Why NGOS should invest in social businesses?
THERE is no doubt that civil society organizations (CSOS) or Non-governmental Organizations (NGOS) do a great job at different levels to complement the government in responding to the needs of those who are vulnerable, poor, destitute or less advantaged as some people would say.
Even though there are no updated statistics, according to the Letsema Network Service Directory (2010) and membership data obtained from Lesotho Council of NGOS (LCN) and other network organizations, there were over 500 organizations and groups in Lesotho operating at different levels with different capacities and resources to respond to the needs of vulnerable families and communities.
All of these organizations, though some of them are now defunct or inactive, rely on external donor funding to fulfil their missions and realise their visions of a positive change in the lives of poor, vulnerable people and their families and communities.
Most of them have been working in the area of HIV and AIDS that has received a lot of support in the last three decades. With the latest developments in our environment, world economies, human rights and new illnesses and viruses, their focus is rapidly changing, but still dependent on external support. Majority are however still working primarily in the area of HIV/AIDS.
According to the UNAIDS report (2014) Lesotho now has the second highest HIV prevalence in the world standing at 23 percent, making the country’s future uncertain as the average life expectancy stands at 48.7 years due to the devastating impact of the epidemic.
The country also has the largest number of vulnerable households with increased numbers of orphaned and vulnerable children as a result of HIV and AIDS.
According to the Situation Analysis of Orphans and Vulnerable Children (2011), between 10 percent and 13 percent (125,000) of all children (1,072,974) in Lesotho are vulnerable and they are between the ages of 0 – 17 years.
The country is classified among the Least Developed Countries with a per capita income of $1879 and it ranks 158 out of 187 countries on the UN Human Development ranking, falling into the category of low human development. National poverty figures indicate that 57.1 percent of the population lives below the national poverty line (Lesotho MDGS Status Report, 2013).
This poverty status leaves most families vulnerable to a number of socio-economic challenges which among other things include depriving children of the opportunities to grow in a normal way and unleash their potential in life.
The challenges facing vulnerable children and their households call for a multisectoral response to their needs, including a more robust and active role played by local CSOS and CBOS.
A combination of factors leaves the vulnerable and poor even more desperate and hopeless and widens the gap between the rich and poor.
These include high unemployment rate of 25.30 percent which seems to be on the increase. The 2008 global economic recession that resulted in multiple socio-economic and political challenges including increased poverty and unemployment, is one of the factors that left many Basotho poorer and vulnerable to a number of undesirable conditions.
When talking in one of the forums, an Economist, Dr Maluke Letete from the National University of Lesotho (NUL) indicated that the global economy has recently recovered a little bit, and as a result a growth in 2016 was expected to be 3.4 percent and 3.6 in 2017.
Dr Letete said though this recovery might mean getting a little more of global funding there are no guarantees. This growth comes largely from emerging markets’ economies while “growth in advanced economies is projected to rise by 0.2 percentage point in 2016 to 2.1 percent, and hold steady in 2017.”
Fundamentally the growth will come from emerging markets which have less contribution to donor aid, and that is a challenge to NGOS.
As a result of the global economic decline, developed countries such as the United States of America that have been major funding sources for decades are beginning to close their wallets and save the money for their own people.
A recent change of administration in the United States of America is a good example as it comes with protectionist measures against foreign aid. According to Devex “the Trump administration proposes a 30.8 percent cut to the overall foreign aid budget…” (www.devex.com).
These cuts in foreign aid were felt since 2008, so they are not necessarily new with the new US administration.
And looking back one can see how the reduction in global foreign aid has impacted in countries like Lesotho.
For example, looking at the donor contribution towards the national budgets of the last three years — 2013/14; 2014/15; and 2015/16, one can the see graph steadily going down.
To a larger extent these reductions in foreign aid affects the Lesotho’s government ability to effectively and sustainably meet the needs of its poor and vulnerable population through the Ministry of Social Development (MOSD).
And budget allocations for this ministry remain low, leaving unanswered questions as to how the country through all key players including NGOS can better respond to the needs of those who are less advantaged or vulnerable including children.
The budgets of the last three years (2013/14; 2014/15; and 2015/16), gave the MOSD, which is responsible for all vulnerable groups such as the elderly, people with disabilities, and orphaned and other vulnerable children, a shockingly low share — below 2 percent of the total proposed allocations or expenditures, as displayed in the table below.
With this worrying external funding picture compounded by the government’s limited resources which undermine its (government) vision of “a strong economy and prosperous nation” by 2020, NGOS as a key government partner in improving the quality of life for vulnerable groups and communities, have no choice but to find alternative means to generate funds. And it is very critical that these NGOS come up with creative and innovative ways to financially sustain the outcomes of the work that they have been doing and to effectively respond to emerging social and economic needs among vulnerable populations.
The issue of sustainability is embedded in most of the global funding frameworks including the Paris Declaration on Aid Effectiveness (2005) and USAID Forward. The international institutions and agencies such as the World Bank, International Monetary Fund and United Nations Agencies all call for prudent and sustainable investments because funding sources are drying up fast.
