The International Journal
of Not-for-Profit Law

Volume 1, Issue 3, March 1999

1. INTRODUCTION

Traditionally the State and private enterprises were considered the principal actors in our society, so that the State had the obligation to satisfy all the important or basic social needs (health, education, transportation, defense) and the enterprises were the suppliers of goods and services in the market. In that context, the role of non-profit organizations was merely complementary.

Nevertheless, the presence of several changes all over the world, as a consequence of the globalization of the world economy, demonstrate that exists separate from the State and the private enterprises a so-called “Third Sector” with its own identity, not merely in terms of what it is not: “non-governmental”, “non-profit”, “non-lucrative”. This sector has its own mission (civil society organizations) that has been defined by Peter Drucker as “to do something different to the functions that commercial enterprises or the government fulfil”.1 Specifically, in his opinion, non-profit organizations do not supply goods and services and do not control the way the State does; their product is a “changed human being”.

Consequently, one could argue that at an institutional level our society is divided into three different sectors: State, enterprises and non-profit organizations.

Nevertheless, we are of the opinion that this delimitation today manifests itself as a typology that facilitates the classification of a group of actors with certain interests (politic, market an a Third Sector composed of diverse organizations with interests different from those of the other actors), but all of them participates in the market and act in accordance with the rules of the market; both of which contribute to the establishment of bridges or links among them.

Nowadays we can verify the existence of the following economic phenomena: the promotion of the liberal market economy and of the free market; the globalization of the economy; the reduction of the size of the State and public spending; the implementation of policies of fiscal austerity and, as a consequence of this, the widening of the tax base, of which an important element is the elimination or reduction of tax exemptions (such as tax treatment of donations given to non-profit organizations).

As a result of this panorama, there has been and continues to be a redefinition of the traditional roles assigned to these actors: State, enterprises and non-profit organizations.

In effect, the State no longer intervenes in the economy and it has changed to regulator role to safeguard the free market competition as well as to privatize various services traditionally provided by the State (health, education, energy and so on). Enterprises understand that their role is not only the generation of benefits in the short term but also to cater for the necessities of the community in order to guarantee their continued existence in the market (corporate social responsibility); and, finally organizations of the Third Sector (especially Non-Governmental Organizations – NGO´s) must adjust to the changes that have occurred to the State and in the economy in general (in the specific case of the NGO´s, they suffer from a shortage of finance from the International Cooperation) by generating its own resources derived from service contracts or complementary links in projects with the State or the enterprises. At the same time,non-profit organizations are using corporate concepts that were traditionally forbidden in their conception: management, efficiency and effectiveness, quality control, and so on.

In that context, non-profit organizations and enterprises (as well as the State) no longer necessarily represent conflicting interests; on the contrary, they look to link with each other, without losing sight of their interests or their own mission.

2. COMMERCIAL ACTIVITIES CARRIED OUT BY NON-PROFIT ORGANIZATIONS. UNFAIR COMPETITION WITH ENTERPRISES?

A prime starting point in order to reveal the reshaping of the activity of non-profit organizations is that related to the commercial activities carried out by them in an increasing and more important way. In our opinion, these activities permit non-profit organizations establish bridges with other agents in society, such as enterprises and the State.

At this point it is necessary to make clear that “the non- profit purpose” does not refer to the kind of activity undertaken by a non-profit organization, rather this concept is defined in terms of the relationship that links members with the organization, that is, the members do not expect the distribution of the incomes or utilities of the organization, and, as a consequence of this, the execution of economic activities is not excluded. The incomes, however, must be destined to fulfil the social objectives of the non-profit organizations, this is a kind of “mandatory legal reinvestment”.

In Peru, the Civil Code establishes in a general manner that “the association is an stable organization of individuals or legal entities, or both, that through a common activity seek to achieve a non-lucrative purpose” (the association is the legal entity most used in the non-profit sector).

In this way, a non-profit organization can carry out commercial activities not only to increase their own resources (consultancy activities, technical assistance, sale of information) but also in a more regular way, that is, commercial activities are an integral part of the social objectives of these organizations. At this point it is difficult to determine the limits for the execution of these commercial activities.

Do these activities alter the non-profit purpose? Do these activities represent unfair competition with traditional enterprises, because non-profit organizations enjoy tax exemptions (such as income tax) ? The criterion of the “destination of income” seems to be insufficient. In effect, the existence of diverse economic phenomena such as the exhaustion of traditional lines of action, the needs that popular organizations have arising from the emergence of the market as the regulator of the social order, the power of the principles of competitiveness and efficiency driving all kind of economical activities, the redefinition of the policies of the International Technical Cooperation , permit us to explain the redefinition of the activities carried out by non-profit organizations (especially NGO´s). So there is a displacement of the centers of interest to the environment (environmental impact, educational projects, technical management of environmental problems), participation of certain social groups in the market in a competitive way; economic research networks; the promotion of corporate social responsibility; finance and technical assistance and managerial support for micro and small enterprises (PYMES).

This is to say, the traditional problem related to poverty and exclusion is changing in its nature, requiring a productive insertion of certain social groups; so, in this context, non-profit organizations must carry out commercial activities as an integral part of the strategy used to reach their objectives.

In this process, non-profit organizations face new challenges. This include to move from merely giving funds (grants) to investment; from philantropy to sustainable development. So it is possible to find a fertile field where the institutional strengthening of these organizations can be accompanied by the interaction with other agents.

