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Finding Common Ground Between the Financing Fault Lines

Forging Common Ground – Series of Oxford Student Insights to the Skoll World Forum 2017.

 Skoll Scholar and Oxford MBA Candidate 2016-17, Ashley Thomas, draws on this year’s Skoll World Forum theme in relation to social impact business models.

There is a fault line between models of international development financing. On one side, there is the traditional donor and philanthropic capital that utilises grant money to support projects. On the other side is the social enterprise space that seeks to create sustainable impact through revenue generation.  There has been a lot of excitement in utilising grant funding for social enterprises to build and tweak their business model, but to date there has been little appetite for true hybrid models of ongoing subsidies for social enterprises.

This is a conversation that I had in numerous sessions and coffees throughout Skoll World Forum. It was also one of the key themes from the session hosted by Mercy Corps and USAID on sharing the learnings from their investments in the Innovation Investment Alliance. There is a common ground emerging; these conversations are hinting at the start of innovative new business models that allow for hybrid grant and revenue streams.

The Problem:

Social enterprises are addressing market failures. They bring products or services to underserved markets, often at low margins, and often at high costs. However, market failures exist for a reason; many companies are realising that even at scale, high volume low margin products are not able to generate the revenues that are necessary to be sustainable. However, social enterprises often sell themselves on this vision- that with initial capital to pilot and build systems, they will be financially sustainable at scale.

The Solution:

Philanthropic capital- which does not require financial returns, can help bridge this fault line, and maximise the potential impact of social enterprises. This does not mean we should revert to the large scale unsustainable development models of the 1990’s, but use philanthropic capital as way of targeting the market failure and allowing social enterprises to maintain their focus on their mission and outcomes. This hybrid model is being utilised in the FundiFix hand pump repair service designed by Dr. Rob Hope out of the University of Oxford. The model uses monthly user subscription payments to pool capital to finance prompt hand pump repairs. However, the willingness to pay only accounts for 2/3 of the cost of the service, and the remaining cost is subsidised through grant funding. This is also used in much larger social enterprises.  Ella Gudwin from Vision Spring spoke about how their model has shifted from seeking to maintain cost recovery- and retailing glasses at increasingly higher prices, to minimising the “philanthropy per pair” and serving their target customer.  They were able to do this under a scaling innovation grant from USAID and Mercy Corps, demonstrating that donors are also recognising the need for the pivot into these hybrid models.

It is increasingly clear that there is not one single model for social enterprise, and a single-minded focus on achieving commercial sustainability may limit the impact. Innovative hybrid models that use the social enterprise ethos of cost effectiveness in combination with smart grant funding that can subsidise the product can address the market failures preventing social enterprises achieving impact at scale. There is immense opportunity to achieve scale and impact through creating this common ground.

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Carbon Imperialism or Energy Leapfrogging

Forging Common Ground – Series of Oxford Student Insights to the Skoll World Forum 2017.

Seth Collins, Oxford MBA Candidate 2016-17 at the Saïd Business School gives his perspective on the  Skoll World Forum session “Carbon Imperialism or Energy Leapfrogging”.

How to balance the ethics and the economics of energy development?

The opportunity is clear for developing countries to forge their own energy infrastructure path, and the question, then, is whether or not they will be empowered to do so with the support of international capital markets.

You see, the banks were not at COP21. In the plenary, we spoke of capitalism’s amorality, and the need to build the playing field to guide the system; currently, argued the panelists “imperialism” hides behind the notion of risk. The risk of funding a energy infrastructure project in a developing country—something everyone agreed was an easy cash flow win if done right—is the risk of a pension fund trusting an institution in a developing country. The fear is that the opportunity is not being realised from the perception, but not the existence, of risk, leading to the paralysis of passive money instead of productive capital.

Of the $300 billion spent last year on clean technology infrastructure, only $22 billion went to developing countries.  If we really want to meet the energy needs of developing countries and mitigate climate change with an aim to stay below 2 degrees, that $22 billion need to ratchet up to $500 billion, a multiple of 25x.

This requires transformational solutions. At Skoll, we heard World Bank President Jim Kim refer to the Development Finance Institution industry as a “cottage industry” as he explained how the Bank is working to change its internal incentive structure. He spoke of how to leverage money through the Bank at a 5x rate. While a useful vehicle to enable progress, that 5x multiple comes with the bureaucracy that prevents Kim, a trained doctor, from talking about coal, even though overwhelming evidence now shows that coal should not have a future in the 21st century—in climate, we have already built enough coal power plants that, if they run for their lifetime, will alone put us beyond the ambition of 1.5 degrees; in health, we know that the local costs to health alone from the pollution of a coal power plant are triple its economic benefits over 10 years; economically, renewables are now cost competitive in technology-agnostic auctions across the world and will continue to push coal into the uneconomic realms of generation merit order; and, as we see increased variability in heat waves and droughts, coal power plants will shut down under heat duress and compete with local communities for water access. 5x with bureaucracy is not the 25x we need.

