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.

Hypnotists and us

While at IIMB, I attended a panel discussion on Corporate Governance and Transparency. An interesting takeaway from this discussion (and from Fin.Acc. course) was that the good guys wanting stability have always played a game of catching up over rogue behaviour by bad guys.

As from following story, it turns out that curbing rogue behaviour can end up encouraging rogue behaviour in some other form. Story picked from MarginalRevolutions (pointing out how licensing is ineffective)

Back when I was working for the Indiana General Assembly, one member...became convinced that it was crucially important for the state to address, via statute, the problem of rogue hypnotists traveling the land, preying upon unsuspecting Hoosiers. He wasn’t anti-hypnotist, mind you–he thought the government needed to protect people from unqualified hypnotists...

So the state passed a hypnotist licensing law, complete with the requisite boards, professional standards, forms to fill out, fees to pay, and so on....Then, after the law was enacted, a funny thing started happening: The state began receiving license applications from people who didn’t live in Indiana....It turns out they were doing it so they could advertise in the yellow pages and on bus-stop billboards as “state-licensed.”

This got me thinking. For starter, I am a product of two of the certified brand names - IITKgp and IIMB. So it turns out that the certification from the brands is no indicator of whether I will be a good guy or a bad guy. Ok, leave me aside. I am a nice guy. But that is not the point.

We demand transparency to have accountability. We enforce transparency through rules and laws. We take transparency as (only) means to accountability since moral conscience is not as objective. Iam not saying that all hypnotists are corrupt. But the point I see in this story is transparency alone can only be partially effective at best, and corruptible at worst (refer to use of derivatives in financial crisis and current debate on whether carbon derivatives will be the cause of next bubble). Relatively best economy is where good guys are consistently catching up over bad guys. If there is something else which can drive responsible behaviour, please comment.

I have a parallel theory. Spiritual and religious philosophers had realized this problem (i.e. transparency not guaranteeing responsible behaviour) centuries ago. Hence they themselves acted opaquely to make it easier for others to follow. They painted good economic behaviour as moral behaviour. You may say that their reason for opacity is well-meant. Or maybe it was just laziness.

God

What is common between prisoner's dilemma, global financial markets, and law? All of them give good results if (and only if) everyone believes and complies with the rules of the system.

If I forsake other prisoner's trust, I gain in a single game. But in repeated games, my best strategy is to comply voluntarily and punish immediately (more specifically, copy other player's previous move, at times with small probability of forgiving defection). With a rational opponent, the sum of individual benefits in non-compliance is less than that in compliance strategy. A beautiful illustration of this can be found at S Anand's four philosophies arising out of pure mathematical logic. Communication, or any method of co-operation between prisoners helps.

In an investment bank I can earn fat bonuses for a few years using complex financial wizardry. But when it comes in an opaque and unaccountable manner (and same is done by other bankers as well), everyone loses trust in me, my company and overall market. The sum of individual paychecks and bonuses is less than overall loss faced by the market. In the long run, I would earn more if I (and others) believed in not cheating the system by not being transparent and circumventing the laws. Government's measures of restoring co-operation and faith help.

If I believe in god (of any kind), I am less likely to resort to atrocities, having faith in my own future. If I start creating a destructive distrust between different religious beliefs, I create a fundamentalist in someone's mind. Respecting the religious systems - mine and others' helps in cooperation and peace.

I have come to believe that the hope essentially stems from the faith in the system. I am inclined towards being agnostic when it comes to religion. But given the above analogies, I think it is better for me that I believe in a system. If more people believe in a system (not specifically religious system), mutual cooperation can produce more benefit for the society on the whole. I am more or less willing to believe in god, if it helps coperation in the system, and I think it does as shown by researchers. This article in The Economist shows through economic games that belief in group/system helps. (Read the last para for humour.)

One may compare the belief in a system to an economic cartel of producers, in both the systems there is a short-term incentive to defect from given association, but not in long term. However, there is one important difference. In a cartel, the extra value created for producer is coming at the cost of customer, making it a zero sum game effectively. In a game of prisoner's dilemma cooperation creates value but not at someone else's cost.

Few days back one of my friends was trying to proxy in class. If I don't believe in the system of x% compulsory attendance in a class, I am likely to give/arrange for proxies. I hope the above argument is convincing enough for him not to proxy in class :-)

PS: Yesterday we had a fantastic talk by Shaheen Mistry from Teach For India. I am inclined towards volunteering, but not yet sure of it. Let's see.

social entrepreneurship

One of the courses this term is on the verge of changing all my priorities in life.

It is interesting that title of another course 'Self Transformation - Indian Approaches' is more appropriate to the result of Social Entrepreneurship course. STIA is about philosophy and spirituality in different religions and transformation of self. While STIA is also food for thought, SE has actually transformed me, or at least influenced my thoughts quite a bit.

Till now it was only a budding thought that I should take up something socially relevant - so I was trying to volunteer for different NGOs and help them in documentation or other MBA-like work. Though a management school leaves little time to volunteer in actual field work, this term did give some opportunities to do that through course work as well as voluntarily.

The thought was probably rooted right at my school Jnana Prabodhini, working itself for rural employment generation, education for children of sugarcane workers & tribal children and other such initiatives. Increasingly, I am coming to believe that I should work full-time in the development sector (poverty alleviation, NGOs, improvement of livelihoods, etc). I am not yet sure if I will take it up right after graduting from IIMB. If not immediately, I do want to, in near future.

PS: Even after putting it in to-do list, blogging has taken a back-seat. As part of that to-do, next I promise to write on some people I look up to - some social entrepreneurs, some mavericks, a couple of musicians. The common thing that connects them is probably their passion.