Slovakia, August 15, 2002


Financial (non) Sustainability of Non-Governmental Nonprofit Organizations and Your Land Program PIP

Boris Strečanský

Starting Points and Trends
Why PIP?
The PIP Program responds to the current situation in the non-governmental nonprofit sector in Slovakia. The situation in the last twelve years is characterized by the development of non-governmental nonprofit organizations to quite a high degree. Part of that development is not sustainable in the long term, particularly financially.

The purpose of PIP is to award grants to key non-governmental nonprofit organization and attempt to improve overall conditions for the functioning of the non-governmental nonprofit sector in Slovakia (change of macro-environment) and strengthening of those non-governmental nonprofit organizations which will form the future backbone of this sector (micro-environment).

Creating of favorable legal, institutional or fiscal conditions for civil society development is the common interest of donors of funds to be re-distributed in the PIP Program. It is our common conviction that for healthy development of our society it is important to have a favorable environment for civic activities and for the existence of non-governmental nonprofit organizations (even though these two things are not identical). We realize that no environment by itself will give birth to civic ethos and it is primarily decision of people-citizens to win this space.

We recognize there are different opinions about what is more favorable and what is not and we want to give such opinions enough space in our program. At the same time we are convinced that there are certain principles which make this sector truly non-governmental, nonprofit, and civic and we are not going to support activities which do not meet these criteria.

Non-governmental character of an organization, as we understand it, is the crucial characteristic feature of an organization which seeks support within our programs. It means the organization started by a voluntary private decision of citizens rather than from the initiative of the state, government or other public "power" and it serves its original public-benefit purpose. It is an organization which is self-governing and makes decisions independently of the state, local governments or other forms of "government". In its decision making it is guided exclusively by its mission and no other interests.

Nonprofit character of an organization as we understand it is declared orientation, and verified in practice, towards public-benefit goals without attempts to distribute possible profit from own income-generating activities to organization founders. Rather any profit should be used to fulfill organization's public-benefit mission.

PIP considers the role of non-governmental nonprofit organization important and useful in the development of democracy, further deepening civic awareness and "liberating" citizens from the sediments of previous regimes. Non-governmental nonprofit organizations are important tools for citizens and allow them to participate in administration of public affairs and organizing life according to their wishes.

Many Faces of the "Third Sector"

In time, non-governmental nonprofit organization constituted the "third sector" which - to varying degrees - joined the public discourse. On one side, it takes a chaotic, amorphous and disorganized shape, which is its crucial characteristic without which it would not be the third sector. On the other side, the messages it has been bringing have often extended beyond the short-term and limited-time thinking of political parties or bureaucrats. The sector is ascribed, sometimes rightfully and sometimes not, greater influence than it deserves.

The third sector has several dimensions. It is a practical label for various organizations defined against commercial and governmental organizations (at both state and local levels).

It is also a part of the society which constitutes 1.3% of GDP, 1% of employment and every sixth citizen in the country is a member of some association or club.

To some people, the third sector is too "political", making statements about general issues of society (which is partly caused by social and political conditions of recent period) when it should engage itself more with fulfilling its mission in various areas (education, culture, etc.) For other people, on the other hand, the wider engagement is needed, because it allows for important social discourse and formulation of autonomous civic attitudes towards more general issues.

For some, the third sector is organized too little to be able to defend its interests or wider interests of the public in relation to the state, local governments, or business. For others, the level of organization of the third sector is too high which suppresses its natural plurality. For yet others, it is a suitable partner in the development of communities, regions and society as such.

Sometimes, the third sector acts as a real "conscience" of the society, at other times, it takes this position unrightfully.

The truth remains that the label of the nonprofit sector serves as an "umbrella" also for activities which lack civic ethos, which do not show "civic quality," and which are motivated by access to funding.

This conflicting faces, roles and attitudes of the third sector are something we need to be aware of, reflect upon and towards which we need to try and take an authentic attitude.

