NextBillion brings together the community of business leaders, social entrepreneurs, NGOs, policy makers, and academics who want to explore the connection between development and enterprise.
Our Staff Writers and Editors offer insights on the latest news, events, interviews and other happenings from the development through enterprise and base of the pyramid universes
The NextBillion.net team is happy to announce the latest addition to the group of Staff Writers: Saurabh Lall.
Saurabh works at the World Resources Institute, in Washington DC, where he is a Program Coordinator/Research Assistant for the Accelerating Clean Energy Markets, Clean Energy for the Base of the Pyramid, New Ventures India and New Ventures Indonesia projects. His research focuses on innovative financing mechanisms for sustainable small and medium enterprises.
Prior to joining WRI, he has worked with the National Council for Public Private Partnerships and the George Washington Center for the Study of Globalization. His research interests include renewable energy, small and medium enterprises and sustainable solutions for the Base of the Pyramid
Originally from Mumbai, Saurabh has a Master of Public Policy degree from George Washington University and a Bachelor of Engineering degree from the University of Mumbai. He is currently pursuing a PhD in Public Policy and Administration at the George Washington University.
Saurabh has written for NextBillion in the past. His last piece refers to the need for more less anecdote- and more fact-based analysis as a requisite to advance the BoP space. We're excited and look forward to having his perspectives more often on NextBillion.
In Professor Gautam Kaul's course "Finance and the Sustainable Enterprise" at the Ross School of Business, we recently had a lengthy and very profound discussion on sustainability and interest rates. (See/hear Professor Kaul discuss his course in the above YouTube video.) Yes, that's right: interest rates. You didn't read this wrong. (And please don't stop reading now. I promise you interest rates are very interesting.)
For those of you who have not taken an economics or finance course, an interest rate is the cost of borrowing money for a given period of time. For example, when you take out a loan from the bank, the interest rate is the price you pay to borrow money over a certain period of time, say a year. A pretty simple concept to grasp, right?
In class, Professor Kaul pushed us to think more insightfully into the concept of interest rates. Irving Fisher, the great economist of our time, stated that interest rates are important because time has value. If time is taken away, there need not be a discussion on interest rates. So the first thing to keep in mind when thinking about interest rates is the value of today vs. the value of tomorrow.
Take for example a risk-free treasury bill. Why is do you think the real interest rate (taking into consideration inflation) is greater than zero? One word: impatience. Time has value because we humans are innately impatient. We would rather have something today rather than tomorrow.
Think about it. Would you prefer $100 today or $100 tomorrow? I'm sure most of you would answer today. Impatience implies that interest rates are greater than zero. (Note: there was a point when interest rates were less than zero. It was during the depression, when the value of time was negative. Why do you think this was the case?)
After this brief discussion on interest rates, Professor Kaul presented to the class an interest rate equation that is a function of two items: 1) impatience and 2) technological progress. Consider the following equation:
Interest rate = ф + ηx
Where:
ф = impatience
η = elasticity of marginal utility
x = technological progress.
Again, as we have stated previous, people are inherently impatient and therefore ф is generally assumed to be positive. η is a coefficient and is generally assumed to be 3 by most economists. x is the growth rate per capita consumption, or the advancement of technological progress. x is also typically assumed to be a positive value.
However, is x always going to be a positive value? Perhaps the past 100 years has convinced us that tomorrow will always be better than today, and that the future holds a world of plenty compared to today. It's easy to believe that because when we look back in time, we have more today than we did in the past. Why shouldn't this trend continue? Philosophically, holding this belief that the future will definitely have more than today, it is easy to have the mentality, "Why not consume more today? Tomorrow will be just fine?"
But is this true? Will ф and x always be positive? Should ф be positive at all?
If global GDP grows by 3% a year [in the next 200 years], the value of the world's output in 2200 will be $8 quadrillion (a 16-figure number). But in present-value terms (using a discount rate of 7%), that stupendous sum would be worth just $10 billion. In other worlds, it would not make sense for the world to spend any more than $10 billion today on a measure that would prevent the loss of the planet's entire output 200 years from now.
What this is saying is that to value the worlds output in 200 years using discount rate of 7% would mean that sustainability is only a $10 billion problem in today's terms.
In class, Professor Kaul said that if we, as humanity, believe that sustainability is a big issue, and use a 7% discount rate to measure the problem, we might as well not even have the discussion. Why? Because if saving the future is only a $10 billion problem, do we really believe it's a problem?
Perhaps we need start valuing the future more than we currently do (i.e. lose the impatience) and stop thinking that the future will be a world of plenty. Because at our current rate on consumption, our future may be in jeopardy.
