Going Better on Good Causes

By Maria O'Brien, Wall Street Editor for Latin Finance Magazine, September 2004

Giving to worthy causes is still far more of an art than a science. This is changing as donors become more professional at raising, managing and donating money.

Mexican telecom magnate Carlos Slim, Luanne Zurlo and Citigroup Chairman Sandy Weill at gala dinner hosted by the World Education and Development Fund.

Torrential rains in the city of Chihuahua in 1990 could have condemned northern Mexico to years of hardship.  Instead, it spawned one of Latin America's most remarkable philanthropic organizations: Fundación Chihuahua Empresarial y Asociación Civil (Fechac).  Business associations banded together to lobby the state government for a 10% increase in payroll taxes to fund an assistance program for low-income communities hit by flooding.

The program took nearly four years to launch, but when it did, it generated $5 million a year with more than 38,000 businesses contributing.  By 2002, annual revenues had grown to nearly $8 million and the foundation boasted a full-time staff of more than 40 employees.  It has evolved into one of the most professionally managed and transparent foundations in Latin America.  David Winder, director of country programs for the Synergos Institute, a US non-profit that works to improve management of foundations in developing countries, calls Fechac a role model.

Corporate and social responsibility is an increasingly important topic in the region as international corporations, domestic companies and policymakers try to bridge the widening gap between rich and poor.  Some corporate and private foundations are rethinking the way they manage their funds.  Many more should follow their example.

The history of giving in the region dates to the arrival of Spanish and Portuguese conquistadores and Catholic missionaries.  Latin American and multinational corporations have taken up the slack since foreign governments and international charities like Oxfam, once generous donors, started cutting back in the 1990s.  There is very little hard data on the activities of non-governmental organizations in the region, but experts agree that Brazil and Mexico - the region's largest countries - also have the greatest concentration of foundations.

In Mexico, individuals and religious organizations are the biggest donors.  In Brazil by comparison, there is a thriving culture of corporate philanthropy that began with government-owned entities such as mining company Companhia Vale do Rio Doce (CVRD) and national oil company Petrobras, both of which operated in distant, impoverished regions that lacked government services.  "Companies had to literally build the infrastructure, homes and schools for their employees," says Luanne Zurlo, executive director of the World Education and Development Fund, a New York-based foundation that supports education in Latin America.  "Brazilian corporations had the earliest sense of fulfilling that role."

Fundação Vale do Rio Doce debuted in 1968, when CVRD was state-owned, to provide homes for the mining operation's employees.  In 1998, the foundation started supporting projects linked to education and social development in the communities where it operates.

Venezuela, Colombia, Ecuador and Chile have fewer corporate foundations, but prominent private ones include the Fundación Cisneros in Venezuela, Fundación Esquel in Ecuador and Fundación Andes in Chile.  Fundación Cisneros, financed by donations from the Cisneros group of companies and the wealthy Cisneros family itself, supports education.

In fact, education is one of the most heavily supported causes in Latin America, considered by many foundations to be essential to the success of democracy in the region.  Zurlo says there are economic arguments, too.  "Latin America - especially Mexico - is losing competitiveness to Asia, where society is much better educated."

Education is a focus of philanthrophy.

Falling at the First Hurdle
Zurlo focuses her fundraising on wealthy individuals from international and Latin American foundations, as well as Wall Street financiers lured by the generous tax deductions they receive by giving to US-based charities. Latin America's tax laws, by comparison, tower as one of the biggest obstacles to the growth of philanthropy within the region.  Few Latin American countries have instituted an estate tax, as the US has done, which taxes an individual's wealth at death.  This tax burden can be reduced substantially through gifts to charitable donations.  Nor do Latin American governments make individual gifts tax-deductible.  Rebecca Raposo, executive director of the Brazilian Association of Foundations (Gife), says: "There is no incentive in Brazil to set up family foundations because the concentration of wealth is passed on and on."

The region offers only isolated cases of government-supported philanthropy.  In 1991, an Ecuadorian government debt swap with the Rockefeller Foundation created an endowment for Esquel, a non-governmental organization.  The Rockefeller Foundation bought deeply discounted Ecuadorian debt; in return, the government passed on a percentage of its savings to form the nucleus of Esquel's endowment.  By the end of 2003, Esquel had made donations of $30 million to community projects.  Mexico, meanwhile, reformed its tax laws in 2002 to allow foundations to issue tax-deductible receipts for donations to environmental and community projects.  Pablo Farias, deputy to the vice-president at the Ford Foundation in New York, says: "Better conditions for communities are better for business.  Contributing to the alleviation of poverty creates a better environment for business.  Encouraging corporations to give 1% of their profits tax-free can be a huge incentive.  Unfortunately, governments see that as lost revenue.  There is also the fear that corporations could abuse that tax incentive."

