Tracking Trends in Ethiopia s Civil Society 1 POLICY BRIEF 1 CSOs and Income Generation Activities (Guideline 07/2004 EC)

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1 Tracking Trends in Ethiopia s Civil Society 1 POLICY BRIEF 1 CSOs and Income Generation Activities (Guideline 07/2004 EC) Issue: civil society engagement in income generation could contribute towards greater independence and sustainability with a supportive regulatory framework The trend of civil society towards engaging in income generating activities (IGA) is a growing phenomenon worldwide, and part of a blurring of distinctions between public, private and civil society sectors. In Ethiopia both civil society and government are increasingly engaged in income generation to support their operations. The Proclamation on Charities and Societies P621/2009 marked the first official recognition and permission for charities and societies to engage in IGA 2 in Ethiopia. IGA guideline 07/2004 developed the regulatory framework further. The government s desire for a gradual financial self-sufficiency of CSOs activities through different means of income generation is clear in both. Research carried out by TECS found that while the new regulations support IGA on the whole, a number of requirements pose significant challenges. These challenges are particularly acute for Ethiopian charities and societies, which are in most urgent need of raising local funds given the requirement in the Proclamation that they raise 90% of their funds from Ethiopian sources. There is a concern that as new regulations are enforced, some CSOs will be obliged to abandon IGA. On the other hand, there is a recognition that if the enabling environment is reformed and more CSO IGAs are established and generate greater profits, there is also a need to ensure that new risks do not emerge. Key among these would be that IGA either poses a 1 The Development Assistance Group (DAG) was established in 2001 to foster information sharing, policy dialogue and harmonise donor support to Ethiopia in order to enable the country to meet the targets set in the Millennium Development Goals (MDGs). DAG also assists in the preparation, monitoring and evaluation of the country s Poverty Reduction Strategy (PRS). DAG currently comprises 26 donor agencies providing development assistance to Ethiopia within the Paris Declaration principles of aid effectiveness and harmonization. Disclaimer: This briefing note is based on research commissioned by DAG members through the Tracking Trends in Ethiopia s Civil Society (TECS) project. The author was Dr Gebre Yntiso Deko. The views presented in this briefing note are those of the author and Atos Consulting and do not necessarily represent the views of DAG members. 2 IGA in this sense means institutional income generation to support charities and societies operations, rather than IGA projects established to enhance the individual livelihoods of beneficiaries. We refer to the former in this paper as CSO - IGA TECS February

2 challenge to the CSO core mission itself causing mission drift (e.g. too much attention is focused on the IGA) or to the private sector (e.g. CSOs use certain competitive advantages such as their existing asset or infrastructure base as well as manpower). Ethiopia has a generous tax regime and exemptions for many categories of CSOs apart from charities and societies (including social and recreational clubs, business leagues, credit unions and many forms of cooperatives). The assumption is that the Government wishes to create an equally enabling environment for charities and societies engaging in income generation. The purpose of this policy brief is to inform the Government of Ethiopia (GoE), development partners and civil society organisations about the current landscape of CSO - IGA and recommend policy reforms and revisions to the regulatory framework. Context profile and status of CSO - IGA The main source of information about CSO IGA in Ethiopia is the Charities and Societies Agency s ( the Agency ) database of charities and societies. The database listed 39 organisations as having applied and been granted licenses to carry out IGA as of October This figure under estimates the total number of CSO IGA in Ethiopia to a degree, given some local charities and societies are registered at the regions rather than at federal level. TECS research carried out in 2011 included interviews with 34 charities and societies with IGA, of which 12 were based in Addis Ababa (taken from the Agency database), 7 in Bahir Dar and 15 in Hawassa. The findings suggest the following profile of CSO IGA 3 : 1. Most CSO IGA occurs within resident and foreign charities. Only one Ethiopian charity engaged in IGA could be found to interview. Given this category need IGA more than most in order to survive, it is discouraging to find so few engaged in IGA. Among the societies however, there appear to be more Ethiopian societies engaged in IGA than Ethiopian resident societies. 2. Resident and foreign charity IGA are generally well established with a strong asset base. 32 of the 34 IGAs were run by well established foreign or resident charities or societies, with many years experience of IGA, and 24 out of the 34 secured their initial capital through foreign funds. Clearly, this is not an option for Ethiopian charities and societies. Ethiopian society IGA often received government support to start IGA. Some of them are mass based societies, which often work closely with local government. 3. Most CSO - IGA was based on service provision education, healthcare, property rental and transport. 3 The sample is purposive, not representative. It is slightly skewed towards the target group of Ethiopian societies and charities which still remain an overall minority. TECS February

3 Cash Flow Contribution to the CSO s Core Operation Series1, 25-50%, 3, 15% <10% Series1, 10-25%, 5, 25% Series1, <10%, 12, 60% 10-25% 25-50% 4. Two thirds (20 out of 34) reported a cash flow from the IGA to the CSO annual budget: 12 reported a cash flow of less than 10%; 5 reported 10-25%; only 3 reported 25-50% (see chart above). IGA contributions to core functions have never exceeded 40% of the operational costs of any CSO. However, though cash flows are low, many CSO - IGAs were not established to support the CSOs financially because they are resident and foreign CSOs. The question remains whether they can be scaled up to act as a significant form of local funding. 5. About half the CSO IGAs faced multiple challenges. These included: a shortage of funds for investment and running costs, lack of physical assets (land, buildings, equipment, etc.), shortage of manpower, high turnover of qualified staff, low technical capacity, low level of community understanding about their contribution, and reliance on donors. Major regulatory challenges for CSO - IGAs The regulations are generally grounded in a sound rationale that seeks to ensure that IGA does not undermine the core operations of CSOs and that they do not compete with the private sector. However, some aspects of the regulations pose unintended and formidable challenges for CSOs, especially for smaller Ethiopian charities and societies. They are listed below: TECS February

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5 Major Policy Recommendations For Government IN THE SHORT TERM: Exempt non-profit (i.e. cost recovery ) IGA from obligation to register with the Agency and from business registration in P686/2010 Allow charities and societies to engage in all activities as long as they do not directly undermine primary missions Drop the requirement to separate IGA which are part and parcel of CSO core missions Carry out the regulation of CSOs IGA in collaboration with sector administrators, which have a good understanding of CSO core missions. Allow CSOs to separate CSOs - IGAs initial capital from the 70/30 split of the CSOs core operations Engage in further dialogue on how Ethiopian charities and societies can be further supported given their significant challenges, (e.g. by allowing them to raise start up capital from external source, provision of tax breaks) IN THE MEDIUM TERM: Establish an inter-governmental policy and review mechanism for further rule making on CSO IGA to support and provide incentives while also guarding against mission drift The Agency and regional BoFEDs to adopt a mechanism to monitor changes in the nature of CSO IGA, with a view to informing further policy For charities and societies: Identify and use existing regional provisions, to support IGA Identify and share best practice on IGA diversification and income maximisation Carry out further research on the capacity building gaps and needs of CSOs for IGA Dialogue with Government on regulatory changes proposed above For development partners: Share knowledge on CSO IGA with government and CSOs Collaborate with CSO partners to support IGA (e.g. in capacity building) Dialogue with Government on regulatory changes proposed above Prepared by: The TECS team. For information, contact gemechu_desta@hotmail.com; Anncondy@yahoo.com; gil.long@btopenworld.com; clairefhoward@ gmail.com For further information, please read TECS research report: CSOs and Income Generation: Prospects and Challenges, Final Report February 2012 TECS February

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