Financing Accreditation and Certification Programs

This section aims to analyze the financial models implemented by relevant accreditation and certification agencies, identify their funding sources and fee structures and to present a list of potential funding sources for a STSC. The purpose is also to identify advantages and disadvantages with regards to the different options. This information can then be used to develop a financial model for a future STSC.

The following financial analysis looks at six ISEAL-member accreditation organizations (FSC, MSC, IOAS, SAI, FLO, and MAC), one national accreditation program (NOP) and three sustainable tourism and ecotourism certification bodies (CST, GG 21, NEAP).

5.2.1. The financial structures

Below is information about the financial structure and condition of the ten organizations, as well as other aspects that influence the financial sustainability of the organizations. Each organization is presented separately, with a focus on the aspects that are pertinent to the STSC (See Appendices 9 through 11 for more detailed information about each organization studied). When the terms “self-funded,” “financially self-sufficient,” or “financially sustainable” are used, it refers to a situation in which the organization generates enough revenues through its accreditation or certification services to fund its annual operating costs. Several different kinds of fees and other revenue sources are mentioned in this section and the following sections. Below in Table 5.3 is a glossary of terms used in this section.

Table 5.3. Definition of fees and other revenue sources

Type of fee Definition

Accreditation fee Fee charged for accreditation services on assessments and audits (document review, site visit). It might be a set fee or a graduated fee varying according to the size of the certifier being accredited. In some cases the accreditor will charge an accreditation fee and then also charge for the actual expenditures related to the accreditation process (charge per day spent on accreditation assessments or audits, per diem, travel, phone, copying etc.).

Application fee A fee charged by the accreditor when the accreditation application is handed in. The fee might very according to the size of the certifier being accredited.

Acceptance fee Fee charged when the certifier gets accredited.

Annual program fee An annual fee (in addition to the accreditation assessment or audit fees) charged each year to the accredited certifier. In some organizations the certifiers does not have to pay the annual accreditation fee in the year they get accredited and in the years when they get re-accredited.

Reaccreditation/Re- assessment fee

Fee charged when the certifier gets reaccredited (every certifier has to be reaccredited after a specific period of years).

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Type of fee Definition

Royalty fee Fee that is charged (by the accreditor) as a percentage of the annual turnover. In many cases the accreditor will choose to operate with an annual minimum royalty fee. Depending on the set up, the royalty fee can be paid by the certifiers (as in the case of SAI) or by the operations certified by accredited certifiers (as in the case of MSC). This royalty fee may be in lieu of an annual program fee.

Value Add Tax (VAT)

A “tax” charged on every sold certified product (products produced by certified producers). The “tax” can be in the form of a percentage or in form of a lump-sum charge.

Tra ining fee Fee charged for running a training course – fee can be charged on each participant or on each course produced (depending on whether the accreditor is organizing the course or the course is organized by somebody else).

Conference fee A fee charged per person for attending a conference

Industry donation Donation or grant paid by industry.

Industry or corporate sponsorship

Annual donation paid by companies to a recipient. The difference between industry sponsorship and industry donations is that an industry sponsorship agreement may be ongoing and/or may underwrite a particular activity where a donation is often a one-time grant that may or may not be tied to a specific activity.

Forest Stewardship Council (FSC)

All costs associated with setting up FSC were financed through donations from WWF-the Netherlands and the governments of Austria and Mexico. Today FSC is a non-profit organization that mainly funds its activities through donations from charitable organizations and foundations. FSC does charge fees for its accreditation services, but these fees only cover a small proportion of the overall running costs of the organization (FSC Web site www.fscoax.org). In 2000, for instance, FSC got almost 85% of its revenues from donations and only 9.6% of its revenues from accreditation fees. The remaining 5.4% of FSC funding came from other sources (FSC Annual Report 2000). Despite the fact that FSC accreditation costs run $20,000-30,000 and up, fees are still only a small proportion of total revenues. FSC’s dependency on donations makes it particularly important for the organization to attract donors. However, FSC does not accept donations from the forestry industry because it wants to avoid any conflict of interest. FSC has so far been very successful in attracting other donations. In 2000, the organization received more than $1.5 million in donations from charitable foundations and organizations, private companies and individuals.

Even though FSC has been very successful in raising funds over the years, a study of FSC’s revenue and expenditure history from its founding in 1994 through 2002 demonstrates how hard it can be to make “ends meet” when an organization relies almost solely on revenues from donations. FSC’s revenues have fluctuated greatly, on occasion by more than 100% from one year to the next. In addition, revenues have not been sufficient to cover the operational costs. In 2000, its best year in terms of donations, the organization ran a $40,000

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deficit, equal to 2.3% of its total revenues that year. By the end of 2000, FSC had an overall debt of more than $430,000--equal to 24% of its total revenues in the year 2000 (FSC Annual Report 2000). Currently FSC is in the process of changing its operating and financial structure, so that the accreditation unit will be an independent, financially self-sufficient department with 100% of its revenues generated by accreditation fees.