Some examples of the peruvian experience can better illustrate this situation:

a. Support in commercialization and management

In Peru, there are civil associations, especially Non-Governmental Organizations (NGO`s) whose object is to promote the social development of or give social assistance to peasants, farmers or depressed urban areas, with the purpose of improving their living conditions and their participation in the economic activity of the country, through the specialized support in commercialization (creation of trade networks, giving them access to internal and external markets); actions related to consultancy, training and technical assistance; promotion of integration and organization of farmers, through, for example, the creation of legal entities (corporations), where even NGO`s participate as shareholders and directors with the “beneficiary population”, with the purpose of strengthening the capacity of self-management of such groups in the future.

b. Micro-financing

Nowadays, in Peru, one of the most important topics related to economic policy is the strengthening of micro and small enterprise (PYMES). In this field, NGO`s have been working for several years, through the creation of credit programs directly managed by them (in these cases the NGO`s assume the role of creditors of the PYMES). That is, NGO`s extend credit (at concessional rates of interest) in order to permit PYMES the access to finance they did not have through the banking system. In addition, they carry out technical assistance, training and support in corporate management.

c. Investigation, evaluation and management of projects

Several non-profit organizations have as part of their social object specialized tasks in fields related to evaluation, follow-up, consultancy and mobilization of national and international resources for development. In addition, they develop a wide research network.

From the examples given, what is the difference between a traditional trade corporation, with a formal Bank or with a consultancy? As we have observed in both cases these organizations carry out regular commercial activities. The common answer is that non-profit organizations do not distribute their incomes (“destination of income” test); nevertheless this answer seems unsatisfactory and could create and image that could affect the reputation and transparency of this sector, in order to establish links with other agents, especially with enterprises. The difference seems to be more subtle and its contours more difficult to define.

A second criterion used is the “principal purpose” test. In effect, when a non-profit organization provides goods and services, it does not consider these activities as business or commercial trade activities in themselves; rather these activities are an instrument or a way to support their “principal purpose”. For example: promotion of agriculture or PYMES; promotion of studies related to fields that are not profitable for enterprises; promotion of the efficiency of the Third Sector, fund-raising, corporate social responsibility; promotion of new styles of cooperation and partnership among different social actors. In these cases, the non-profit organizations (in special NGO´s) actively promote or support initiatives of social interest.

In other words, in the case of enterprises “the economic activity constitutes the social object; meanwhile for civil associations, the social object is that referred to the common interest for the associates (health care, study and diffusion of culture, promotion of certain sectors), so that economic activity is just a means to achieve their social objectives”.2

In the same sense, PETER DRUCKER affirms that for a non-profit organization it is not sufficient to be a mere supplier of a service; rather what distinguishes it from enterprises is the aspiration towards objectives beyond a mere sale of goods and services; even though we can observe a change in the corporate attitude in the sense of searching for a new kind of relationship with society and nowadays enterprises do not only want an immediate generation of profits.

UNFAIR COMPETITION WITH ENTERPRISES?

A serious and delicate issue related to the possibility of establishing new interactive forms of collaboration between non-profit organizations and enterprises is that linked to the commercial activities carried out by non- profit organizations could imply some kind of unfair competition with enterprises. In this case, this consideration might be a real barrier to the development of links between these two actors.

In our opinion, the commercial activities undertaken by non-profit organizations in Peru do not involve unfair competition with those carried out by enterprises. In effect, in the specific case of Non Governmental Organizations (NGO`s) they provide goods and services in different fields and/or to different actors and they are guided by the mission to satisfy the necessities or to promote/support the initiatives of social or popular organizations, that at least initially are not of interest to enterprises.

Nevertheless, this affirmation does not imply that there is some kind of separation of areas of action between non-profit organizations and enterprises, because in that case it is not possible to link these two actors. To be precise what we are seeing here is that in certain areas, non-profit organizations come together or can come together with enterprises (credit, environment, education, for example). It is possible to promote the establishment of complementary relationships in which each party makes a contibution according to their area of expertise.

This point generates an important and continuing debate. If one admits that non-profit organizations can carry out commercial activities “derived” from their objectives, the principal problem is fundamentally one of taxation; to be specific the exemption of income tax in Perú.

At this point, the final decision depends on the policy of a specific government regarding different issues, that hinges on the political and economic situation of certain country. These issues can be: taxation policy (elimination of tax exemptions, the need to increase public resources by widening the tax base), the need to encourage and promote the role of non-profit organizations in developing economies such as those of Latin America, considering that these kind of organizations can not easily access capital markets to raise money (shares, bonds and so on) and have difficulties in securing finance from the International Technical Corporation.

It is important to mention that in Peru, in 1996, there was a declaration made by the Taxation Tribunal (the main administrative authority of taxation in Peru) related to an association who managed a market network for agricultural and agroindustrial products in a specific Rrgion of Peru, the purpose of which was to improve the terms of exchange between the rural communities and the urban areas.

In this case, the first decision-making administrative authority, the Taxation Office, required the payment of income tax. It concluded that the association could not be considered for the income tax exemption, since the support this association gave implied the commercialization of agricultural and agroindustrial products; so this activity generated corporate incomes (third category income in peru). Furthermore, the interpretation of the Taxation Office was supported by the argument that the organization had used the legal form of civil association with the intention of giving a supposed “social mission” to their corporate activities.

At the second decision-making authority (Taxation Tribunal), the organization won the case, on the basis of the argument that their objectives were the execution of several activities of social support, which included corporate support, to the beneficiary population; the purpose of these activities was not the generation of economic benefits to the members of the association. That is, there was a distinction made between the mission or purpose of a non-profit organization and the “instruments” they use to achieve it; the use of that “instruments” does not imply a change in the nature of this kind of organizations, so long as the instruments are “related” to tehir social objectives, which enjoy the income tax exemption, such as social promotion, social assistance, education, culture, science and similar areas (Art. 19, Income Tax Law of Peru. This exemption has been extended until December 31, 2002).