We heard Citi’s Global Head of Environmental Finance and Sustainability outline how the underlying purpose of the two dominant incentives for clean energy infrastructure developed in the US (PURPA) and Germany (FiTs) was to provide a proxy long-term off-taker guarantee, and that to see the take off of energy infrastructure supported by capital markets will require a similar mechanism moving forward. This is the inspired market thinking we need to compliment the socio-political pressure promoting 21st century energy infrastructure jobs.

While calling the banks a cadre of imperialists uninspired to invest in productive change may ring normatively true, it is up to leaders to build the rules, frameworks, and enabling environments through which to pull the uninspired from the passive cubicles of the Street or the City to build the inspiration of billions to have the capabilities to build lives powered by cheap, distributed, and clean electricity.

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Business as a Catalyst for Poverty Alleviation

Forging Common Ground – Series of Oxford Student Insights to the Skoll World Forum 2017.

Allegra Day, Oxford MBA at the Saïd Business School gives her perspective on the  Skoll World Forum session “Business as a Catalyst for Poverty Alleviation”.

In the Opening Plenary of this year’s Forum, Winnie Byanyima of Oxfam International revealed the fault lines in the capitalist model that have enabled 8 men to own as much wealth as half of humanity. Winnie was unequivocal that the system is rigged against the majority and a new economic model is needed that is fairer and more sustainable for all. This echoes a theme that has reverberated across the Forum: business is central to poverty alleviation, but the current legal structure and incentives underpinning big business need to change.

Throughout the week, we have heard from organisations championing this change through investments in staff, suppliers and innovation. Hamdi Ulukaya, CEO of Chobani, spoke of providing a living wage for his employees, one fifth of whom are refugees. During the Business as a Catalyst for Poverty Alleviation Panel, Charlotte Oades of Coca-Cola outlined the company’s aim of supporting 5 million women entrepreneurs to grow their businesses and eventually enter the supply chain of Coca-Cola and other companies through the 5by20 initiative. Fellow Panellist Cherie Blair CBE, QC spoke of her Foundation’s work with financial institutions in markets where women are viewed as “risky” customers training local staff to understand that women are generally good borrowers and should be considered for loans.

But is all this enough? Those spearheading the B Corp movement would probably say no. Panellist and Co-Founder of B Lab Company Bart Houlahan reminded us that in many places, directors are liable under company law for not returning maximum profit. The B Corp model offers a solution: a new legal structure enabling directors to incorporate community engagement, worker involvement and environmental footprint objectives alongside profit maximisation. We now need greater adoption of the B Corp model and adaption of the model to suit multi-national corporations. Alongside this, Ms Blair and Mr Houlahan called for greater education of bankers, investors and lawyers to understand the changing role of business.

Beyond legal reform, the Panellists described two key ways in which businesses can play their role in tackling poverty. The first is more support for women-led businesses in addition to women-owned businesses, given the challenges associated with ownership of assets for many women. Panellist C D Glin of the US African Development Foundation described this as a critical tool for economic growth that dovetails with the safety and security aims of the US Government. The second is support with scaling up enterprises. Ms Oades spoke of the role Coca-Cola can play in scaling enterprises through identifying and sharing learnings across its network that can be adapted to a local context.

During the Forum’s Skoll Awards Night, Bono said that capitalism is “not immoral but amoral: we have to tell it what to do.” Conversations at the Forum have made clear that we as leaders, consumers and human beings must challenge businesses to modernise and innovate in line with moral and ethical standards to create more common ground for us all to share.

Follow Allegra: @legshd

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Building Bridges: Partnerships in Responsible Supply Chains

Forging Common Ground – Series of Oxford Student Insights to the Skoll World Forum 2017.

Macarena Hernandez, Skoll Scholar and Oxford MBA Candidate 2016-17 at the Saïd Business School, gives her perspective on the Skoll World Forum session “Building Bridges: Partnerships in Responsible Supply Chains”.

The task to build bridges to trigger the development of responsible supply chains is not only a task for “bridges builders”, it is a common task. We need to forge common bridges together.

The session kicked off with a “pop-quiz” leading by the session’s moderator, Daniel Viederman, Managing Director at Humanity United. “How many cocoa farmers are around the world?” After guesses and approximations, the right answer was 5 million.

