Endowments
of Foundations Receive
By
Petr Pajas
Prague,
Czech Republic
August
1999
At
last! Following more than eight years of waiting, thirty-nine Czech
foundations have been selected to obtain a significant contribution to their
registered endowment from the State Privatization Fund of the Czech Republic.
The
story begins with the suppression of foundations and the confiscation of their
properties shortly after the Communist Party take-over in postwar
Czechoslovakia, which was the final blow after the persecution by Nazis during
the war. Prior to the war, foundations made significant impacts on the
development of Czech society. The foundations established by noble or rich
families existed in the Lands of the Czech Crown for centuries. In fact, the
foundations’ legal existence until 1991 was based on an Imperial Edict from
1811, which may be taken as evidence of their sustainability and long-term
recognized tradition. During the nineteenth century, and later at the very
beginning of the Czechoslovak Republic, there were several important
foundations, which gave origin to many institutions. After 1952, what remained
were only a few palaces in Prague and other buildings in other cities that
being used for purposes other than those for which the foundation was founded.
Indeed, this was nothing very special in a country where all private property
had become so-called “common property of the people.”
November
1989 brought about not only the rebirth of democracy and pluralism in
politics, but it also opened the doors to private enterprise and made it
possible to return the stolen property to at least some percentage of original
owners of the estates and industrial companies or their heirs. Even
foundations were allowed to return to the legal framework. However, with only
very few exceptions, there was no one who could claim for the legal return of
the original property of foundations. Instead, several foreign foundations
started to operate in Czechoslovakia, and many local civic initiatives stood
behind the rapidly growing number of newly established foundations. While the
former were using the assets of foreign independent foundations or state
agencies and individuals who wanted to support the changes taking place in the
Central Europe, the latter depended exclusively on the determination and work
of a very concrete group of people and collected the assets needed for
achievement of their goals from small contributions and gifts of citizens and
corporations. Only a few of the local foundations were able to generate income
from their own property and use it for the publicly beneficial purpose for
which they were established.
Simultaneously,
the need for strong domestic foundations grew, mostly due to the fact that the
state was not found to be the best and the most reliable partner in
co-financing new educational or other important initiatives. The need to find
at least matching funds for the Central European University in Prague
initiated the idea to use a small part of the funds made available by the
privatization of state owned industry for an endowment of a foundation.
Shortly afterwards, in the beginning of 1992, the Czech National Council (the
parliament of the Czech Republic, at that time a constituent part of the Czech
and Slovak Federative Republic) enacted the amendment to the Privatization
Act, according to which, a part of the portfolio of state industry privatized
by the voucher privatization method should be made available to the needs of
foundations. At that time, the requirement to provide a certain portion of the
privatized assets to foundations was accepted as reasonable and legally
acceptable. Besides, the voucher privatization, as such, was considered a way
of compensation not only for those from whom the property was stolen, but also
to those who worked on bringing about most of the post-war assets to be
privatized.
As
a result, in 1992, the State Privatization Fund established the Foundation
Investment Fund (FIF, or NIF in Czech) as a share holding company, and the
Government of the Czech Republic created a Council for Foundations as its
advisory body. While the former institution was presumed to take care of the
1% voucher privatization portfolio and then distribute the shares or dividends
from it to foundations, the latter institution, the Council for Foundations,
was assigned the role of looking for foundations to which a contribution
should be made.
However,
the work of these institutions was not very successful. After a very emotional
proclamation of the Council of Foundations in the summer of 1992, according to
which foundations with good public benefit projects should apply for funds from
privatization, an avalanche of newly created foundations with well-designed
future projects was initiated. As a result, more then 600 foundations applied
for the funds. Experts of the
Council of Foundations were soon overwhelmed by the huge number of projects to
choose from. All that at a time when no money nor the portfolio were
available.
The
initial activities were subdued by the simple fact that the first chairman of
the Council of Foundations was elected Lord Mayor of Prague and his successor
was not at all interested in the project. As a result, the FIF did not obtain
the portfolio, nor did the Council of Foundations continue with its work.
From
1992 to 1995, the situation of foundations at several conferences of
foundations was sharply criticized, but no solution was found regarding how to
validate the governmental promise of funds to foundations. In March 1995,
after consulting specialists, mainly the Charles Stuart Mott Foundation from
USA and others, the idea of establishing a National Endowment Foundation,
which would take over and further maintain the portfolio assigned originally
for the FIF took the form of a draft law. While the project was rejected by
the government, it had the effect of reviving the original promise of the
Czech Government. Even the
Council of Foundations voted against its chairman in support of the new
project. The draft law was finally adopted by a group of deputies of
Parliament and resubmitted again in 1996 as a proposal to establish a Czech
National Foundation with a very democratic decision-making structure and
annual endowment-contributions distributing organs. The Bill on the Czech
National Foundation passed successfully through two readings in the
Parliament, only to be taken off the agenda at the last session before the
1996 elections together with several other Bills, which were not acceptable to
the Government of Civic Democratic Party of Vaclav Klaus.
The
1996 elections brought about several significant changes to the political
scene of the Czech Republic. The chairmanship of the Council of Foundation was
assumed by Mr. Pavel Bratinka, Minister without Portfolio of the Government.