Finally, this is not a resolved point and it is open to an ongoing discussion. In general, the idea is to permit non-profit organizations to engage in active trade or business in order to realize their mission. Another problem is the tax issue, which has different technical solutions, depending on the policy of each Government. The principal alternatives usually mentioned are: a) general exemption from income tax; b) no exemption from income tax; c) exemption when the incomes are derived from “related” activities, nevertheless it is difficult to determine or manage in practice whether an activity is “related” or “unrelated” or what the situation is when the majority of the activities of non-profit organizations constitute economic activities (such as the case of the alternative market network for agriculture in Peru indicated above); d) the establishment of tax arbitrary rules (a fixed percentage, for example) regarding the amount of incomes derived from commercial activities.

3. BUILDING BRIDGES BETWEEN NON-PROFIT ORGANIZATIONS AND ENTERPRISES

Now we are going to present two cases taken from peruvian reality (financial and sponsoring agreements) that illustrate in a concrete way the form in which enterprises and non-profit organizations (especially Non-Governmental Organizations-NGO`s) have linked; independently if these links imply or not the creation of alliances of cooperation agreements. In any case, these experiences are an important step towards new forms of interaction. In the case of the sponsorship contract an enterprise participated with the State (that is, it did not participate a non-profit organization), but this experience permit to appreciate new forms of partnership in clasic fields of acting of enterprises (Phylantropy) such as culture and this case does not exclude in the future the incorporation of new actors of the Third Sector such as museums.

It is important to point out that these cases have developed considering the current peruvian legal system where it does not exist a specific regulation of cooperation agreements or alliances and important tax benefits to grants in favor of non-profit organizations.

We also comment two cases related to mining companies and education (videolibrary) to reveal fertile fields to develop relationships between non-profit organizations and enterprises.

The lack of a special legal literature about this topic permits to explore cases of the reality in order to find links among different social actors involved in the ongoing process of building alliances.

3.1. SOME EXPERIENCES IN PERU

A. FINANCIAL AGREEMENTS

The sector of the micro and small enterprise (PYMES) has increased in Peru as a consequence of unemployment and recession. Even though this group is recognized as an important potential sector, at the same time we can observe serious limitations in order to participate in the market such as: training, lack of an appropriate management, negative or reduced acumulation rates.

One of the specific problems of this sector is the lack of financing, concretely its limited possibilities to access to financing from the banking system, because PYMES do not have an appropriate economic and financial support in order to guarantee the banks the recovery of their credits. There are also problems of informality (PYMES do not constitute as legal entities, abscense of financial statements and accounting books and practices), they do not have guarantees (mortgages) and/or their real property is not legally regularized.

At the beginning, as an alternative of financing, Non-Governmental Organizations – NGO`s extended direct credits to PYMES, supported with training and technical assistance, especially in favor of micro and small enterprises placed in depressed urban areas or farmers of the valleys of the Coast.

Nevertheless, in certain moment, some banks realized that this sector channelled a significant percentage of the economically active population, so it was important to attract them to the Financial System, even though this did not represent an important volume (amount of money) in comparison with their total credit portafolio. The banks wanted to change their traditional image of corporate banks with emphasis in the medium and large enterprise; they felt, in certain way, that they could not “abandon” or “overlook” an important sector of the economy. However, at the same time, they noticed that the creation of a special area for PYMES implied a volume of administrative spendings (evaluation, follow-up, recovery) that was not possible to assume if they wanted a profit business. On the other hand, certain NGO`s, that were extending direct credits to PYMES as an integral part of their social development programs, considered the convenience of derived these credits through the banking system; because in that case they could avoid the risk that these credit programas could be interpreted as the execution of some kind of financial intermediation activity not legally authorized).3

In that context, enterprises (Banks) and non-profit organizations (NGO`s) linked, in order to look after the needs of an important sector of society, by extending credit lines to the PYMES. These credit lines were earmarked to working capital or purchase/improvement of fixed assets (the amounts varied from US$ 1,500.00 to US$ 10,000.00). The participation of these actors was as follows:

a. The Banks formally contribute with their “own resources” to extend credit to PYMES by creating special financial lines, even though the amount of these lines depended on the amount of the guarantee fund that was given by the NGO`s (deposit account).

In certain cases, the banks contribute with technical knowledge or assistance to evaluate the debtors and their guarantees. Formally the banks assume the role of creditors with the micro and small enterprises (PYMES).

b. The NGO`s took charge of the selection and evaluation of the credit applications forms and guarantees. When the credit was approved (with the final participation of the Bank), NGO´s carried out the follow-up and supervision of the credits, gave complementary technical assistance to support the PYMES and, finally, they executed all the actions related to the recovery of the credits. Even though the NGO`s did not initially assume the formal role of creditors, they finally assumed the risk of these credits, because in case of default, the banks affected the guarantee fund given by the NGO`s and these organizations must recover the credits by themselves.

This relationship was formalized by using the following legal instruments:

An agreement called “Financial Cooperation” that was signed between the Banks and the NGO`s. In these agreements, both actors declared their common intention to promote credit programs in favor of certain social groups that had the necessity to access to financing in order to improve their social and economic conditions.

The lack of guarantees of the PYMES was replaced by the guarantee funds given by the NGO`s. These guarantee funds were saving deposits and they generated interests in favor of the NGO`s. In these agreements there was an special clause that limited the liability of the NGO`s to the resources (money) deposited in these accounts.

