Monday, January 13, 2014

The "procurement" problem with social enterprise solutions

Use market dynamics to solve social problems is the new buzz phrase in development. Newly minted development professionals, backed by small grants from donors seeking diversification of their lending portfolios, enthusiastically venture out from schools on social enterprise pursuits in Africa and elsewhere. Even the business schools have been swept by this trend. The nature of this approach chimes well with the prevailing academic ideology of evidence-based field-experiment driven search for development solutions.

But the one thing that the growing list of such projects reaffirms is that social problems are fiendishly intractable and not amenable to any one strategy. It is therefore no surprise to find young and incredibly smart entrepreneurs, who put their heart and soul into designing what they think are perfect low-cost solutions for critical social problems, apparently far superior to anything in the market, face repeated road-blocks with their projects.

Times has an article which describes the frustration faced by a non-profit firm, D-Rev, in its efforts in India to promote (in public hospitals) the use of a more efficient and sturdy photo-therapy equipment used to treat infant jaundice. Its business model is typical of social enterprise firms - leverage their knowledge-capital to design medical equipments suited to the conditions of developing countries and then license it to for-profit distributors. So, what gave,
"We thought if you design a good product, it will scale on its own... That works in efficient markets, but most developing communities don’t have efficient markets"... D-Rev’s... designers and engineers came up with an inexpensive light therapy system, called Brilliance, that was rugged enough to roll smoothly across dusty, rural hospital floors, and able to cope with erratic power supplies. But... D-Rev’s commercial distributor in India... found that cronyism or corruption sometimes led hospitals to select higher-cost, lower-quality products... Hospital systems still sometimes chose higher-price systems because of bribery or cronyism, or because they didn’t understand Brilliance’s technical innovations... Seven years after its founding — and a decade into the rise of “social entrepreneurism”— D-Rev and its peers have found that the marriage of nonprofit motives to for-profit markets can be rocky.  
It was amazingly naive for D-Rev to have expected its new device to be procured by government hospitals. Even in the most ideal procurement environment, D-Rev's new device would have stood no chance of even getting to the starting line. Public procurement of all kinds requires certain universal pre-qualification requirements - experience (device has been used by a critical threshold of users for a period of time, say 2-3 years) and financial turn-over (the firm has done business beyond a critical financial threshold for a period of time). D-Rev, or for that matter any social entrepreneur promoting a new device or idea, would fail both tests. I have blogged earlier about the first mover disadvantage with public procurements here, here, and here. Furthermore, for equipments there are also technical specification requirements, which are always bench-marked based on that of the most widely available devices in the market.

As for corruption, it arguably would have played a part in the procurement, but would have been by way of preferential treatment to a particular provider among notionally pre-qualified competitors. Regarding "technical brilliance" claimed by D-Rev, where is the credible market (or other) test? It baffles me that we go around in circles with this problem. Such initiatives can succeed (ie scaled-up) only under one of the following four conditions.

1. In a tinpot country, a large donor could make a difference. If the donor finances the use of the device or process across the country at a scale reasonably large enough to credibly establish its effectiveness, then it becomes possible for an enlightened government to legitimately procure the same equipment in scale across the rest of the country.

2. The social entrepreneur could convince a few or one large private service provider (say, a large hospital group in case of medical equipments) to use their equipment and thereby establish its reliability and effectiveness. Once it becomes established that the device is cheaper and more effective than its competitors, the private market will immediately embrace it. It is then only a matter of time before public sector takes to it. In the process, the social entrepreneur would be able to acquire enough financial turnover and experience to meet public procurement requirements.

3. A "smart" alternative is to play the same rules of the game as the incumbent competitors and strike a deal with a corrupt government. If the equipment is as good as is being claimed and it gets to be used by a large enough sample of users, then it will invariably generate demand elsewhere. In addition to the reputational goodwill, like with the private market based entry, the social entrepreneur will acquire enough  financial turnover and experience to meet the financial and technical qualification norms to formally compete in public procurement.

4. An extremely enlightened official or leader, at a very high-level, could become personally convinced about the effectiveness of this device. Then they would personally assume the risk (of indictment from a future enquiry or audit holding them responsible in case the device fails) and award the contract to the social entrepreneur on a nomination basis.

I think the last two paths are not in the interests of the social entrepreneur, for a number of reasons. Both are unsustainble and it will be only a matter of time, especially when governments or officials change, before the contract starts unraveling. Disgruntled incumbent suppliers, with strong connections, too are certain to play their role in this process. The first and especially the second provide the best strategies for social entrepreneurs (and their donors) to promote the adoption of innovations. In the second strategy, it will require constant engagement with progressive private managers to get them to bite the bullet. The donors too will have to stay engaged with the process for a long-time before the idea's commercial opportunities starts to look up.  

Yes, you could turn around and argue that innovations happen through a tortuous process of discovery, where failure is the norm and successful examples are very rare. Venture capital (VC) works on that principle and has been behind much of the advances in the field of Information Technology (IT). The social entrepreneurs are merely following this trend.

But I strongly feel that this premise is misguided assessment. IT and the role of VCs is a superficially attractive but mis-leading similarity. The equipments which are being pursued by social entrepreneurs are much more complex, especially in its functional versatility. Even if the technical challenge is overcome, that of ensuring its reliability in the exceptionally demanding usage environment is very difficult.

In fact, I cannot recollect any example of a spectacularly successful low-cost device to address social problems that has emerged from such social enterprise endeavors (and whose use has been scaled up, and is not just a demonstration example to showcase before donor agencies). Where are the reliable and scaled-up low-cost incubators, sonograms, prosthetic devices, sewer cleaning machines, biometric attendance devices, water purifiers, classroom instruction tablets, healthy and environment friendly cooking stoves, solar lamps, energy efficient motors, and so on that could have been created by social entrepreneurs?

Doubtless there are isolated pockets of small-scale implementation examples in all these cases. In fact, in countries like India, every state would have atleast one example implemented in a few schools or hospitals or villages by a committed group of individuals working for a non-government organization. But scaled-up versions impersonally embraced by governments, virtually nothing! In any case, leave aside social entrepreneurs, even regular entrepreneurs face often insurmountable problems breaking open markets in developing countries.

Maybe, such innovations are more likely to emerge from established firms with deeper pockets, pursuing the same product market for a sustained period of time, rather than from inexperienced but smart, idealistic, and well-intentioned social entrepreneurs pursuing the same idea for a limited time on shoe-string budgets.  


KP said...

Fantastic post. Thanx, regards, KP.

Johnniem said...

Doing a great job mate . Like to keep in touch . My main interest is in Agriculture and resilience support for rural communities

Alain Kongo said...

Great Post!

Social Entrepreneurship is indeed the way forward!
For a thorough presentation of Social Entrepreneurship and the impact it will have on the future of humanity,

I strongly recommend a recent book, Social Entrepreneurship, The Secret to Starting a Business Worth Living For.

A good review of the book can be found Here.