversification 1 1 Introduction NGO financial sustainability is a key challenge to ensure an effective NGO sector in Indonesia, which has important knock-on effects for the country™s continuing democratic consolidation efforts and economic prosperity. NGO financial sustainability is defined here as the ‚ability to generate resources from a variety of sources, which will, over time, reduce – dependency on development assistance funds™. 1 Developing financial sustainability and diversifying funding is important for NGOs as it is ultimately about making sure these organisations™ impacts can be sustained over time. 2 International good practice suggests that to ensure their survival, NGOs need long-term financial support from a variety of sources, as demonstrated by the illustration of possible funding scenarios in Figure 1. NGO funding can be categorised as restricted or unrestricted (indicating flexibility), and short term or long term (reflecting continuity). Funding types include: > grants (project funding or core funding) from international sources such as INGOs or donor agencies or domestic sources such as government; > gifts or donations (endowments, one-off or regular donations, and fundraising) from individuals or corporations or foundations; > earned-income (fee for service activities and sale of products or services like training, sales or technical assistance) from the government, general public, domestic interest groups or international donors; and > in-kind contributions (for example, provision of office space or pro-bono work). Each of these funding types comes with their own mix of advantages and disadvantages. 3 NGOs that do nothing to diversify their funding may continue to manage to survive but will often remain small and relatively ineffective. The type of support a NGO receives affects its ability to be ‚independent™, to improve the way their organisation runs, to nurture a new generation of NGO leaders, and to engage with government and the private sector. 4 1 Lewis, 2003, p. 213. 2 Financial sustainability is described as ‚a state in which an institution has a reasonable expectation of covering its costs for the foreseeable future through a combination of donor funding and locally generated income™ (The Population Council, 2008, p.2). 3 IDRC, 2010. 4 However, it should be noted that having sustainable financial support does not necessarily mean that NGOs will be more independent. The quality and nature of the financial source is another factor that determines that independency of a NGO. The nature of funding support (gift-based, aided-based and more enterprise-based) will have different consequences on independency (Hailey, 2014).
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Financial Sustainability and Funding Diversification 3 This brief charts the funding diversification challenges facing Indonesian NGOs. It relies primarily on: > data and analysis collected as part of commissioned studies; 12 > a global comparative review of donor programs used to inform the design of the NSSC; and > a literature review on NGO funding sustainability. The NGOs that were part of the field research had many characteristic variations and can be categorised by variables such as whether the organisations are: > district / city, provincial, or national NGOs; 13 > small, medium, or large NGOs; or > branches of larger NGOs or coalitions of NGO networks, or organisations that were not part of such groups. The brief begins by providing an overview of the state of the NGO funding landscape in Indonesia. It then assesses the different forms of funding available and NGOs™ attempts to diversify their funding. It shows that there is a shifting funding landscape that requires Indonesian NGOs and other stakeholders wanting to support them to urgently rethink strategies and approaches. The final section provides some suggestions for NGO directors, funders and the government that could help create an environment that better supports NGO sustainability in Indonesia. Ultimately, it is hoped that the brief will contribute to improving the understanding of the challenges facing Indonesian NGOs in diversifying their funding, which has both policy and practical implications, particularly for NGO leaders making tough decisions about the future of their NGOs. 2 NGO Financial Sustainability in Indonesia Much has changed in the NGO funding environment in the fifteen or so years after the fall of Suharto and the democratisation process that followed. Despite the initial influx of international donor support for Indonesia™s democratic transition, today NGOs face significant challenges. A number of factors have contributed to this situation: 14 > International donor funding is in a state of decline. There are only a handful of international donor agencies still providing funding for the NGO sector in Indonesia. This has been the result of Indonesia™s emergence as a Lower Middle-Income Country in 2006, and a perception that, from 2004, Indonesia had successfully consolidated its democracy and was in a position of relative political stability. 