The Banks extended the credit lines in favor of the PYMES considering the volume of the guarantee funds given by the NGO.

The present case demonstrates the interaction between the business sector and non-profit organizations in favor of the micro and small enterprise, which can access to more amounts of credit than they used to with NGO`s. However this link, even though is formally titled a “financial cooperation agreement”, does not really represent an horizontal link where both agents share common objectives and the risk involved in these credits. In effect, in the reality the banks functioned as some kind of a “specialized financial window”, extending resources in favor of the PYMES that were selected by the NGO`s and these organizations took charge of almost all the activities involved in these financial programs: selection, evaluation, follow-up, technical assistance and finally recovery.

In any case, faced with the problems of tardiness in paying, or failure to pay, loans, banks almost immediately encumbered the guarantee funds of the NGOs, and endorsed the commercial papers which represented the credit, so that the NGO could recover the resources (guarantee funds); even though, when mortgage guarantees were given by PYMES, the banks did not accept to execute them, preferring to cede their contractual position to the NGOs so that these could begin a legal action.

How could this have happened? Banks are not only profit-oriented entitites (where high administrative costs that come with dealing with micro and small enterprises may lead to banks being less interested in offering them this type of finance), but are also subject to strict regulation by the Banking and Insurance Superintendence where the indices of its risky portafolio is concerned (establishment of provisions); at the same time, it is in their best interests to differentiate themselves in the market with alternative sources of finance. In this context, they find in NGOs the possibility of approchement with a different

sector (micro and small enterprises) without taking on major risks; organizations that have, however, a knowledge of, and a chance of approchement with, the small and micro business sector. NGOs, meanwhile, find in the banks the possibility of mobilizing resources towards its target population.

What we are dealing with,, then, are atypical agreements in which the actors involved articulate and coordinate on a general level, without such a link constituting a hiring of services by the banks (there is not payment for services). In this way, the banks commit a volume of their own resources as a function of the guarantee deposit established by the NGOs and which the latter, on the other hand, make available as collateral to a sector somewhat distanced from the financial system. This it does via the guarantee deposit previously mentioned, and its promise of follow-up and technical assistance to the beneficiaries of the credit program.

Does the fact that this arrangement is not, strictly speaking, a cooperation agreement distort the interaction between the actors involed? Probably not, even though it is certain that the benefits of agreements of cooperation are recognized. The case mentioned is beneficial because it shows a new dimension of the enterprise-non-profit organization relationship. In other words, we are dealing with an experience that, despite existing difficulties, shows that it is possible to develop complementary capacities in a common area to both actors (credit) for the benefit of an important sector of the community.

How can the legal system improve the terms of interaction in the case presented above? The answer is difficult from a legal point of view; notwithstanding, at the contractual level, both parties are autonomous and, as such, can freely define the terms of their participation. At the taxation level, there is a special exemption from sales tax on the credits channelled by banks. In this sense, it could be that a strengthening of the relationship between the two actors (banks and NGOs) does not depend on the creation of new legal instruments, but on seeking to optimize this relationship. This could be either by a greater commitment from bank by way of a greater extension of resources as a function of the guarantee deposit provided by NGOs, or sharing the execution of the guarantees establishing, to similar effect,a differentiation according to the amount of credits. Nevertheless, this will depend on the success of the credit programs in the areas of prompt payment and a greater capacity for getting into debts by the “beneficiary sector”, so that the banks will be interested in more direct participation in the future.

B. NEW ALTERNATIVES FOR SPONSORSHIP CONTRACTS OF CULTURAL PROGRAMS

Within the context of the economic situation Peru is currently experiencing (which is similar to that of many countries in Latin America), and the policy of fiscal austerity being implemented by the Government, it seems difficult to conceive of the Government granting tax benefits in the short term, especially those which favor donations given, especially by enterprises, to certain organizations or projects of social interest. This, the mechanism of fiscal self-sacrifice for redistributive purposes, does not seem a viable alternative or, less still, the only alternative to be considered, with the objective of a coming together of enterprises and non-profit organizations, while at the same time serving as a mechanism for the channelling of resources in favor of the latter.

On the other hand, the business sector finds itself weakened for having “survived”, in the period following 1990, an economy racked with hyperinflation and instability as a result of terrorism, while at the same time coming to grips with a population severely depressed as a result of unemployment and underemployment. This has resulted in the population having little or non-existent capacity to generate surpluses to satisfy other, non-essential needs.

Such a situation implies that the business sector needs to strengthen itself. In order to do this, it must develop a more integrated promotion policy which goes beyond the marketing of a certain product and the generation of profits in the short term.

At this point, it is important to note that the traditional support of the business sector where cultural promotion is concerned, and has been, in the form of sponsorship of certain events, or donations to the restoration of cultural heritage; art galleries sponsored directly by corporations (in particular by banks), or by foundations founded by these corporations, in which it is not the norm for the large enterprises concerned that they undertake these activities in unison with non-profit organizations.

Within this general framework, I would like to comment on the case of one important telecommunications firm which reached a special agreement with the Lima City Council for the promotion and sponsorship of a series of South American and national Bienales, or art exhibitions, the first of which was held between October and December 1997, and will conclude in the year 2001. The staging of these art exhibitions is part of the overall program of the Lima City Council to recover the historic quarter of the city of Lima.

The participation of each of the parties involved was as follows:

The Lima City Council: assumed the responsibility of organizing the Bienales and drawing up of the budget; rehabilitated the venues and lent the support necessary for the staging of the art exhibitions; it lent the services of the municipal police at each of the venues; and identified and promotes the corporation as the main sponsor of the Bienales.

