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Articles / 9 August 2007 | 11:00
Microeconomic Development and Social Enterprise in Ukraine: A Marshall Plan for Ukraine - Part Two

Microeconomic Development and Social Enterprise in Ukraine: A Marshall Plan for Ukraine - Part Two


ForUm Special Edition

Terry Hallman

Copyright Terry Hallman 2007. All rights reserved.

Part Two

Center for Social Enterprise

It is almost impossible to overstate the need for social enterprise in Ukraine. The nation is plagued by widespread socioeconomic problems and deficiencies, with a host of disparate, haphazard, uncoordinated efforts aimed at solving them. In order to understand the overwhelming critical need for social enterprise and a formal national center to facilitate social enterprise, an operational definition for social enterprise is essential.

Enterprise is any organizational activity aimed at a specific output or outcome. Once the output or outcome the primary objective is clear, an organization operating to fulfill the objective is by definition an enterprise. Business is the most prominent example of enterprise. A business plan, or organizational map, provides a reference regarding how an organizational scheme will operate to produce a specific outcome: provision of products or services in a way to create profit. Profit in turn is measured numerically in terms of monetary gains, the bottom line.

This is the function of classic capitalism, which has proven to be the most powerful economic engine ever devised.

An inherent assumption about capitalism is that profit is defined only in terms of monetary gain. This assumption is virtually unquestioned in most of the world. However, it is not a valid assumption. Business enterprise, capitalism, must be measured in terms of monetary profit. That rule is not arguable. A business enterprise must make monetary profit, or it will merely cease to exist. That is an absolute requirement. But it does not follow that this must necessarily be the final bottom line and the sole aim of the enterprise. How this profit is used is another question. It is commonly assumed that profit will enrich enterprise owners and investors, which in turn gives them incentive to participate financially in the enterprise to start with.

That, however, is not the only possible outcome for use of profits. Profits can be directly applied to help resolve a broad range of social problems: poverty relief, improving childcare, seeding scientific research for nationwide economic advancement, improving communications infrastructure and accessibility, for examples the target objectives of this particular project plan. The same financial discipline required of any conventional for-profit business can be applied to projects with the primary aim of improving socioeconomic conditions. Profitability provides money needed to be self-sustaining for the purpose of achieving social and economic objectives such as benefit of a nations poorest, neediest people. In which case, the enterprise is a social enterprise.

In this case, for the project now being proposed, it is constructed precisely along these lines. Childcare reform as outlined above will pay for itself in reduced costs to the state. It will need investment for about five years in order to cover the cost of running two programs in parallel: the existing, extremely problematic state childcare scheme, and the new program needed to replace it for the purpose of giving children a decent life. The old program will be phased out as the new program is phased in. After this phase transition is complete, the state will from that time forward pay out less money for state childcare. Children will have a better life, and will be more likely to become healthy, productive assets to the nation rather than liabilities with diminished human development, diminished education, and the message that they are not important the basis for serious trouble. There is no need whatsoever to give these children less than a good quality of life as they grow and mature. The only problem is reorganization of existing resources.

The microenterprise and microfinance component will support itself, as was the case in a previous effort in Tomsk oblast, Russia, and is the case with most microfinance programs around the world.

The Internet component taps into an almost completely undeveloped market sector in Ukraine, and provides a strategy to deploy a nationwide high-speed Internet communication infrastructure profitably estimated minimum 15% return on investment annually. In doing so, it provides badly needed high-speed Internet communication infrastructure across most of Ukraine at a price that much of the population can already afford, but dont have now because it is not available. Profits can then be used to help subsidize social development programs. This is only one example for creating a profit center for the purpose of providing funding for social benefit.

The Center for Social Enterprise will engender and foster exactly this sort of enterprise thinking for the purpose of further addressing and resolving the wide range of desperate social needs throughout Ukraine. Programs can be designed and deployed all over the country as long as there is a strong nucleus center to make them happen.

The Center for Social Enterprise will be created in cooperation with Kharkiv National University. It will require a one-time foundation grant of $5 million, after which it will be permanently self-sustaining. That amount can be deposited into any one of several existing banks, with returns of about 14% per year in interest on a hrivnia deposit account. That amount provides CSE a comfortable operating budget of $500,000 per year and a comfortable reserve margin above operating costs. Note that funding for projects designed and implemented by CSE is a separate budget account.

A Brief Overview of Social Enterprise

The following section is excerpted from Social Enterprise Typology, by Kim Alter, April 13, 2006. Excerpts are rearranged and edited for presentation in this document.

Preliminary Definitions

Embedded Social Enterprises - Social programs and business activities are one and the same.Non-profits create Embedded Social Enterprises expressly for programmatic purposes. The enterprise activities are "embedded" within the organization's operations and social programs, and are central to its mission. Social programs are self-financed through enterprise activities and thus, the embedded social enterprise also functions as a sustainable program strategy.

Integrated Social Enterprises - Social programs overlap with business activities, often sharing costs and assets. Organizations create integrated social enterprises as a funding mechanism to support the nonprofit's operations and mission activities.

External Social Enterprises - Social programs are distinct from business activities. Nonprofits create external social enterprises to fund their social services and/or operating costs. The enterprise's activities are "external" from the organizations operations, but support its social programs through supplementary financing.