15 > Relationships between national NGOs and sub-national NGOs are underdeveloped. This impacts the ability of smaller NGOs that operate mostly within one or in some cases (where districts have recently been administratively split) two cities or districts ability to access funding, capacity development and networking opportunities. 16 also crucial in ensuring overall financial sustainability. See Antlöv, Ibrahim, and van Tuijl (2006) for more information on these views. 12 STATT, 2012; see also the first brief of the NSSC Research Series: The NGO Sector in Indonesia: Context, Concepts and Challenges by Megan McGlynn Scanlon and Tuti Alawiyah. 13 City/district NGOs are NGOs that focus their work in one or in some cases Œ where districts have recently administratively split Œ two cities or districts; provincial NGOs operate across two or more cities or districts within a particular province; national NGOs are NGOs that work across multiple provinces or at a national scale, many of them serving explicit support functions to the NGO sector overall. 14 Aspinall, 2011; Mietzner, 2012. 15 Aspinall, 2011; Mietzner, 2012; and Anand and Hayling, 2014. 16 See the findings of the networks analysis set out in the fourth brief of the NSSC Research Series: NGO Networks and the Future of NGO Sustainability In Indonesia by Jonatan Lassa and D. Elcid Liu. Noteworthy also, a 2012 review of ‚Local Capacity Development Lessons Learned Œ Indonesia™ notes that there are no national strong NGOs advocating on behalf of the NGO sector for the enabling environment and the ones that exist are mainly focused on capital cities: (USAID, 2012).
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Financial Sustainability and Funding Diversification 4 > A strong civil society support structure has yet to develop, which would enable NGOs to develop the organisational capacity needed to access funding from non-traditional sources. 17 > Alternative sources of funding are underdeveloped. Beyond Islamic tithing ( zakat ), there is yet to be a strong institutional or strategic philanthropic culture to support the NGO sector in Indonesia, and there is a lack of an appropriate local regulatory framework and tax incentives to support and encourage philanthropy. > The relationship between NGOs and the government has changed dramatically. The dual processes of democratisation and decentralisation that ensued after the fall of Suharto requires a much more sophisticated way of engaging. There are opportunities to work with government more closely to inform policy development and implement programs; however, not all NGOs have taken advantage of these opportunities. 18 > While there is no accurate data to demonstrate that actual overall amounts of funding going to the NGO sector are decreasing, in real terms levels appear to have remained stagnant compared to the rest of the economy. Other parts of the economy, including the government and private sector, have become significantly more sophisticated whereas NGOs are operating in ways similar to the post-Suharto era. This has meant that the way of doing business in Indonesia is changing, but NGOs are less able to change with it. This context has resulted in challenges for many Indonesian NGOs, as they remain dependent on funding from international donor agencies. While this source of funding is now starting to be reduced and becoming even less secure, the availability of local sources of funding remains insufficient. 19 2.1 Funding Sources: Dependency on Donors The findings of the qualitative research indicate that most of the revenue coming into the NGO sector in Indonesia is from international donor agencies. 20 Some studies have suggested donor funding makes up to 85-90% of funding for NGOs. 21 Based on data collected for the NSSC design, it is estimated that the estimated annual total revenue for all Indonesian NGOs in 2013 was just over AU$330 million (IDR 3.4 trillion). 22 Of this figure, DFAT is likely to have contributed around 11% of the overall funding for the sector or more than 40% of the estimated revenue for national-level NGO according to reviews conducted for the NSSC design process. 23 The findings of the qualitative research show that, apart from some mass-based membership organisations and government-sponsored NGOs, most NGOs have difficulty accessing public and corporate funding and rarely access potential government funds. Advocacy NGOs are particularly reliant on international donor agencies for their budgets, whereas NGOs focused more on service delivery could access opportunities from the government and private sector. 