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Tuesday, June 27, 2006 - Page updated at 12:00 AM

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For Gates Foundation and Buffett, charity isn't a soft touch

Seattle Times business reporters

Warren Buffett's business savvy helped him amass a fortune worth an estimated $44 billion. Seeing the same entrepreneurial savvy applied to philanthropy convinced him to put nearly all of his fortune into the hands of Bill and Melinda Gates.

In merging their wealth, they've created the largest philanthropic organization in history, with more assets than the gross domestic product of seven out of 10 countries in the world. Buffett is donating most of his fortune to the Bill & Melinda Gates Foundation a year at a time, in effect doubling the foundation's $29 billion in assets.

The wealth gives the Gateses enormous power to bring social change beyond what most governments could muster, considering that the annual spending for the entire United Nations is $12 billion and the U.S. Agency for International Development budget is about $9 billion.

Yet, their real impact isn't the amount of money but how they intend to use it, say people who work closely with the Gates Foundation.

The Gateses have made the nonprofit sector more effective by applying the rigor of the sharpest financial manager. And they hope to persuade a whole generation to start giving more of their own wealth to reduce inequality around the world.

Starting in July, Buffett will begin donating shares from his company, Berkshire Hathaway, to the Gates Foundation and to four other foundations set up by his family.

His contribution is expected to double the Gates Foundation's giving to more than $3 billion a year.

"When you've got billions of people who have been dealt a terrible hand in life, ... this is not something that $3 billion a year is too much for," Buffett said Monday during a news conference.

Bill Gates noted that $3 billion a year works out to roughly $1 per person if you consider only the poor half of the world's population. That's a small amount compared with the problems the foundation is trying to solve.

Gates and Buffett have been talking for years about how to use their wealth to change the world. They started more than 10 years ago on a trip to Ireland and have talked periodically over bridge games ever since, they said.

"We've known Warren since 1991, and it was his thought that wealth should go back to society that got us thinking about doing our foundation in the first place," Gates said.

Earlier this month, on the day he announced plans to invest more of his time in the foundation, Gates said he had discussed the decision with Buffett.

"He asked really good questions and got me thinking about it, and once I'd made the decision, he was very supportive," Gates said.

Melinda Gates said the foundation, which has about 300 employees, is gradually expanding its focus, which has been primarily global health and education, to include micro lending and agriculture — areas that support global health.

"If you go watch the people standing in line in Zambia who are getting treated for tuberculosis, they can hardly swallow their medication if they can't at least have a banana to go with it or some water," she said.

The Gateses and Buffett want to apply their entrepreneurial ethic toward solving entrenched problems.

In deciding to give his wealth to the Gates Foundation, Buffett said he considered whether the foundation could be at least twice as effective with twice the resources.

"I wouldn't be surprised if actually they became more efficient, more effective per dollar spent in doubling the funds," Buffett said.

United Way of King County has demonstrated how that might be done, said Ruby Smith Love, director of the Gates Challenge Endowment for the organization.

"They're all about maximizing efficiencies," Smith Love said.

The foundation gave the United Way chapter $30 million in late 1999 and a $55 million matching grant, both aimed at reducing administrative costs.

Since then, United Way has lowered its operating costs from 10.2 percent — meaning roughly 10 cents of every dollar donated went to administrative costs — to 6.1 percent, Smith Love said.

The Gates money helped the United Way become more flexible and nimble, while allowing it to spend more on its efforts to end homelessness and get kids ready for school, she said.

Another organization funded by the Gates Foundation is the Seattle Biomedical Research Institute (SBRI), which also receives money from the National Institutes of Health. SBRI Director Kenneth Stuart said Buffett's gift to the Gates Foundation is remarkable in that it doesn't appear to be designed to call attention to Buffett.

In choosing the Gates Foundation, Buffett is recognizing the businesslike approach it has taken to grants, which Stuart refers to as "investments."

He said the foundation distributes its money strategically and closely monitors how effectively it is used. In this way, the foundation stays involved, rather than writing a check and walking away.

Moreover, Stuart said Gates Foundation money tends to encourage collaboration, where other granting agencies and the federal government have fostered competition among researchers competing for the same pot of grant money.

For example, SBRI's malaria-vaccine efforts, which received $32.5 million from the Gates Foundation, are closely integrated with researchers in government, nonprofit groups and industry around the world. Labs and clinics have been set up in Tanzania.

"That sort of enterprise would have been extremely difficult just a few years ago with other sources of support, but it's actually encouraged and stimulated by the form and amount of funding from the Gates Foundation," Stuart said.

The businesslike practices of the foundation have not been widely adopted by more established granting agencies, Stuart said. Newer private foundations, however, are using the Gates Foundation as a model.

Roy Prosterman, president of the Seattle-based Rural Development Institute, said the new model could help revive philanthropy, which suffers from "large entrenched bureaucracies and a separation from the will of the founder."

Some of the long-established foundations "have lost all sense of direction and imagination in the last generation," he said.

Yet the approach the Gates Foundation takes is sometimes criticized as "the corporatization of philanthropy."

In fact, that much money flowing into any sector could create problems if used in the wrong way, said Geoff Davis, president and chief executive of Unitus, a nonprofit that invests in institutions that give microloans in developing countries. Unitus received $1.5 million from the Gates Foundation in May.

The foundation scrutinized his plan carefully and "built benchmarks and deliverables into the process just like in a business contract," Davis said.

"The performance-based rigor and accountability in this space is just what is needed," he said.

The foundation's efforts connect with the business world in another way. It's trying new ways to develop vaccines that drug companies haven't been willing to fund because they might not see a potential market for them, Prosterman said.

While there's no guarantee the research will succeed, it could lay the foundation for further development by the private sector.

Prosterman thinks Buffett's decision could send a signal to "other very wealthy individuals to use a large part of their fortunes to deal with global problems like poverty and disease."

Said Buffett: "A rich person should leave their children enough so they can do anything, but not enough so they can do nothing."

Seattle Times researchers Gene Balk and David Turim contributed to this report.

Kristi Heim: 206-464-2718 or kheim@seattletimes.com

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com

Copyright © 2006 The Seattle Times Company

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