The business sector: financed the art exhibitions, absorbing the costs associated with them, for which it approves the budget presented to it by the Council; implemented the planning, production, programming and coverage of the publicity campaign for the exhibitions (in co-ordination with the Council); participated in the organization of the exhibitions (by way of representatives who worked jointly with the Council), which included the supervision of the contents of the Bienales; and it looked to strengthen ties with other corporations with a view to securing cosponsors for the event, which must be approved by the City Council.

Similarly, the case discussed above demonstrates the participation of another type of organization, the private non-profit organization. This category includes entities such as museums, with the aim of creating venues for the staging of the Bienales, an activity not limited to the mere cession of venues, but which also involved the active participation of such organizations in the areas of dissemination of publicity and the staging of complementary cultural events, among other activities.

The legal instrument that made viable this project was an agreement called “Sponsorship”, which under Peruvian law constitutes an atypical contract. Even though the participation of the enterprise concerned is directed fundamentally towards the promotion of the Bienales, it is worth noting that in the case mentioned certain mechanisms for joint participation of a horizontal nature (in what refers to organization and supervision, as well as the publicity campaign) have been established between both parties, which would bear witness to a more active involvement on the part of the corporate sponsor towards the definition of a common objective: to increase the accessibility of culture in Lima.

It should also be pointed out that under the concept of atypical “sponsorship” agreements, an enterprise dedicated to the production and commercialization of cosmetics at the national level financed a project of social interest carried out by an NGO, to help peasant women in a depressed region of the country (Ayacucho). Was this company interested in selling cosmetics to these peasant women? Strictly speaking, no; the interest of the company was to encourage the use of cosmetics among middle-class women, taking into account that the disposable incomes in this sector are limited/low. To that effect, it needed to improve its image, to reinforce the idea that this was a company that cared about women in a more complete sense of the word, while at the same time making the objective public feel, by buying cosmetic products, that it was collaborating with the corporation in the financing of a development project of interest to the community as a whole.

In both cases, the sponsoring or “financing” companies link up with other agents and do not apply a traditional “marketing” strategy, as they are aware that the abovementioned link is to their benefit, while seeking to improve the conditions in which they operate, and most certainly the conditions of the market in which the various actors eventually find themselves.

Both situations also demonstrate that favourable taxation treatment was not necessary, and that the classic model of donations and grants was not adhered to. The enterprises contributed with financial resources earmarked for specific projects; such operating costs were deducted for income tax purposes, insofar as they concerned costs relating to promotion (strengthening the public image of the corporation) and, as such, were related to maintaining “the flow of funds to the cause.”

So what can be learned from the aforementioned cases? They are not examples of “business philanthropy” or traditional solidarity, which use as their instrument of choice donations (which, furthermore, could be claimed by the donating companies as a tax deduction). In this situation, they are individual and one-off actions, where only the financial resources of these enterprises are affected, without a further commitment on their behalf to redefine the objectives of the corporation.

The articulation was made possible by the fact that the approchement made by the non-profit sector towards the business sector was made with a view to advancing its own interests, given the fact that the motivation of enterprises is to generate profits for distribution, and it is precisely this motivation that differentiates it from the other sectors. As has been demonstrated, both enterprises have as an interest, especially in the political and economic context outlined at the outset, in strengthening their image in the community and, as a result, improving their position in the market (regulated by the principles of free competition); developing, to such effect, a corporate publicity by way of financing projects of social and cultural importance.

C. MINING COMPANIES: THE ENVIRONMENT

Among the findings of a study4 carried out by the Centre for Research at the Pacific University, Lima, is that an important area of interest for enterprises and which is a productive vehicle in the interaction with non-profit organizations is that related to the environment, a theme which is the feature of the programs of social responsibility carried out by enterprises, especially by mining companies. There exists one particular Peruvian mining concern whose target population considers important the communities in its surrounds, due to which its program of social responsibility involves the areas of health, education and the environment.

Even though these tasks are undertaken directly by the company, in certain cases they turn to specialized institutions that work with the local community in question. In matters pertaining to the environment, such organizations include universities and NGO´s specializing in environmental issues. In this way, reforestation, soil conservation and fish farm programs come into being.

Generally, as part of the works of social responsibility undertaken by mining companies, the methods used to execute such plans are developed by the corporation itself, in cooperation with the local government or with grassroots movements; the establishment of links with NGOs are harder to find.

D. EDUCATIVE PROGRAMS: VIDEOLIBRARY

Another topic that is usually an integral part of the programas executed by enterprises related to social responsibility is education, because education has a significant impact in order to strengthen the corporate reputation in society.

In Peru, there is an important corporation (beer sector) called “UNION DE CERVECERIAS PERUANAS BACKUS Y JOHNSTON S.A.A.” that carries out a wide range of activities related to social responsibility, one of these activities is in the area of education.

Specifically this enterprise manages a videolibrary program. This program offers educative material to schools without any cost and also organizes events of professional orientation.

The videolibrary offers information about academic issues, social-formative issues and professional information. The academic videos offers topic such as history, geography, mathematics, science, technology, ecology, art and current issues. The social-formative videos are related to topics such as the human being, the family, the school and the community. Finally the professional videos give guide and orientation related to professional careers. All of these material are prepared by specialists or personnel paid by the corporation.

The videolibrary has organized training workshops with teachers in Lima and Chiclayo. After these workshops these teachers are promoters in order to include this material in the program of their courses.

