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Philanthropy fosters commercial propositions
Sarah Murray

          In Tanzania, the Allanblackia tree may hold the key to increased prosperity. Research indicates that oil from its seeds can be used as a substitute for palm oil in products such as margarine and soap. With Unilever, the Anglo-Dutch consumer goods group, guaranteeing the market for the seeds at a pre-set price, the tree could one day generate income and employment for local farmers.
This is the idea behind a joint project in which Unilever is working with the World Conservation Union, the Netherlands Development Organisation and The World Agro-forestry Centre through the United Nations Development Programme's Growing Sustainable Business initiative.
While the project is being driven by developmental goals, the intention for Unilever is also to create a viable business which, in the long term, will provide the company with a new source of raw materials for its products.
This is just one of many strategies emerging as companies seek to reduce poverty and foster development through their commercial activities. Models range from using philanthropic funding as a pump-priming tool through which to develop markets serving poor countries to running businesses at a far lower rate of return than would normally be expected.
However, private sector organisations are not the only ones looking for alternative strategies. At the International Finance Corporation (IFC), the private sector lending arm of the World Bank, Michael Klein, its chief economist, argues that bilateral and multilateral donors could be employing a more commercially focused model to ensure aid more efficiently reaches poor communities.
The idea behind an incentive-driven approach that the IFC calls "output-based aid" is that when money from a donor is assigned to, say, providing rural households with a supply of clean water, an auction is held and the contract is given to the enterprise that bids to the lowest subsidy or to whichever organisation will deliver the highest service at a given subsidy.
"Instead of subsidising the construction of a water system up front -- and then, if it's not well managed, no water flows -- you shift the performance risk to a commercially minded party," says Mr Klein. "If and when they achieve the goals laid down in the concession agreement, and they provide so much water to so many households, then they get the subsidies." When it comes to the corporate sector, philanthropy is often part of the equation. An example is a project in KwaZuluNatal, South Africa, through which EDF Energy (UK) has funded a solar-powered pump, water storage tanks, water taps and irrigation hoses for a community garden. The idea is that, once trained to maintain the system and to manage a small enterprise, co-operative members can not only meet subsistence needs but supply fresh produce to local markets, generating income. Even in what is largely a philanthropic project, the company sees some commercial benefit, says Jennifer Gramolt, sustainable development manager. A similar project being rolled out in India, she says, presents opportunities to build its reputation with Indian customers in London who "might feel positive about EDF Energy for the fact that we're going above and beyond any obligation".
Some models that have initially involved philanthropy later become commercial enterprises. Jane Nelson, director of the Corporate Social Responsibility Initiative at Harvard's Kennedy School of Government, cites Citigroup's microfinance activities.
"They started it off very much as a philanthropy-type model with an edge in the sense that it was linked to their core business," she says. "But they're now transitioning to a very small but nonetheless business unit in the mainstream business of the company. It's clearly never going to be at the level of profit of their other businesses, but they're seeing it as a business proposition."
Where philanthropy is not part of the equation, some companies are developing a business model in which development-driven initiatives are run from an entity within the company that is protected from the results-oriented strategies of other parts of the organisation.
Tetra Pak, the carton manufacturer, has done this, creating its Food for Development Office through which the company is providing milk to schoolchildren and, in Tanzania, working to improve the links between milk production, processing and consumption.
Stuart Hart, chair of sustainable global enterprise at Cornell University's Johnson School of Management, believes this is the most successful model for companies wanting to address issues such as health, nutrition or poverty alleviation. He argues that consumer initiatives run along purely market-driven principles tend to be successful in delivering products and services to low-income households, but find it hard to address more intractable problems of health, poverty or access to clean water.
To do so, says Mr Hart, requires much time and money setting up the project and forming the right partnerships before any signs of commercial returns appear. "So to have a chance, they have to be given a separate space and held accountable to a different set of metrics," he says.
He cites KX Industries' development of a water filter that turns dirty water into drinking water overnight without chemicals, power or equipment. The company which usually sells its filters to companies -- such as Procter & Gamble -- is developing the filter so that it can be produced and sold at low cost in developing countries.
"That requires putting together a very different business system," says Mr Hart. "And you can't hold that kind of business system accountable in the same way you would a new filter that's going to be sold to P&G. There's a period of two or three years that's just reconnaissance - getting on the ground to figure out how to do this and getting the local partners necessary."
However, he argues that this "reconnaissance" work benefits companies in the long term. "The companies that get on the ground, establish these relationships, and develop trust and understanding among local people have a huge advantage," he says. "There's definite early-mover advantage here."
Under syndication arrangement
with FE


  More Headline
Commercial banks take a fresh look
Philanthropy fosters commercial propositions
In search of coherence
Driven by a shift in customer expectations
Big business starts to scratch the surface

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