By Maximilian Martin, Impact Economy, Working Papers Vol. 1 2011
This paper identifies four key developments in the transformation of the social capital market from an inefficient form, where the funding of services is strongly relationship-driven and centred around grants and fundraising, to a more efficient market which allocates funds according to value (social change and demonstrated impact). It is written by a founder of UBS Philanthropy Advisory Services, Maximilian Martin, who has been an active participant in the development of global philanthropic culture and practices for several decades. UBS Philanthropy Advisory Services was one of the first investment-bank-housed specialist services in this area.
Martin argues that grants and fundraising, the traditional forms of funding of social activity, are not only expensive but are short-term in focus, meeting current service provision needs alone. Transaction costs in grant funding are also stifling. He cites US research which suggests that the cost of grants and fundraising is ten times higher than the cost of stock market allocations. As a result, he suggests, ‘non-profit organizations enjoy insufficient flexibility to adapt, change and invest in their workforce or infrastructure’ (p.5).
The four revolutions presented in the paper are:
(1) Amplifying social entrepreneurship through synthetic social business;
(2) From microfinance to inclusive financial services;
(3) From development assistance to base-of-the-pyramid investments;
(4) From classical grantmaking to entrepreneurial internalization of externalities.
The first revolution to be considered is the move from individual social entrepreneurship to synthetic social business. This analysis responds to the problems of supply-side constraints in the number of social entrepreneurs our societies produce – not enough of these charismatic individuals exist to meet the demand for their services. So what can be done?
Social entrepreneurs, using the definition used in Martin’s paper, use market mechanisms to deliver a good or a service in a highly effective fashion to a marginalised or poor population that would not otherwise have access to a service of the same level. How do we produce more of them? The author works through incubation approaches and the development of enabling structures and businesses with a social purpose which may be seeded by philanthropists and don’t rely on individuals but on structures and organisations created for the purpose. The incubation model and examples cited are yielding real fruit. Rather than wait for social entrepreneurs to emerge, this model takes training and train-the-trainer facilities into communities and develops the skills and aptitudes in the available talent, including how to run a sustainable business/social enterprise. Case studies presented include Aravind Eyecare and Ashoka University Faculty Institute.
The second revolution discussed is the move from micro-finance to more inclusive financial services. Micro-finance is the provision of capital to low-income individuals with an objective of economic empowerment and poverty alleviation. Micro-finance broadens access to capital at the bottom of the economic pyramid. Martin describes the fact that the poor are now slowly being offered a far wider range of financial services and also refers to the massive growth in microfinance investment vehicles. The World Bank estimates microfinance investment vehicles grew to over US$ 6.6 billion by 2009. All sorts of segments in this developing market are explored. A case study of Banco Compartamos is offered.
The third revolution is a move from development assistance to ‘base of the pyramid’ investing. The base of the pyramid refers to the gigantic market of four billion people with ‘pent up demand’ for a myriad of goods and services from consumer goods to education, health, housing and sanitation. Given the broader reach of markets and technology, this could represent a profound shift in the provision of public as well as wellbeing-enhancing goods of all types. The article explores the cases of the Rockefeller Foundation and its contribution to the Green Revolution through seeding innovation and technology transfer across the developing world and of Ignia Ventures in Mexico investing in business development capacity. This revolution is perhaps the one with the greatest implication. (Notice how quickly the term the ‘developing world’ is being replaced by ‘emerging markets’).
The final revolution Martin presents is from classical grant-making to entrepreneurial internalisation of externalities. To translate this economic jargon: ‘externalities’ are the outcomes of economic activity that individual firms or households do not count but that exist and are indirect by-products of their activity. Negative externalities such as pollution create adverse impacts for others but (before carbon taxes and trading) these costs are not counted as costs by firms and so output is higher than what it would otherwise be. Positive externalities on the other hand are external indirect benefits to others whose value is not considered in a firm’s or household’s decision making and so less is produced than is socially warranted.
So where do philanthropists fit in? Martin’s contention here is that while grant-making will remain an important component of philanthropic activity because so many of the challenges of the 21st century cannot be tackled by markets alone, there is an important place for philanthropists to play a catalytic role in entrepreneurially identifying externalities that can be ‘internalised’ or taken on by groups that will be rewarded for doing so and thus creating a market for the internalisation of the externality. Think about the policy objectives in pricing carbon for example.
Martin sees philanthropists having the opportunity to identify cases where this can be done and then to encourage the development of functioning market places. He suggests the philanthropist’s role should be temporary. He cites three cases: The Global Alliance for
Vaccines and Immunization, the World Sanitation Financing Facility WSFF and the Social Impact Bond.
To read the full article see: Four Revolutions in Global Philanthropy