Given the finite amount of philanthropic funds available in the system, the need of the hour is to devise new and innovative ways for global Non-Profit Organisations (NPOs) to finance their social development programs. The key funding options and their nuances are listed below.

Development Funds. One of the largest sources of funding for the social sector has been multilateral and bilateral aid from international organizations i.e. United Nations, World Bank, Asian Development Bank etc. or from foreign offices of developed countries. In some developing countries the local government also funds welfare and community development programs.

Charity funding is another key source to finance social programs i.e. grant funds (charities, foundations and international organizations that are privately managed), including donations, project funding, online crowd-funding, fund-raising events etc. that are usually project-specific. This category also includes High Net-worth Individuals (HNIs), a relatively recent but a fast growing segment in social impact funding in India.

Corporate Philanthropy is yet another source of funding which can either provide a long-term commitment to certain campaigns, or partner primarily programs revolving around a particular theme. The concept of Corporate Social Responsibility (CSR) has become important because it legitimizes a Company’s operation and public stature by pursuing social or environmental goals. In a traditional CSR partnership, the funding partner shortlists a social development program, finalizes an implementation partner/NGO and then provides requisite funds to implement the shortlisted project.

However, all the options listed above suffer from a key limitation i.e. delayed implementation and complete reliance on donors’ goodwill to get the project executed. To complicate matters further, at the time of donation, the donors have no information about the operational prowess of the implementation partner and the potential social impact on the target community. Some, if not all, donors (especially smaller ones) may be unsure of partnering with a social project without the assurance or ‘evidence’ that it will be efficiently managed. In fact, a web based survey conducted by a US charity found that ‘lack of transparency’ was the main concern that held back many such ‘skeptical’ donors.

With these ensuing limitations, a possible innovative alternative that can be considered is ‘ex-post funding’ of CSR projects. In this novel ‘market based’ approach, the NGO deploys its own (limited) funds to implement a project initially. The outcome of these early phases is then documented in the form of ‘result certificates’.  Donors are then invited to purchase these certificates. This ‘sale’ of certificates yields dual benefits i.e. it provides tangible evidence to the donor on the management and expected outcome of a project and the implementation agency through sale proceeds (of certificates) covers the expenditure incurred in executing the project. In some cases, the projects which are successfully concluded through the ‘seed’ money of the NGOs have reported measurable and sustainable impact and are funded for continued performance and growth of the program. This also mitigates the fear of ‘fly by night’ operators running unsustainable projects.

One of the key benefits of ‘ex post’ funding is its transparency as it allows the donor to assess efficiency of an implementing agency’s operations as well as the (initial) outcome of the program. This is expected to convince ‘wary’ or cautious donors to participate in a relatively secure project. Additionally, an NGO has the option to execute projects in stages and raising finance (in relatively smaller amounts) from multiple donors.

Ex–post funding however comes with its own set of challenges ranging from financial risks resulting in project execution delays and inability of the sponsor to take the project to fruition owing to cash crunch. The question is whether it is worth taking this risk for a cash-starved NPO? Studies seem to suggest that with a relatively small amount of initial funds, the NPO can deliver substantially higher benefit by using the ex‐post funding approach when compared to a traditional approach that requires the NPO to raise all the funds upfront. So, in essence, if this concept has to fructify, more corporates need to start ‘adopting’ existing projects i.e. proven and accepted, instead of re-inventing the wheel!

Source: http://isbinsight.isb.edu/ex-post-funding-innovating-non-profit-organisations/