ARCHIVED - Evaluation of Foundations

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VI. Cost Of Foundations

The chapter reviews the level and structure of foundations' operating and administration costs relative to their disbursements and compares them to the levels reported by a number of government organizations with programs that are similar to those of some foundations.

A. Relative significance of operating and administrative costs

Differences in the mandates, activities and funding of foundations mean that their respective operating and administration costs cannot be easily compared or inferences drawn about their relative cost-efficiency. However, a review of the general characteristics and patterns of expenditures on these costs provides some useful insights into their impacts on total foundation costs.

In general terms, foundations' operating and administration costs exhibit a similar pattern from their start-up to the attainment of what might be termed their "steady state" operating level. Our review of operating and administration costs reported in foundations' annual financial statements showed that in their first one to two years, foundations' operating and administration costs accounted for a high proportion of total expenditures, as would be expected of any start-up organization, as they recruited people, secured space, and established their operating systems and processes. Thereafter the share of operating and administration costs quickly fell to a relatively stable level as projects were selected and disbursements ramped up.

Within this overall pattern, the relative significance of operating and administration costs varies considerably as a function of such factors as the scale of operations, complexity of project selection processes and the degree to which foundations undertake activities other than project selection, funding and monitoring. This can be seen in Exhibit VI-1, which shows the average share of operating and administration costs in total expenses for foundations, excluding their first two years of operation, and the reasons for the relative significance of their operating costs. The time periods for calculating the average shares range from three to seven years, depending on the time in which each foundation has been operating.

Key factors that influence the size and structure of foundations' operating expenses are:

• Scale of operations. The share of operating and administrative costs relative to project disbursements falls as the total amount of funding available to a foundation increases.
• Type of foundation. In general, operating costs are more significant for foundations with perpetual endowments than for foundations with fixed term funding, primarily because their operations are funded by the income from their endowments and the scale of their activities is smaller. Perpetual foundations typically have lower gross revenues – equivalent to about 5% of the endowment value – and operate on a much smaller scale than most foundations with fixed term funding. For instance, in 2005-06 the Trudeau Foundation generated operational funding of $5.6 million from its $120 million endowment. This is approximately equivalent to a foundation with $50 million in fixed term funding disbursed in equal amounts over a ten-year term.

Exhibit VI-1

Relative significance of foundations' operating and administrative costs

Foundation	Share of Operating Costs in Total1	Key Factors Influencing Operating Costs	Average Annual Disbursements
			Amount ($m.)	# of Years
Canada Foundation for Innovation	3%	Relatively small number of large value research infrastructure projects.	$270	7
Canada Millennium Scholarship Foundation	4%	Arrangements with provinces/territories to administer bursary awards in return for fixed annual payments by CMSF.	$296	5
Canada Foundation for Climate and Atmospheric Science	6%	Relatively small number of long-term research projects.	$12	3
Green Municipal Fund	7%	Relatively small number of large value environmental management capital projects. $50 million of $550 million funding is fixed term, remainder is a perpetual endowment.	$68	4
Genome Canada	8%	Focus on selection and funding of research platforms and large scale research projects.	$79	4
Aboriginal Healing Foundation	11%	Selection and funding of community-based healing projects to redress the impacts of residential schools plus support for the development of sustainable healing capacity and processes.	$58	5
Canada Health Infoway	24%	Selection and support for multi-year projects to plan for and implement electronic health information and management technologies. Many CHI projects involve advance planning and design phases with implementation, and disbursement of the majority of project funding occurring the in later years of project lifecycles. Share of operating costs in total expenses should fall in future (05-06 share: 14.7%).	$64	3
Forum of Federations	29%	Projects are undertaken to facilitate the main mission of the foundation to exchange information and support best practices in countries with federal systems of government.	$3	3
Pierre Elliott Trudeau Foundation	34%	Foundation provides mentoring programs for research scholars, and fosters dialogue among scholars, policy makers and other stakeholders, in addition to funding scholarships. Perpetual foundation.	$3	3
Sustainable Development Technology Canada	37%	Relatively small number of large scale technology demonstration projects. Long lead times between project approval and start-up (average of 34 weeks) affects rate of disbursement. Long-term nature of projects also means disbursement rates are still ramping up.  Share of operating costs in total expenses should fall in future (05-06 share: 32.5%).	$8	3
Canadian Health Services Research Foundation	41%	Significant level of operating expenditures support outreach and promotion activities to ensure that research findings are transferred to, and applied by, health care managers.	$8	7
Pacific Salmon Endowment Fund	51%	Supports capacity development of its program delivery partner and strengthen its effectiveness in facilitating salmon habitat rehabilitation. Perpetual foundation.	$0.9	3

1. Average operating and administration costs share in total expenses since receipt of conditional grant, excluding start-up period (assumed to be the first two years of operation).

Source:   KPMG analysis of listed foundations' financial statements.

