Investing in social enterprise

Photo Supply by Hagar, DDD and Friends

Staff receive training in the kitchen of Hagar Catering and Facilities Management.

AFTER decades of inefficient spending and unsustainable initiatives, there is widespread acceptance among development groups that donor money, in itself, is not an effective catalyst for sustainable economic development. “More than aid, trade has the potential to increase the share of the world’s poorest countries and people in global prosperity,” wrote the UN in a report in 2005.

Although the vast majority of foreign money coming into Cambodia, including the nearly US$1 billion pledged by UN member states to Cambodia in development aid last year, was given in the form of grants, there is a movement under way to turn social services in Cambodia into a truly entrepreneurial venture. “Charity keeps people where they are,” explained Sebastian Marot, who co-founded Friends International in 1994 and was named the 2009 Schwab social entrepreneur of the year, speaking to the social mobility his organisation tries to facilitate among poor urban children, its main target group. “That is the opposite of what we are trying to do,” he added.

One of the things that Marot is trying to do, along with a number of Cambodian NGOs already globally renowned for their innovative work in guaranteeing transparency in their social returns on investment, is begin to tap into private investments by harnessing capitalist market forces, creating an opportunity to receive financial returns on investment.

Photo Supply by Hagar, DDD and Friends

Disadvantaged youth become skilled IT workers at Digital Divide Data’s Phnom Penh office.

“We can show exactly where the money from our businesses go - back into our projects for kids and families,” explained Marot about the commercial arm of Friends international, which is staffed by underprivileged Cambodians. “We have proven that an NGO can run successful training businesses and then reinvest the proceeds.” The Friends businesses, which include the Romdeng and Friends restaurants as well as a number of shops selling clothing, crafts and various products made by urban poor parents, cover 44 percent of the costs of Friends’ social projects, which provide a wide scope of services addressing a range of problems plaguing urban poor kids.

The idea of social entrepreneurship is not particularly new. Its most famous proponent, the co-recipient of the 2006 Nobel Peace Prize, is Muhammad Yunus, who started Grameen Bank, the world’s first micro-finance institution, in the early 1980s. His vision was to create a community-based system of banking that gave small loans to the poorest people in Bangladesh without collateral, instead using peer pressure as the incentive for returning on loans. His efforts began to receive massive international acclaim when the loans began to perform as well as loans to higher-income segments of the population. Since its inception, Grameen bank has distributed $6.55 billion in loans, of which $5.87 billion has been repaid.

Photo Supply by Hagar, DDD and Friends

Chefs-in-training are hard at work at Romdeng restaurant.

Social entrepreneurship, as it is defined by organisations such as the Skoll, Schwab and Ashoka foundations (all founded by major players in the commercial entrepreneurship world), who work to recognise and support pioneers in the sector, does not necessarily require a vision of economic profitability, but rather a vision for capitalising on a social opportunity in a way that makes a large-scale impact on a marginalised segment of society or for society as a whole.

In their 2007 review “Social Entrepreneurship: The Case for Definition”, Roger L Martin and Sally Osberg explained the dangers of using social entrepreneurship too generally by including organisations whose vision is socially geared but does not have the sort of innovative vision to be called entrepreneurial. They warn that if a broad definition is applied, “social entrepreneurship will fall into disrepute, and the kernel of true social entrepreneurship will be lost”.

Along with Friends, Cambodian NGOs such as Hagar International and Digital Divide Data have been recognised by the aforementioned groups for the entrepreneurial spirit they have brought to the non-profit sector. Now they are looking to perfect a further innovation, stabilising their non-profits by integrating employment-generating, profitable enterprises into their models. They are betting that providing a return on investment will make available a whole new pool of private capital and create sustainable jobs and training centres for their clients.

Besides attracting funds from organisations such as the Bill and Melinda Gates Foundation and the Clinton Foundation, who would already be pouring cash into healing Cambodia’s social ills, building profitable businesses to provide a sustainable flow of capital into social ventures will be the key in attracting investment from a burgeoning array of private investors looking to expand their portfolios in Cambodia. In 2008, Bloomberg reported that private investment funds such as Leopard Capital were preparing to invest upwards of $450 million in various sectors of Cambodia’s economy.

