Boundaries

The three types of organizations, of course, interact with each other. When their interests are aligned together, there is potential for useful cooperation, but without blurring the organizational boundaries. Effective partnerships are more like “project alliances” than hybrid organizations. The problem with hybrid organizations is the potential for “privatizing the gains, and socializing the losses” to the detriment of the citizens. Hybrid organizations suffer from tension between the mission and the bottom line.11 It is critical for the not-for-profit organizations to maintain their legitimacy by preserving their independence and capacity to criticize. The two examples below illustrate the problems caused by blurred boundaries.

Social-entrepreneurship organizations such as the Acumen Fund contribute to the confusion by claiming they offer patient capital. It is a fallacy to believe that capital markets are short-term oriented or impatient. Investors are long-term oriented and patient provided they are compensated for the time value of money and the risks involved, which is what drives the concept of cost of capital. Capital markets fund investments in ventures such as biotechnology that are not expected to pay off for 15 years or more. The phrase “patient capital” is just a euphemism for low-cost capital subsidized by philanthropy. An individual providing financial resources to a venture and expecting to earn a return lower than the cost of capital is behaving as a philanthropist, not an investor. This individual is, in effect, making a donation equal to the difference between the cost of capital and the expected return. This is not to suggest that philanthropists are irrational; just that there is a critical difference between a philanthropist and an investor. Investors expect to earn more than the cost of capital, and philanthropists expect to earn less than the cost of capital. This is an either-or distinction; there is no blurring of boundaries and no hybrids. Expected returns are, of course, impossible to determine accurately ex ante. The actual returns earned ex post might, and do differ considerably from the expected returns. The cost of capital is very difficult to calculate accurately in practice—much research in the field of finance is devoted to this issue. The fact that both the expected return and the cost of capital are difficult to assess accurately does not invalidate the conceptual distinction between philanthropy and investment.

Contrast the approach to philanthropy by the Acumen Fund and ExxonMobil. The Acumen Fund made a low-cost loan of $1 million to A to Z Textile Mills, a Tanzanian manufacturer of insecticide-treated bed nets used in combating malaria;12 in effect, the Acumen Fund is subsidizing A to Z. It is not transparent how this benefits the poor in Africa. “Anuj Shah, who runs the company is no do-gooder. He is in it for profit and is determined that net making in Africa is a seriously commercial activity.”13 There are three major players in the commercial industry for manufacturing insecticide-treated nets: BASF, Sumitomo, and Vestergaard Frandsen. They all sell bed nets to various NGOs, international organizations, and local governments, which distribute them either free or at heavily subsidized prices. A to Z participates in this market and accounts for less than one-tenth of Africa’s need for bed nets. There is a market price for the nets the manufacturers sell to governments and not-for-profit intermediaries; however, there is no market price for the nets sold to the end users. Providing subsidized capital to A to Z certainly benefits the company; it is ambiguous how it benefits the poor. By contrast, ExxonMobil sells the resin used to manufacture the nets to A to Z at market prices. Driven by philanthropic motives, Exxon is a member of the global partnership “Roll Back Malaria”; the company then donates the money, which it makes from selling the resin, to UNICEF to buy nets to distribute to the poor. The Exxon approach of keeping business and philanthropy transparently separate is more appropriate, thus ensuring that the philanthropy reaches the intended recipients.14

In 2001, Project Shakti was initiated by HUL, Unilever’s Indian subsidiary, as a multisector partnership to create a direct-to-con- sumer sales distribution channel to villages. In their research in Andhra Pradesh, where the project was launched, Thekkudan and Tandon find that all the partners by now have withdrawn from the project.15 While launching the project, HUL sought and received cooperation from NGOs and government officials from the state and district levels. All of the five NGOs who were involved in initiating the project in Andhra Pradesh have discontinued their association, criticizing the assumptions underlying the project. The NGOs have questioned the sustainability of the project since it does not promote the livelihood of the poor. The researchers conclude that “civil society therefore runs the risk of becoming the midwife of market penetration; and in this case, some have disappeared without any accountability to the Shakti Amma [the women entrepreneurs] they were instrumental in creating. Others, questioning their role in the partnership and attempting to resolve it, are left with a sense of helplessness.” The government of Andhra Pradesh was keen to participate in Project Shakti at the outset because it expected the benefits to percolate to existing self-help groups. But the government’s enthusiasm waned, and it withdrew from the project within three years. HUL has piggybacked on the self-help group network, a system that was promoted and whose investment costs were borne by the government. The researchers conclude: “It seems the government of Andhra Pradesh never questioned the objective of HUL in starting the initiative, but took the philanthropic objectives for granted.”

 
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