There is a perception that non-profits do good at a small scale so everyone involved can feel good.
But the notion of non-profits as charities is misguided, even though the Public Charitable Trust or u/s 25 of the Companies Act, 1956 requires NGOs who have a tax exemption to work only for public welfare, owning assets strictly used for “charitable purposes”.
This has created a sector that, on one hand, is underpaid and under-capacitated; on the other hand, lacks accountability. If the funds given to non-profits are seen as handouts, then very little is expected in return.
The role of non-profits is evolving and the funding models must change too.
New funding models
India needs new models for funding and new ways of measuring accountability of non-profits (I am distinguishing here between non-profit organisations and rights-based social movements, which are more political in nature and need crowdfunding).
India’s new Social Stock Exchange (SSE) aims to change this. SSEs are a unique mechanism for non-profits to access funds in a way that is reliable and subject to public scrutiny. The aim is to improve market access for social organisations and investors, while providing investors with confidence around proper due diligence procedures.
We need to articulate the value of non-profits better.
* Non-profits solve problems that the government and private sector cannot solve. They overcome transaction costs to connect groups with aligned interests. Transaction costs (or exchange costs) are costs incurred to achieve an objective. Political economy theory shows that it’s easier for one organisation to change the rules to favour them at a small cost to the entire population because it is hard to get individuals to collaborate on complex issues, even when they have shared interests.
* Firms exploit government connections to gain advantages — weaker environmental regulations, fossil fuel subsidies, or infrastructure contracts. Let’s say that a company lobbies lawmakers to pass legislation that bans the sale of generic lifesaving malarial drugs so that they enjoy a monopoly. Millions of consumers who will be impacted may not understand the implications of a clause buried in an obscure policy. Non-profits can build evidence on how the proposed regulation will harm consumers or file lawsuits challenging the regulations.
* Another example is inter-agency coordination. Many laws on paper in India are poorly implemented, because of poor coordination. For instance, Bengaluru cannot reuse treated wastewater without a standard for safe reuse that indemnifies users. Non-profits often play an important role in coordinating across agencies and citizen groups to resolve inconsistencies.
* Often institutions for resource sharing are taken over by the most powerful actors in the room. For example, Water User Cooperatives are often controlled by the most powerful large farmers, who are located at the ‘head end’, closest to the dam allowing them to capture the greatest share of the resource. Non-profits might organise farmers to ensure the institution is more fairly designed.
* Externalities refer to the impact of an economic decision that affects a third party not directly involved in the activity or transaction. Let’s take the example of air pollution in northern India.
The non-profit sector could use philanthropic capital to implement new seeding machines or biomass gasification. They often have the trust and social capital to handhold and de-risk farmers.
* Unlike government projects that can be quantified through benefit-cost analyses or private sector projects that can be assessed using return on investments, a major challenge is how do we value investments in non-profits? This is going to lie at the heart of the SSE also.
At the moment, we lack standardised methodologies to track and quantify societal value. But if this is done in a systematic way, perhaps it will pave the way for non-profits to be seen not as ‘charity cases’ but as valuable social institutions.
Veena is Executive Director of the Bengaluru-based Water, Environment, Land and Livelihoods (WELL) Lab