Nowadays the corporation BACKUS executes this actitivies without establishing cooperation agreements. The agreements that this enterprise signs with non-profit organizations (specifically Universities and educative institutions) does not imply a collaboration relationship between them, because BACKUS organizes all the activities (career exhibitions) and the educative institutions only contributes giving venues and administrative support.

But in the near future this corporation wish to contact non-profit organizations (such as specialized NGO´s) in order to share with them some of the activities of this program and other projects related to social promotion. In their opinion, its contribution to this “alliance” is not only to give funds (such as grants) but also to contribute with “know-how” (organization, managerial support).

3.2. ESTABLISHMENT OF COOPERATION AGREEMENTS/ ALLIANCES

There are a number of reasons to defend the alliances or cooperation agreements between the business sector and the non-profit sector, instead of keeping them as separate entities. These reasons include the following: they provide a mechanism by which resources can be directed to non-profit organizations; they allow for lower operating costs; and they achieve a coming together with popular or social organizations which would not occur were the enterprises acting individually. In this way, this affords them greater legitimacy and a higher degree of integration in a certain locality; it also allows for the identification of forms of democratic cooperation in society; and it also creates openings for greater participation and influence for this sector.

Although these answers are quite relevant, the advantage of forming links between these two sectors will depend on their capacity to discover that, when faced with scarcity of resources and the redefinition of the roles traditionally assigned to the various social actors (the State, enterprises and non-profit organizations), such links are of benefit to them in that it leads to the more efficient production of goods and services of interest to each, iwhen there is a common center of interest.

That is to say, it is important to discover the power of the alliances or cooperation agreements as a mechanism to increase the efficiency of the production of goods and services of interest to all the agents involved, so that a new kind of relationship is created, different to the classic business philanthropy in the sense of donations, or to the continued acting of the various agents in an isolated or individual manner.

What this implies is a process of maturation, convincing and further familiarization among the various agents towards the establishment of alliances with continuity as a prime objective. This would translate into the exploration of different forms of interaction; from functional and operative links, the inclusion of initiatives developed and coordinated by one of these parties, through to forming genuine links of cooperation, whose strength is derived from horizontal links where each agent makes legitimate contributions to reach common strategic objectives.

In other words, the strength of these alliances lies in the following characteristics:

• community of objectives, without any of the parties foregoing their own objectives;
• active participation in the implementation of specific activities, going beyond the donation of funds and which, furthermore, implies a spreading of the risk involved;
• the horizontal nature of its internal structure, which implies the creation of appropriate conditions for open and equal participation. Consequently, it is not concerned with merely types of coordination or operational relationships;
• complementary contributions, that is, each agent makes a positive contribution by way of their participation: technical aspects, management, the convening of meetings (in this field there is important know-how on NGOs), finance, materials and so on. It is this point above al others that demonstrates the synergy between enterprises and the non-profit sector. The contributions made must be real, effective, efficient and acknowledged by the other partners.

In this context, the efforts of enterprises in the promotion of social responsibility can play an important role in extending these links. Indeed, it should be noted that the viability of an enterprise in the long-term will be determined by developments in its environment (including the creation of various mechanisms designed to improve the productivity of its employees). In this way, the enterprise could not maintain and generate greater sustained surpluses within an impoverished community. It is at this point in the debate that the concept of social responsibility arises as an alternative to classic philanthropy.

Notwithstanding, it has been pointed out by way of the research carried out in Peru on this topic that most of the enterprises that implement these programs do so in a hands-on manner and do not turn to non-profit organisations for collaboration. Among the preferred institutions of enterprises to carry out social welfare projects are city councils, universities and cultural entities; further down the list are the central government, the church and NGOs.

In other words, there exist certain cultural and ideological factors (mistrust, lack of knowledge, lack of information) which act as limits on the development of links of co-operation. This situation is better illustrated by the graphics in the Annex enclosed (see Graphics Nro. 1, 2 and 3). Please note that these refer only to NGOs.

As one can appreciate from the graphics enclosed, there are subjective as well as legal requisites to working with NGOs, in order to make viable the establishment of alliances. Such establishment of alliances require promotion, meeting and approchement among the parties concerned, with a view to preparing the parties (enterprises and non-profit organizations) possibly interested in developing links of cooperation in areas of interest to both.

This, however, does not imply that the enterprises should relinquish the acquisition of profits as a prime objective, or that non-profit organizations should relinquish their objectives of social promotion (in the case of NGOs), or the common interests that bind them (popular organizations).

The current economic context demonstrates that, where enterprises are concerned, the way to the accumulation of profits is neither particularly immediate nor straight-forward; enterprises must strengthen their position in the market and build solid bridges within the community while reinforcing their institutional structures, by promoting leadership among their members and creating healthy work environments, among other measures. On the other hand, in the case of non-profit organizations, the new rules that apply in the economy and society, reveal that in their traditional support for social change or change in the individual, their current role is to search for greater integration of production of social groups, which they support. In other words, at the level of the non-profit organization there has also been a reorientation of focus, away from philantropy towards development, as has been indicated previously, in which such entities look to modernize and energize the management of their resources, strengthen the institutional aspect of their nature and find an area of specialization in order to complement their activities with those undertaken by enterprises (NGOs, cultural, educational and health entities). This implies an abandoning of traditional perspectives of confrontation with enterprises.

At this point in Peru, the experience in specific sectors allows one to identifiy possible areas of common interest on which links could be based. In the Annex enclosed (Graphic Nro. 4) we illustrate the areas of action of NGO´s (results of a study carried out by the NGO DESCO).

