The case for social enterprise

The Edge Financial Weekly. Dec 7, 2009
By Quek Sue Yian and Kal Joffres

Five hours Northeast of Karachi in the Thar Desert may not sound like a very happening place. Yet, on a few small patches of desert land, an important test of a potentially potent mix of capitalism and charity is happening.

Hours into the middle of the desert, when pavement gives way to dirt and scorching heat, a parched landscape of sand and shrubs reveals an ocean of yellow heads extending to the horizon. Not too long ago, this sunflower farm was acres of cracked earth. Naran, the farmer who owned the dry land, barely scraped by with the wage he earned working on other farmers’ land. Naran’s farm is part of an innovative project by MicroDrip, a for-profit company that enables rural farmers to significantly increase crop production through drip irrigation technology. Naran now works for himself and uses the extra income he gains to send his children to school.

While the champions of market capitalism are far and few between these days, charity has gained no new converts. Critics increasingly point to cases where charity has caused more harm than good by creating strong dependencies on outside money or installing technology where local communities have neither the expertise nor money to fix when it inevitably breaks down. Capitalism and charity will undoubtedly remain keystones of the global social system. However, just as it is becoming clear that neither will deliver the world from its problems on its own, a third path is emerging: social enterprise.

A vibrant community of social entrepreneurs – including Malaysia – is addressing social problems in a sustainable way by creating organizations that deliver social benefits using business models. As bed-follows, capitalism and charity are turning out to be less awkward that might have been expected. Mohammed Yunus’ Grameen Bank is one of many examples.

Social enterprises are emerging to provide innovative ways of delivering prenatal healthcare, early education, and agricultural technology to disadvantaged communities often out of reach to conventional businesses. Unlike charity, the benefits of social enterprise to the community continue long after the flow of outside money has stopped. In each case, social enterprises have managed to bring the self-sufficiency of business and the incentives of market forces to bear on problems of poverty in a way that neither pure capitalism nor pure charity have been able to match.

Chandran Nair, who heads the Global Institute for Tomorrow, grills a class of high-potential managers at a major Malaysian company. “Does your company have a social responsibility?” He stares out into the crowd. “I don’t mean giving RM 4,000 to an orphanage. That’s high school stuff.” The class was the corporate training client of Leaderonomics, a Malaysian social enterprise founded by former GE managers. Leaderonomics generates revenues from management and leadership training at major Malaysian companies. It turns around and uses those revenues, training materials, and sometimes executives at client companies to run leadership and entrepreneurship camps for youth, including many underprivileged children.

“We think that the best way to create a better generation of leaders in Malaysia is to start young,” says Roshan Thiran, who founded the enterprise. For Nair and Thiran, social enterprise is far more than traditional corporate social responsibility. The challenge of social enterprise is using the same core competencies that generate revenue to create social benefits.

While traditional enterprise can contribute towards employment, social enterprises generate employment in areas where it is most often needed but least created: poor and disadvantaged communities. Elevyn.com is a Malaysian company that leverages the internet to cut out layers of middlemen and connect crafts sellers in poor communities directly with consumers in wealthier markets.

Craftspeople receive up to 75% of the sale price of goods sold through the company’s low-cost, online sales and supply chain infrastructure. A portion of each sale goes to a fund financing a project the community has agreed on, such as buying books for a school or financing a child’s studies. The company works with 366 artisans and 7 field partners in Malaysia and Cambodia.

Social enterprise is increasingly being tapped as a way of solving some of the world’s most difficult problems. Today, 1.1 billion people lack access to clean drinking water. 3.6 million people die each year of water-related disease. At RM 10,000 to RM 15,000 per well, delivering clean water to thousands of people is weighty expense, let alone the millions of people who need to be helped in order to make a dent in the water problem.

As is often the case with global problems like water sanitation, the solutions of charity alone do not match the scale of the problem. At the same time, many donors are discovering that successful interventions need to be embedded in a business ecosystem. When a water pump breaks down, users must be able to afford maintenance, businesses must be in place to provide maintenance, and someone needs to provide replacements.

Enter WaterHealth International, a company that uses a franchising model to deliver clean drinking water to small villages. WaterHealth provides village entrepreneurs with UV filtration technology, which is used to process and sell clean drinking water to remote villages at low cost. Through its network of franchises, WaterHealth provides access to pure and safe drinking water to half a million people in 4 countries. When something goes wrong, WaterHealth technicians are available to troubleshoot equipment. Village entrepreneurs pay for maintenance using the proceeds of their business.

WaterHealth illustrates what happens when the self-interest of entrepreneurs is aligned with delivering social benefits. WaterHealth distinguishes itself from conventional charity through scalability. While the benefits of charity tend to increase in proportion to the amount invested, a WaterHealth can grow exponentially from an initial capital investment as it leverages revenue, borrowing, and the economic interests of other businesses down the delivery chain.

In cases where consumers can afford to pay just a few cents per transaction, there is potential to create scalable and replicable businesses that address the difficulties of poverty. Social enterprises promise dividends not just for Malaysian youth or the farmer hours into the Thar desert, but also the investors who back them.

Some worry that social enterprise, like charity, let governments off the hook of their responsibilities. Jacqueline Novogratz, a social enterprise investor, disagrees. “When Jeff Sachs says every poor person should receive a free bed net, I agree – but in reality many end up not receiving one,” she tells The Economist. “And I don’t live in a world of shoulds.”

That pragmatism underlies many of today’s most impactful social enterprises. If the global financial meltdown was the product of zealous market capitalism, the failure to address the world’s social problems will lie in an ideological attachment to charity.

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