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Corporate Impact Venturing: Working Together

Husk Power Systems Fostering sustainability is at the forefront of the world development agenda. For a long time, corporations have taken part in facilitating sustainable development by engaging in corporate social responsibility (CSR) initiatives. The companies are, however, faced with an ocean of need when it comes to fulfilling their societal obligations and they often find that CSR cannot adequately rise up to meet these challenges.

Corporations have now realized that they can yield social, financial and strategic returns by investing in inclusive entrepreneurial ventures targeted at individuals at the base of the pyramid (BoP) in what is known as corporate impact venturing.

The largest problem that social entrepreneurs face is accessing adequate financing to enable them to develop and grow their businesses. Traditional financial models such as donations and grants often serve to stultify their development. Most start-ups also lack managerial and business expertise and adequate scalability.

Corporations, on the other hand, lack insight on low-income markets. They often have rigid and bureaucratic structures in place, expect high returns on investment and are generally risk-averse. These are all qualities that make it difficult for them to invest in BoP Markets.

Corporations and social entrepreneurs are quickly realizing that numerous benefits can be realized from working together.

When a corporation invests in a social business, it gains a foothold in low-income markets and increases its brand visibility with BoP individuals. In addition, it acquires valuable market insights and is able to gain access to top local talent. Inclusive businesses gain much-needed capital, scalability and business acumen required to firmly establish their enterprises.

A report by Endeva highlights the three different models that are currently being utilized by corporations engaged in corporate impact venturing: direct investments, third-party funds and self-managed funds.

Direct investments involve organizations funding inclusive businesses from primary accounts, with the investment amount being listed on the company’s annual balance sheet. Self-managed funds involve corporations setting up separate investment companies, while corporates that use the third party method for corporate impact venturing are limited partners in third party funds such as venture philanthropy funds.

This alliance of convenience is not only a win-win for both corporates and inclusive businesses. The biggest beneficiaries are the low-income earners to whom the products and services are geared.

Husk Power Systems is an innovative, inclusive business that was founded by Gyanesh Pandey, Manoj Sinha, Ratnesh Yadav and Charles Ransler in the Indian State of Bihar. The organization provides off-grid energy solutions for people living in rural areas in India and East Africa. They do this by designing, installing and operating small power plants that convert agricultural waste into electricity.

The venture has managed to install more than 80 mini-power plants which provide energy to over 200,000 people in 300 villages in India and 6 villages in Uganda and Tanzania.

The growth that Husk Power Systems has achieved since its inception has been fueled by its strategic partnership with the Shell Foundation. The foundation has provided the start-up with funding, recruitment supervision and research and development guidance.

The Shell Foundation was founded in 2000 by the multinational corporation Royal Dutch Shell as part of its sustainability strategy to deliver environmental and social impact.

“At a time when many companies report that they are stuck on their ascent to sustainability, engaging in venturing through impact investing is a powerful opportunity to achieve results of consequence for both business and society,” says Dr. Maximillian Martin, the founder of Impact Economy. “Companies can become profit-making shapers in a changing world—rendering their businesses future proof while delivering positive impact.”

– June Samo

Sources: Business Fights Poverty, HBR, Husk Power Systems, Impact Economy, Shell Foundation, The Guardian, The Practitioner Hub 1, The Practitioner Hub 2
Photo: Flickr

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Global Public Goods: A Case for Funding Development

Global_Public_Goods
Garnering political support and securing the funding to put a substantial dent in global poverty is proving to be a frustratingly tricky endeavor.

At a UN General Assembly meeting 45 years ago, leaders of developed countries agreed to funnel money, in an amount equal to 0.7 percent of their GDP, towards developing countries. This money was to promote “economic development and welfare of developing countries” and is referred to as Official Development Assistance, ODA for short. The 0.7 target, which is non-binding, has been repeatedly agreed upon and consistently undershot.

