Author: David Hew
To suggest that there can be such a thing as a For-Profit social philanthropy may seem oxymoronic. This will be so if one associates philanthropy with Not-For-Profit activities only, where one gives without expecting anything in return. Perish the thought of linking philanthropy with profit-making. This article challenges this norm.
The Profit Element
A For-Profit social philanthropy makes profit an essential condition. It could be a post-condition, as in I give on the basis that the receiver will strive to make a profit and deal with the whole or parts of the profit as I, the giver, desires. Or, the profit requirement can be a pre-condition, as in I make a profit and I undertake philanthropic activities as a part of the transaction. Where the giver is a corporation, it is transaction-based corporate social responsibility because the transaction-dependent profit is the genesis of the philanthropy.
The writer contends that For-Profit social philanthropy may not only be necessary; but can even be critical where market failures exist and/or where a more sustainable model of philanthropy needs to be sought to co-exist with Not-For-Profit social philanthropy.
A “post-condition” For-Profit Social Philanthropy
One common instance of market failure robustly addressed can be found in micro-financing initiatives. In micro-finance, loans are made to borrowers for whom loans may not otherwise be available if only ordinary market forces are allowed to prevail. What is often touted as the successes of micro-finance initiatives is the very low repayment default rate associated with such micro loans. What is less known is the micro finance borrower has to make a profit with the loan received because repayment must not only be made of the loan principal but also of the cost of the loan. The micro financier gets paid the loan principal and also makes a small profit for extending the loan to the borrower. Without the micro finance made available, the borrower’s plight may worsen and possibly slip deeper into poverty.
Micro-financing is a form of post-condition For-Profit social philanthropy, the post-condition being that the borrower has to put the loan to work in order to generate a profit.
A “pre-condition” For-Profit Social Philanthropy
A pre-condition For-Profit social philanthropy is the business practice known as Offset, a.k.a. industrial cooperation, partnership for development, industrial participation, just to name a few of the many nomenclatural variances of Offset.
How is Offset a pre-condition For-Profit social philanthropy, you may ask?
A seller in order to induce a purchase may indicate or may even be compelled by a buyer to agree, by way of a pre-condition of the sale to flow back a part of its profits or provide benefits-in-kind – especially benefits of the kind that the seller is well positioned or endowed to provide – to the buyer. The buyer can promulgate Offset policy and guidelines to direct what the seller’s For-Profit social philanthropy should be and how they should be manifested; compromising neither the originating purchase’s objectives nor the observance of best procurement practices in the buyer’s quest for value for money for its purchase.
Where and how is the market failure addressed by Offset? In an environment where there are few sellers, many buyers, where information is asymmetric, poor or unavailable, a market cannot be left on its own to bring about an optimal outcome. The defence industry is such an environment. When the circumstances are appropriate, policies like Offset may need to be introduced to correct imperfections and distortions or to address inefficiencies in markets in order to achieve economic, social and security objectives.
Considering that the buyers in major defence purchases are mostly governments, the post-condition For-Profit social philanthropy compels foreign sellers to differentiate their offerings and commit some of its own resources or even part of the profits made to benefit the host country. The benefits or spin-offs thus secured through this typically include jobs creation or retention, assistance to local businesses, knowledge building, securing foreign direct investments or technology transfer activities that may otherwise be funded from the taxpayers’ or public monies used to make the purchase from the seller.
Is it a wonder then that studies from the U.S. have found that over 120 countries require Offset of some sort for their defence procurement and this practice is “persistent and increasing” and “may never be eliminated”? The need to build an indigenous defence industrial base is an obvious reason for this. This can be achieved in addition to the other spin-offs noted above, serving especially a government’s need to constantly seek all available means to save or create jobs for its people.
Co-existence of For-Profit and Not-For-Profit Social Philanthropy
There is a strong case for both For-Profit and Not-For-Profit social philanthropy to co-exist.
No point telling a hungry man that he should learn to fish when his basic needs are not satisfied. For him the Not-For-Profit social philanthropy would be most apt.
A more sustainable model however is addressing not just the hunger alone but to identify and address the specific market failure in order to create opportunities and provide solutions on a long-term basis with a view to benefiting a larger and more diverse group. This is the raison d’être of For-Profit social philanthropy.