Earlier this month the UK-based Medical Emergency Relief International (Merlin) announced a merger with Save the Children. The two NGOs said that the decision was to achieve a better reach of critical humanitarian services to the world’s most vulnerable.
“By combining Merlin’s expertise and flexibility with the heritage and reach of Save the Children, we will create a unique proposition: a global humanitarian force that can provide faster and more cost effective support in a humanitarian crisis,” said Carolyn Miller CBE, Chief Executive of Merlin at the time of the announcement.
An investigation into the past few years of Merlin’s operations reveals that the charity was financially stressed. John Alliage Morales at Devex dug into Merlin’s financials and asked other NGO workers to find out what happened. He learned that narrow funding streams and overspending in 2011 led to £1.9 million in losses.
Morales finds that between 2010 and 2011 funders like Mercy Corps, McCall MacBain Foundation and Academy for Education Development did not give money to Merlin. The organization also saw cuts from Irish Aid and the Global Fund to Fight AIDS, TB and Malaria.
The funding cuts forced Merlin to focus 90% of funds on spending determined by donors. That meant that projects had to meet the needs set by outsiders rather than Merlin itself. Morales says that this caused a greater need for administrative spending which contributed to the losses in 2011.
Relying on project-based funding may eventually hurt nonprofits, several NGO sources told Devex. These groups said projects entail additional costs like staffing, and without enough money from the untied pool to cover the additional expenses, NGOs have to shoulder the full cost.
In 2011, Merlin incurred a loss of £1.9 million because the income that went through the unrestricted pool was not enough.
NGOs explain that in times of budget crunch in the developed world, nonprofits have to aggressively eye funding from wealthy individuals, private foundations, previously untapped government donors and philanthropists, among other sources.
But the charity struggled to attract funding from new sources these past years. Merlin has repeatedly identified “fundraising in a difficult economic environment” as one of its main risks.
To fund those deficits, Merlin tapped its shrinking reserve funds: from £9.3 million in 2009 to £7.1 million just two years later.
Most of the time, Merlin has run into cash flow troubles because of the earmarked projects it has with its donors. Since its fund reserves are not enough to finance its multimillion charity activities worldwide, the organization would try to get bank loans.
The case of Merlin illustrates that nonprofits cannot rely on a small group of donors. Merlin did not have a very diverse set of funders before 2010. Little money was coming in from the private sector or alternative funders. That meant that the sudden decline in funding from the few donors that funded Merlin had a serious impact on its ability to stay open.
NGOs can learn a thing or two from what happened to Merlin and so can multilateral organizations. Morales points to the fact that the UN Development Programme (UNDP) relies on only a few donors.
Over the past years, a multilateral agency like UNDP has clung on to its top ten donors who provided 85 percent of its funding. Much of the money that goes into its coffers is already off-limits — in effect, UNDP acts as a contractor for donors.
Because of this, UNDP has been forced to impose administrative cuts, restrict program focus and diversify its funding.
Are major NGO mergers the new normal? The answer depends a lot on whether NGOs can continue to get the money they need to opperate. The changing landscape of funding for NGOs was cited by an unnamed global health worker to spoke to the Guardian about the merger between Save the Children and Merlin.
“My sense from a lot of NGO workers I know is that they don’t really seem to be seeing where things are going in terms of aid and development – they see it as a change in availability of funding rather than a much bigger paradigm shift. There’s still this sense that services for poor people have to come from INGOs,” said the professional.