The International Journal
of Not-for-Profit Law

Volume 3, Issue 2, December 2000

By Nitza Nachmias,
Department of Political Science, University of Haifa

and

Amiram Bogot, Esq.,
Registrar, Non-Profit Organizations, Ministry of the Interior, Government of Israel

Abstract

This article examines the relationship between government-nongovernment organizations (NGOs) in the Israeli context. Building on existing data and focusing on NGOs that receive public funding, the article analyzes and evaluates the characteristics and the structure of the interaction between the government and NGOs. The paper uses the mutual dependence approach based on the heavy dependence of the Third Sector on the government, and the government dependence on NGOs services, to study the two major dilemmas that are identified as the heart of the relationship: the government’s resistance or acceptance of institutional pluralism, and the NGOs’ resistance or acceptance of government oversight. An examination of the effects of the structural dilemmas reveals that:

1. while the transfer of public funds imposes some restrictions on NGOs, it enhances the NGOs freedom of action, while restricting the government regulatory capabilities,
2. the higher the level of community and grass root support for the NGO activities, the higher the level of public funding allocated to the NGO, which in turn results in greater community support,
3. the Israeli NGO law creates opportunities for NGOs to gain simultaneous access to multiple resources, namely, government ministries, agencies, and local governments,
4. the law is vague and includes ambivalent requirements for either NGOs accountability or their “Proper Management” practices, and
5. the fierce competition among NGOs for government support often results in a lopsided distribution of benefits. Consequently, the inherent dilemmas and structural constraints condition and determine NGO-government relations.IntroductionThe “Third Sector” consists of organizations that are neither part of the government apparatus nor part of the business sector. NGOs gained universal, legitimate recognition in article 71 of the UN charter, which granted NGOs formal standing with the United Nations Economic and Social Council. Article 71 was adopted following a stringent lobbying effort by over 1200 NGOs which were represented at the San Francisco Conference of 1945. Because NGOs were perceived as the representatives not of governments, not of organizations or businesses, but of “the People,” they were assumed to be the fulfilment of the opening statement of the UN Charter: “We the people.” Fifty years later, NGOs seem more likely than ever to fulfil this mission. An interesting metaphor suggested by Marc Nerfin presents the ‘prince’ as the government, responsible for the maintenance of public order; the ‘merchant’, as the private and the business sectors, responsible for the production of goods and services; and the ‘citizens’, represented by NGOs, who are responsible for the accountability of the prince, and the responsiveness of the merchant.[1]

In Israel, since the mid 1970s, the Third Sector has become a major provider of social services and has gained prominence as the backbone of the country’s young civil society. This development has been congruent with the New Public Management (NPM) approach that was introduced in Israel in the 1970s, and was based on the principles of decentralization, privatization, and the outsourcing of civil service. Following the defeat of the Labor party in 1977, the Likud government introduced and adopted private sector strategies and tactics to public sector programs. The approach assumes political processes to behave as market processes, with their own entrepreneurs, rules and norms. To execute this policy the Israeli government began to shift vast amounts of public funds to the Third Sector. The NPM reform assumed that the system

1. will be less corrupt and more effective in providing social services,
2. will carry out better and more just distribution of funds to the communities,
3. will exercise more responsiveness to the needs of the people, and
4. it will help to solve all, or most of, the severe malaises of the government bureaucracy.[2]  (9 The World Bank, “The Palestinian NGO Report,” July 15, 1997[3]

In Israel, the move toward privatization of public services was strengthen by a steady decline in public confidence in government competence that was spurred by a new breed of interest groups and lobby strategists and their public relations advisers who harshly and mercilessly attacked traditional civil service. Indeed, “Between 1980 and 1993 the population of Israel grew by 35% from 3,921,000 to 5,327,000 while the number of government employees decreased at the same period by 22%, from 66,631 to 51,995.”[4] “If we look at the picture that emerged, it seems that government took upon itself the provision of services in areas of national importance (education, absorption) as well as in areas where no appropriate infrastructure existed…In other areas, it left nonprofits and private sectors to provide services they had provided before.”[5] While the buzzwords: ‘free market”, “economic competition”, and “privatization” of social services,  imply greater efficiency and professionalism, it will be wrong to ignore the complex dilemmas that they create. First, NGOs activities could be perceived as unwanted criticism of the government, since it is incapable of effectively providing all the required social services to the community. Second, NGOs compete with government agencies for contracts, funds and political power. Third, Israeli NGOs have often been supported by foreign donations and investments, while coordination and accountability to the Israel government have been minimal, at best.[6]

Ignoring these problems, Israel was ready in the 1980s to reform both the structure of its bureaucracy and the processes of providing social services. The reforms in the public sector included the transfer of public services to charitable and other nonprofit organizations, privatization of government controlled industries, quality control procedures, strategic planning, and contracting out of social services.[7] Areas of privatization included the public housing sector, construction, infrastructure, telecommunication, and others. These reforms ended Israel’s archaic, quasi socialist, state control of the economic and political systems, which was viewed as a failure from all perspectives. Indeed, Israel followed the concept of free market economy that had been viewed as a great success in the West for over one hundred years. Consequently, the public policy reform gave an immense advantage to the Third Sector. In fact, at the turn of the 21century, the Israel Third Sector included some 30,000 associations of individuals and groups who claimed to share a common purpose and have been registered with the Ministry of the Interior as Non-Profit Organizations (“Amutot”). In 1999, NGOs employed 10.7 percent of the Israeli non-agricultural work force, and produced 12.8 percent of the Israeli GDP![8]Between 1991 and 1995 total NGO expenditures grew by 13.5 percent and the number of their employees grew by 19,000. Moreover, “between 1980 and 1993 the population of Israel grew by 35% (from 3,921,000 to 5,327,000). During these years the number of government employees decreased by 22% (from 66,631 to 51,995).”[9]Consequently, NGOs have become an important force in Israel’s political, social and economic realms. These developments necessitated an effective strategy of cooperation with, and regulation of, NGOs’ activities.

