India Journal: What’s Policy Got to Do With Social Enterprise? - India Real Time - WSJ

By Lindsay Clinton

Many social entrepreneurs and social investors tend to avoid inviting the government to their table because it often means a slow, fat-fingered solution, rather than a targeted, nimble infusion of resources.

However, government policy can also serve as a growth catalyst and a broad-based enabler, and, as such, cannot be overlooked as an important partner in the development of social enterprise as a sector.

What does a marriage between social enterprise and government look like?

David Wood, director of the Initiative for Responsible Investment at Harvard University, has been researching the roles that government can play to positively impact social enterprise or, more precisely, social investing. He explains that government can positively affect the development of social enterprises.

Government’s actions can increase the supply of “impactful” capital, or investment by those interested in social and financial returns (e.g., government as co-investor). Government can also increase the demand for impactful capital (i.e., government as capacity builder) or channel capital in strategic directions (e.g., federally regulated organic labeling). All three can be useful mechanisms for accelerating the growth of social enterprise.

Should we encourage more government involvement in partnership with social enterprise?

A current policy discussion led by the Reserve Bank of India about “priority sector lending”—an example of channeling capital—is a case study to consider when we think about the role of government in social enterprise. Historically, the RBI has mandated that all public sector banks reserve 40% of their capital for lending to rural regional banks, microfinance institutions, and others and required them to lend to these institutions at reduced interest rates.

Over the last five years, we’ve seen the impact of this policy writ large with the explosive growth of the microfinance sector. It could be argued that lower borrowing rates helped MFIs grow as they might not have otherwise.

With the initial public offering of the Indian microfinance institution SKS, the policy now seems more like a loophole than a leg-up.  Has the RBI been too successful in its support of the microfinance market?

Perhaps. Less than a month after the close of the SKS IPO, the RBI announced that it was considering disallowing MFIs to be regarded as part of the “priority sector lending” label. The RBI has not announced a decision.

Did a policy of priority sector lending cause the runaway success of MFIs? Would MFIs have grown at such speeds, and reached as many poor people, without the benefit of lower interest rates? Are borrower over-indebtedness and regional MFI saturation adverse effects of this policy?

The decision to forge a relationship between social enterprise and government often comes down to patience. To borrow a farming analogy: Should we grow organic crops even though we may not produce enough to feed everyone? Or should we cultivate genetically modified seeds, even though the adverse effects are unknown, because it will solve a problem now? The more sustainable strategy is organic growth. But, what is better for the market? For the customer?

The RBI now sees that MFIs are getting a sweet deal by having money thrown at them by banks, the markets, and, in the case of SKS, now the public. Do microfinance customers stand to gain from this? That is not yet clear. While more customers can be reached with the addition of capital, the quality and breadth of services provided by commercial MFIs remains a question.

Although policy can take years to incubate and implement, it can have far-reaching effects. Unfortunately, some policies once put in place, are hard to take back, like sending an elephant downhill in a go-cart without brakes.

It’s clear, however, that we must look closer at the intersection of policy and the social enterprise arena to determine how the two can complement each other, without cannibalizing.

A relatively new innovation in the UK, the social impact bond, demonstrates how government can function as a strategic partner to spur private investment into social causes in a measured way. This financing mechanism links improved social outcomes to returns for investors. In one instance, the social impact bond has been used by Social Finance, a U.K.-based organization, as a tool to lower prisoner recidivism. Through a unique arrangement, the government agrees to support a project that will save money and potentially lower taxes—in this case, keeping prisoners from reoffending and returning to Peterborough prison.

Once the government agrees to support the project, the social enterprise solicits funds from investors. The more successful the program (for example, a decrease in the reoffending rate of prisoners), the more money investors receive at the end of the contract period—which the government pays out.

The social finance bond works because investors, government, and social enterprise have skin in the game. Importantly, a project is contractual, time limited, and focused on outcomes.

Social entrepreneurs tackle problems that government has not been able to reach, and may not have the means to reach for an indefinite period of time. But, they often struggle to find funding and working capital for their enterprises.

Social enterprise may stand to gain by encouraging the government to work as a partner to support new solutions to intractable problems. But, finding a balance between good policy and runaway policy requires open, steady dialogue by all the stakeholders, and creative solutions with checks and balances.

Lindsay Clinton is an associate vice president at Intellecap, a social investment advisory firm, and writes about social enterprise and development innovation in South Asia.

via blogs.wsj.com

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