ThinkChangeIndia pointed my attention to the announcement of TED's India Fellows. We wrote about the Fellowship earlier this year and are thrilled to see a list full of friends and organizations that have been part of NextBillion in one way or another. Here'a a quick sample:
M. Yasmina McCarthy, Co-founder and CEO of GreenMango, a virtual marketplace connecting small businesses in the informal economy with their customers. Nitin Rao wrote about GreenMango in the pages of NextBillion
Congratulations to all the TED India Fellows. Such a program could easily become a turning point for their ventures. We'll be ready to continue reporting on their progress.
For those of you out there who are interested in applying for future fellowships, make sure to check out the details of the program.
The panels focus on the nuts and bolts of social enterprise-how one becomes a social entrepreneur, and how social enterprises are financed, structured, and scaled.
In essence, these are the key 'stops' on the pipeline of enterprise creation. As an attendee, one could imagine starting off as a budding entrepreneur and working to build a properly structured, adequately financed, scalable social enterprise. Certainly not a bad day's work.
But what happens 'the day after tomorrow?' That is, let's assume our intrepid social entrepreneur successfully creates an innovative, fully-functioning organization. Who's to say it will stay that way? What are the critical factors that will help the social enterprise to maintain its efficiency, effectiveness, and edge? How will the organization develop a learning culture that will adapt as the world around it changes? How will its social impact be measured? Perhaps this inquiry leads us too far down the rabbit hole; after all getting one of these organizations up and running is a mighty task. Nonetheless, I'd like to believe that discussing the sustainability and impact of these organizations might be worth the air time.
I'm finally back in my Washington DC home, having spent the better part of the summer working from my other home in Colombia. While I enjoy almost every aspect of being on the go, traveling implies an almost inevitable distraction from routines and habits that I cherish, many of which relate to reading. For instance, I love to walk down to my neighborhood's coffee shop and read the Sunday New York Times; I love to pick up and skim through The Onion on my way home and I eagerly look forward to getting ahold of the writings of Hertzberg and his colleagues every week.
Being back home also means catching up and tuning on to my BoP-related reading. Well, as I expected it to be, my mailbox was packed with good stuff that I'm currently working on. Following are a couple of pieces I thought I'd share in case you're interested in bringing some home for the weekend.
Most notable in my mailbox was the Spring Issue of Innovations, the excellent journal published jointly by MIT, Harvard and George Mason University. One piece in it caught my eye immediately: Matt Flannery's Kiva at Four. Matt is exceptionally candid, both in speech and in writing and it has been very fortunate to have his voice for those of us passionate about social enterprise and, more generally, about the process involved in turning ideas into organizations. I strongly encourage you to read Matt's previous piece in Innovations back when Kiva was 2, as well as his blog post concerned with the not-so-successful periods of the organization's history. Through all these pieces, Matt reminds us of an inescapable truth: human beings do not scale; organizations (in the forms of values, systems and processes) do, and with them, the impact of meaningful ideas. Building them is an iterative process and embracing transparency as a habit, as Matt wisely phrases it, pays off good dividends.
Our friends at Changemakers point our attention to a recently launched competition that is very closely linked to the role of enterprise in development. Run in alliance with the Global Alliance for Improved Nutrition (GAIN), the competition "is open to innovators with new ideas to expand and improve nutrition - to make sure all people have access to the vital nutrients and the critical information that will help them thrive. Solutions with the potential for growth and scale are likely to come from creative community members from all corners of the globe and local, grassroots organizations." (from Ashoka's press release).
There's something interestingly different about this particular competition. Besides a $5,000 cash prize and extensive media exposure through Changemakers's networks (common to all Changemakers competitions), the five best projects will have the opportunity to present their projects to investors during the GAIN Business Alliance Global Forum, taking place in May 2010 in Dubai.
I encourage you to forward this announcement around to anyone you know who might be working in an eligible project. I will do so with Tom Stehl, a friend who works for a corageus organization called Meds and Foods for Kids, which is tackling the challenge of child malnutrition in Haiti through locally products that fall under the category of Ready-to-Use Therapeutic Foods (RUTF). Tom was part of the 2008 Class at Santa Clara University's Global Social Benefit Incubator. Click here to watch his introduction video.
Climate and carbon are hot topics these days, as what may be the most important climate conference ever approaches. Whatever its outcome, the December 2009 Copenhagen climate negotiations represent the first time since the election of Barack Obama that all countries will come together to discuss climate change under the rubric of the now universally accepted human-induced global warming.