Could you imagine the investment that is needed to audit all of these cocoa farmers have the responsible practices? How many more products a single food industry company have? As Viederman mention, we are not talking about a lineal supply chain, we are talking about a supply web.

The complexity of this supply web has meant that no one takes the responsibility to ensure fair labour conditions within the web. The private sector thought that labour issues needed to be solved by the public sector. Governments have been establishing regulations that encourage big industry players to start solving these issues.

Despite this complexity, companies such as Target and Mars Inc. are taking responsibility and action. In 2015, Target started a partnership with GoodWeave in support of their mission to end child labour in the rug industry. Mars Inc. is partnering with Verité to design simple solution for their suppliers to meet their responsible sourcing standards.

Building Bridges - Partnerships in Responsible Supply Chains panel

Building Bridges – Partnerships in Responsible Supply Chains panel

These leading efforts are transforming the unfair labour practices across industries. However, these partnerships and projects are not easily scalable for the various products across different industries. As Marika McCauley Sine, Mars’ Human Rights Director, said, ‘the situation is complex; we need to make it easy. We need to be specific and clear. Make it as simple as possible.’

For me, this simple and scalable solution is called: trust. If enterprises trust in other stakeholders, especially suppliers and suppliers of suppliers, there would be no need for huge investments to develop detailed audits or localised projects throughout the supply chain.

Although, building trust is not easy. How can we trust in others? Transparency, openness, collaboration, accountability, and information flow is needed. Who is creating trust through stakeholders? Talking and listening during the forum, two potential solutions came into my mind. After the panel, I had the opportunity to talk with Charmian Love, Co-Chair and Co-founder of B Lab UK. I realised that the B-Corporation Certification is identifying responsible players around the world. Listening to the session “Data-Driven Models for Change”, I discovered that Provenance is developing digital tools to trace products’ journeys.

Both trust’s mechanisms, mentioned above, include characteristics such as collaboration, data sharing, and transparency. This openness creates and distributes value along all stakeholders. Which make me reflect: Are the main industry players and competitors ready to collaborate between them? Are the innovators ready to share best practices? Are businesses ready to share value, despite the fact that these actions will reduce barriers to entry, increase the number of competitors, and increase consumer power?

I hope they are! In the long term, collaboration will be the key for value creation. My favourite value at Prospera, the Mexican social enterprise where I was working before coming to Oxford, states: “El que comparte, prospera. Siempre.” Translated to English: “The one who shares, thrives. Always.”

Follow Macarena: @macarenahdeo

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A Work Landscape in Flux for Young People

Forging Common Ground – Series of Oxford Student Insights to the Skoll World Forum 2017 MBA candidate 2017, Ahmed Abu Bakr gives his perspective on the Skoll World Forum session ‘A Work Landscape in Flux for Young People’

We all know that the world is changing at an unprecedented rate, but I regularly feel that we forget, often far too easily, that these changes aren’t entirely new. Marina Gorbis, executive director at the Institute for the future, reminds us that the technological disruptions we are witnessing today, aren’t really as rapid as we make them out to be.

The internet, the proliferation of mobile technology and sensors, and the big data revolution are a result of over thirty years of consistent investment and prioritisation in the space of communication technologies. She refers to the outcome of these technologies as greater “digital coordination”; and through this, she provides a broader definition for technology. If the internet and big data allow for coordination, then institutions and organised systems (for business, government, and otherwise) are also technologies in their own right- technologies for the coordination and allocation of resources.

'A Work Landscape in Flux for Young People' panel.

‘A Work Landscape in Flux for Young People’ panel.

And it is important to keep in mind that organised systems that are being disrupted today- financial markets, healthcare systems, the transportation sector, etc.- were actually major innovations in their own time that disrupted the status quo back in their day.

There is no doubt that the nature of work is being radically transformed by what Marina calls “digital coordination” technologies. But is it really a source of disruption for the nature of work?

The remaining panellists attested that young people in Egypt and Africa were choosing to delve into entrepreneurship and the growing start up culture because of two primary reasons. Firstly, there is an undoubted frustration within the youth populations where they are dissatisfied with the available economic opportunities. Fhazhil Wamalwa, managing director at Disa Energy Management, recalled how he was led to believe that a good education would result in a decent job, and how his inability to get on after his master’s degrees was a painful but necessary disillusionment.

The second factor is a deliberate and concerted effort by many to promote entrepreneurship and entrepreneurial activities as a response to the failure of the existing systems. Dina El Mofty (Injaz Egypt), and Marwa Moaz (Bamyan Media) both talked about their sustained efforts within Egypt to inspire and develop an entrepreneurial mind set.