Thus, while until the early 1990s there was little appreciation of the potential role of NGOs in Israeli society, this has changed in the 1990s , following the dynamic growth of the Third Sector in size and volume of activity, and the substantial increase in the amount of public funds transferred to NGOs.

Table # 1: Public funding of NGO – 1992- 1998 (in billion of NIS; in 1999 value)

1992     2.14
1993     2.33
1994     2.28
1995     2.60
1996     3.06
1997     3.56
1998     4.04

Source: Berlinski U; Sofer P. “Government Support of NGOs and Publc Institutions,” Report by the Ministry of the Prime Minister, 2000

The new reality created a growing concern both at the Knesset and the government levels, over the immeasurable growth of the Third Sector. The government realized that its power to regulate and oversee the use of the billions of NIS transferred and spent by thousands of NGOs is extremely limited. Moreover, since the mid 1980s, two distinguished and prestigious Israeli institutions, the Israel supreme court, and the State Comptroller Office, expressed harsh criticism over the processes used in the granting of public benefits to NGOs.[10]The most important criticism pertained to the processes of approving and granting public funding to NGOs. Following this criticism the government took action to address the issue.[11] First, the Israeli Knesset amended the Non-Profit-Non-Government Organization (NGO) Law of 1980 to include accountability and transparency requirements. Second, the government issued numerous regulations aimed at strengthening the government regulatory powers. For example, the 1996 amendment provided the Ministry of the Interior, with whom all Israeli NGOs have to register, oversight and regulatory responsibilities- specifically, the authority to demand of NGOs to disclose and enumerate their expenditures and sources of income. Moreover, NGOs were required to submit an annual budget and activity reports, completed and approved by a certified CPA. In September 1998, the Ministry of Finance issued a series of regulations aimed at ensuring the execution of these amendments, and in 1999 the Ministry of Finance followed up with a series of detailed regulations mandating six government ministries that have been the main distributors of funds to NGOs, to establish a computerized process of control to identify duplication in grants and other forms of abuse by NGOs. Perhaps the most important regulation was issued on September 23, 1998, by the Government Auditing Committee. The regulation established the “Proper Management” principle mandating every NGO applying for government funding to receive from the office of the Registrar, a certificate of “Proper Management”, which approves the NGOs management practices and policies. This certificate has to be submitted to the Ministry of Budget that approves the NGO’s eligibility to receive public funding and tax benefits.[12]

However, the execution of these regulations encountered some major difficulties:

1. bureaucratic shortcomings, namely, severe shortages of qualified personnel at the Registrar’s office,
2. lack of coordination and cooperation among the various Ministries providing funding for NGOs ,
3. lax control of the use of public funds by the NGOs, and
4. legal difficulties emanating from the fact that the law provides NGOs with the full freedom and autonomy to make all policy, administrative, and budgetary decisions concerning the operation of their organization. Consequently, while being funded by the government, the NGO executives have been determining their own salaries and expenses, the size and structure of overhead, fixed costs, personal expenses, travel, etc.[13]

Moreover, the 1980 law and the amendments of the 1990s, had to reconcile two conflicting values: the peoples’ right to ’‘freedom of association’, and the government’s right to enforce accountability and transparency. The reconciliation of these conflicting values severely curtailed the government‘s oversight capability.[14]

It seems that in the balance of power between the government and the NGOs the government has not been enjoying a strategic superiority. (See following discussion) As noted by Smillie and Helmlich , the nature of the relationships between government and NGOs are “as varied as the governments, the NGOs, and the societies they serve.”[15]

The Israel Government-NGO Relationship: A Mutual Dependence Approach

The diverse community of Israeli NGOs reflects the whole spectrum of Israeli society, but the NGOs share some common features:

1. they are required to incorporate by law for specific purposes detailed in a formal, enumerated charter,
2. they must exhibit a firm bureaucratic structure and permanent governing institutions, and
3. they must work toward specific, enumerated economic, social, or strategic goals. Because Israel’s NGOs are greatly financed by government, their activities are expected to be congruent with the national interest. NGOs are expected to fulfil a particular mission, achieve a specific goal, or solve a pressing problem, even if they are created on an ad-hoc basis. In case of a conflict between the self-interest of the NGO and the public interest, the public interest should prevail.

Because the Israeli Third Sector is predominantly financed by the state, government-NGO relations are increasingly being accepted as inevitable. An examination of NGO-state relations shows that a high level of dependency has developed between the government and the Third Sector. In fact, in a wide set of policy fields the non-profit sector has established close ties with the bureaucracy, often becoming increasingly “state oriented” and politically aligned with the government. This study focuses on the formal-legal NGO-state relationship, regarding the power and authority of the state to oversee and review NGO operations, in particular, the use of public fund by NGOs. The study

1. evaluates the complex Israeli formal-legal environment as a framework for regulating NGOs operations, and
2. examines the inherent dilemmas and structural constraints that weaken the power of the state to act as a regulator of NGOs’ activities. The main issue discussed in the paper is: how can the state guarantee that NGOs will follow “Proper Management” practices and procedures?[16]

One of the major dilemmas stems from the procedure and practice of the “subsidiarity” principle, which uses the free market model, with its own entrepreneurs, rules, and norms as its “role model”, and follows private/business strategies in the public sector. The process translates social policy “into a system whereby private provision of services takes precedent over public efforts.”[17] Subsidiarity implies a structure of institutional arrangements and policy making processes based on the belief that the state should aspire to perform only the functions that the private and the Third sectors cannot perform, namely, matters of national security, foreign policy, immigration, law enforcement, etc. In fact, the state, quasi-government agencies, and private or public nonprofit institutions enter into explicit, legislative arrangements that spell out the division of labor, accountability, and financial obligations among the parties involved in a particular social service. In Israel, the principle of subsidiarity applies to the NGO-government relations both in contractual deals and in the transfer of formula and block grants. The non-governmental-voluntary associations, and the private sector are expected to execute most social services while receiving support and resources from the government.[18] This policy has been reinforced by a steady decline in public confidence in the Israeli government’s competence and integrity. Thus, since the late 1970s, Israel experienced a massive decentralization of service agencies, privatization, and outsourcing of social services.[19] Clearly, this gradual shift in public management expressed the fact that Israel’s central government was no longer able, perhaps no longer willing, to maintain the same central, omnipotent role it played in the pervious era. These changes…touched the relationship between the government and the nonprofit sector.”[20]