Under his chairmanship, the Council of Foundations was enlarged by several
representatives of non-governmental organizations and officials from those
ministries of the Government that have on their agenda the cooperation and
partial support of associations. The enlarged Council soon came to the
conclusion that there were already several foundations in the Czech Republic
which might be given the responsibility to take care of the endowment, and,
therefore, that there was no more need to establish a new Czech National
Foundation. Thus, at the end of 1997 a new concept was born on how to
distribute the privatization money, which had been estimated at that time to
amount to CZK 500,000,000 under the State Privatization Fund and CZK
2,000,000,000 in market value from the remaining portfolio set aside by FIF.
However,
one important prerequisite was still missing. It was clear that the activities
of foundations should be regulated by a stricter law than what was
provisionally provided by the Civil Code amendment of 1992. After seven years
of drafting and negotiating, the new Law on Foundations and Funds was enacted
by the Czech Parliament on September 1997 to come into force from January 1,
1998. The original foundations were given one year to register as foundations
with endowment or as funds without endowments, or to transform into public
benefit corporations providing public services.
The
new Law on Foundations and Funds made it easier to define the legal entities
to which the contributions from the privatization fund may be given. The law
defined the notion of a “registered endowment” as that part of the total
assets of the foundation which may not be sold, used as a lien, nor willfully
diminished by the actions of the foundation. The law allows only the income
generated from the endowment to be used, but this income is fully exempt from
corporate income tax, which represents a savings on tax in the region from 20%
to 35% of the annual income, depending on the type of income.
Thus,
the Council of Foundations, working with the approved Law on Foundations and
Funds, could require the recipient of the privatization contribution to be
only re-registered foundations with endowment and the contribution itself to
enhance the registered endowment of the recipient foundation. In this way, it
was ensured that the distributed money will not be consumed by foundations
themselves, but only the income from it will serve for many years to those in
need of grants from the chosen foundations.
The
Government of Mr. Tošovský, which replaced the Government of Mr. Klaus in
November 1997, took over the results achieved by the Council of Foundations.
In May 1998 a tender for foundations interested in securing the contribution
from privatization has been announced. In between, the political development
in the Czech Republic continued by extraordinary elections after which a
minority government of the victorious Social Democratic Party came into power.
The new government also assumed responsibility for the tender for
privatization contributions to foundations.
Under
the chairmanship of Minister Jaroslav Bašta, the Council of Non-Governmental
Organizations, into which the former Council of Foundations was transformed
under the previous Government, continued to work. In March 1999, seven
committees of the Council decided the fate of ninety-three applications
accumulated during the tender. Only thirty-nine of these fulfilled the formal
requirements of the tender and were evaluated further.
Finally,
the Council recommended, and the Government approved, a proposal to the
Parliament to provide contributions to twenty-six foundations, out of which 16
scored best in six nominal groups (health care promotion, social care
promotion and humanitarian assistance, education promotion, culture promotion,
environment protection and human rights protection), where a nationwide
substantial grant-giving activity of the foundation has been required. Ten
other foundations were selected from the seventh group, which was open to
foundations with regional activities or their own projects instead of granting
activities.
After
a heated discussion and many days of lobbying by some foundations that were
not recommended, the Czech Parliament finally adopted the resolution on July
8, 1999. Thirty-nine foundations
that passed the test of formal requirements are to be given the contributions
at the amount proportional to the points they received in each of the seven
groups in the evaluation process.
Despite
its compromising characteristics, the Parliament resolution is of great
historical importance. It is, first of all, the long awaited realization of a
promise to replace the gap in the natural process of establishment of
foundations, not to speak of the complete loss of their property that resulted
from the combination of the war-time Nazi occupation and the post-war
Communist regime. In fact, the resolution means that there is to be a
potential of CZK 500,000,000 in the endowments of the Czech foundations, which
may generate annually from CZK 30,000,000 to CZK 75,000,000 in assets, which
directly serves the non-governmental organizations (recipients of grants from
the foundations). Moreover, the Parliament in its resolution requires the
Czech Government to prepare the criteria for the second round of the tender
for distributing contribution receiving foundations to the end of September
1999. This means that another portion of about CZK 2 billion may become
available to foundations’ endowments. It is expected that in the second
round there will be about 150 to 200 successful foundations, each of which
would get more than CZK 10,000,000 in contributions to their endowment.
According to the proposals discussed, it is also possible that a small part of
the distributed sum, about 10% of it, may be made available to be used for
direct grant making in the first one or two years. That would make the much
needed money available immediately, without waiting a year or more for the
interest rate or investment income from the endowment.
Several
important self-regulatory and co-operative processes have been generated by
the development of the case of privatization funds distribution to
foundations.
First,
as already mentioned above, the formal Council of Foundation has developed
step-by-step into a full-fledged active and respected advisory body of the
Czech Government, as well as a forum where the new plans for co-operation
between civil society organizations and the state administration may be
discussed and formed into concrete activities, projects or even legislative
initiatives.
Second,
foundations and other donor representatives, meeting under the auspices of the
Donors Forum, have come up with proposals of three important documents: an
ethical code for foundations, a strategy of the not-for-profit sector for the
next decade, and the commitment of foundations receiving the privatization
money to common investment activities.
The
last mentioned initiative resulted in a special tender for a bank prepared to
establish a special investment fund, which would make it possible to generate
greater income from the endowments under conditions compatible with
governmental requirements.
By
having approved the resolution on distributing contributions to foundations,
the Czech Government and Parliament have set an example to the countries where
privatization is still under way. Despite the long waiting, the result is of
the win-win category: the state helps private foundations regain at least
partially their strength and, henceforth, civil society becomes much more
self-sustainable and less dependent on foreign and/or governmental financial
resources in its future development.