Another issue facing the FSC is that it has been (and still is) quite a difficult task for the FSC to make the certifiers accept the general increase in accreditation fees that the implementation of a new FSC fee structure will lead to. These difficulties demonstrate how important it is to get the price “right” from the beginning with regards to the level of accreditation fees that would be charged by a possible future STSC. Fee schedules need to balance financial self- sufficiency with realism about the market demand for the service.

Marine Stewardship Council (MSC)

Unilever and WWF, MSC´s founders, financially supported both the set up and operational costs during its first phase, before MSC became an independent organization.

Today, the MSC is funded through donations from charitable organizations, individual donors, and funds generated through corporate sponsorships, accreditation fees, and royalty fees from companies certified by MSC-accredited certifiers (MSC Web site www.msc.org). Seafood companies that get certified by MSC-accredited certifiers enter into a “branding” contract with the Marine Stewardship Council. The company has to pay an annual royalty fee to the MSC amounting to 0.1% of the company's annual turnover in order to be allowed to use the MSC logo on its product packaging. The MSC logo is used by multinational corporations as well as small local producers and the logo appears on fresh seafood products as well as on canned seafood products.

Even though MSC increased it is revenues from accreditation and royalty fees by more than 140% from 2001 to 2002, MSC still relies on donations as its main funding source. MSC recognizes that it is not financially sustainable to continue to rely so heavily on donations as the primary funding source. MSC officials say that there are several reasons why it is risky to continue relying on donor funding as its primary income source:

1. Donations tend to dry up after a while. Donors typically fund projects in their initial stages and then expect the projects to be financially sustainable and independent.

2. Donations tend to fluctuate a great deal from one year to the next, in part reflecting shifts in the stock market, and in part reflecting donors’ changing funding priorities.

Given these uncertainties, it is difficult to use a long timeframe for planning future activities. Consequently, the MSC is in the process of reorganizing its financial structure to increase its income from royalty and accreditation fees, so as to gradually become less dependent on donor funding. The MSC is also looking into the possibilities of providing training as well as getting into certification of non-seafood products and even cruise liners as potential lucrative additional sources of revenue (Alex Hickman, MSC, pers. comm.).

In contrast with FSC, MSC has also sought funding from corporate sponsors. In 2001-2002, 12% of MSC annual revenues came from corporate-sponsorships (MSC Annual Report 2001- 2002).

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From a marketing perspective, the MSC seal is apparently viewed by the industry as adding value to certified products. Today multinationals such as New England Seafoods, Sanford Ltd., and the producers of Iglo and Movenpick products, as well as big retailers such as Woolworths, Marks and Spencer, Sainsbury’s and Whole Foods Market are using the MSC seal in their marketing of seafood products.

Social Accountability International (SAI)

SAI charges accreditation fees of $2,000 for certifiers operating in one country to $15,000 for certifiers operating in more than one country. In addition, SAI charges an annual royalty fee of 1.5% of the certifiers’ annual turnover. Despite this, SAI's income from fees is far from sufficient to cover the organization’s overall operation costs.

Despite the fact that the SAI generates a substantial amount of revenues through its accreditation and training activities, the organization still relies on donations to finance a large proportion of its annual operating costs. In fiscal year 2000, SAI’s revenues from accreditation, royalty fees and training activities covered 56% of SAI’s operating costs, with the remaining 44% coming from donations (SAI Annual Report 2000).

In 2000, SAI’s balance sheet ran a surplus due to a large grant received and carried forward. In fact, in fiscal year 2000 SAI’s expenditures were only 54.6 % of its revenue. Such a large surplus is not the norm for SAI; usually SAI has a balanced budget with either a small surplus or a small deficit.

In considering the applicability for STSC, both SAI and MSC have a royalty fee that is based on a percentage of the annual turnover instead of a lump-sum fee. This makes certification a lot more attractive and affordable for smaller companies. In addition, SAI – like FSC – generates a lot of revenues through donations, but where the FSC does not generate quite enough revenues to finance its annual expenditures, SAI has succeeded in generating more than enough revenues to finance the organization’s annual operating costs. An important difference between the two organizations is that FSC is a membership organization and carries costs associated with serving a large, diverse membership while keeping membership fees relatively low. SAI is not a membership organization, which probably makes it a “leaner” organization and less costly to run.