This study shows a greater degree of specialization and development of new areas of work for the NGOs in the areas of “agroindustry, commercialization, regional development, corporate management, city council, irrigation, environmental health and gender”,5 to such an extent that they command increasing importance within the activities of NGOs, in addition to the areas of training, technical assistance, organization and education”.6

As a consequence of the above, among the favorable areas in which to encourage new joint projects between non-profit organizations and enterprises could be mentioned: small and micro-business; education; health; culture; the environment; urban infrastructure; housing; organization; efficient administration of popular organizations; the development of agriculture and agroindustry; and, in a more general sense, the promotion of, and the provision of training and technical assistance to projects related to commercial activities.

In this way, beginning with the identification of possible lines of common action, steps can be taken towards the formation of links between the business and non-profit sectors. Enterprises would be interested in participating in this kind of collaboration as a strategy to enhance the environment in which it operates; to reinforce its corporate image (according to studies concerning acts of social responsibility, the main motivation cited was related to enhancing the prestige and reputation of the corporation); to improve its position to influence or acceptance in the community, all of which translates into longer-term economic benefits for the business concerned. Non-profit organizations would participate in this kind of arrangement to increase their participation in the process to bring in popular organizations; to safeguard and improve living conditions; and to improve their areas of specialization (case of the NGO´s).

To conclude, the comparative advantages of alliances for both actors can lead to a greater efficiency in the management of resources and of activities of the interested parties, as a guarantee of the sustainability of the investment or improvement in the integration or participation in the processes of interest to them.

4. THE ROLE OF THE LEGAL FRAMEWORK

4.1. THE ESTABLISHMENT OF COOPERATION AGREEMENTS/ALLIANCES: THE LEGAL DIMENSION

In accordance with the studies carried out in the area of social responsibility, the main perceived limitation by Peruvian enterprises is the legal framework, specifically taxation law. Nevertheless, it is worth mentioning that at present recessionary economic conditions are also a real obstacle to overcome for enterprises if they are to consider such kinds of agreements, especially with new actors.

As we have demonstrated above, tax incentives or the existence of specific contractual regulations with respect to cooperation agreements will not influence the decision of enterprises to build bridges by establishing cooperation agreements with non-profit organizations. Rather, this will depend on the knowledge, meeting and interest of the parties concerned, which is a more efficient and effective way to produce goods and services to carry out activities of interest to both parties.

The main role of the legal framework is to safeguard the stability and transparency of institutions. More specifically, the agents should act in accordance with rules that are foreseeable, easy to comprehend, consistent and not obstructionist.

Therefore, the process towards the building of alliances can be improved by way of objective instruments, where one can be found the establishment of an appropriate legal framework which allows and facilitates the development of different forms of articulation between the various agents, including the State. All of this need not necessarily lead to an exhaustive effort at legal regulation or to profound legislative changes; rather, it would lead to measures to strengthen these institutions, to facilitate the terms of reference for the formation of alliances and / or the elimination of legal or administrative obstacles.

In addition to the above, what is required is that the administrative and / or judicial authorities involved in the areas of the legal system related to the topic being discussed have an adequate knowledge of this area and that, in practice, they do not restrict the potential of this kind of cooperative relationship.

It is also desirable to establish and develop within the context of such agreements alternative mechanisms to resolve conflicts (conciliation, arbitration), which produce a rapid resolution of any dispute which may arise between the agents comprising this kind of cooperative relationship.

4.2 GENERAL LEGAL PROPOSALS

The basic areas of the legal system involved in the effort to improve the cooperation agreements/ alliances would be the following:

INSTITUTIONAL OR ORGANIZATIONAL

This refers to the recognition of the legal capacity and identity of certain social/popular organizations, without this implying that they adopt the classic forms of civil association. Often, the lack of formal legal identity (in Peru this is decided by the Public Register) can be an obstacle for the formation of alliances with actors of civil society other than NGOs when one takes into account that this group of actors has no “legal capacity” to enter into legally binding contracts.

At the same time, it is concerned with creating flexible, decentralized mechanisms of institutional recognition, by way of the relevant administrative authority (city councils) so that, for example, social organizations can be part of programs of neighbourhood participation which would involve enterprises in certain locality by way of concrete actions in the areas of education, health, environment, housing and urban infrastructure.

CONTRACTUAL

In our opinion, the establishment of alliances does not imply the creation of a new type of legal organization (legal entity). It must be remembered that the creation of a legal entity has as a consequence the need to obtain a series of registers and administrative licences for its day-to-day functioning, and later an exhaustive process to effect its extinction. This would prove a disincentive to the parties involved, and would increase the costs of the alliances.

What is concerned is complementary contributions to particular activities, so the strength of the alliances is to be found in the area of contracts. This being the case, it would be better if the legal framework were quite flexible, so as to strengthen the figure of atypical contracts, backed up by the principle of “autonomy of willingness”, which supposes that the parties can freely create relationships they consider will advance their interests and establish the limits of such relationships, so long as they do not violate mandatary laws.

To be more precise, the strengthening of cooperation agreements or of alliances will not rely on a contract being regulated as such. Rather, it will rely on whether the legal framework does not place restrictions on their formalization, while at the same time its validity and legally binding nature are recognized.7 One could consider the establishment of a regulatory framework as a guide (with guidelines relating to topics including ownership of goods, responsibility and representation) related to cooperation agreements, as exists in Peru with joint ventures contracts.

In the area of contracts, it also plays a fundamental role in the establishment of a flexible legal regime as opposed to a tightly controlling one for international technical cooperation agreements, as well as in facilitating the channelling of resources from these sources.