Financial nonsustainability of non-governmental nonprofit organization in Slovakia

We start with the assumption that non-governmental nonprofit organizations are one of the important social agents with a potential to support transformation of our society. If we recognize the importance of non-governmental nonprofit organizations in this sense, it makes sense to deal with the issue of their further existence. Taking into consideration the above-mentioned disproportion of available resources and the structure and current scope of non-governmental nonprofit organization activities, we consider it necessary to search for ways to minimize this unsustainable trend.

Even among non-governmental nonprofit organizations there is some differentiation and different types of non-governmental nonprofit organizations have different opportunities to increase their sustainability. It is also obvious that some areas which have traditionally been financed from outside sources, particularly foreign institutional sources (such as human and civil rights, protection of minorities, development of democratic institutions etc) will continue to be able to find sources from abroad for their missions, even if there will be fewer of them. However, many other areas and correspondingly organizations which undertake important citizen-engagement activities at local and community levels will not be able to find these vanishing foreign resources and will feel the impact stronger.

The outflow of foreign sources will be partly compensated by the integration process in which civic associations can be expected to take their role. We can assume that principles of partnership and cross-sector co-operation and the integration process itself will translate also into an opportunity for more non-governmental nonprofit organizations to offer their strengths in these partnerships and use them to find resources to implement their public-benefit activities on the principles of partnership with governmental and for-profit sectors.

At this point, it is difficult to estimate, however, to what degree this principle does or will constitute a formal condition and this role is "voluntary by force". In addition, the cross-sector partnership itself in combination with insufficient natural institutional maturity of these partners (professional level of public administration in increasing but has not yet reached parameters of developed countries; capacity of non-governmental nonprofit organizations to be a partner is, however, also limited) represents an unbalanced cocktail of interests which can hardly be relied on. Let us hope it is not the only solution and source of sustainability of civil sector in the upcoming period of 10 to 20 years. Some non-governmental nonprofit organizations will consciously choose to stay out of these processes for moral or practical reasons (incompatibility of values or too small a size for these processes).

The chance remains that set-up of the integration programs will take into consideration also these parameters, even though it appears today that they are set more towards big, formalized and well-established organizations or projects with no room for spontaneous activities of citizens.

It can also be expected that in the next 3 to 5 years, there will be a change in the quality of financing of nonprofit organizations from foreign institutional sources in comparison to previous practice (so far, we have seen presence of at least 3 or 4 major grant programs distributing SK 50 to 100 million each year to support a relatively wide range of activities). Even now the trend is clear for broader-based grant programs or foundations to narrow down their scope or declare departure in the near future.

Priorities of private and governmental foreign donors ever more often move to southern and eastern parts of Slovakia. The interest of foreign governmental and private sources in Slovakia after its expected inclusion among standard Central European democracies will decline (the question remains what happens if Slovakia establishes a hybrid system which will freeze the integration process for the upcoming term. It is possible that departure of foreign sources will not be so sharp but who knows?). In any case foreign private and governmental sources do already focus today on institution building or other stabilization more than development of various new initiatives. It is ever more obvious that after the rapid development of associations, foundations etc. in early 1990s, it will a challenge for this exuberant sector to find stability without external help. That is also the main goal of funding from the Trust for Civil Society in Central and Eastern Europe.

Even bigger challenge is the situation that we may be facing after the expected entry of Slovakia to NATO and accession to EU. Slovak nonprofit sector will need adequate capacity for monitoring the government and fulfilling its watchdog function. These roles will be equally important even then, because the quality of Slovak democracy will not automatically increase through the integration into the Western structures. The Slovak political scene has not yet been crystallized and Slovakia lacks well established formal or informal checks & balances that would keep the democratic governance of Slovakia on the same or improved level as it is now. Unwanted result of this may be the situation that the image of Slovakia in front of foreign audience will be much better than its reality. The role of advocacy NGOs in this mirroring will be inevitable for future of Slovak democracy.