• Focus on project selection and funding versus broader ranges of activity. Foundations that are primarily focused on the selection and financial support of large value projects – typically for infrastructure or research and development – typically achieve operating cost shares in total expenses of between 7% and 15%, with the Canada Foundation Innovation at a level close to 3% and Sustainable Development Technology Canada at 37%. Other foundations, such as Pacific Salmon Endowment Fund, the Canadian Health Services Research Foundation, Aboriginal Health Foundation and the Forum of Federations, engage in a variety of outreach, capacity building and knowledge dissemination activities that complement their core support for projects. As a result, the share of operating and administrative costs in their total expenses is higher.

B. Structure of selected foundations' costs

In order to obtain a better understanding of the structure of foundations' cost structures the management of the six foundations that participated in our case studies provided breakdowns of their operating and administration costs in recent years, on a confidential basis. Information on five categories of costs was compiled and reviewed:

• Program management and operations costs – the costs of activities directly related to the delivery of foundation services, for example, ranging from soliciting proposals, screening and reviewing proposals, negotiation and due diligence processes for approved projects, administration of disbursements, project monitoring and project finalisation.
• General management and overhead costs.
• Governance costs – board activities and support from foundation management.
• Investment management fees – fees charged by investment managers.
• Amortization charges for capital assets.

Any comparisons of the trends in these disaggregated costs need to carefully qualified, given the significant differences between the six case study foundations examined, in terms of their relative sizes (endowment funding ranging from $30 million to $3.65 billion), areas of focus, and numbers and sizes of projects supported. The average shares of total operating expenses for each of these cost items over the last five years and ranges across the six case study foundations are shown in Exhibit VI-2.

Exhibit VI-2

General structure of case study foundations' operating and administration costs

Cost Categories	Average Share of Total Operating Expenses1	Range
Program management and operations	46%	15% - 55%
General management and overhead	41%	27% ‑ 70%
Governance Activities	5%	2% - 9%
Investment Management Fees	6%	1% - 12%
Amortization – Capital Assets	2%	1% - 4%

1. Simple average of each foundation's cost mix over the most recent 5 years of financial data.

In very general terms, these cost breakdowns are characterised by:

• Program management and operations costs are driven by such factors as the frequency of proposal calls, complexity of project selection and evaluation processes, project due diligence and monitoring activities, and supporting communications and outreach processes. A number of foundations also undertake extensive research activities to improve their understanding of program issues and measure emerging impacts. The relative significance of this cost category within the overall mix of operations and administration costs increases as the total value of project disbursements increases.
• General management and overhead costs are indirectly driven by the level and rate of growth in project disbursements as a function of requirements for enabling information technology, financial, human resource and project management systems. The relative significance of general management and overhead activities in total operating expenses was highest for smaller foundations and lower for the large foundations.
• Governance costs remained relatively constant throughout the periods covered for five of the six foundations. Four of the five had annual costs within the range of $200,000 to $300,000 per year, one varied between $400,000 and $500,000, and the sixth, which had a regional focus and representation on its board, was well below $100,000 per year. Governance costs represented between 2% and 7% of the foundations' total operating and administration costs on average, except for one foundation where the board played a more significant role in the foundation's consultation and project selection activities where the average was 9%.
• Investment management fees are linked to the size of each foundation's investments. This means that foundations with fixed term funding that received a single grant have declining investment costs whereas those that received grants on a number of different occasions had investment costs that moved in line with the net impact of these new infusions and their rates of project disbursements.
• Amortization charges for capital assets are driven by costs of office equipment and space requirements, that is, the costs of office furniture and fixtures, computer equipment and software, and leasehold improvements. These requirements, in turn are a function of staff numbers.

In summary, the six case study foundations work with very lean structures focused on structured and transparent processes for reviewing and selecting projects to support, and supporting systems for project tracking and financial management. Their operating and administration costs are driven by needs to efficiently manage project workloads and to provide timely support for governance and accountability requirements. Foundations' resource levels, and costs, appear to be closely matched to, or follow, their project workloads, to the point where some evaluation studies have recommended that resource levels be increased to better control the processing and management of the volume of project-related work.

C. Relative cost-effectiveness of foundations

Another way of looking at the relative cost of foundations is to compare the relative significance of their operating and administration costs to those of similar governmental organizations and programs. In this regard it is possible to obtain indicative comparisons between some foundations, four government organizations – the three granting councils and one new department providing support for infrastructure development – and two provincial research foundations.

 The Canadian Institutes of Health Research (CIHR), National Science and Engineering Research Council (NSERC) and Social Sciences and Humanities Research Councils (SSHRC) are granting councils that have similarities to Genome Canada, Canada Foundation for Climate and Atmospheric Science (CFCAS), Canadian Health Services Research Foundation (CHRSF) and the Canada Foundation for Innovation (CFI). At the same time, they have two significant differences. Firstly, they disburse much larger amounts of money each year - $765 million by both CIHR and NSERC, and $549 million by SSHRC in 2005-06 – than the foundations cited. Secondly, the average size of their research grants is much lower than the typical projects supported by foundations such as Genome Canada, CFCAS and CFI, and they have had many years of experience in developing streamlined processes to solicit, review and select projects to be supported. The average share of operating and administration costs in the total expenses of CIHR, NSERC and SSHRC over the last six years was between 5% and 6%.