The United Nations Climate Change Conference, or COP 15 as it is casually known, seeks to establish a successor to the Kyoto Protocol, which expires in 2012. Most countries are feeling the pressure to cut carbon emissions, but for rapidly developing countries, such as India and China, the call for emissions stands in oppositon to their own industrialization. Indeed, many would argue that the wealth enjoyed in Europe and the U.S. is a result of burning fossil fuels for the past one hundred years. For COP 15 to result in an aggressive agreement to reduce global carbon emissions, a fair strategy that addresses the needs of developing countries will be required.
E+Co, a mission-driven clean energy investor in developing countries, is working to implement strategies that enable Wall Street investors to put capital to work in developing countries through the carbon markets. Unlike more traditional carbon finance developers, however, E+Co strives to ensure that dollars flowing from carbon credits make it to the bottom of the pyramid. To that end, the organization recently announced that it has successfully registered two energy efficient cookstove projects with the Gold Standard, a Swiss-based non-profit that serves as a governing body for Verified Emissions Reductions (VERs). These are among the first such projects ever registered with the Gold Standard.
Energy efficient cookstoves are important for a number of reasons. First, they are 40% more efficient than traditional stoves, thus significantly reducing the amount of charcoal that is used for cooking. The stoves also reduce indoor air pollution, which is one of the leading causes of death in developing countries: according to the World Health Organization, one person dies of indoor air pollution every 20 seconds, and more people in the developing world die from indoor air pollution than from malaria.
Because of the triple bottom line benefits associated with energy efficient cookstoves, E+Co has long invested in companies that manufacture and sell the products, particularly in West Africa. Now, two of its investee-enterprises, Katene in Mali and Toyola in Ghana, have successfully completed the validation process, the carbon credits are registered and awaiting sale.
"More than any carbon project, cookstoves address most directly health and poverty at the bottom of the pyramid," says E+Co Carbon Finance Manager, Erik Wurster. "What we want to do is get more money flowing down to the local cookstove manufacturers, enabling them to drop the price of stoves and make more stoves accessible to more people. This, in turn, greatly reduces the amount of soot and other particulates that are released into the air. When burned in poorly ventilated conditions in primitive stoves, solid fuels such as wood and charcoal have a tremendously harmful public health impact and are a leading cause of respiratory illness in developing countries," Wurster notes.
It took E+Co over two years to complete the application and registration process. The benefit of the arduous process, though, is that it offers needed transparency and confidence to a new and abstract commodities market, which is critical for this market to thrive. Wurster acknowledges, "E+Co learned valuable lessons from this experience and is leading the way in terms of developing carbon credits from cookstoves. We are among a short list of organizations who know how to develop these types of projects. And, we know how to do it well."
E+Co anticipates that these two stove projects will generate an enormous amount of carbon dioxide emissions reductions over the next several years. These reductions will be sold on the market as carbon credits. Entrepreneurs will see a significant slice of the carbon revenues in the form of cash, which is then used to grow their business. E+Co will continue to work with other companies in its portfolio to develop carbon credits.
As for COP 15, it is this type of cash-in-hand transfer to developing countries that will bring them to the table to discuss emissions reductions. Wurster notes, "E+Co does not really engage in crafting policy, we're not a think tank or a lobbying group. We are doers. We develop and implement sound business strategies for the bottom of the pyramid. Yet, we are optimistic that demonstrating the benefit of these projects can improve the upcoming climate talks. Perhaps in a small way, this achievement shows how capital can be used to curb greenhouse gas emissions, improve public health, and perhaps most importantly, offer ingredients for an equitable climate change treaty post-2012 in which all countries benefit."
Reconciling social motives with profitable means of achieving them is a fundamental, underlying tension - a constructive one, I think - in the development through enterprise space. We're far short of consensus, but more and more people seem to buy the "why" and the "whether." What we're discussing is increasingly the "how." This was reflected in many of the blogs from SoCap, and it was front and center at the IFC-Templeton Foundation-Dalberg Franchising in Frontier Markets workshop I attended last week.
In the roundtable discussions that dominated the agenda, participants returned time and again to what the organizers called "franchising public goods and services" - not public goods in the economic sense, but rather those high social value, often low margin products and services like health care. The participant list was particularly heavy on health care franchisors (including HealthStore Foundation, Living Goods, and MicroClinic) and researchers specializing in the subject (like UCSF's Dominic Montagu).
Obviously there are lots of differences between franchising hamburger restaurants and health care provision. A big one is financing. In contrast with ventures that are purely commercial or purely social, those pursuing social objectives through profitable business models have their choice of commercial and philanthropic funding. Participants' experience showed that the choice is not straightforward.