This trend is clearly shown in the following numbers: in 1995, the total expenditures of the Third Sector were 33 billion NIS (over US $8 billion).[21] The expenditures of the health institutions (Kupot Holim) amounted to about 13,000 billion NIS of the total. Of the 33 billion NIS the Israeli government had transferred to the NGOs, 23 Billion NIS (about US $5.5 billion), namely, over two thirds of the total annual expenditures of Israeli NGOs, was covered by the government! Because the government support of NGOs is mandated by Israeli law, about 85 percent of the funds are being transferred as block and formula grants. This procedure is included in the regular state budget.[22]Interestingly, subcontracting of services from NGOs amounted to only 6 percent of all the funds transferred to NGOs.[23]

Table # 2: Funding sources of the Third Sector, 1995 | Third Sector Expenditures, 1995

Public funding                                         64% | Health                                     45%

Earned income                                       26% | Education                                33%

Contributions                                         10% | Culture                                     9%

| Welfare                                    6%

| Philanthropy                            2%

| Others                                     5%

Total                                                     100% | Total                                      100%

Source: “The Israeli Third Sector at a Glance,” Ben Gurion University, 2000

The public funds that have been transferred to the Third Sector came from four sources:

• 21,4 billion NIS, ( $ 5,4 billion) in Block and formula grants transferred to NGOs by law (Budget Law clause 3(a);
• 1,2 billion NIS payments for services (contracts for services)
• 2,6 billion NIS grants (mainly for orthodox, parochial education)
• 72 million NIS small grants, for special events, granted from the national estate fund.

Source: “The Israeli Third Sector at a Glance,” Ben Gurion University, 2000

However, in the late 1990s it became clear that the Israeli government lacked the proper procedures, processes and institutions to oversee and regulate the spending of these funds. These facts gained public attention mainly by investigative news reports that revealed that many of the NGOs receiving public funds are religious-orthodox associations that have been functioning as “family businesses”, namely, they provide goods, benefits, and services to themselves and/or their family members![24]Thus, the providers and the recipients of the goods produced by NGOs have often been one and the same! However, the authority of the government to regulate the “family NGOs” has been extremely limited by the law that allows NGOs almost full autonomy in their operations. In fact, the process of “family NGOs” has been reaffirmed by several Israeli supreme court rulings.[25] Consequently, the unique circumstance of “family NGOs” has been protected by the high respect for the value of “freedom of association” and the vagueness of the law. Following these rulings, public funding of the Third Sector has been anchored in the budget law and it is now determined solely by the legislature and the executive branches. This principle legitimizes the government practice of allocating funds arbitrarily, often following solely their political interests.[26]  While “family NGOs” continue to be generously supported by the government, this practice has been harshly criticized by both the media and the State Comptroller office. Both institutions criticized the allocation of public funds to NGOs as part of the political process.

The issue was discussed at length in an article at the Israeli daily Ha’aretz, which published a front page article on August 9, 2000 entitled: “Volume of grants to NGOs increased 75%.” The article summarized the report of a special committee report appointed by the Ministry of the Prime Minister. The report revealed that between 1992 and 1998 the block grants transferred to NGOs increased from 2.14 billion NIS in 1992 to 4.04 billion NIS in 1998. In addition, over 5,000 NGOs received additional funding of approximately 2 billion NIS from local governments, adding up to over 6 billion NIS. An additional 5 billion NIS in block grants are transferred by the government to NGOs providing higher education. About 80 percent of the grants are allocated by two ministries: Education and Religion. In comparison, Israel’s annual budget deficit is 10 billion NIS![27]

While the supreme court refused to intervene in the policy considerations and the establishing of priorities in the allocation of public funds, it did insist on a strict adherence to the “equality” principle in the decision making process, to ensure the exclusion of prejudices or biases from the allocation of public funds. For example, in 1988, while still refusing to express any opinion concerning the politics of the allocation of public funds, the supreme court did express harsh criticism of the government performance, specifically, the lack of a clear transparence regime, namely, a clear and binding set of rules and regulations for the allocation of public funds. The court stated that indeed, the basic rule of equality under the law is violated when funds are arbitrarily and unequally allocated, with no rational and insufficient evidence that the transfer of funds was justified and that it served the public interest. [28] Following these rulings the government took action to stop the common practice of duplication in grants.[29] In 1998 the office of the Government Counsel (“Ha’yoetz Ha’mishpati”) issued a set of binding instructions that imposed a ban on transfer of funds from more than one government office, and imposed transparency and disclosure requirements for all the Ministries allocating funds to NGOs. On June 17th, 1998 the Ministry of Finance issued regulation No. 98/14, requiring the Ministry to investigate all NGOs requesting direct or indirect public assistance. The investigation includes review of bank accounts, financial credibility, and solvency. However, only in 2000, did the Ministry of Finance begin investigating NGOs, reviewing their activities and budgets, and enforcing regulation 98/14.[30] However, these regulations failed to require the Ministries to provide explanations as to why they preferred to fund particular NGOs while denying funds to others. A greater unaddressed problem was the government lack of manpower and resources necessary to enforce the new regulations. The Shass case may, perhaps, provide an insight to this complex situation. Since the early 1980s Shass has been extremely successful in raising money, receiving public funding and using it as leverage to gain social and political power. The success of the Shass movement shows that the strength of NGOs emanates from the willingness of the government and private donors to provide them with funds to promote their activities. However, the NGO capacity to generate public funding is in direct correlation with the support that they gain at the grass root level.[31]

