NonGovernmental Economic Institutions (ENGIn)
Development Model
Table of Contents
SCOPE……………………………………………………………………….….......................................Paragraph A
FUNDAMENTAL ASSUMPTIONS……………………………………………….………...................................B
Nongovernmental organization…………….………………………………………………............................1
Nongovernmental group of companies……………………………………………………...........................2
Substance over form…………………………….……………………………………….…….................................3
Economic institutions…………………………….…………………………………………...................................4
FEATURES OF THE MODEL…………………….……………………………………….....................................C
Types of development projects…………………………..…………………………………...............................5
Development sustainability…………………………………..………………………………..............................6
Consequences of nongovernmental economic institutions.…………………………….............7-11
Charitable image of the nongovernmental group………………..…….……………...…..................12
Role of donor and regulatory agencies……………………………………………….....................….13-14
Date of issue…………………………………………………………………………………........................................15
This model aims at suggesting the most effective way to institute sustainability into socio-economic development work carried out by nongovernmental organizations i.e. through acquisition and control of Economic Institutions. The model also discusses how profit driven business undertakings, especially those having juridical personality, can be owned and controlled by NGOs, without the parent NGO or the nongovernmental group of companies losing stance of existing not for profit.
A nongovernmental organization is an organization which-
§ is formed for charitable purposes and without an objective of maximizing -
- equity or residual interest evidencing ownership, or
- intrinsic value of notional ownership or control i.e. goodwill,
of its owner(s), governor(s) or trustee(s), inherent in the organization. This shall not apply if the said owner(s), governor(s) or trustee(s) is(are) also an NGO formed for charitable purposes complying with the conditions laid down in this model;
§ is not owned or controlled by a government or by an organization actually or notionally controlled by a government;
§ by way of its constitution, charter or other equivalent framework defining the fundamental objects and purpose of existence of the organization, prohibits ascertainment, declaration or distribution of dividend or other appropriation out of any surpluses of their incomes over expenditures or other reserves to its owners, governors or trustees.
Nongovernmental group of companies means a group of companies beneficially owned or controlled by an NGO.
NGOs may take a legal or notional form of a profit earning entity for the purposes of facilitating operational efficiency and effectiveness subject to adherence to the conditions summarized in 1 above.
Industrial, commercial and other profit driven undertakings, whether corporatized or not, shall be termed as Economic Institutions (EI) for the purposes of this Model. The reason for using the expression "Economic Institution" is that these undertakings “institute” i.e. establish perpetually sustainable prosperity in an economy in the same manner as a financial institution supports smooth running of a business to ensure that the business remains an ongoing concern, or an academic institute instills effective education into society. These industrial and other profit driven undertakings bring prosperity in an economy through fulfillment of consumers’ and suppliers’ needs, establishment of an employment base, mobilization of institutional and individual as well as local and foreign investment, payment of levies into government treasury and financial and other contributions towards social responsibility issues.
Types of development projects
- those involving incurrence of expenditure on the objects of the project whose benefits do not usually extend beyond a short term or one to three years e.g. provision of supplies to refugees, public health camps, etc, i.e. short impact projects,
- those involving purchase, acquisition or construction of an identifiable tangible or intangible output or other outcome usually evidenced by an economic value being placed on such output or outcome e.g. a road, a dam, a software or marketable literature etc, i.e. capital projects, or
- those involving setting up of an entity having legal existence, carrying out-
§ management or setting up of other NGOs, or
§ profit driven economic activity, qualifying to be termed as Economic Institutions; i.e. Economic Institution (EI) based projects.
Development sustainability
6. Based on extensive research of primary and secondary data and the observations through evaluations and audits of a large number of development projects implemented by governmental and nongovernmental organizations, the modeler recognizes that such projects, whose benefits are realized within a short period, predominantly within upto three years, or whose control is surrendered immediately to community or other entities of lower operational capacity, do not result in long term sustainability of developmental objectives. However, such short impact projects are indispensable for relief, rehabilitation or reconstruction work needed in case of natural disasters, wars and other socio-economic crises. However, the modeler is of the opinion that real and sustainable socio-economic prosperity is brought about by the type of development projects that involve setting up of Economic Institutions with a view to exist and operate perpetually. This model asserts that NGOs, and for that matter governments, can best ensure sustainability of development work if the NGOs are allowed to hold control of Economic Institutions in perpetuity.