Ventures like HealthStores, Living Goods, and MicroClinics need financing that allows them their desired balance between social and financial goals, and that imposes a healthy pressure for efficiency and results. Commercial financing imposes that pressure but may constrain a venture in terms of its social objectives - from serving the poorest, for example, or meeting the most acute needs. Philanthropic funding permits more of a focus on social value creation, but doesn't always impose the same degree of financial discipline. And this doesn't always mean it's more flexible: as the Templeton Foundation's Steve Beck observed, grantmakers "tend to take strategy out of the hands of management," and complying with an array of different reporting requirements takes a significant amount of time.
Luckily, there's a lot of innovation happening between the extremes of purely commercial financing and traditional philanthropic funding. For example, the David Weekley Family Foundation - which has invested in HealthStores, Living Goods, and MicroClinics -always has an exit strategy and asks grantees to demonstrate progress toward sustainability along the way. Ashoka Fellow David Green's new eye fund brings in foundations as first loss investors, reducing the risk in order to attract more commercial money. Many clinical social franchises use subsidies from the government to treat the poorest patients for free, while charging those further up the income pyramid.
Innovative hybrid financing and revenue models hold a lot of promise, but the devil is always in the details. Those of us in the development through enterprise space need to pay attention and learn from them in real time. We need to figure out how to formalize and mainstream the ones that work - for example, through enabling regulatory frameworks like the Low Profit Limited Liability Company (L3C).
And we need to monitor results. The debate on mixing social motives and profitable means is far from closed, especially when it comes to products and services - like health care and safe water - which many consider human rights. Even the participants at last week's workshop, many of them pioneers in this mixing process, ended up questioning whether, from an ethical point of view, we should entrust health care provision to the private sector - or whether the public sector shouldn't be the one to provide for at least some needs, for some populations. The battle over health care reform in the United States right now shows that the issue is as pertinent as ever.
Whether it's "right" to mix social motives and profitable means is a philosophical question, but the practical answer depends on whether it achieves better results than other approaches. To find out will require bold experimentation and relentless measurement of results.
For those interested in the base of the pyramid (BoP) space, it will be a busy fall as many conferences and events are upcoming. I've just updated the Take Action page here at NextBillion, but in case you are not in the habit of checking it regularly, here's a rundown of the events coming up, along with some commentary.
Disclaimer: This doesn't claim to be a comprehensive list. If you know of an event with a strong BoP focus that isn't listed here, please e-mail me and we'll add it up. Thanks!
"Bringing together aspiring and accomplished social entrepreneurs with an African interest" This is a new event for 2009, and it should be an interesting one, with funders like Rockefeller Foundation as well as intermediaries such as Endeavor both in attendance.
The 2008 edition featured an historic panel of 5 Nobel laureate economists; the 2009 conference will focus on innovation, entrepreneurship and technology and feature keynote speakers like Tim Berners-Lee and Desh Deshpande.
This invitation-only event will bring together approximately 300 BoP academicians and practitioners. The meeting's outcome will be an edited volume written by many of the so-called "founders of the BoP movement" including CK Prahalad, Stuart Hart and Al Hammond.
NextBillion is a conference sponsor of this year's Columbia Social Enterprise conference, and we will be providing blog coverage throughout. Speakers include Craig Barrett (ex-CEO of Intel) and Nancy Barry (former president of Women's World Banking).
Pop!Tech's 2009 speakers aren't all BoP experts, per se, but Esther Duflo from MIT's Poverty Action Lab will be on stage, and more importantly, the Social Innovation Fellows will again represent a suite of market-based approaches to poverty alleviation. Can't beat coastal Maine in October, either!
The ESR conference will honor Benetech's Jim Fruchterman as the social entrepreneur of the year; you'll no doubt get a strong dose of franchising expertise from BYU-based Jason Fairbourne and other experts.
The pre-eminent social/environmental gathering for business school students in the US, Net Impact's 2009 conference will be held at Cornell this year. Be sure to visit the Moosewood Cafe if you make the trip!
An article in the Economist, 'Froth at the bottom of the pyramid' brought to my attention an interesting ongoing debate about the possibility of an emerging 'bubble' in microfinance. While news of a bubble is in itself extremely interesting, the argument also highlights a fundamental weakness we currenty face in analyzing the BoP space. The lack of large scale quantitative data and analysis to back our arguments.
The debate is as follows: Based on the findings of a research study in the silk making town of Ramanagaram, in the south of India, a reporter from the Wall Street Journal wrote about a groundswell of discontent among microfinance borrowers in the town and warned of an emerging 'bubble', as lenders chased potential borrowers who would not have the ability to repay their loans. Based on interviews with residents of the town, academics and investment funds, she finds evidence of a 'credit crisis' brewing, as over-indebted borrowers find it difficult to pay back their loans. She talks about poor neighborhoods in India being 'carpet-bombed' with loans, which are mostly being used to pay for weddings, purchase goods and pay off other lenders, rather than for any income enhancing purposes.