Regulating the Third Sector

Regulating the Third Sector has become one of the most difficult challenges for the Israel government due to the size of the Sector, its diversity, and the volume of its activity. This paper examines the causes and effects involved in regulating NGOs with reference to historical patterns, and in an effort to avoid a high level of generality. The discussion is based on an empirical foundation, using a methodology developed by Esman and Uphoff (1984), who suggested five possible levels of government-NGO linkages:

1. autonomy, with effectively no interaction and no government control over NGOs operations and resources,
2. low linkage, with minimal interaction,
3. moderate linkage, with some, but not regular interaction,
4. high linkage, with much interaction but not a full reciprocity in terms of transfer of resources and services, and
5. direction, where a high level of interaction exists, and the government’s control is substantial and effective.[32]

This paper assumes that the fourth category, namely, the “high linkage” category relates best to the Israeli case, due to the high level of interaction and the exceptional dependence that exists between the state and the NGO community. This category highlights and explains the inconsistency that exists between the high level of dependence and the low level of government leverage over NGOs activities. Using this approach, this paper explores some of the implications that follow from the “high linkage” condition and formulates them into testable propositions.

The Effects of Social Culture on Accountability

The first proposition assumes that the state-orientation of the Israel non-profit sector stems from a more general, underlying characteristics of Jewish economic, political and social cultures, originating in the pre-1948 tradition of self-sustaining Jewish civil society in the diaspora and Palestine. Indeed, historically, in the Diaspora, the Jewish NGOs provided all the social services for the community. This tradition continued in Palestine, where between 1882 and until 1948, a highly sophisticated network of NGOs created an extremely effective modern system of civil society. They executed all the political, economic and social functions and actually acted as a de-facto government.[33] In 1948, the newly created state took over most of the responsibilities and operations that were carried out previously by the Zionist NGOs.[34] However, the traditional orthodox-Jewish NGOs, maintained their autonomy and operated independently of the state. Since 1948, the state of Israel has been supporting the orthodox NGO network, allowing it to flourished and grow especially through the generous transfer of public funds to their private, orthodox education systems. At least 41% of Israel NGOs are religious-Orthodox, while their percentage in the general population is lower than 20%. Between 1991-1997, the religious-orthodox education systems received 37.2 % of the funds transferred to all NGOs. In comparison, Israel’s higher education institutions received 3.6 % of the total funds.[35] It seems that the orthodox communities have developed a “dual identity”, namely, they continue to practice the diaspora tradition of self-sustained self-contained communities, but have been relying heavily on funding from the secular state of Israel. The issue of the accountability of orthodox NGOs and government regulation has been a thorny issue that has not been resolved in either the NGO law of 1980 or the various government regulations issued in the 1990s (detailed discussion follows).

Socialism and the “Revolving Door” Effect

The second proposition assumes that the ‘high linkage’ relations that exist between the Israeli government and the secular and mostly socialist NGOs, was shaped by a process of extreme and swift transition from revolutionary organizations to a civil society. The pre-statehood, under-ground revolutionary Zionist guerrilla groups had to transform and become an integral part of the newly created democratic-bureaucratic-legitimate political system. Precisely because of their accomplishments, the pre-statehood voluntary organizations became the backbone of Israel’s government. A particularly noteworthy development occurred, namely, following the establishment of the state of Israel, a revolving door developed between the traditional Jewish-Zionist-socialist NGOs, and the newly created government. Both the legislative and the executive branches became staffed with the leaders of the veteran Jewish-Zionist NGOs, while the ex-revolutionary activists became employees of the burgeoning Israeli bureaucracy. Consequently, the leaders of the pre-statehood NGOs assumed an extensive share of the high ranking government positions, a fact that facilitated the generous transfer of funds from the state coffers to the Israeli network of NGOs. In addition, between 1948 and 1977, during the successive Israeli Labor governments, a high linkage developed between the public and the private sectors. The Labor governments created a system of quasi socialist- planned-economy, and established an extremely high level of government involvement in the Israeli social and economic spheres. The high linkage system spilled over to the Third Sector, resulting in mutual dependence between the government and the Israeli civil society. “For many years there were no clear demarcation lines between sectors, the result being a social system that Kramer terms “holistic”…In this period one of the first questions the government had to ask itself regarding human services was, which services should be provided directly by government agencies, and which could be provided by existing sectoral nonprofits?…The division of labor was not the outcome of a planned process, but rather of political negotiations.“[36]

By the end of the 1970s the growth of government involvement in the civil society gained much criticism from experts and citizens alike, thus placing great voter pressure for changes in the concept and execution of public services. The critics expressed a widespread feeling of a “crisis of the state,” a crisis that has manifested itself in a serious questioning of the traditional social welfare policies of the Israeli government, and in a disappointment over the management of the state-led economy. The Israeli public rejected the experiment of state socialism and demanded a structural reform, specifically a shift to a market-oriented economic and social policies. The public also demanded a change in the government’s attitude and support of civil society organizations, demanding higher financial and political support. The beneficiaries of these structural and policy changes were mostly parochial organizations, representing deprived grass-root communities that had used the concept of ’empowerment’ to promote in a very sophisticated manner their political agenda and self-interest.[37]

While the structural reforms helped the Third Sector to grow and flourish, the government’s ability to regulate and oversee the NGOs affairs continued to be limited both in legal and tactical terms. It seems that the Israeli government was caught in an unexpected dilemma: should the government intensify and tighten its control of NGOs, the government could risk harsh criticism from the NGOs clients and beneficiaries. In the Israeli fragile political coalition system this could hardly be politically wise. On the other hand, lax regulations and weak controls could undermine the government authority and result in a gradual and almost unnoticed, shift in the center of power from the government to a myriad of highly motivated and often highly politicized NGOs. In fact, these NGOs have been consuming vast public resources and often used them to promote their sectoral or ethnic self-interest.[38] (C.P.M. Wilderom, “High-quality Management of Private Nonprofit in the Netherlands in the 21st Century,” unpublished paper, 1997[39])

While the NGOs alarming growth in political power and influence gave the government an excellent reason to be anxious- its authority to regulate and control NGOs activities remained highly restricted by the civil rights principles. Clearly many powerful NGOs used the “freedom of association”, “freedom of speech”, and “freedom of the press” effectively to avoid accountability, and transparency.[40]For example, the first clause of the NGO Law addresses ‘the freedom of association’ principle by recognizing the right of any two people to form a NGO. On the other hand NGOs have an adverse fear: the state will eclipse their endeavors and turn their achievements into bargaining chips in Israel’s complex political process.

