Posted by: gppn | 13/11/2009

Economic Reforms – The Social Economy

Presentation: The Social Economy – A New Paradigm for Financial Sustainability

Speaker: Vasudev Daggupaty, Sciences Po, Paris, France

Moderator: Aneliya Nazirova (LKYSPP) – Rapporteur: Naomi Jacob (LKYSPP)

Abstract

The current Financial Crisis presents an opportunity to restructure financial instruments to enable social innovation, in a Schumpetarian manner (model of “creative destruction”).

Problem

How can one use the opportunities presented by the current financial crisis to transform the presence of social innovation in the economy?

Analysis

Currently Social entrepreneurs have to depend on three types of Income financing- grants from Governments, Charity from Private Benefactors and Revenue Funding. As the first two sources are not sustainable for operations with a long-term view, since the amounts to obtained from them will keep fluctuating, the presentation concentrates on how social enterprises can be sustainable in the long run using revenue funding. The framework used was to look at two axes-a vertical axis ranging from high involvement to low involvement and a horizontal axis ranging from charitable donations to commercial funding from banks etc. The intersection of the axes divides the space into four quadrants-

  • Venture philanthropy – charitable high involvement funding
  • Venture capital- commercial high involvement funding
  • Grant making- charitable low involvement funding
  • Bank Lendiing- commercial low involvement funding

Solutions and Strategies

Social enterprises can also be encouraged by legal and tax structure changes:

A Community Interest company is a new type of company introduced by the United Kingdom designed for social enterprises that want to use their profits and assets for the public good. Regular limited liability companies that do not have charitable status find it difficult to ensure that their assets are dedicated to public benefit. There is no simple, clear way of locking assets of such a company to a public benefit purpose other than applying for charitable status. The community interest company is intended to meet this need.

The L3C is a low-profit limited liability company (LLC),that functions via a business modality that is a hybrid legal structure combining the financial advantages of the limited liability company, an LLC, with the social advantages of a non-profit entity. An L3C runs like a regular business and is profitable. However, unlike a for-profit business, the primary focus of the L3C is not to make money, but to achieve socially beneficial aims, with profit making as a secondary goal. The L3C thus occupies a niche between the for-profit and charitable sectors.

The role of public policy in this regard is to be a bridge between protecting the interest of lenders as well as giving incentives to citizen-sector entrepreneurs.

Questions and Answers

What are specific examples of social enterprises?

In the US, prisoners’ rehabilitation program to prepare them for jobs: sweet potato pie bakery set up by a guy to give jobs to ex-cons. The profits were used to run educational programmes for prisoners. Aside from his initial start-up, he used loans as capital for his company.

Do we need to create new institutions to support the social economy? Won’t these be parallel structures? Can we use existing systems?

Yes, the idea is to reform existing institutions to accommodate and foster the social economy. But the context is different in particular countries. In countries where existing institutions do not have the capacity, there may be a need to create new institutions.

Do banks’ lending criteria need to evolve?

The method of evaluating projects should ideally also have to change as the nature of the projects is also different from typical business ventures.

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