With this context, it becomes evident that the changing nature of work, the rise of gig jobs, and the proliferation of self-employment and entrepreneurship is a response to the failure of the existing econo-political system where digital technology is less of a cause and more of an enabler.

One thing remains uncontested- the old institutions have to be reformed, and in some cases completely revised. For me personally, the key question is around the evolution of these new systems. The topic of the day seems to be around growing wealth inequality. But wealth inequality is a result of inequalities in the distribution of power- social and politcal. What’s even more troubling is the feedback effect on power from the accumulation of wealth. The 21st century has seen tremendous concentration of wealth because of a tremendous concentration in power. What can we learn from history to design new social and political institutions that distribute power rather than concentrate it?

Ahmed Abu Bakr is an MBA 2016-17, Skoll Scholar at the Saïd Business School, University of Oxford, and Co-founder of Jeeon

 

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Echale a tu Casa

Recent graduate of Oxford Saïd MBA 2015-16, Andres Baehr Oyarzun, spent his Summer Consulting Project in Mexico with 2015 The Venture finalist, Echale a tu Casa. Andres shares his story.

echale-a-tu-casa-team

“Echale, echale!”, screamed a child behind us, while we watched Mexico City’s Lucha Libre. Chubby wrestlers kept slapping each other’s chests while we sat next to our supervisor. This was not your average MBA consulting project, I thought.

It was the first time we heard the word Echale outside of the context of ‘Echale a tu Casa‘, which can be translated as ‘Throw your Heart at your House”. Echale is Mexico’s first B Corp, a finalist in Chivas’ The Venture competition in 2015, and the recipient of the ‘Best of the World’ award by the Rockefeller Foundation. The organisation works to provide affordable housing through an innovative and effective model. We were in Mexico to help them prepare for releasing an investment prospectus – post- competition support that was financed by Chivas after Echale’s participation in The Venture. We hoped to learn more about an innovative social business model while using our skills to add value to the Echale team’s work.

And learn we did – the model works as follows: imagine you are a low-income homeowner in need of a new home or home improvement work. Due to lack of access to finance, you will usually be limited to making necessary changes to your home as your savings allow – on an ongoing/ ad hoc basis, rather than during a singular, planned project. In many cases this leads to substandard home conditions and overcrowding. With Echale’s model, families only have to finance and carry out 30% of their home construction and Echale helps them to complete the rest. By creating access to both a government subsidy and a credit service, Echale enables homeowners to complete a new home or improve an existing one, in a sustainable manner. The impact goes beyond housing. Families get access to financial advice and products, they are active participants in the building of their own homes and the environmental impact of home construction is reduced by the use of Echale’s eco-friendly construction materials.

We drove with Alejandra, Director of Promotion, into Jocotitlán, one of the rural communities where Echale operates. “I wasn’t too sure about social entrepreneurship” she said, “until I met Francesco (Echale’s CEO and a regional celebrity of sorts).  After speaking with him, I knew I wanted to be part of the team, so I contacted him again, and again, until he just said ok, ok, come work with us”. 50 houses have already been constructed in Jocotitlán and the team is aiming to construct 500 more. This is just a small portion of the 30,000 completed homes, 150,000 home improvements and more than one million lives already positively affected by Echale.

Alejandra pointed at the steel beams that can often be seen poking out from the roofs of half-constructed houses. “You see those? They call them the ‘beams of hope”, she said. “Owners leave the beams in case one day they can afford a second floor”.

echale-a-tu-casa-house

We visited Maria del Carmen, one of the homeowners who had recently moved to an ‘Echale’ house. She walked us around her old home. We looked at the blue cracked walls, dirty floors and pierced tin roof. The contrast with the tiled based and firm structure of the new house was remarkable. Maria represents one life improved, but a sea of homes is waiting to be built; in Mexico, an approximate 4.9 million families live in substandard housing.

After two weeks of bilingual Skype teleconferences, research, modeling and writing, we finally had to say good-bye to the Echale team.  During our last meeting with Francesco we felt a combination of sadness, gratitude and excitement.

“Social impact is like a quantum gate”, said Francesco and raised his palm. “Once you touch it, you can’t go back. Once you have experienced it, you can’t go back”.

We packed up our bags and made our way back to Oxford. Back in Mexico, the luchadores would keep slapping their chests, the beams of hope would still stand high and the Echale team would still be there, throwing their hearts at it.

The Venture is looking for social businesses from around the world that are using business to help create a better future, if you are interested in applying or know of someone who should, head to their site to learn more www.chivas.com/the-venture.

 

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