The closest that developed countries have come, as an aggregate, was 0.51 percent of GNI back in 1963, seven years before the UN agreements (The data uses GNI instead of GDP, but lack of substantial difference between the two should not significantly skew the data). Wavering between 0.36 and 0.21 percent of developed country GNI between 1970 and 2014, perhaps a novel strategy for the provision of ODA is needed. Enter Global Public Goods.

Global Public Goods, a more calculating, if a less emotive method of funding global development, rests its case on the idea that there are some goods, which when consumed, have positive impacts that extend beyond the consumer. Because all of the positive impacts are not accrued to the person who pays for the good, some people can avoid paying yet still receive the benefits, known as free-riders. This leads to the good being under-supplied. Therefore, the government steps in to provide more of the good, funded through a tax, making everyone that benefits pay their fair share.

Some classic examples of public goods include education, national defense and immunization programs. What is important is that the increase in the goodwill have benefits for all of society, and outweigh the cost of the tax, making everyone better off.

This idea, which is founded on the fact that costs and benefits spread out over society from individual actions, is gaining significance in an increasingly networked and connected global economy. Many economic decisions and consequences have widened in scope and have necessarily transcended nation-state boundaries and legal systems. Few are isolated from the complexity and interdependence of global forces, and individual nations are not equipped to properly deal with the effects. In short, the market is now global and attempts to correct the market should be also.

Corrective solutions for global problems like “international security, financial stability, eradication of epidemics and the dissemination and sharing of knowledge” as well as pollution and loss of biodiversity, require cooperation on an international level. According to the Global Public Goods school of thought, funding for the institutions that would provide these goods should be paid for by all that benefit, in other words, everyone. The technical details of provision and funding (for example, would the funding come from a supranational tax authority or existing national revenue collection agencies that coordinate where and how the funds are spent) are still being worked on. Still, this avenue promises to correct a global imbalance of public goods and bads, providing more of the former and minimizing the latter, making everyone better off.

Currently, the dependence on voluntary contributions and the free-rider pitfall that the 1970 UN agreement did nothing to address are two explanations for the lack of ODA funding, which stood at 0.29% of developed country GNI in 2014, instead of the agreed-to 0.7%.

As problems of global insecurity and climate change are on the rise and roughly two billion people will be joining us in the next 35 years, a traditional approach to solving these problems may prove to be prodigiously expensive. Rethinking global development through the lens of Global Public Goods can have a greater impact on poverty reduction and development, and its solid economic underpinnings may make its funding more politically palatable.

– John Wachter

Sources: French Ministry of Foreign Affairs, Global Policy Forum, Organization for Economic Cooperation and Development, Swedish Ministry of Foreign Affairs, United Nations Department of Economic and Social Affairs, United Nations Industrial Development Organization, United Nations Millennium Project
Photo: NRF

Understanding Foreign Aid

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Foreign aid is a broad term that defines the assistance of one country to another, usually a developed country helping another nation. This assistance can be monetary or otherwise and can be intended for many different purposes or reasons.

The origins of foreign aid in the United States stem from the Marshall Plan and the U.S. assisting Europe in its post-World War II recovery. More recently, the United States Agency for International Development’s stated mission is to help fledgling democracies and end extreme poverty.

Most people in the U.S. believe that foreign aid is substantially higher than its actual value, which is equivalent to or lower than one percent of the federal budget. The money sent to other countries as aid is fairly small for the U.S., yet it is capable of producing a host of benefits for the recipient countries.

Humanitarian assistance is the most common reason for giving foreign aid. The recent earthquake in Nepal triggered a response by USAID whose contribution of over $47 million have been used to help with disaster relief in the region. Other reasons for humanitarian-related aid include extreme poverty, hunger and the effort to improve global health by fighting preventable, communicable diseases that are common in the developing world.

Infrastructural development is a commonly cited purpose for aid dollars. China, for example, has been investing heavily on infrastructure in Africa, including a $15 million aid deal with Sierra Leone for fiber optics installations. This investment is only one example of how aid is used to build communications, transportation, medical and other critical infrastructure in order to help facilitate economic growth and development.