17 This is closely linked to the public image of the NGO sector. For the sector to be sustainable, it is necessary that government, the business sector, and communities see a positive image of NGOs, including a broad understanding and appreciation of the role that NGOs play in society. Public awareness and credibility directly affect NGOs™ ability to recruit members and volunteers, and encourage donors. While some NGOs might receive very positive coverage in the Indonesian media, overall, public perceptions of Indonesian NGOs are very low (Rukmantara, 2013 and Edelman Indonesia, 2015). 18 Davis, 2007. 19 Anand and Hayling, 2014. 20 The research findings show that NGO budgets vary dramatically. Average budgets differ substantially for NGOs between the city/district (IDR 20 million or AU$2,000), provincial (IDR 500 million or AU$50,000) and national level (IDR 2.2 billion or AU$220,000). The majority of NGOs in Indonesia manage relatively small budgets. A 2009 survey of 551 NGOs (mostly on Java) suggested that around 75% of Indonesian NGOs manage budgets of less than IDR 200 million (AU$20,000) annually and almost 90% manage less than IDR 500 million (AU$50,000). 21 Ibid. 22 This is a very rough estimate and is calculated by adding-up all revenue reported for all local NGOs as part of the NSSC design; dividing this figure by 7 (the number of districts from 4 provinces where data was collected for the NSSC design), and multiplying it by the number of sub-districts in Indonesia (514). These currency conversions were made on 10 June 2015. To the author™s knowledge there have not been similar efforts to estimate the total size of the sector. This figure was then added to the average of the revenue reported by national NGOs, which had been multiply by the estimated number of national NGOs (60). 23 National NGOs are most likely to receive grants from international donors or the donors™ direct partners.
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Financial Sustainability and Funding Diversification 5 Indonesian NGOs rarely have a diverse range of funding sources. 24 As is common globally, NGOs reported a reliance on one source of funding for their activities. Data for NGOs from city/district, provincial and national levels collected during the research for the NSSC design process also supports this finding. The survey of NGOs found that city / district NGOs that are located more remotely from major cities or urban areas in district or provincial capitals tend to rely mostly on self-financing activities, with around 45% stating that their own self-funded or earned-income activities were the most important funding source. 25 For city / district NGOs, government (5%) and international donors (15%) are not main funding sources. This contrasts with NGOs located in provincial capitals, which rely primarily on international donors (around 45%) or national NGOs for their funding (around 15%). National NGOs are even more heavily skewed towards relying on international donors (70%) for their funding (see Figure 2). Figure 2 Main financial sources for city / district, provincial, and national NGOs 26 Source: NSSC Survey of NGOs Dependence on one form of funding has implications for the NGOs™ ability to serve the people they are hoping to represent. NGOs reported that relying on year-to-year budgets that depend on outside funding sources had an impact on their ability to plan ahead sufficiently and invest in their own organisations. As documented in the separate piece in on human resources and leadership in this research series, this dependency has impacted on NGOs™ ability to hire staff and ensure they have the capacity and capability needed to support program activities. Dependencies on funding sources also have also forced NGOs to align and change their missions in line with donor preferences. In the worst- case scenario, some NGOs abandon their mission for the pursuit of financial resources. But perhaps most important for the long-term sustainability of the NGO sector, this kind of reliance and dependency has damaged NGOs™ reputation to the Indonesian public, government and private sector. 27 It is probably unsurprising, then, that funding diversity and sustainability are consistently at the top of the list of challenges identified by NGOs as threatening their survival. 28 This is a common challenge for NGOs internationally. 29 NGOs™ increasing dependence on international donors has been a key 24 STATT, 2012, p. 17. 25 In Indonesian, ‚ swadaya ™ or self-help or self-reliant activities. 26 For all figures, data represents percentages of NGOs™ reported primary funding sources. 27 Antlöv, Ibrahim, and van Tuijl 2006, p. 156. 28 PRIA, 2012 and NSSC Survey of NGOs. In the survey, around 50% of respondents reported funding as the most influential factor influencing their capacity. Mitchell and Schmitz 2012 document how NGOs in the United States found funding diversity to be the most significant obstacle to achieving their objectives. 29 Just as dependency on foreign donors is mostly the case for national NGOs, city/district NGOs are also heavily reliant on self- financing or earned income activities and thus this is a major issue for them. City / District Provincial National Self-Generated 741110International Donors 74674International NGOs 3257Government 343Private Sector 303Others 1014301020304050607080
