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This report presents the findings of an evaluation of the use of foundations as instruments of public policy. This evaluation study was conducted by KPMG LLP (KPMG) on behalf of the Government of Canada between September, 2006, and January, 2007. The study addresses the government's commitments to the Standing Senate Committee on National Finance and Standing Committee on Public Accounts to undertake an evaluation of the use of foundations as tools for the delivery of public policy, particularly with respect to the use of up-front conditional grant assistance.
Three aspects of the government's use of foundations were examined:
We interpreted the objective relating to "appropriateness" as referring to the appropriateness of using foundations as instruments of federal public policy. "Effectiveness" was interpreted to mean progress in achieving objectives set in foundations' funding agreements and (where applicable) legislation, and "cost" to mean the relative significance and composition of foundations' administration and operating costs.
Our methodology for the study involved several lines of enquiry, to enable the evaluation issues to be assessed from several perspectives and to understand and balance the positions of the various stakeholders: foundations, funding departments, central agencies, and, to a limited degree, partners/beneficiaries. We used the following methods:
Our analysis identified six defining characteristics of foundations that are used as tools to deliver public policies:
These characteristics have a close degree of alignment with the guiding principles for using foundations that were issued in Budget Plan 2003:
This structure means that foundations are not directly accountable to Ministers nor Parliament, and the government can only intervene in the operation of foundations if they are found to deviate from their formal mandates and the terms and conditions of their funding agreements.
Past reports of the Auditor General have generally focused on sixteen organizations that display the above characteristics, which also provided the focus for our analysis. These organizations and their levels of funding are:
Foundations With Fixed Term Funding Agreements |
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Foundation |
Funding ($m.) |
Foundation |
Funding |
Canada Foundation for Innovation |
$3,650 |
Aboriginal Healing Foundation |
$390 |
Canada Millennium Scholarship Foundation |
$2,500 |
Canadian Health Services Research Foundation |
$151.5 |
Canada Health Infoway |
$1,200 |
Canadian Foundation for Climate and Atmospheric Sciences |
$110 |
Genome Canada |
$600 |
Forum of Federations |
$30 |
Sustainable Development Technology Canada |
$550 |
|
|
Foundations Funding Agreements Providing Perpetual Endowments |
|||
Foundation |
Funding ($m.) |
Foundation |
Funding |
Green Municipal Fund |
$550 |
Frontier College Foundation |
$15 |
Pierre Elliott Trudeau Foundation |
$120 |
Clayoquot Biosphere Trust Society |
$12 |
Asia Pacific Foundation |
$50 |
Canadian Institute for Research on Linguistic Minorities |
$10 |
Pacific Salmon Endowment Fund Society |
$30 |
|
|
1. Appropriateness of foundations as policy instruments
The sixteen foundations examined in this evaluation exhibited generally strong degrees of alignment with the guiding principles published in Budget Plan 2003, in that they:
From this perspective, the foundation approach is appropriate in situations when there is a combination of specific multi-year needs, capacity for independent non-partisan decision making, flexible multi-year funding of supported activities and, ideally, opportunities to obtain additional funding for activities from third parties.
2. Effectiveness
The findings from evaluations of foundation activities and results, results reported in foundations' annual reports and comments from key informants indicated or concluded that foundations are generally achieving intended results and justified the use of foundations as a policy instrument in these instances. Projects supported by most foundations have long life cycles so information on outcomes and impacts is only now starting to become available, but initial results appear encouraging.
Most foundations operate in fields where their activities link to or complement the activities of related government programs. This is particularly true with regard to foundations with mandates to support public research and development, the establishment of specialised infrastructure, and education. We found that the boards and management of foundations are aware of the need to avoid duplication and have taken steps to ensure that areas of potential overlap and opportunities for cooperation with government programs are identified and factored into their business plans. Having said this, many key informants from departments, foundations and granting councils noted that the information sharing and coordination is generally effective but is an area that requires ongoing attention as policies and programs evolve, and management turnover occurs within these various organizations.
While some degree of coordination or integration of foundation activities with the program of other public complementary programs is likely, a high degree of coordination would suggest that a foundation is not addressing a need that was as specific and separable as anticipated at the time it was created. Generally, the evaluations of foundations that we reviewed did not identify any significant issues of overlap or duplication among the foundations studied.
Mechanisms to modify or refine the alignment of foundation objectives with policy goals do exist and are applied. On the government side, new funding tied to modified policy goals or priorities can be offered to foundations, and the objectives set in funding agreements jointly re-negotiated as part of this process. On the foundation side, boards and senior managers of foundations use their contacts with funding departments and Ministers' offices to keep informed about the evolution of policy priorities and to use the knowledge gained to refine their priorities and resource allocations within the overall structure of their mandates. Foundations also have the opportunity to use their periodic evaluations of results to assess the degree to which policy goals are being met and to draw on these findings in their corporate planning. Foundations with perpetual endowments have a greater degree of freedom, by virtue of their open-ended terms, to set a course that may potentially diverge from government policy goals, and the Minister can only intervene if the terms of the funding agreement are not satisfied. (Note that this is not to say that any of these foundations appear to have objectives that are out of alignment with government policy goals.) .
Various steps have been taken by the government to strengthen the accountability of foundations since their first use in 1997-98. These actions include introducing consistent expectations regarding the preparation of annual corporate plans and performance reports, the conduct of independent audit and evaluation studies, submission of these reports to the responsible ministers and their public disclosure, and discretion for responsible Ministers to commission their own independent evaluation and performance audit studies. Most of the sixteen foundations studied now have funding agreements that include these provisions as well as consistent conditions under which the Crown may intervene in the event of non-compliance with the requirements of funding agreements.[3]
In addition, the Auditor General now has increased authority to inquire into the use of funds by foundations and data on annual disbursements for four foundations—Canada Foundation for Innovation, Canada Millennium Scholarship Foundation, Sustainable Development Technology Canada and Aboriginal Healing Foundation—are now included in the government's annual financial statements. These changes to the accountability and transparency requirements for foundations were made in response to concerns expressed in the Auditor General's 1999 and 2002 reports as well as the experience gained with the establishment of foundations and administration of these arrangements.