Another possible comparator is Infrastructure Canada, which was established in 2002 to address the infrastructure challenges of Canadian cities, communities and regions, through research, policies and funding programs in partnership with the other levels of government. Infrastructure Canada's support for specialised infrastructure projects has some similarities to the Green Municipal Fund, Sustainable Development Technology Canada, and the Canada Foundation for Innovation. At the same time, Infrastructure Canada also has a broader role, in that it administers a mix of transfer programs involving a diverse mix of projects, both large and small.

Infrastructure Canada has only existed for three years and the share of operating and administrative costs in its total expenditures exhibited a similar pattern to the start-up periods of the foundations, going from 26% in 2003-04 to 15% in 2004-05. In 2005-06, as project disbursements ramped up – from $199 million in 2004-05 to $1,488 million in 2005-06 – the operating and administration cost share fell to 2.8%. During the 2004-05 and 2005-06 period Infrastructure Canada lapsed $281 and $260 million in contribution appropriations, respectively. Presumably at least part of this would likely have been due to timing issues involved in flowing support to complex long-term projects within the limits imposed by the annual appropriation cycle.

At the provincial level, two foundations - the Alberta Heritage Foundations for Medical Research, and Science and Engineering Research – are similar to a number of the small and medium-sized foundation supported by the federal government. The Medical Research Foundation disbursed an average of $49 million in grants and awards per year over the last five years and the Science and Engineering Research Foundation averaged almost $11 million in annual disbursements over the last four years. Administration and operating costs accounted for 12% and 14%, respectively, of total expenditures during the periods examined.

This comparative information, which should be treated as indicative only, suggests that the foundations have been able to achieve similar levels of administrative performance to somewhat analogous government organizations.

One could also look at cost-effectiveness of foundations by asking how the costs of delivery would compare if these same activities were delivered through a departmental program. In practice, the very reasons for establishing foundations as independent organizations with multi-year funding make such direct cost comparisons difficult. In particular, departmental programs do not have the same flexibility to match project disbursements to the achievement of key milestones, the timing of which almost always cannot be confidently predicted prior to commencement, but must administer project grants and contributions within the limits imposed by the annual appropriation cycle.

Foundation representatives who participated in our interviews were almost uniformly sure that their organizations would have lower costs compared to delivery of similar projects and activities by a departmental program. Departmental representatives were more circumspect and often pointed to areas where a departmental program should have lower costs but also noted that savings in one area are likely to be offset by higher costs in other areas or more time-consuming administrative processes. The core themes running through these comments, noted below, point to the difficulty of making comparisons of operating costs between foundations and departmental programs.

• Departmental representatives felt that foundations would have higher average salary costs, on average, because they have higher manager-to-staff ratios than departmental programs. Views also differed as to whether salaries for comparable positions would be higher or lower in departmental programs, especially once the costs of benefits available to government employees and the allocation of departmental management and overhead costs are taken into account.
• Foundations incur costs in a number of areas that do not arise in departmental programs, or not to the same extent. The costs of board operations and support, and investment management, being cases in point. Note however, that these costs account for a relatively low proportion of foundations' operating and administration costs; averaging about 5-6% of operating expenses, respectively.
• Departmental programs incur additional costs because of the need to manage contribution programs within the annual appropriation cycle rather than project life cycles, for example, the work involved in managing the annual planning and disbursement of funds for projects extending over multiple years has substantial staffing and cost implications. The emphasis in departments is on distributing grant funds within the current fiscal year – summarised by one departmental representative as being "to show that money is going out and things are being done" whereas foundations can take more measured approaches tied to the timing of project milestones.
• The nature of foundations' funding arrangements provides them with incentives to keep operating costs low and thereby maximize funding for projects and other program activities.
• Foundations were recognized as having greater flexibility in recruiting and, possibly, their ability to attract employees with specialized expertise required for their activities. Staffing levels in foundations also appear to be very lean and, due to their small size and focused operations, benefit from a cohesive culture and high degree of multi-tasking.
• The focused mandates and flatter management structures of foundations improves the access of their managers to senior decision makers and the timeliness of their decision-making.
• The independence of foundations from wider federal/provincial/territorial jurisdictional considerations and government-wide systems and processes for establishing new government organizations enabled them to get up and running very quickly.

These views suggest that the operating and administrative costs of foundations are, at worst, unlikely to be significantly different from the full costs of an equivalent departmental program and, at best, could be markedly lower. Further research on comparative cost structures and levels would be necessary to provide a more definitive answer on relative costs. Of equal or greater importance to considerations of the cost-effectiveness of foundations, we would suggest, has been their ability to become operational in very timely manner, including the establishment of operating agreements and arrangements with key partners, such as other levels of government, and the scope for more efficient financial management due to the availability of multi-year funding for projects.

 

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