Patron-Client Relations in Reverse

The third proposition reviews the Israeli patron-client relationship that existed between the Third Sector and the government, in particular the formal framework that serves as a basis for transfer of funds to NGOs. Interestingly, the heavy dependence of the Third Sector on government support and the patron-client relationship that have developed, hardly yielded a substantial level of government leverage over the operations and activities of the Third Sector remained low and elusive.[41] The review reveals four categories of support:

1. payments for contracts and outsourcing of services, (between 5 and 10 percent of the total)
2. designated and appropriated block grants given to NGOs directly from various government departments,
3. grants from estates’ foundations managed by the government, and (d) funds transferred by law for specific issue-areas.[42]The bulk of public resources that were transferred to NGOs by law, have been block grants, distributed in particular issue-areas.[43]

Table # 3: Transfer of government funds to NGOs by Ministries  

Ministries

No. of NGOs

Total funding (In millions of NIS)

	1997	1998	1997	1998
Education	1 ,262	1, 354	1,833	1,692
Religion	2,294	2,310	1,137	1,168
Labor	756	584	95	106
Prime Minister	15	25	100	124
Health	166	201	56	482
Trade and Industry	12	7	61	69
All others	633	637	72	62
Total	5,138	5,118	3,213	3,844

Source: Annual Report of the Israel Comptroller’s Office, 1998, p. 732 [44]

Clearly the Israeli budget law has been extremely generous to NGOs by allowing vast amounts of funds the be transferred to NGOs , while paying little attention to accountability, transparency and oversight procedures.[45]Moreover, the legal system allows NGOs to receive grants from more than one government agency, while neglecting to create a coordinating mechanism to prevent duplication and to ensure that no two agencies will fund the same activity. It seems that while the Israeli government has been willing to transfer a vast amount of social and civil responsibilities from the government to the people, it has hardly accompanied these responsibilities with appropriate control and regulatory mechanisms. It seems that the lax legal environment induced over 30,000 groups to create NGOs, albeit, only 35 percent of all registered NGO have been actually active and providing services. Thus, while NGOs-state-client relationships have to be based on democratic values and civil rights, they have to avoid a possible power struggle and a competition for control.

In order to resolve this conflict, and following harsh criticism by the State Comptroller Office, the government adopted resolution 291 (classified as a “restricted” document”), on September 9, 1999. The resolution imposed significant conditions on the allocation of funds to NGO. The conditions included: a bank assurance for a percentage of the requested grant (exact percentage not determined in the resolution, N.N.), at least two years of significant activity, a disclosure of the NGOs bank accounts, and an annual auditing of the NGOs annual financial reports. On September 23, the government issued an addendum to resolution 291, (classified as “restricted”) that took effect on 15 October, 1999. Addendum 4418 (BK/128). The addendum assigned the Office of the Registrar at the Ministry of the Interior with the responsibility to execute the resolutions. However, it remains to be seen whether these recent accountability measures will be promptly executed.

Fields of Operations and Allocation of Public funds

The fourth proposition argues that the level of linkage between NGOs and the government will be determined mainly by the type of the organization, the services it provides, its economic circumstances, its objectives, and last but not least, the NGO dependence on government support. Along a continuum, we can assume that the greater the level of dependence on government resources the greater linkage will be found. To study this issue, Israel adopted the John Hopkins Institute for Public Policy Typology that places NGOs in 12 categories according to their purpose, objectives and types of operation. The categories are:

• Business & professional;
• Civic & advocacy;
• Community empowerment;
• Culture; Education; Environment;
• Health;
• International operation;
• Philanthropy;
• Relief and Social Services;
• Religious & congregations;
• Unions;
• Others (in Israel: memorial organizations). [46]

This paper applies the typology only to the 40 percent active Israeli NGOs:

Table #4: Typology of NGO by Categories of Operation:

Religious organizations	24 %
Education and research	19
Culture & Leisure	14
Recreation & welfare	12
Philanthropy	8
Civic, legal & political	6
Housing & development	5
Health	3
Labor unions & chambers of commerce	3
Memoriam	2
Environment	1
International activities	1
Total	100 %

Source: Gidron, B.; Katz, H.; Bar, M. The Third Sector in Israel, Ben Gurion University, 2000, 20

An examination of table # 4 reveals a positive correlation between the NGOs fields of the NGOs operations, their nature and objectives, and the level of public support that they enjoy.

Table # 5: Funding of NGOs by Categories

Category	Percentage of NGO (of the total # of NGOs)	Percentage of public funding (Percentage of the total)
Religious NGOs	24%	41.3 % of public funds
Education (elementary and high)	19	17
Arts, culture & science	14	11.4
Recreation & welfare	12	9.4
Philanthropy	8	3.2
Civic, legal & political	6	1.3
Housing & development	5	0.6
Health	3	6
Labor unions & chambers of commerce	3	4.2
Memoriam	2	1
Environment	1	1.5
International activity	1	0.4
Non-Jewish religious NGOs		0.4
Others		2.4
Total		100 %

Source:Gidron, B.; et al. The Third Sector in Israel, 2000, 24.