Therefore, having explored different alternative sources of funding including once off donations by companies through their corporate social responsibility programs, I strongly recommend that Lesotho CSOS/NGOS should consider investing in social businesses for their financial sustainability. My experience in Bangladesh where I visited in February 2016 to learn more about the micro-financing and social business models created by Professor Muhammad Yunus, a founder of the Grameen Bank (a bank for the poor), taught me that social businesses is the way to go for our organizations if they are to be financially sustainable. But first what is a social business?
In his Adam Smith Lecture delivered at Glasgow University on December 01st, 2008, Prof. Yunus defined a social business as “a business whose purpose is to address and solve social problems, not to make money for its investors. It is a non-loss non-dividend company. The investor can recoup his investment capital, but beyond that no profit is to be taken out as dividends by the investors.
These profits remain with the company and are used to expand its outreach, to improve the quality of the product or service it provides, and to design methods to bring down the cost of the product or service”. In other words the “profits realized by the business are reinvested in the business itself (or used to start other social businesses), with the aim of increasing social impact…”
Other definitions are also consistent with Prof. Yunus definition of the social business: The social enterprises are business created to further a social purpose, applying business solutions to social problems and challenges. As indicated in some definitions of the social enterprise, “the ultimate goal is to achieve sustainability by enabling non-profits (CSOS) to support themselves financially in innovative ways instead of relying solely on grants and donations”.
Seven principles of social business:
Professor Muhammad Yunus and his colleagues developed the following principles for social business to guide those seeking to venture into this noble journey for our communities: 1. Business objective will be to overcome poverty, or one or more problems (such as education, health, technology access, and environment) which threaten people and society; not profit maximization. 2. Financial and economic sustainability 3. Investors get back their investment amount only. No dividend is given beyond investment money 4. When investment amount is paid back, company profit stays with the company for expansion and improvement 5. Gender sensitive and environmentally con
scious 6. Workforce gets market wage with better
working conditions 7. Do it with joy
You will notice that in his definition Prof. Yunus talks about potential investors who can be approached or voluntarily put their money into the social business as capital, but not expect to make profit out of it, instead leave the profits with the social business for the good of those who are poor or in need. This is because in most cases those who want to start social businesses do not have the money required to get started. So they have to find investors with a ‘social heart’ to support their initiatives. Even though some people are sceptical about the concept of the social business, wondering “why would anyone devote time, energy, and money to projects with no personal gain, Prof. Yunus shows us that naturally people (including business people) are driven by conscience and sympathy for others, therefore, when appropriately approached they are willing to support this kind of initiatives. In my previous conversations with some business people, I learned that most of them have money that they would like to spend on those who are in need, but they do not know how.
In the same lecture mentioned above, Prof. Yunus says “the concept of social business got international attention when Grameen Healthcare Trust launched a joint venture with Danone, a multinational company from France. Grameen teamed up with Danone to bring nutritious fortified yogurt to the undernourished children of rural Bangladesh. The aim of this social business is to fill the nutritional gap in the diet of these children. We sell the yogurt to the poor children at an affordable price, charging just enough to make the company self-sustaining. Beyond the return of the original investment capital, neither Grameen nor Danone will make any money from this venture, by agreement.
Grameen Bank and Grameen Trust have also created a joint-venture with Veolia of France to deliver safe drinking water in the villages of Bangladesh. These are just few examples of how even the NGOS can go into partnerships with established businesses to start social businesses or to request capital for such businesses. Usually social businesses are exempted from paying tax given their nature and the fact that they complement the government on its obligation of meeting the needs of the poor. In the case of Lesotho, this is something that can be further investigated with the Ministry of Trade and the Lesotho Revenue Authority.
Prof. Yunus through his centre, the Yunus Centre and Grameen Trust are supporting countries in Asia, North America, Europe, Africa and other parts of the world to start social businesses for financial sustainability of their development interventions. Albania is one of the countries benefiting from their guidance and support. Albania is a small country on the Mediterranean Sea, across from Italy and north of Greece. “After a long period of isolation and Communist regime, it has opened up to new ideas…” They are still faced with a plenty of social and economic challenges including high levels of unemployment of youth etc. “Older people are being left stranded, with no one to care for them. Traditional businesses in Albania do not address these issues as they are not profitable enough or just too difficult to tackle. That’s why a new generation of entrepreneurs is turning towards the idea of social business” (Grameen Dialogue Newsletter, April 2015).
I hope this article will shed a light for our CSOS/NGOS on how the concept of social business can help sustain their work financially so that they do not entirely depend on external donor support which is shrinking. I encourage the CSOS to sit down with experts and experienced people to further explore this income generation opportunity and start somewhere. Vision Research Consultants is building a relationship with Grameen Trust to ultimately be able to provide technical assistance to Lesotho CSOS in establishing social businesses. The technical support will include development of business plans, resource mobilization to raise capital and business management support.
I am also challenging local businesses and foreign businesses operating in Lesotho to re-consider how they invest their social responsibility programs’ funds. While I am not against once off donations made by many companies, I however believe that the impact of such funds can be more sustainable if they invested in social businesses – supporting local CSOS to start income generation projects which will behave just like any other businesses, but with a social goal at the centre of their heart.