Social Enterprises: Visibility and the Potential for Failure are Key

I am now coming to the end of my third year working in the development field after fifteen years in commerce. My preference for the social enterprise model will not surprise many, though I would like to think there are better reasons to support it than familiarity.

My work has been in the area of renewable energy. For years the obvious need for power, and the obvious solution of solar meant nothing. Giving away free lamps successfully transferred technology from suppliers who had been already paid and done no marketing, to people who had not paid and made no choice other than to accept something that was free. Neither party was inspired to start selling or buying as a result.

What was perhaps more interesting than this cleverly worded put down was that if you read about some of those projects written by the aid agencies, NGOs and consultants who participated, you could only have been impressed at how successful the projects had been. Tens of thousands of lamps had been sold, and hundreds of thousands of people benefited. I have personal knowledge of one case where a social enterprise was set up to take the work of an NGO forward. In this case, the motivation was frustration at the lack of success, although the NGO numbers would never have suggested that. In its last year of operation, the NGO claimed responsibility for the sales of tens of thousands of solar home systems. In the first year of operation of the social enterprise, sales of less than 1000 were achieved. 4 years later, the social enterprise is reaching break even, and sells 2000 systems, with good prospects for growth. The difference is that 2000 systems are real – imported, distributed, marketed, installed and working. The NGO number was little more a third hand rumour of what other people claimed to have done – impossible to verify, not that anyone had any interest in doing that.

It is not news or particularly insightful to note that development impact is not measured in any real sense, but merely described. The inevitable result of this approach is that aid money is channeled to those who are best at writing proposals, and producing reports. Every few decades when the sheer corruption of this approach becomes unbearable, new approaches emerge. Today, results based financing and social enterprises are trying to change the dynamic and get value of aid funding.

In the first, the goals of the program are set in advance but paid in arrears. For instance funding is provided after 3rd parties have reached goals that are measurable such as sales, when sales are part of the project. Unfortunately sales are not often available as a measure, and in their absence everything can fall back into the same mud trap of before. Expensive consultants like me are asked to validate the outputs in a different way. Before you know it, layers and layers of agencies, development consultancies and sub-contractors are all in place. This complex bureaucracy is of course expensive, but the layers provide credibility. It reminds me of the same issue in academic papers. References are convincing, even if the underlying data is weak. The bigger issue however is that aid bureaucracies whatever measurement system they use do not risk failure – only criticism. DFID will still exist tomorrow if all its programs underperform. They will perhaps change their name, but no government will pull the plug from the wall.

Social enterprises are another and in my opinion better alternative. They are set up to solve a social problem taking a commercial approach. The approach can be summarised by ‘sustainability’. The orgganisation must raise money, and apply that money to solving the problem. The process needs to generate a surplus which in time should make the solving of the problem self financing. If it does not succeed in solving the problem, funding dries up and bills are not paid. The enterprise folds. It fails. When the problem is solved successfully, a surplus is generated which can be distributed – hopefully recycled into increasing scale. But maybe not – but so what, as long as the underlying social problem has been addressed.
It comes down to visibility it seems to me. A social enterprise must compete for social equity, and must produce convincing reports of its outputs to raise additional capital. By being focussed on becoming self-sustaining and paying its own way, it avoids the trap of aid bureaucracy where the goal is to keep doing projects, and not to keep finding and scaling successful ones. The social capital market is more demanding than government when it comes to allocating money. And it rarely tolerates spend for the sake of running out the budget rather than returning it.

There are problems where social enterprise is not appropriate. Simplistically health and disasters. In most of the other cases I vote for the social entrepreneurial approach with better visibility, more accountability, and the possibility of failure. Be successful or get out of the way and stop wasting precious development funding.

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