The insular nature of many foundations has also fostered suspicion.  Many Latin Americans suspect these organizations are political slush funds, tax shelters or vehicles to finance pet projects of rich people.  It does not help that most family-operated or corporate foundations are indeed run as private organizations and, therefore, not required to make their accounting public.  Brazil even permits for-profit organizations like schools and medical centers to operate as foundations.  "We have approximately 460,000 non-profit organizations in Brazil, but only half are civil society organizations," says Raposo.  "The rest are serving the interests of other communities that are not philanthropic."

Encouraging Modernization
Winder, of Synergos, believes civil organizations like Brazil's Gife and Mexico's Centro Mexicano para la Filantropía (Cemefi), rather than governments, must encourage foundations to embrace modern-management principles.  That means hiring professional staff and approaching fundraising and asset management in a business-like fashion.  Farias says the Ford Foundation provides grants to Latin American organizations that help foundations run transparently and professionally.

Winder says: "We recommend that foundations build an endowment, and then the interest on the investment can be given as grants to support their programs.  "Raposo says many private foundations avoid endowments because they fear losing control. 

Farias at the Ford Foundation suggests that corporate foundations be persuaded to give part of their funds to community foundations, such as Fundación Vamos in Mexico - not to be confused with first lady Marta Fox's Vamos México foundation (see box).  Says Farias: "[Fundación] Vamos established programs working with several industry groups related to the rehabilitation of downtown Mexico City.  With several private foundations such as Telmex, they have proved very effective in fostering collaboration with private foundations in a community setting."

Endeavor, a non-profit set up in 1998 to foster entrepreneurship, has launched programs in Latin America and South Africa.  Swiss industrialist Stephan Schmidheiny provided $500,000 in seed capital to Endeavor through his AVINA Foundation.  An Argentine donor provided an additional $200,000 through a matching grant.  Brazil's Fundação Abrinq, which supports children's rights, has also successfully raised endowment funds from Brazilian and multinational corporations.  It employs a professional staff of 59 and allocates 34% of its resources for grants requests directed at NGOs.

Making Funds Go Further
Earmarking a third of resources for grant making is high in Latin America, where foundations prefer to donate directly to charities rather than through grants to NGOs.  But Raposo says NGOs are usually more effective.  "Business people know how to manage and make money grow and think they can apply this logic in social areas, which tend to be much more complex," she says.  "They don't want to spend money to give money away.  To give money away professionally, you have to invest in professionals."

Zurlo says her World Education and Development Fund encourages the schools it supports to match its funds.  "Matching grants are such a powerful tool.  They are something you haven't seen that much of outside of the US," she says.  In Mexico, Ramón Pérez Gil Salcido, director of the water program at Fundación Gonzalo Río Arronte, says his foundation only supports projects through matching grants.  The 3-year-old foundation received a $600 million endowment on the death of its founder, Mexican chocolate and real estate magnate Gonzalo Río Arronte.  "We will not support a project 100% with our funds.  Most of the money granted goes to non-governmental organizations because this is a much more agile way of supporting our causes.  There is a lot of potential for Mexicans to follow this path of giving."  A percentage of the profits generated by the endowment's financial market and real estate investments in Mexico fund donations.

Santiago-based Nonprofit Enterprise and Self-sustainability Team (NESsT) trains NGOs to raise long-term funding from corporations.  "A lot of funding to NGOs is short-term, project-based funding, so they are often running after project funds and can't be as effective as could be in their area of expertise," says Nicole Etchart, CEO of NESsT.  NESsT is exploring ways to group NGOs together to invest their funds in the financial markets.  Etchart explains: "We are working on a social enterprise loan fund to provide debt financing to NGOs, as there isn't a lot of lending to non-profits.  Eventually, we would like to create a capital market for the nonprofit sector."

Etchart wants to improve upon a model created by Colombia's now-defunct Fundación para la Educación Superior (FES), nationalized during the 1999 economic crisis.  The university foundation, set up with an endowment of less than $2,700, became one of Colombia's most important private community foundations and its largest finance company with assets close to $300 million.  During more than three decades of operation, FES built an endowment in excess of $42 million and awarded more than $100 million in grants.  Using matching grants, FES encouraged NGOs to pool their resources into a fund that invested in Colombia's financial markets.  FES paid the NGOs a guaranteed rate of 4% over the prevailing base interest rate, which they could then use to fund their activities.

Give and Take - Donors to charitable organizations - %

FES failed because it could not raise $50 million to pay out to NGOs when interest rates started soaring in 1999.  But Etchart says the principle of pooling resources to invest in the markets still makes sense.  Latin American countries need community infrastructure such as low-income housing, drinking water and medical centers that governments have failed to provide.  Privatized pension funds in Colombia and Mexico are buying mortgage-backed securities, which support those countries' housing sector.  Etchart thinks foundations and non-profits could even trigger demand for comparatively small community-based project financing deals, such as sanitation projects, that have attracted little interest from the financial markets or the government.  "Why can't non-profits also capture that part of the market, to build assets and become players for social ends?" she asks. LF

Perpetuating a Poor Image

Marta Sahagún de Fox, Mexico's first lady, launched her Vamos México foundation to great fanfare in October 2001, 10 months after her husband became president.  Elton John performed at the foundation's launch and the o