Non-governmental nonprofit organizations working for democracy development, increased participation of the public in decision-making, analytic and think-tank organizations producing independent and critical analyses and recommendations, or foundations used to re-distribute foreign funding to other non-governmental nonprofit organizations-these will all feel quite strongly this outflow. It will impact, however, also many organizations defending interests of citizens which did not have direct access to major foreign donors but for which these sources were the last, but crucial drop to allow them development rather than barely survival, to allow them innovation rather than routine, and to give them working comfort rather than spasmodic tension.

The outflow of sources will be felt also by organizations offering services to the public which citizens are not able or willing to pay fully or for which there is no developed system environment to support their co-financing by public and private domestic sources. These are usually organizations with a clear public-benefit mission, with humanism-oriented leaders, which operate on the border of areas influenced or guaranteed by the state and business. They suffer from the lack of basic reforms of the social system, health care, pension system, and education.

What to Do About it?

One of the paths to take is to strengthen indirect tools of non-governmental nonprofit organization support. These are mostly tax deductions for donors which raise motivation on the side of sources (individuals and companies). Connected to it is the improved tax treatment for non-governmental nonprofit organizations themselves (greater tax allowances or tax exemptions of income from their own activities), which the state can use to offer certain advantages in comparison to the business sector and receive more effective, cheaper and more committed service for the citizens.

A partial but very welcome change for these organizations was the already-effective amendment to the Tax Code to allow tax-payers to assign 1% of their tax duty (let us hope it will not stay at 1%) to non-governmental nonprofit organizations. It would be a welcome change if this option could also be used by businesses, even if in their case it would be meaningful to discuss what this 1% assignation of tax duty would be for Top 50 tax-paying companies and how to guard the use of such amounts for public-benefit purposes. It will be interesting to assess the effect of this institute after some time and look for ways to make it more effective if there is need.

It is also necessary to consider removal of the 15% tax burden on interest income on deposits which represents a double taxation for individuals but also foundations or other nonprofit organizations and discourages giving to endowments funds.

Another issue of discussion has been the removal of VAT applied to foreign donors.

In addition, there are topics connected to the management of volunteer work, streamlining bureaucracy in the accounting of costs of volunteer work etc.

The deficit of foreign resources will not be immediately replaced by domestic sources. All the more so because there is still no clear strategy to apply other indirect tools by non-governmental nonprofit organizations or by the state. It can be expected that gradual development of a favorable system will not be achieved immediately but will depend on political will of the ruling elites. So far, political development in Slovakia does not give much reason for optimism regarding these changes. For non-governmental nonprofit organizations-if they are capable of it-the repeated opening of these issues remains a long-term task.

One of possible and still discussed alternatives of strengthening non-governmental nonprofit organization sustainability is the initiative to assign a part of privatization revenue to foundation endowments. Endowment revenues would then be used to finance non-governmental nonprofit organizations. It is up to the government to take a stand to this proposal.

Institutional Aspect

In addition to financial aspects of sustainability, we need to mention its other aspects as well. The aspect of institutional sustainability is important, as so is the aspect of suitable legal and institutional environment for non-governmental nonprofit organization existence-i.e. internal maturity of non-governmental nonprofit organizations themselves on one hand and favorable legal environment for non-governmental nonprofit organizations and civil society on the other hand.

Currently, we are witnesses to certain "reconstruction" of legislation on nonprofit organizations which is directed mostly in favor of citizen interests. In the past, however, we saw proposals for legislative changes were based on immature values. We are left to hope that key legislative norms such as the law on association of citizens, which should be opened for discussion still in this election term, will remain faithful to principles of autonomy, self-government, independence, and freedom of the civic principle. In addition, the issues remain open of eliminating discrimination in the access to public resources (the issue of public procurement from non-governmental nonprofit organizations), increasing transparency of provision of subsidies and grants from the state etc. Until key reforms are undertaken, including effective completion of decentralization, which will assume also a role for the non-governmental nonprofit organizations in the provision of social, educational, health-care, humanitarian, cultural and environmental services, the share of income of non-governmental nonprofit organizations from public resources will remain under the average of surrounding countries. The same holds true about motivation of donors. Until there is stronger motivation of donors and sponsors, we can expect no increased share of local sources in the financing of non-governmental nonprofit organizations.