True to the definition of social entrepreneurship, Yunus’ vision of microfinance has been replicated in developing countries around the world, and 22 licensed microfinance institutions are currently operating in Cambodia. Where Yunus’s vision for Grameen produced a whole new way to structure banking to the poor, one in which investors could stand to profit, a number of social entrepreneurs in Cambodia have been working to realise reproducible and scalable innovations in hospitality, technology and manufacturing.

Hagar International, which was founded by Pierre and Simonetta Tami in 1994, has been working to integrate businesses into their holistic mission of rescuing and rehabilitating abused and trafficked women and children in Cambodia since the late 1990s. The businesses, which included Hagar Soya Co Limited (HSL), a soy milk manufacturing plant, Hagar On Time! (HOT), a garment factory, and Hagar Catering and
Facilities Management (HCFM), a hospitality business and training centre, “began as employment opportunities for women from the shelters during a time when the private sector in Cambodia did not provide many options”, according to Tim Rann, interim CEO of Hagar Enterprises in Cambodia.

However, in the wake of the economic crisis, it became apparent to Hagar’s board that managing such a diverse array of businesses was putting too much of a burden on the organisation. “We could either put all of our resources into one of the businesses, which had proven to have a social impact and financial success, or continue to lose money and take on serious business risks with all of them in the portfolio.” Both HOT and HSL were sold in 2009 to new management, but they continue to employee former beneficiaries from Hagar’s Career Pathways program.

According to Graham Taylor, who was brought in to manage HSL at the end of 2008 and recently bought the company from Hagar, changing the name to So! Nutritious, the problems facing Hagar’s soy milk operations were due to a lack of management expertise in combination with inherent issues in employing underprivileged populations. “Hagar had managers with banking and NGO backgrounds, but they lacked experience in the specific businesses,” said Taylor, who has a background as a manager of industrial dairy farms in New Zealand. “We also had to change the mindset that we employ beneficiaries. We employ people who add value to the business.”

Taylor pointed to Hagar Catering and Facilities Management, which began with an investment of $30,000 and now has the capacity to employ 130 former beneficiaries, as an example of what can happen when a general manager with expertise in the field, in this case Nathan Chan, who has a background in hospitality and IT in Silicon Valley, “has expertise and a vision for what the company should look like”. HCFM now serves 20 businesses around Phnom Penh including the Hotel InterContinental, British American Tobacco and the United States embassy, and they have recently revamped their restaurant and menu at their flagship location.

Raising efficiency is a necessary move as NGOs look to manage profitable businesses, but the populations staffing these businesses require intensive training in order to work within a commercially competitive environment. While HCFM may be profitable, they rely heavily on the social costs being absorbed by the Career Pathways programme, which trains their beneficiaries to become hospitality students, and ultimately employees.

Finding equilibrium between social service and profitability has been a crucial part of Digital Divide Data’s expansion over the past decade as well. The company takes rural poor Cambodians and trains them in IT work, while simultaneously supporting them to study at university – ultimately allowing their employees to pursue a career of their choosing. Jeremy Hockenstein, who founded the nonprofit and has acted as its CEO since 2001, said that targeting a population that is both highly vulnerable and capable of learning to do fairly high-skilled work doing data input and digital publishing has been a work in progress.

Hockenstein said that DDD piloted a project in 2005 that focused on rescued women with a third-grade education, but the costs of training them to do the necessary work was too high and the project failed. They realigned their strategy to target women with a lower-secondary school education and the results were much improved.

Operations at DDD’s offices in Battambang and Phnom Penh have become self-sustaining, according to Hockenstein, although the organisation still relies on donor money. “We will have $3 million of client revenue this year and about $1 million of donor funds. The donor funds are used for the educational scholarships, capacity building and other social benefits,” he told the Post. The company also relies on additional support from the Center for Information Systems Training (CIST), who in 2009 took over a large portion of the recruitment and training that DDD requires to prepare the poorest Cambodians to work in their offices. Although Hockenstein says he hopes DDD will rely on donor money only for expansion within two to three years, he admits that without that aid, DDD could only hope for stability.

While Grameen bank is a rare example of a truly profitable form of social entrepreneurship, companies such as Hagar, Friends and DDD, which carefully select employees for whom social mobility would otherwise be a virtual impossibility, the cost of maintaining high social standards limits their ability to shed dependence on donor money.

“We can’t ask kids to work in factories,” said Marot of Friends. “That defeats the purpose of our organisation. We will continue to rely on donor money, we just realise the need to have something that we can fall back on if, for whatever reason, some of that money stops coming in.”