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Underwriting social enterprise: A comparative advantage approach

LUTFEV SIDDIQ
SPENDING time at aWorld Economic Forum event — with members of its communities of shapers, leaders and social entrepreneurs -- always forces me to think about the effectiveness of "doing good” from first principles.
Typically, I bump into two groups of people:
• Domain-experts (doctors, engineers etc.) who deliver their expertise directly to disadvantaged societies on the ground; and
• Those that have switched careers mid-stream to offer their organisational expertise in the furtherance of a cause.
Both groups are inspiring not least because they approach their calling full-time and at the expense of alternative careers in mainstream arenas.
Then there are those like me. Not quite ready to give it all up, yet keen to give back in any way that we can.
Paying a small percentage of one's regular income by direct debit into some charity ticks the basic box but it is impersonal and often doesn't provide a sense of contribution. Selfishly for the donor, there needs to be effort, sacrifice of personal time in order to provide the psychic rewards of giving.
This is the reason that people brave a challenge, conquer a fear or run a marathon to raise funds. This is also the reason that people volunteer time, on weekends for example, in the direct delivery of some charitable service.
There is yet another alternative --what 1 call the "Comparative Advantage Approach” (CoAd for short) to doing good.
It didn't take long for me to realise that any habitat that I build with my own hands would likely not be fit for humanity. Similar to other professions, delivery of social outcomes is a specialised job that takes specialist skills. For me to step into that role for a few hours on a weekend and expect to make meaningful impact is delusional.
• For anyone else in similar shoes to mine, I'd recommend a two-step approach:
• First, do something that productively employs your core skills (outside of the day-job and outside normal working hours) at a fully-professional level of competence. For this, you should expect to get paid a full commercial wage; and
• Then, hand over the money to those who specialise in the disbursement of charitable services.
Teach at an evening-college, vocational training institute, write a book, give a concert, provide accounting services on weekends — whatever gives you the highest earning power for a finite number of hours. The result of your money and your personal time will now stretch that much farther.
For several years now, I have followed this approach and as a result, each hour of my volunteer work has reached significantly more end-users than would otherwise have been the case. This is just another manifestation of Ricardo's theory of international trade.
Now, social enterprise -- especially as it applies to the base of the pyramid — can be classified into three categories.
zation,
• A narrower definition is offered by Nobel Laureate Professor
Mohammed Yunus. He believes that a social business should return the investor's capital — but no more. Once the original investment is redeemed, there should be no further claim on dividends;
• Then there are those who believe that an enterprise approach can crowd out funds from the abject poor. For some objectives, outright philanthropy may be the only realistic option.
I believe that there need not be a conflict between the three alternatives. It should be possible for a given project to access funds in any or all of the three tranches:
If, for example, the enterprise is seeking to raise $100, it is possible for $50 to come in the form of "pure charity," $30 from investors who are driven by the Yunus motivation and the remaining $20 from traditional, for-profit investors.
However, it is a fact that, in spite of good intentions and much attention, the amount of funds actually disbursed to social enterprises that operate at the base of the pyramid remains dramatically low.
According to a Credit Suisse report published in January 2012, using the widest definition of social enterprise across developed and developing worlds, the total amount is less than one percent of global stock market capitalisation.
If we were to narrow the definition to projects in Asia, Africa and Latin America targeting those that stand the best chance of weaning themselves from charity, the amount of funds delivered thus far is infinitesimal.
I personally believe that this is what needs to be done:
I would like the CEOs of the top ten globally-active investment banks to sign up to the following charter: 1.Actively encourage deployment of their origination and distribution machinery for social enterprises as part of their employeevolunteering programme,
2.In addition, each must commit capital for the purpose of underwriting a finite number of these transactions. A commitment to back-stop $100 million each should provide the thrust for lift-off.
It should also be possible to construct
At its widest definition, it generates an identifiable social benefit together with a stream of income that is self-sustaining beyond an incubation period. As long as the social benefit is measurable, the company can operate like any other for-profit organi-
annual "league tables" of social financing in the same way that league tables of traditional issuances are published and fought over by investment banks.
This is essentially the Comparative Advantage approach now applied at the level of the institution!
The top-down messaging and the commitment to allocate capital (no matter how small) would send a strong signal. Externally, this will help attract first-time investors while internally, staff across organisational divisions will be galvanised — in spite of its limited profit opportunity.
While the modalities can be refined, it should be possible to obtain this commitment at a gathering such as Davos -- at least from the banks that are partners to the World Economic Forum. I believe that the monetary cost to banks would be minimal. On the other hand, the bandwagon effect of launching this as a top-down, coordinated yet competitive campaign amongst banks may well prove to be the thrust that enables a much-needed step change in the financing of social enterprise.
The writer Is a member of the Young Global Leaders Community at the World Economic Forum — writing In a personal capacity