Aid earmarked for education assists countries while preparing them to be more independent. Aid programs often focus primarily on improving access to education, which can be a limiting factor for education’s effectiveness. These programs also target teachers’ training in order to improve the quality and impact of the education being provided. Building human capital by establishing skills such as basic literacy cannot be underestimated.

In the past eight years, the European Union Commission has invested well over four billion euros in improving education and literacy in multiple developing countries. They were able to put at least nine million children into schools and train hundreds of thousands of teachers in order to improve standards of education. Rudimentary reading and writing skills that are taken for granted in developed countries can change the lives of those in developing countries where literacy rates are low. Literacy can be thought of as a gateway toward further human capital and economic development.

Foreign aid can also be motivated by strategic and geopolitical forces. Helping other countries can leverage support for the gifting nation or help build strong relationships in a certain region.

Israel received the most foreign aid from the U.S. in its 2012 fiscal year. Though Israel does not face the same low literacy rates or high levels of poverty as countries in Africa, there are strong geopolitical motivations that have led to this phenomenon. In addition, five of the top ten recipients of aid in the same year were from the Middle East. Some states in the region are rife with war and turmoil. As a result, the U.S. provides foreign aid to help these states recover from the damages of war or to aid in creating and sustaining stability across the region as a whole.

Developed countries are in a position to help those in foreign countries who are in need of assistance. Foreign aid is an essential and fairly pain-free way for developed countries to fight against global poverty and support global health, education and peace.

– Martin Yim

Sources: USAID 1, RAND, Washington Post, Aid Data, USAID 2, European Commission, ABC News USAID
Photo: Georgetown Public Policy Review

Africa’s Sahel Region in Need

Africa's Sahel region
In February 2014, the UN pleaded with aid organizations to meet a $2 billion challenge in order to face a food crisis in Africa’s Sahel region that could affect over 20 million people.

Africa’s Sahel region divides the Sahara Desert from the Sudanian Savanna, spanning the width of the African continent, and has, in recent years, been damaged by a process known as desertification. Desertification is caused by poor agricultural practices and natural soil erosion. Additionally, a combination of population growth, drought, and conflict has put the already vulnerable region at risk.

Of the 20 million food insecure inhabitants, 5 million are children at risk of acute malnutrition. Already, nearly 577,000 children die each year of malnutrition in the Sahel.

UN officials are especially concerned about the Sahel because, in 2013, donors only offered about 60% of the requested $1.7 billion. They argue that another shortfall would prove catastrophic for many of the region’s most vulnerable.

The requested $2 billion would fund a three-year development plan that includes the countries of Burkina Faso, Cameroon, Chad, Gambia, Mali, Mauritania, Niger, Nigeria and Senegal. The UN seeks to work with the governments of the Sahel in conjunction with international aid organizations to address the root causes of conflict and famine in the region in order to make the Sahel more food secure.

This is the first multi-year plan for the Sahel, and it represents a shift in the way the UN deals with food security issues.

In September of 2013, the UN Humanitarian Coordinator for the Sahel, Robert Piper, said of the situation, “Business as usual doesn’t cut it . . . One of the problems we have today is that governments tend to want to fund food and nutrition . . .They are much more reluctant to fund, say, agriculture or water and sanitation inputs.”

Piper argued for the development of long-term solutions as the only option for the people of the Sahel.

Many of the food insecure are those who have been displaced by conflict.  Violence in the Central African Republic, Sudan and Nigeria has lead to more than 730,000 refugees spilling into the region and some 495,000 displaced internally.

Without a plan to resolve these conflicts and care for the refugees, the continuing costs and caseload will become too great for the UN, Piper claimed.

– Chase Colton

Sources: UN News Centre, New York Times, BBC, UNOCHA Sahel, UNOCHA Piper
Photo: Reuters