In addition to changes in the legal and fiscal frameworks, changes will need to involve non-governmental nonprofit organizations themselves. These changes will be a part of overall adjustment of the Slovak non-governmental nonprofit sector to the changed conditions of financing. What changes or trends can we expect in this regard? After short consideration, we came up with the following trends but the list is certainly not exhaustive:
  • development of membership base
  • increasing the share of income from own activities
  • increasing the level of professionalism of the organization, expansion of client base, marketing of services etc.
  • change in the scope and quality of activities, narrowing down of or expansion of the mission
  • fundraising from local sources in the form of gifts or sponsorship payments
  • reducing costs while maintaining the scope and quality of activities
  • more effective usage of existing resources and assets of the organization
  • changing the structure of staff, increasing the share of volunteer work in relation to paid staff
  • building partnerships and relationships with strategic partners (local governments, higher regional offices, business etc.)
  • accessing the EU-accession programs
  • building a network of users of services, marketing of services, and the organization
  • building long-term reserves
  • investing capacity into fundraising and searching for strategic position of the organization in relation to future possibilities of financing
  • etc.

These possibilities can be used to higher or lesser degree, depending on the type of organization, its mission, and its character. Some organizations will cease to exist in the future, many will become smaller and, let us hope, many will be able to change in a constructive way to be able to realize their mission.

What picture do we get when we look at Slovak non-governmental nonprofit organizations in 2010? Compared to the present situation, fewer will be likely to rent expensive office space to the extent common today e.g. in Bratislava. There is likely to be more organizations which will better communicate with their members and from which they will derive their "power" and support. The position of non-governmental nonprofit organizations will likely be clearer among the public because some of them will move to private business sector and those which will remain in the nonprofit sector will be truly nonprofit oriented. We leave further considerations along these lines to you.

In Everything Bad There is Something Good

If we talk about decreasing the level of funding for non-governmental nonprofit organizations, we do not need to forget about the positive effects which this process will bring. First, the nonprofit sector environment will be cleared of organizations which partly acted as parasites, using relatively cheap resources. Secondly, non-governmental nonprofit organizations will have to define their missions more clearly and guard them more strongly if they want to convince their sponsors that their support is meaningful. Another positive effect will be the stimulation of non-governmental nonprofit organizations to search for domestic sources and undertake activities closely reflecting real needs of communities they are serving. They will be more responsible to their supporters because it will be a direct donor-recipient relationship without an intermediary which does not own the resources (most present-day foundations).

Role of PIP
In view of the Your Land program, PIP is a tool to provide strategic support to key organizations which should play an important role in the entire non-governmental nonprofit sector in mid-term and long-term future.

PIP is considered a tool of support to allow an organization achieve qualitative change in its institutional and financial sustainability. The change is a matter of a longer term than one or two years. Therefore the support from PIP is to be spread over several years. We also expect that organizations seeking support from PIP will be able to perform self-reflection and assess their own role in wider context and they will themselves propose and justify what is crucial in their view for their own strengthening and what change they wish to achieve during the program.

PIP can be also seen as an opportunity for those organizations which are serious about their future and are able to see how to use this relatively comfortable period to prepare for more difficult times. PIP is not intended for organizations without long-term vision of their future or for organizations which plan to dissolve in the foreseeable future (with due exceptions).

Support from PIP can be understood as an "investment" into the organization rather than a support for its activities. It is not because activities of non-governmental nonprofit organizations are not valuable but rather to the contrary. It is because for PIP, a non-governmental nonprofit organization is important as a whole, including its activities. If we understand PIP as a program of "investment", then it is natural that investment is made where there is trust of both sides in its return. The aspect of reliability and trustworthiness of partners is present.

We understand it will not be possible to satisfy all applicants for support from this or other programs. But that is the reality which is ever more often the reality of our every-day life and which we must learn to cope with.

Boris Strečanský is Executive Director of the ETP Slovakia. He can be contacted by email at => .

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