Using the John Hopkins typology, Table 3 correlates the public funding of NGOs with their activity, fields of operation, and their weight in the Israeli NGO community. It seems that Jewish-religious NGOs are the preferred category. They receive 41.3 percent of the funds allocated to the Third Sector while they constitute only a quarter of the sector. On the other hand, the philanthropy category, that constitutes 8 percent of the Third Sector, receives only 3.2 percent of all funds. This fact could be attributed to the volume of support that the NGOs enjoy at the grass roots level and their political leverage. It seems that the higher the level of leverage, the greater support the NGO will receive from the government. In fact, the weakest group in Israel, the non-Jewish religious groups receive only half-a-percent of all public funds allocated to NGOs, compared with the 41.3% allocated to the Jewish orthodox groups. The inconsistent process and unclear principles guiding the allocation of billions of NIS to the religious-Orthodox NGOs could and probably did make the process of overseeing and regulating them the greatest challenge for the government.[47]Both the courts and the Office of the State Comptroller have expressed strong criticism of the duplication, lack of clear criteria, and the arbitrary manner in which a myriad of agencies, departments, Ministries, and local governments have been allocating funds with no coordinating agency ensuring the absence of duplication and the misuse of the funds.[48] Following the criticism and a Supreme Court ruling, the State Counsel issued a regulation aimed at creating objective criteria, namely, tests, to determine eligibility for public funding. The tests required an NGO to show that its activity is in the public interest, and that the funds are necessary to execute important, community services. However, it has been argued that the established criteria were flawed due to three major problems: First, the tests required the NGOs to provide information that is irrelevant to their activity, i.e., the established criteria and parameters have been “tailored” to favor particular NGOs, whose eligibility to receive public funding would otherwise be questionable.[49] Second, the government created artificial categories to allow NGOs to claim eligibility for funding, while objectively they are either redundant or do not pursue the public interest. Third, the government and the legislature, did not put a cap or a ceiling, on the amount of funding allocated to each category, as required in budget law 3a (III). In fact, the funds are being allocated to individual NGOs with no overall strategy to support a particular category. It seems that the politicization of the process resulted in both the arbitrary and unequal allocation of funds, and the entanglement of the coordination and review processes.[50]

The NGOs Law as a Regulatory Mechanism

The fifth proposition assumes that the main regulatory instrument that the Israeli government can use to regulate NGOs is the NGO law that requires NGOs to apply for a registration license, disclose their name and address, explain their goals, raison d’etre, and to affirm the democratic nature of the Jewish state. Indeed, any organization that negates the right of the state of Israel to exist, or is planning to commit illegal acts, will be outlawed. The law also requires that all the original initiators of an NGO to disclose their permanent address and identity information. Once this information is provided, the government via the Office of the Registrar can access all the information about the members, including their financial status, military history, police record, etc.[51] The Registrar has the authority to demand that an NGO change its name if he or she finds it improper. The law does not explain what it means by an improper name.[52]The NGOs that are directly or indirectly supported by the state, are expected to provide specialized and professional services not otherwise available, and to act in the public interest. However, it seems that these regulatory tactics can hardly provide vigorous government oversight and impose accountability and transparency on the NGO community.

However, in Israel, because of the historical experience and the cultural traditions, NGOs often operate as “non-territorial-governments,”[53]exploiting their unique legal status, informal structure, lax regulatory mechanisms, and rudimentary government oversight system. The term “non-territorial governments” (NTGs), denotes a political and social environment where NGOs assume control and carry out policies on an independent, autonomous basis. NTGs enjoy and exercise a creative status of “Functional Sovereignty”, namely, they assume control over a particular issue-area or a social service, either on an exclusive or a shared basis with national, regional or local governments. This situation greatly differs from territorial sovereignty, where a political entity enjoys control over a territory, and carries out public policies on a sovereign, legitimate basis. Indeed in an international system that is controlled by the principle of political units equally sovereign in their territorial boundaries, NGOs operations are often controlled by the principle of “functional sovereignty”.[54] This situation could severely limit the capability of the state to regulate of control NGOs operations.

Consequently, it seems that both the NGOs and the government share the responsibility of creating circumstances that make the regulation of NGOs difficult. First, Israeli law hardly imposes clear, objective eligibility criteria for the allocation of public funds. Second, the lack of a coordinating agency allows for duplication in grants. Third, no restrictions can be established on NGOs’ overhead expenses or the salaries that NGO executives may appropriate to themselves.[55] This could constitute the allocation of profits to NGO executives. Finally, neither the law nor the government regulations require annual activity reports, or ‘programs executed’ reports. Indeed, NGOs operate autonomously and independently, spending vast amounts of public funds with hardly any meaningful legislative or executive oversight.[56]

Conclusion

More than a decade ago, John Clark claimed that the sources of NGOs’ strength in their relations with the government are as follows:

• Influencing the government bureaucracy to adopt approaches and programs that were successfully used by NGOs.
• “educating and sensitizing the public as to their rights and entitlements under state programmes;
• attuning official programs to public needs through acting as a conduit for public opinion and local experiences;
• influencing local development policies of national and international institutions including decentralisation and municipal reforms;
• helping government and donors fashion a more effective development strategy through strengthening institutions, staff training and improving management capacity.”[57]

In the Israel of the 21st century, as in most Western societies, NGOs are emerging as critical ingredients of civil society. They are moving beyond a ‘supply-side’ strategy that focuses on the delivery of services and the development of projects, to a ‘demand-side’ emphasis, empowering communities and disadvantaged groups and helping them articulate their preferences and voice their concerns so as to become active participants in the transformation of the Israeli quasi-socialist society to a liberal-democratic-capitalistic civil society. While the government remains responsible for the maintenance of the political agenda and the national interest, it becomes clear that there are severe limits to the government competence, especially in the delivery of services, and the allocation of entitlements. An active, accountable civic society may be the best instrument for a responsive socio-economic system. But, a clearer definition of the relationship between the government and the Third Sector, and a recognition of the mutual dependence conditions are essential prerequisites for an accountable civil society.