Consequences of Nongovernmental Economic Institutions
7. Since an NGO is set up as a charitable not-for-profit organization, earning profit is not the purpose of its existence. However, this model suggests incorporation of an NGO with a program of setting up industrial and other profit driven undertakings to generate surpluses of income over expenditure, which should serve as primary source of finance, thereby converting such surpluses into similar Economic Institutions.
8. Such corporate bodies should offer shares and securities to general public through listings with a view to provide return thereon, while the majority of stakeholdership would be retained by the parent NGO. Such declaration and distribution of dividend and prospects of capital growth in the securities is the main reason why individual and institutional investor, both foreign and local, would be significantly mobilized as this kind of an investment opportunity would not only provide profitable investment opportunity but also an indirect stakeholdership in humanitarian and developmental ventures in a country through the parent NGO company, which would utilize dividends remitted on both short impact as well as capital projects as identified in paragraph 5.
9. This type of an initiative also ensures sustainability of the employment base created, which has been tested and proven by few of the international development organizations on a relatively smaller scale as compared to the one suggested by this model.
10. Governments, if satisfied as to the regularity of operations of such a nongovernmental group of companies, should offer tax exemptions and credits on dividends, capital gains and other returns generated by such initiatives.
11. In particular perspective of thirdworld countries, foreign individual investor, who otherwise restrains from sending foreign exchange into such countries, would be the one most mobilized through such projects out being attracted to the incentives that such projects would have to offer.
Charitable image of the nongovernmental group
12. The question arises now as to how would such a nongovernmental group of companies retain its charitable image when it engages in and controls such a high level of profit earning activity?
There are more than one ways to do this:
§ The parent NGO company would, by way of its constitution, charter or other equivalent framework defining the fundamental objects and purpose of existence of the organization, have to prohibits ascertainment, declaration or distribution of dividend or other appropriation out of any surpluses of their incomes over expenditures or other reserves to its owners, governors or trustees as already described in paragraph 5.
§ The parent NGO may also wish to adopt a legal form which does not have a share capital e.g. company limited by guarantee, in order not to even bring up the question of any dividends in the purview.
§ Those charged with the governance and management of the parent NGO as well as persons associated with them e.g. spouse, children and dependents etc, would be refrained by way of constitution as referred to in paragraph 1, from investing directly into the projects launched by such parent NGO in order to avoid a risk of providing the governors and managers with zero interest based finance facilities in the form of donor funding.
§ Function of independent external audit usually includes an appraisal on the reasonableness of salaries and remunerations paid to directors as well as those charged with the governance of an organization. However, such appraisals can be performed as a separate function, in case regulatory authorities or donors require it.
Role of donor and regulatory agencies
13. Since most of NGO-managed development projects are funded by international donor organizations, they are vested with an enhanced responsibility to ensure that funds provided to such nongovernmental group of companies holding Economic Institutions are utilized in a transparent manner. The reason for such skepticism is that corporate business is usually carried out by individuals of high technical expertise making such an arrangement more susceptible to organized frauds or mismanagement of funds. Accordingly, donor as well as regulatory agencies should require the same level of accountability from such a nongovernmental group as is required for organization brought into existence with a motive of maximizing stakeholders’ net worth therein.
14. This very fact that a non-governmental group of companies carries a risk of mismanagement of donor funds, however, should not be taken to be the reason for disallowing any tax exemptions, credits or allowances as to other governmental levies as one of the main objectives of this model is to propose modalities on how those non-governmental group of companies can qualify for such fiscal exemptions, credits or allowances to ultimately support the objective of economic development in thirdworld countries by facilitating the ENGIns of those countries - the NonGovernmental Economin Institutions.
Date of issue
15. This model is issued for the first time on the eighth day of December, 2003 under the signatures of the modeler and placed for discussion.
Modeler: Muhammad Altaf Hussain