ADMINISTRATIVE AND BUDGETARY

Even though this exposition has focussed on the relationship between enterprises and non-profit organizations, it is important to mention the contribution of the State to this relationship, by way of the mobilization of resources for the carrying out of projects of social interest in which the two could act in unison (in areas such as the environment, culture, agroindustry and education).

At this point, it is concerned with making more flexible the mechanisms for articulation between the State and the other sectors, so long as this does not presuppose a link for a common hiring of services. Here, it is important to establish the general boundaries which distinguish, in the area of budgetary law, between the transfer of public resources as a form of payment (which would suppose a tendering process for the contract) from that transfer which supposes the distribution of resourses for the execution of projects of social interest or others which the State shares an involvement with other actors in civil society.

In such cases, it could be recommendable, where the management of public resources is concerned, to define in legal terms the contents of such agreements of cooperation and the specification of particular areas of social interest it wishes to promote, in order to distinguish it from a conventional hiring of services subject to budgetary law. At the same time, it could be recommendable to anticipate budgetary laws which allow for greater flexibility in the carrying out of projects linked to such agreements (expenditure, regulatory regime for contracting services), while monitoring the outlay of public resources. By contrast, the establishment of draconian restrictions with regards to the possibility of transfers of public resources to private organizations, especially non-profit organizations, is not desirable.

Finally, in special cases of programs and /or projects of social or national interest or scope, it is recommended that these projects/programas have their own individualization and differentiation at the level of the State, establishing decision-making authorities in coordination with the other sectors. At the same time, it would be convenient in such cases to endow these programs /projects with workable mechanisms with regards to the application of resources (execution and expenditure) and a contractual regime.

TAXATION

In the current context, it would not seem realistic to offer major tax incentives or exemptions. Even though it is widely recognized that favorable tax treatment of donations (traditionally in the form of treatment as a business expense or as an income tax credit) can be an important mechanism in moving resources from the corporate sector to the various organizations in the civil society, coordination efforts should not be exhausted, at this level, with the State, especially if one considers that the incentives given for donations are more concerned with an attitude of classic business philanthropy, and not to consolidate forms of horizontal participation (collaboration) among the actors involved.

Notwithstanding this, at the taxation level a possible reform to be considered could be a clarification of the relevant laws (in particular regarding sales tax) with relation to contracts relating to the provision of services versus cooperation agreements or, in any case, depict such differentiation as a criterion of obligatory observance of the Tax Administration; wherever there exist substantial differences (which in certain cases, one should note, can be difficult to define) between the cooperation agreements (links of horizontal participation) and common contracts for the provision of services (functional links). In effect, in cases where organizations of the Third Sector (particularly NGOs) provide a service on similar terms and conditions as any business (for example, the development of special software or a technical report on a given topic), and because of that activity they receive a payment , which supposes greater income for the NGO, the common taxation regime should be applied (sales tax). It should not be applied in the cases of cooperative efforts, where the parties involved share the risk and actively take part in the achievement of a common objective and, as correlate of the situations previously mentioned, what occurs is a redistribution of resources among the various participating actors (including financial and material support of non-profit organizations) for their application to the components of the relevant project or program.

At the taxation level, the safeguarding of the stability and transparency of the current taxation framework (as is the case with those of the laboral regime) by the State is desirable, as it allows enterprises and various non-profit organizations to plan courses of action beyond the short-term.

FINAL THOUGHTS

From the experiences presented in this paper, it would be reasonable to conclude that the fact that enterprises and non-profit organizations have particular objectives is not at present an obstacle. Esentially, each sector looks to complement or “empower” itself with the other sectors (including the State). It is about establishing new forms of interaction between enterprises and non-profit organizations, in order to go further than individual efforts would take the actors in the undertaking of activities of interest (or, more simply, in the production of goods and services), which will help enhance the sustainability of such organizations in the long term.

Notes

1 DRUCKER, Peter. “Managing the Non-Profit Organizations”, 1996. Spain. El Ateneo. p.2.

2 LUNA VICTORIA, CESAR,, “The Patrimonial Regime of Civil Associations”, Law Magazine Themis Nro. 5, 1986, Lima, pp.49-50

3 In Peru the Banking Law (Law Nro. 26702) regulates a special figure (enterprise) called Micro and Small Enterprise Development Entity (EDPYME, in spanish), which object is to finance PYMES. Its intention is that NGO`s derive financial funds through the Banking System by using this figure (legally they adopt the figure of corporations where NGO`s participate as shareholders) and in this way they are under the supervision of the State (Banking and Insurance Superintendence). This topic also is related to the cost of credits, because the credit directly extended by NGO`s does not have the sales tax exemption (18% rate), meanwhile entities (corporations) that are integral part of the banking system (such as Banks) enjoy this exemption

4 “The Potential of the Philanthropical Sector in Peru”, June 1997. Study carried out of 10 large Peruvian enterprises from a range of sectors (industry, telecommunications, mining, among others).

5 Research Centre for the Promotion of Development – DESCO. Noriega Davila, Jorge. “Peru: Non-Governmentál Development Organizations- NGDOS)”.

6 It is important to note that although it continues to be an important area for NGOs, there has been a decline in the importance of the traditional activities of research and publications as a result of the lack of resources from International Technical Cooperation and a depressed market for these products.

7 The Constitution of Peru of 1993, within the Section referring to General Principles of the Economic Regime, clearly states that “the freedom to enter into contracts guarantees that the parties may negotiate according to the laws in place at the time of contract. The terms of contract may not be modified by laws or other provisions of any kind.(….) (Art. 62).

8 For its part, Article 1354 of the Civil Code states that “the parties may freely determine the contents of the contract, so long as it is not in violation of mandatory laws.”

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