While the Third Sector in Israel is heavily supported by the government, the NGOs often keep their distance from the government and run autonomous projects either parallel to those of the state or play an effective appositional role. On the other hand, NGOs provide instruments which, whether invited or not by the government, emphasize the participation of the grass root communities. Clearly, proactive relations between the government and the Third Sector are difficult because: (a) many Israeli NGOs do not follow rigorous formal rules and bureaucratic procedures, (b) almost half of the public funds are allocated to parochial groups that by law are exempt from many of the accountability restrictions and “Proper Management” procedures mandated by the NGO law and the recent government regulations, (c) many NGOs lack the necessary professional knowledge of accounting and auditing. Thus, donations are wrongly identified, while expenditures are wrongly reported. The answer may require efforts on both sides: the government has to pursue a higher level of cooperation and active involvement in the programs and activities of NGOs, while ensuring NGOs accountability and “Proper Management” procedures. Most importantly, the NGOs have to create and pursue a healthy, honest nonprofit, civil society environment, namely, ensuring transparency and accountability. The law has to be strengthened and translated into clear rules and regulations, and loopholes must be closed. Communities have to be active and demand responsiveness and accountability from both the NGOs and the government.

This paper presented a variety of relationship types and provided an examination of state-NGO relations in an effort to explain the dynamics that create both potential opportunities, and pose potential limitations to NGO-state cooperation.

Notes

[1] Weiss, T.; Gordenker, L. “ Pluralizing Global Governance”, in: NGOs, the UN & Global Governance, T. W. ; L.G. Eds.; Lynne Rienner: Boulder, CL, 1996; 19.

[2] The case of the Palestinian NGOs is an interesting comparison. “The importance of NGOs to the economy of the West Bank is clearly recognized…The World Bank estimated that over 1,200 Palestinian NGOs and 200 international NGOs are active…In early 1996, it was estimated that NGOs provided about 60% by value of all primary health care services and up to one-half of secondary and tertiary health-care. All disability and preschool programs are run by NGOs, as well as most agricultural services, low cost housing and micro-enterprise credit schemes.”

[3] The Palestinian NGO Project, Word Bank publication, Washington D.C., 1997, 4.

[4] Hartuch, A. de. “Government support of public institutions: The Flourishing of the “Special Funding’” (in Hebrew). Mishpatim, 1998, 29, 82-83. The Israel labor unions have been contesting the government growing use of NPM, arguing that adopting free market strategies inthe public sector creates economic and job insecurity and it exploits the workers. Ibid., 79.

[5] Gidron, B. “A resurgent Third Sector and its relationship to government in Israel,” in: Gidron, B; Kramer R. M.; Salamon L.M. (eds.). Government and the Third Sector; Jossey-Bass : San Francisco, 1992, 186.

[6] The Peres Peace Center is a case in point. It is supported by foreign foundations and governments, for example through various “People-to-People” programs, while the Israeli government has no overseeing powers of the processes. Gidron, B. “A resurgent Third Sector and its relationship to government in Israel,” in: Gidron, B; Kramer R. M.; Salamon L.M. (eds.). Government and the Third Sector; Jossey-Bass : San Francisco, 1992, 186.

[7] For example, TQM and ISO 9000 became mandatory procedures in the health industry, higher education institutions, among others.

[8] Gidron, B.; Katz, H;. and Bar M. The Third Sector in Israel; Ben Gurion University Press, BeerSheva, 2000, 10 (in Hebrew).

[9] Hartuch, A. de. “Governmnet support of public institutions: The Flourishing of the ‘Special Funding’ ” (in Hebrew). Mishpatim, 1998, 29, 82-83.

[10] Supreme court rulings 59/88 – 1593/90. Quoted in: Hartuch, A. de. Mishpatim, 1998, 29, 84-85. While the transfer of funds to NGOs was legally adopted in the Budget Law of 1985, a committee appointed in 1996 by the Minister of Religious Affairs , criticized the lack of government control over the process. Berlinsky, U; Sofer P. “Government Support of NGOs and Publc Institutions,” Report by the Ministry of the Prime Minister, 2000, 4. According to the Registrar’s records, in 1999, about 8,500 Amutot applied for government funding.

[11] For example, 1996 Addendum to the Budget Law 35 (a), and the special regulations issued by the Office of the Government Counsel. The addendum focused on NGOs with an annual operating budget of over 750,000 NIS. The new regulations required a proof of two years of active operation prior to receiving any government support, mandatory disclosure of all sources of income, and accountability for all expenditures. Annual Report of the State Comptroller Office, No. 47, 297.

[12] Israel government resolution # 1-01.01.12.14, of Jan. 11, 1998.

[13] Annual Report of the State Comptroller Office, 1988, 50b ; 727-739.

[14] Bar Mor, H. Non for Profit Institutions: the Legal Status. Beer Sheva: Beer Sheva University, 1999, 4-5.

[15] Smillie, I. ; Helmlich, H. (Eds.) NonGOvernmnetal Organizations and Governmnets Stakeholders for Development. OECD Development Center, Paris, 1993, 16.

[16] “Proper Management” is an official term used by the Office of the Registrar to denote eligibility of an NGOs to receive government funding.

[17] Anheier,H. K. “ An elaborate network: profiling the Third Sector in Germany,” in: Gidron, B.; Kramer R. M, ; Salamon L. M. Eds. Government and the Third Sector:1992, 35.

[18] Some prominent examples are institutions for higher education, burial services (“Hevra Kadisha”), the National Bar Association, the Scientific Council, local municipalities, etc.

[19] Many state owned corporations were privatizes. The giant telephone-communication company Bezek is a case in point.

[20] Gidron, B. “A Resurgent Third Sector and irs Relationship to Government in Israel”, in: B.; Kramer R. M, ; Salamon L. M, Eds.,1992, 188.

[21] This information was published in Gidron B.; Catz,H. The Israel Third Sector Economic Data. Ben Gurion University Press, Beer Sheva, February 1999, 12.

[22] The national budget, article 3a (III).

[23] Gidron B.; Catz,H. The Israel Third Sector Economic Data. Ben Gurion University Press, Beer Sheva, 2000.

[24] Ha’aretz, “How NGOs become a family business,” (in Hebrew) Sep. 4, 2000.

[25] See for example: 1971- 175/71; 1983-780/83, quoted in Hartuch, A. de, 1998, 82-107.

