Non-profits in Budget FY18 – (I)

Two big measures were announced in the federal budget regarding non-profits (NPOs) in Pakistan. Today’s article looks at one of those proposed measures: that the administrative and management expenses of NPOs should be restricted to 15 percent of their ‘income.’

First, a preamble: the term ‘non-profit organisation’ is quite broad and is not just restricted to charitable organisations that give out material assistance like money, food, water, clothing, or shelter; it encompasses NGOs involved in health and education, think tanks, universities, chambers of commerce, even political parties may be considered non-profits, as they are not making any profits:

“A not-for-profit association applies its profits or income in promoting its objects only and prohibits the payment of any profits, income, dividend or proceeds to its members, this differentiates it from the other type of companies,” as per the Companies Ordinance, 1984.

Now, most NPOs do not have any income-generating activities to begin with. They operate mostly on funding, charity, donations, etc. The ones that do earn a profit must invest it back into the organisation (for instance, a university like LUMS). So, when we talk about administrative expenses as 15 percent of ‘income,’ we are referring roughly to the total operating budget of an NPO.

On the one hand, a 15 percent limit sounds like a welcome move to contain the administrative costs of those NPOs that are not operating efficiently. In the case of some charitable non-profits, whose main focus is providing material assistance like money or food, may be 15 percent is high by some stretch of the imagination.

Then again, how is ‘administrative expense’ defined? What about the numerous charitable organisations that are providing services like healthcare or education, where the main expense is the salaries of doctors and teachers? What about the think tanks in research and advocacy? The drivers of a vast network of ambulances? The professionals in research institutes? The rules need to be different for each type of organisation. One cannot simply apply a 15 percent limit on ‘administrative expenses’ to everything under the term ‘NPO.’ Depending on the organisation or the definition, administrative expenses may even amount to 90 percent of the expenses.

Moreover, what about those charitable NPOs that receive contributions/donations in the form of food or clothing? What would their ‘income’ be defined as, and how would one arrive at 15 percent of that figure? What if the ‘income’ varies from year to year?

Needless to say, the policy has some gaping holes in it, and how its implementation will come about remains to be seen. Will there be stricter monitoring of NPOs in Pakistan by the government? Will all NPOs be forced to slash their administrative expenses, or will it breed corruption and a culture of extortion from NPOs by state officials?