Editor’s Choice, January 2017: demystifying why and how donors support enterprises

This month’s Editor’s Choice is a report titled Why and how are donors supporting social enterprises? published by the Overseas Development Institute (ODI) in 2014. Although it is a couple of years old it is a still a very useful report for those who want to understand better how – and why –donors support enterprises. As such it is a valuable addition to our theme this month on Demystifying the donor-business space.

Before I start to discuss the report I should thank the Hub team for inviting me to be guest Editor for this month. It is always a privilege to be in this seat, as I was for a spell in 2015.  This month is a theme close to my heart, and wearing another hat I am delighted to be able to use this opportunity to publish a new report from the Business Innovation Facility (BIF) as part of the theme. The report is called How can companies and market systems development programmes engage effectively? and you can also read my introduction to the report here.

Background to the ODI report

The ODI report we have selected this month is part of a larger, cross-disciplinary research programme at the ODI which. In their words the research ‘seeks to understand and track the growing role of enterprise models in delivering social and environmental outcomes in developing countries’.

The aim of the report is to review the way that donor programmes in this space work, and to compare this to their stated rationale. Five donor agencies were examined, selected on the basis of their level of engagement in this kind of programme.

How do donors justify supporting enterprises?

The report starts by laying out and reviewing four arguments used by donors to justify supporting enterprises which I summarise as follows:

1. Addressing situations where markets do not work properly in respect of a desired outcome or target group (market failures);
2. Helping poor people to get more benefit from participating in markets through inclusive growth (which they point out can be a variant on 1);
3. Leveraging the private sector to provide socially useful products and services (including addressing ‘state failure’);
4. Tapping into private sector innovation to deliver desired social outcomes.

They then outline some of the risks, particularly with certain approaches. Direct subsidy of enterprises, for example, can distort a market and ‘crowd-out’ otherwise viable companies thereby having the opposite effect to that desired.

They point out that new types of ‘donors’ such as impact investors have arisen recently. These often provide direct subsidies to individual enterprises and can therefore also be open to criticism. They also mention that such subsidies can risk creating donor dependency on an enterprise.

I have two further questions over the risks involved in providing concessional finance that is directly replacing commercial loans or equity, as follows:

• How can such finance be properly price when there is no market mechanism to do so (which may be in the enterprise’s favour or not)? and
• Whether such finance is dis-incentivising some enterprise from developing a rigorous business model from day-one that can then reach scale by self-financed growth?

The thorny issue of definition

There is quite an extensive section in the paper addressing definitions/typologies of enterprise. Many of us working in this field will have had similar discussions at some point or other. You will note that I have ducked the issue so far in this review by using the term ‘enterprise’ and not seeking to qualify it at all, The ODI refer to ‘social enterprises’ in the report but they land on a broad definition of this terms as ‘enterprise models seeking social/environmental impact as part of their core business.’ This to me could include (and rightly) more traditional companies that do not frame their business as a ‘social’ one.

I will not dwell on definitions here, and the ODI discussion in the report is there if anyone wants to read it. They suggest somewhat wryly that any tighter definition would have opened up the possibility of missing relevant donor programmes in their review as ‘It is possible that donors deliberately do something very similar to supporting social enterprise while calling it something else entirely.’

Report findings

The researchers of the report whittled down a list of 100 donor funded programmes to focus on 30 which they felt to be the most relevant and desirable to review. They then interviewed a good selection of relevant staff and experts, including the Hub’s own Caroline Ashley.

They report that the top four (out of 10) rationales for intervention that they were cited in interviews, in declining order, were:

• Reduced poverty, improved livelihoods or opportunities for the poor;
• Improved access for the poor, Bottom of the Pyramid (BoP) approaches;
• Supporting women and other vulnerable or marginalised groups
• Increased quality of jobs, and access to skills and training.

They do not attempt to cross-reference these to their four arguments for donor support to enterprise (above). I guess we can all do it for ourselves, although this may be difficult as the rationales for intervention that they heard in interviews seem to me to be not to be mutually exclusive as stated. The dangers of qualitative research perhaps!

They also provide data on the funding amount, sector targeted, whether products or services and instruments used. In the latter I was surprised to see that, after grants (68%), the next biggest category was debt (19%) and then equity (16%), with 39% expecting some kind of financial return (which brought me back to my questions over this kind of support). This means that concepts such as returnable capital and impact investing have taken a deeper root in donor programme than I had appreciated - and of course may have become even more prevalent since 2014.

Technical Assistance (TA) was provided in 69% of programme which was good to see. I believe that work done by BIF and other (for example our 4Ps report at the end of the first phase of BIF) has shown the value of TA to companies.

The report also looks at how donors measure impact, noting the divergence of approaches that still exists despite attempts to harmonise standards in this area. I would recommend anyone who has a particular interest in how to measure the results of private sector development programmes having a look at these sections of the report.

They also note that a majority of the programmes reviewed (18 of 30) were subcontracted to external executing agents (such as business consulting companies). I am actually quite surprised that so many donors still run their own private sector programmes but I suspect that reflects that most of my experience in recent years is in the DFID context.

Emerging lessons

The emerging lessons in the report that jumped out to me are those that relate the intervention rationale cited in programme design with the four main arguments that donors deploy to justify supporting enterprises (that I summarised earlier).

Across the programmes reviewed, the most frequent intervention rationale cited in their design is ‘inclusion’ which refers to number 2 in my list (helping poor people to get more benefit from participating in markets). However they note that this sometimes expanded to ‘making markets work for the poor’ (M4P), which I would think is more about number 1 (responding to market failure). They suggest that M4P is more of an operational approach than a rationale as such which I would both agree and disagree with, since the theoretical foundations to M4P are not hard to discern.

In terms of what is being implemented (compared to what is said in the design) they found the greatest emphasis placed on improved market access (as consumers and/or producers) for the poor and other vulnerable groups. This would broadly align with the intervention rationale of ‘inclusion’ but there can be significant differences about how such a programme addresses this which would have been useful to know more about.

In terms of the other two arguments, the found that number 3 (leveraging the private sector to supply socially useful products or services) only appears in a minority of the programmes reviewed, and number 4 (supporting innovation), was apparently frequently alluded to as a complementary argument to one of other three. This seems unsurprising to me.

Final word

As I hope you can tell from my own reflections on the report, ODI’s Why and how are donors supporting social enterprises? covers a lot of ground, provokes debate and has intriguing loose ends, as any good report should. The authors suggest what questions they believe should be researched next. I suggest you read it yourself and see what you learn about how donors support enterprises – and what questions still remain.

This blog is part of the January 2017 series on how, and why, donors and businesses work together for development impact. For more candid opinions on what works, and what doesn't, read the full series on demystifying donor-business collaborations.