3. Costs
Our analysis of the operating and administration cost structures of the six case study foundations found that these foundations work with very lean structures focused on structured and transparent processes for reviewing and selecting projects to support, and supporting systems for project tracking and financial management. Their operating and administration costs are driven by needs to efficiently manage project workloads and to provide timely support for governance and accountability requirements. Foundations' resource levels, and costs, appear to be closely matched to, or follow, the trends in the project workloads.
More broadly, and excluding the cost performance during initial start-up periods, the shares of operating and administration costs in total expenses of foundations with high average annual rates of disbursements (i.e., greater than $100 million per year) range from 3% to 4%. These rates are not dissimilar to the 5% to 6% levels achieved by granting councils and Infrastructure Canada, which share similarities to some of the foundations but have significantly higher numbers of projects (in the case of the councils) and annual disbursements. For medium-sized foundations (~ $40 - $80 million per year), the share is of the order of 7% to 11% (plus one foundation with a share of 24%).
Foundations with low annual rates of project disbursements (below $40 million per year) do not have the same opportunities to achieve economies of scale as the foundations with higher disbursement rates, and many also undertake other activities in addition to selecting and funding projects, such as, knowledge transfer, capacity building and outreach. The share of operating and administrative costs in their total expenses ranges from about 29% to 51%, except for one very lean foundation where the share averaged 6%. In some cases, the relatively high share of operating and administrative expenses in total expenditures may be due to the fact that annual disbursements are still ramping up to planned levels. This appears to be the case with Sustainable Development Technology Canada and Canada Health Infoway where both the elapsed times from project selection to commencement and the time periods over which funds for each project are disbursed are quite long.
The issue of scale is particularly relevant to foundations with perpetual endowments where the level of funding available for projects and administration is a function of the income generated from their endowments. Achievement of a reasonable scale of operations thus depends upon the foundation receiving (or building) a very large endowment.
Recommendation #1 – more structured criteria for assessing foundation proposals
The findings presented in the previous section, and in more detail in the body of our report, suggest that foundations provide an appropriate means of addressing public policy goals in situations where organizational independence, financial stability and special expertise enables more effective program delivery than would otherwise be the case. Currently, the only formal guidance for determining if the foundation approach is appropriate is provided by five guiding principles first published in Budget Plan 2003. While these principles provide useful general guidance for the use of foundations we believe that decision-making regarding the future selection and use of foundations could benefit from the development and application of a set of supporting criteria drawn from the experience with current foundations. These criteria should complement and extend the existing guiding principles and provide a consistent, more rigorous basis to assess proposals to use the foundation approach or to renew and/or revise existing funding agreements.
We recommend that the government formulate a more structured framework that provides guidance for the assessment of proposals to use a foundation to contribute to the achievement of policy goals, or extend or renew multi-year funding for existing foundations. This framework would extend the existing guiding principles by defining criteria to inform decision-making regarding the use of foundations and assessment of supporting business cases for their funding. Such criteria as the following should be considered in developing this policy:
1. Specific area of need or opportunity:
2. Capacity to establish an independent board with directly relevant knowledge and experience:
3. Need for funding beyond annual parliamentary appropriations:
4. Capacity for decision making using expert peer review:
5. Evidence that leveraged funding can be secured:
6. Timeframe to achieve intended results:
In applying these criteria, all proposals to use a foundation would be expected to satisfy criteria 1, 2 and 3, which are linked to the fundamental rationale for using the foundation approach. The application or importance of the remaining three criteria may vary in response to the particular context in which the foundation is to operate. This variability is also present in the current mix of foundations.
Recommendation #2 – use of fixed term versus perpetual foundations
Any decisions to use a perpetual endowment to fund a foundation should carefully assess the extent to which the characteristics of the need to be addressed differ from those addressed using fixed term funding agreements.
Seven of the sixteen foundations examined in our work operate with perpetual endowments, using investment income from their endowments to fund both program delivery and administrative activities. Approximately 7% of the funding transferred to the foundations studied was in this form. Foundations with perpetual endowments represent the most independent form of the foundation approach, in that the government has more limited opportunity to re-negotiate the terms and conditions of their funding agreements and, potentially, to ensure continued alignment with relevant government policy goals. (This is not to say that any are out of alignment at present, however.) Their reliance on investment income alone also means they are more exposed to interest rate risks and require a significant endowment if they are to maintain high rates of project funding. Based on the information reviewed, it was not apparent that the needs being addressed by foundations with perpetual endowments required noticeably different time frames to achieve results than the needs being addressed by foundations with fixed term funding.
Recommendation #3 – Consider the expected scale of activities and relative cost-effectiveness when evaluating foundation proposals
The relative cost-effectiveness of foundations is determined by the scale of operations relative to the cost of operations and administration, and the extent to which supporting activities are performed, such as outreach to and capacity building among targeted beneficiaries. In situations where these operations and administrative costs are expected to consume a significant proportion of the total funding available it may be more economical to use an alternative instrument to achieve the desired policy outcomes.
We recommend that the assessment process for proposed new foundations incorporate, in addition to the guiding principles and criteria proposed under Recommendation #1, criteria related to the assessment of expected administrative and operating costs for the proposed foundation and alternative policy instruments.