Sunday, 17 January 2016

SELCO and For-profit Social Enterprise

I have been a fan of the concept of for-profit social enterprise after seeing Prof Trilochan Sastry's work on Commodity Cooperatives (CCD). CCD works for creation of wealth for the poor by acting as a catalyst and as capacity builder and let the poor manage their own affairs. For example farmers in AP districts form a cooperative, operate it and add value to their production by adding collective capability to process their turdal (arhar) in their own daal mill. Another district builds a different cooperative for different crop and purpose.

The most important part for me was the grounded approach, and the philosophy that it's arrogant to tell poor how to improve their lives. One should rather assist them in institution-building and they will manage things better than external agencies can.

Recently I came across an article about SELCO who are also one such enterprise. They sell solar equipment to poor which can improve their livelihoods. The important bit again is the philosophy of respecting the intelligence of poor and providing them systems or commercial business models.

SELCO founder Harish Hande makes quite a few interesting observations in this lecture (Part 1 - starts around 18:30, 2, 3, 4). This article is also a good perspective of his work and thoughts.
  • Business models for poor are fundamentally different than classic business studies and need to be innovated in a decentralised way. Therefore the models for poor cannot fundamentally scale-up (only the abstract principles behind them can scale).
  • Poor pay for energy more than average person - 1/8th of income in the example he gives. So the question of affordability is twofold - low income but also higher cost (last mile delivery, financial risk, contract enforcement and so on). Most often poor are willing to shore up the ability to pay but there are not enough market solutions for the cost part. This is where SELCO found that their solar energy solution can be cost competitive if a financial model can be provided. His favourite example - a fruit vendor could repay Rs 10 a day but not Rs 300 a month.
  • India keeps saying that its energy intensity is very low and development of poor needs coal power, but there is a stark divide in which urban/rich India consumes energy in line with developed economies and the power from coal plants is not reaching the poor anyway. In that sense the rich in India are hiding behind poor to make an excuse for cheap energy.
  • "I went to IIT [only] because 600 million Indians did not write [JEE]". The number is debatable but the point is the uneven field of awareness/opportunities.
  • 'Fortune at the bottom of pyramid' is coming from non-expendable income. Providing a poor person a choice to buy Re 1 shampoo sachet is fine but at what cost is the choice for clean water? The fortune is larger in enabling them instead of selling to them.
  • Microfinance models are often too expensive for asset financing, it may work for working capital.
You can disagree with his overall slant of moral obligation (which is perhaps only a perception because of his style of rhetorical questions and sarcastic remarks) but the points are quite valid. For example I didn't see the moral obligation of us being a product of subsidy and therefore giving back to society is as black and white (perhaps he also doesn't). Those who work for their own or corporate also create value in society. The point remains that the value created by such a social enterprise is better in broader sense than the value created for shareholders. The broader sense can be improving livelihoods, providing economic freedom/dignity, financial inclusion or even macroeconomics (poor have higher propensity for consumption because they are fulfilling needs before wants). It is an individual choice in selecting the value creation.

Coming back to the for-profit part - SELCO are providing the product at a margin which is also shareholder value. But such a shareholder is fundamentally making the choice of making less margin for a longer term to fund such business. The margin part is important for market efficiency and avoiding wrong incentives / behaviours (for example in a subsidised model poor have less incentive to repay). There will be a subjective assessment of how much margin is right - setting the right incentives but not usurious - again there won't be a theoretical solution here.

Overall a very inspiring example - of a for-profit social enterprise creating value for poor and of a person with grounded and no-nonsense views of the world.

Update 20/1: M-Kopa in Kenya also offer such product with additional accessories (Hat-tip: Himanshu). Poor in Kenya have less access to banking compared to India so the company had to finance the sales themselves. On the flipside the mobile payment systems (M-Pesa) is much more widely used in Kenya so collections are easier.

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