[26] Ibid., 75 -107.

[27] See the 1998 Annual Report Of the State Comptroller, 1998; 727-739.

[28] “…As for the format, a clear set of criteria has to be established, that will serve as guidelines in the making of decisions concerning allocation of funds, including the establishing of control and review mechanisms that will ensure that the funds will serve their objectives.” Supreme Court ruling, 1988; 19/88 (Translation: N.N.) Quoted in Hartuch, A. De, 1988, 84.

[29] Government resolution # 1867 of March 17, 1997.

[30] See reports in Ha’aretz, Aug.8-9; Sep. 15, 2000.

[31] See for example discussion in: DiMaggio, P.; Powel, W. The New Institutionalism in Organizational Analysis, University of Chicago Press, 1991.

[32] Uphoff, N.; Esman M. J. Local Organizations: Intermediaries in rural development. Cornell University Press, N.Y.: 1984, 153.

[33] The Zionist NGOs were created in the diaspora before 1882, the date of the first wave of massive Jewish immigration to Palestine. NGOs activities covered health care, education, labor unions, defense, treasury, among other spheres of activities. It personified “The long tradition of support (financial and other) by Diaspora Jews of the Jewish community living in the Holy Land.” Gidron, B. 1992, 179.

[34] The international-Zionist NGOs, e.g. the Jewish Agency, were organizations that operated as government agencies prior to 1948. While most are still in operation, they are not included in this discussion because they are not government supported.

[35] Source: Gidron B.; Katz, H. Basic Data of Israel Third Sector, 1999, 24.

[36] Gidron, B. “A resurgent Third Sector and its relationship to government in Israel,” in: Gidron B.; Kramer R. M.; Salamon L. M. (Eds.) , 1992, 184.

[37] The orthodox-Sepharadic movement “Shass” is a case in point. It was created in the mid 1980s as a minor opposition party to the secular-socialist government. It soon established a network of NGOs, lead by charismatic-orthodox local leadership. Shass power was based on a ‘basket of social services”, offered by NGOs including, free education, and individual attention to children grades K to 12. These services have not been offered by the mandatory state-education system. Shass manipulated the Israeli support of NGOs and its parochial activities have been 100 percent financed with public funds. Consequently, during the last three elections, their political power grew from 3-4 representatives in the legislature to 10 and to 17 in the 2000 elections. Shass is now the third largest party in Israel.

[38] While the case of Holland differs from the Israeli case, it can, perhaps, serve as a frame of reference. “In The Netherlands, public services are mainly delivered by private nonprofit organizations…”

[39] However, the nonprofit organizations have been financed mainly by the Dutch government, which became extensively involved, and gained an almost full control of the organizational management of private nonprofit sector…Through their legitimate power position government was able to influence societal missions of private nonprofit.” Wilderom, C.P.M.. High-quality Management of Private Nonprofit in the Netherlands in the 21st Century. City University of Hong Kong, 6-7, June, 1998.

[40] See discussion in Bar-Mor, H. Nonprofit Institutions – The Legal Context ( Hebrew), Beer- Sheva University, 1999; 6-9.

[41] Ha’aretz, August 9, 2000, 1, quoted a special report prepared by Berlinski U.; Sofer P., June 2000 for the Office of the Prime Minister. The report was especially critical of the Minstry of Religion saying that it granted public funds with no objective criteria and without any moral or just norms. The picture was bleak tregarding the systemic problems of excessive salaries to the five highest ranking directors of NGOs, amounting to hundreds of thousands of NIS per year, excessive overhead, and excessive travel abroad expenses that could hardly be considered necessary. See footnote # 15; also the Annual Report of the State Comptroller, 1998; 727-739.

[42] The Budget Law, clause 3 (a). Issue-areas include: handicaps, veteran groups, etc.

[43] See Gidron, B. Katz, H. & Bar M. The Third Sector in Israel, 2000, 34-42.

[44] This paper examines only the effects of the direct government support of NGOs namely, funds actually allocated and disbursed. The paper does not review the effects of the government indirect support of NGOs , e.g., tax exemptions, etc.

[45] Annual Report of the State Comptroller, 1998; 727-739.

[46] Salamon, L. M, ; Anheier, H. K.; List, R.; Toepler, S.; Sokolowski, W.& Associates. Global Civil Society, John Hopkins Center for Civil Societies, 1999, 7.

[47] Perhaps the most important impediment to the overseeing of the Jewish-religious category of NGOs is an Israeli government resolution of 1992, declaring that the “Equality Principle” and the requirement to prove that the funding of an NGOs is in the public interest will not apply to the ultra orthodox education systems. See Hartuch, A. de. 88.

[48] See Supreme Court ruling 780/83, quoted in Hartuch, A. de, 82. Also, Report of the State Comptroller, 1998; 728-739.

[49] Ibid.; 89- 97.

[50] Ibid., pp. 89- 97.

[51] In May 2000, the Israel High Court ruled that the Registrar’s refusal to register an NGO because its name included the title : “Palestine” was illegal and was null and void. The Court ordered the Registrar to register and licence the NGO.

[52] “An NPO will be denied registration if its name offends the public’s feelings.” No further elaboration is given. [Article 4 (a) ] [53] In this paper the term “non-territorial governments” denotes public institutions that assume responsibility for providing public services for a community commonly provided by national or local governments.

[54] In this paper the term “functional sovereignty” denotes a condition when NGOs assume autonomous control over a particular issue-area or a public service.

[55] Bar-Mor, H. Nonprofit Institutions: the Legal Context. 1999, 47.

[56] The Israeli law allows NGOs to use public funding to advocate anti-government policies. For example, in 1999, the supreme court ruled that political NGOs can use public funds to lobby the annexation of the Golan Heights, although these activity could hinder peace negotiations with Syria.

[57] Clark, J. “The State, Popular Participation and the Voluntary Sector,” in Hume D.; Edwards, M. (Eds) NGOs, States and Donors. Macmillan, London: 1997, 44-45 (citations omitted).