Illusory restrictedness

TL;DR
Restrictions on donations are likely to be illusory unless they are a material proportion (e.g. > 10%) of the charity's total income; this is because of the fungibility of cash. I refer to this as illusory restrictedness. The illusoriness I'm referring to goes above and beyond the misleading elements of charity marketing that have already been discussed elsewhere. This happens even where charities are being entirely honest and accurate in their financial management.

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By now it is a familiar staple for charity donors to "buy a goat" for a family in sub-Saharan Africa.

It is not new to point out that this is potentially misleading. The argument that has been so far is that you have to look at the small print to see this, (example small print here, here, or at the bottom of the "read more" section of this page).

However, even the claim made in the small print is misleading. The claim made in the small print is that when you "buy a goat" you are contributing to the "making a living" programme, which includes many programmes, such as training farmers, distributing livestock, and teaching business skills (and, presumably, goats).

However, as a donor, your question is the counterfactual question: what would change if I hadn't made that £5 donation? Using Oxfam as an example, the chances are high that it would have got caught up in the reserves - i.e. instead of Oxfam ending the year with £29.4m, they would only £29,399,995 instead (I'm using a bit of poetic license with the rounding here!)

To be clear, there is nothing wrong with charities holding reserves - indeed this is a good thing - and enables charities to do their work. Having more reserves can enable charities to start up a new project, or to not have to close down an existing project.

At this point, you might think I've missed the point - the donation you gave was restricted, and has to be used on goats (or at least, if you look at the small print, it has to be used on the somewhat broader "Making a Living" programme of work). And this is where fungibility of cash comes in.

If you had not given £5 to buy a goat (or whatever) Oxfam would have completed its programme of work and still bought the same number of goats in total. If your (restricted) goat donation had not been there, the total spend on goat-related work would have been the same, and would have had to be funded from other funding sources. I can't say for sure what those other sources would be, but chances are it would have resulted in there being £5 less of reserves available.

Is there any way that the restriction could make a difference?
Yes. If, say, you and lots of other people give lots to gifts that fall within the "Making a Living" programme, it may end up being more than Oxfam had already planned to spend (or if you are a large donor)

So in the example on the right, the top of the bars (in red) indicates the total level of spend that Oxfam plans to do (ignore the numbers, this is an illustrative example).

It will then do a check on the level of donations it has received that are restricted to that work. In this case, the amount restricted (ie the amount that charity *has to* spend on that programme) happens to be less than the amount they were planning to spend anyway. So the charity can breathe a sigh of relief, and not worry about it.

Now imagine that one programme (for example, the Making a Living programme, as depicted in the chart on the right) happens to be very popular among restricted donors, and gets so much money restricted in its favour that the restricted amount exceeds the amount that the charity was in any case planning to spend. This would cause extra logistical work for the charity - it would need to recognise its obligations to its restricted donations and adjust its spend upwards on that programme.

I did try to find the data to be able to create these charts based on real data from the annual report and accounts of Oxfam, but it looks like there wasn't enough data in there to be able to do this. I would expect that the total funding of these projects is well above the amounts expected to be raised on a restricted basis, since it would be very difficult to effectively manage the project otherwise.

I have used the familiar "buy a goat" mechanism as an example here, however hopefully it is clear that this could equally apply in pretty much any situation where a restricted donation is given. It would only be different if the amount donated were large relative to the size of the charity - then the second of the two charts shown above would automatically apply - you wouldn't need other donations to also be restricted to the same thing as your donation, your donation would be large to have an impact on its own. In other words, if you give a donation that is large relative to the size of the charity, then the restriction is probably not illusory - it is probably a real restriction.

Note - I have used Oxfam as an example here, but this is just to make things more tangible. I think this would apply equally to Cafod, World Vision, or any of the other myriad large charities that work like this.

Am I saying this is a bad thing?
No, there's nothing wrong with using goats as an illustrative example. This is marketing, and marketing never highlights every detail, warts and all (not least because most people don't have the patience to listen to that much detail). Giving donors the mindset that their donation actually *achieves* something is a good thing, and I'm glad it's happening.

I also suggested that the net impact of a £5 donation to Oxfam would probably be that the reserves would be £5 higher. This is true, but it's also not necessarily a bad thing. Having higher reserves means that the charity is less likely to have to shut down a project in the future, and more likely to take on a new one.

So the actual impact of your donation is *not* (necessarily) the project which you restricted your donation to, it's the project which is able to exist because of your donation.

However for serious donors interested in the impact of their donation, this phenomenon - that I call illusory restrictedness - highlights just how difficult it is to understand the implications of a donation to a large charity with several programmes of work.