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Financial Sustainability and Funding Diversification 6 concern for post-authoritarian and middle-income Asian countries. 30 With the ‚Golden Era of NGOs™ experienced in the 1990s a distant memory, researchers and the international development community are increasingly focusing their attention on funding sustainability beyond international donors.31 The landmark Civil Society at a Crossroads report identifies a shrinking resource base for civil society globally as one of the main challenges facing NGOs. 32 The nature of the different funding sources (international donors, government, private sector, and earned-income) has implications for NGO sustainability. 33 Each source of funding can offer advantages and disadvantages, and may or may not be appropriate for a particular NGO depending on its financial needs, values and mission. The advantages and disadvantages of several options are described next. 2.1.1 International Donor Agencies Funding from international donor agencies has been and still is the mainstay for the NGO sector in Indonesia (particularly for NGOs that operate at the national or provincial level, and advocacy NGOs), but the availability of this source of funding is decreasing. It was reported from the interview results that in Central Sulawesi, for example, that advocacy NGOs depend on international donor funding for 99% of their funding. Significantly more national NGOs access funding form international donor agencies compared to city / district NGOs. 34 Meanwhile, NGOs located outside of the urban centres of provincial and district capitals have very little direct or indirect access to this source of funding, due to physical distance, difficulties establishing relations with donors, and difficulty meeting the requirements to access the funding. This is partly due to the weak linkages between city / district NGOs far away from urban centres and national and International NGOs, which are the primary recipients of international development funding. The availability of funding for NGOs from international donor agencies peaked in the aftermath of the overthrow of Suharto in 1998. 35 The opening up of political space saw a dramatic increase in funding for NGOs from donors keen to ensure that Indonesia consolidated its democratic transition and could recover from the preceding financial crisis. This period also saw the rapid rise of a new breed of national advocacy and watchdog NGOs (for example, Indonesia Corruption Watch, Seknas Fitra , Centre for Electoral Reform and Kontras ) that were established and supported almost entirely on a system of short-term donor contracts and grants. Despite the initial influx of funding, international funding for NGOs in Indonesia has decreased dramatically since the early 2000s. 36 The resource environment has changed significantly over the last seven years across DFAT projects. While NGOs have had increased access to funding from Australian aid through increasing budgets focussing on issues like HIV and AIDS, gender, and local governance, they have also become increasingly dependent on Australia as a source of funding, as other sources dry up. In the HIV sector, for example, Australian aid is seen by NGOs as one of the last available sources of funding. Interviews with NGO activists carried out for the NSSC design indicates that the current mode of engagement between donors and NGOs provides very limited financial certainty for Indonesian NGOs . There are very few funders and donor programs in Indonesia that provide NGOs with a guarantee of financial certainty beyond 12 months. 37 This is a by-product of the project-based nature of international 30 Parks, 2008; Alymkulova &Seipulnik, 2005; Khieng and Dahles, 2014. 31 Agg, 2006; Roche and Hewett, 2013; Fowler, 2000; Holloway, 2001. 32 PRIA, 2012. 33 See Froelich (1999) for an overview from a resource dependence perspective of the effects of different types of funding (grants and donations; earned-income; government funding) on NGO sustainability. 34 NSSC Survey of NGOs. 35 For a history of funding to NGOs and the role they played in the New Order, see Eldridge (1995); Riker (1998); and Aspinall (2005). 36 Some exceptions exist in 2000s where international funding increased dramatically in 2005 (Indian Ocean Tsunami) and 2006 (Yogyakarta Earthquake). 37 It should be noted that there are a few notable exceptions to the rule here including the core funding provided by AusAID / DFAT to SMERU from 1998 until today, core funding offered through the Australia Indonesia Partnership for Justice via The Asia Foundation, the Knowledge Sector Initiative, and an endowment set up by USAID for KEHATI from 1995Œ2005 totaling $16.5 million (Hadad, n.d.). According to the Kehati website, ‚the Endowment Fund was invested in stocks and bonds through
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