Social Enterprise Operational Models

Social enterprise models fall into three distinct categories: fundamental models, combined models, and enhanced models. Fundamental models can be combined and enhanced to achieve maximum social value and social benefit creation.

Fundamental models

Fundamental social enterprise models include:

Entrepreneur Support Model

Market Intermediary Model

Employment Model

Fee-for-service Model

Service subsidization model

Market linkage model

Organizational support model

- Entrepreneur Support Model

The entrepreneur support model of social enterprise sells business support and financial services to its target population or "clients," self-employed individuals or firms. Social enterprise clients then sell their products and services in the open market

The entrepreneur support model is usually embedded: the social program is the business, its mission centers on facilitating the financial security of its clients by supporting their entrepreneurial activities. The social enterprise achieves financial self sufficiency through the sales of its services to clients, and uses this income to cover costs associated with delivering entrepreneur support services as well as the business' operating expenses. Economic development organizations, including microfinance institutions, small and medium enterprise (SME) and business development service (BDS) programs use the entrepreneur support model.

- Market Intermediary Model

The market intermediary model of social enterprise provides services to its target population or "clients," small producers (individuals, firm or cooperatives), to help them access markets. Social enterprise services add value to client-made products, typically these services include: product development; production and marketing assistance; and credit. The market intermediary either purchases the client-made products outright or takes them on consignment, and then sells the products in high margin markets at a mark-up.

The market intermediary model is usually embedded: the social program is the business, its mission centers on strengthening markets and facilitating clients' financial security by helping them develop and sell their products. The social enterprise achieves financial self-sufficiency through the sale of its client-made products. Income is used to pay the business' operating expenses and to cover program costs of rendering product development, marketing and credit services to clients. Marketing supply cooperatives, as well as fair trade, agriculture, and handicraft organizations frequently use the market intermediary model of social enterprise. Common types of business that apply this model are: marketing organizations, consumer product firms, or those selling processed foods or agricultural products.

- Employment Model

The employment model of social enterprise provides employment opportunities and job training to its target populations or "clients, people with high barriers to employment such as market dysfunction, physical and/or mental disability, homeless, at-risk youth, and ex-offenders. The organization operates an enterprise employing its clients, and sells its products or services in the open market. The type of business is predicated on the appropriateness of jobs it creates for its clients, regarding skills development, and consistency with clients' capabilities and limitations, as well as its commercial viability.

The employment model is usually embedded: the social program is the business, its mission centers on creating employment opportunities for clients. Social support services for employees such as "job coaches," soft skill training, physical therapy, mental health counseling, or transitional housing are built into the enterprise model and create an enabling work environment for clients. The social enterprise achieves financial self-sufficiency through the sales of its products and services. Income is used to pay standard operating expenses associated with the business and additional social costs incurred by employing its clients.

- Fee-for-service Model

The fee-for-service model of social enterprise commercializes its social services, and then sells them directly to the target populations or "clients," individuals, firms, communities, or to a third party payer.

The fee-for-service model is usually embedded: the social program is the business, its mission centers on rendering social services in the sector it works in, such as health or education. The social enterprise achieves financial self-sufficiency through fees charged for services. This income is used as a cost-recovery mechanism for the organization to pay the expenses to deliver the service and business expenses such as marketing associated with commercializing the social service. Surpluses (net revenue) may be used to subsidize social programs that do not have a built-in cost-recovery component.

- Service subsidization model

The service subsidization model of social enterprise sells products or services to an external market and uses the income it generates to fund its social programs.

The service subsidization model is usually integrated: business activities and social programs overlap, sharing costs, assets, operations income and often program attributes. Although the service subsidization model is employed primarily as a financing mechanismthe business mandate is separate from its social missionthe business activities may enlarge or enhance the organization's mission.

Non-profits that implement service subsidization social enterprises operate many different types of businesses, however, most leverage their tangible assets (building, land, or equipment) or intangible assets (methodology, know-how, relationships, or brand) as the basis of their enterprise activities. Commercialization of core social services leads to enterprise activities that are close in nature to the organization's social programs and may enhance the mission; whereas leveraging physical assets to sell to the public may result in an enterprise that is very different from the organization's social programs. In financial terms the business benefits from leveraging and cost sharing relationships, and provides a stream of unrestricted revenue to "subsidize" or wholly fund one or more social services. Service subsidization is one of the most common types of social enterprises because it can be applied to virtually any nonprofit. The service subsidization model may conceivably grow into an organizational support model if it becomes profitable enough to throw off revenue to the parent organization.

Service subsidization model social enterprises can be any type of business. Those that leverage intangible assets such as expertise, propriety content or methodologies, or exclusive relationships tend toward service businesses that commercialize these assets: consulting, counseling, logistics, employment training or marketing. Those that leverage tangible assets such as buildings, equipment, land, employees, computers, etc. may launch any number of enterprises that utilize infrastructure and capital assets: leasing, property management, product-based retail businesses; copying, transportation or printing services, etc.

- Market linkage model

The market linkage model of social enterprise facilitates trade relationships between the target population or clients, small producers, local firms and cooperatives, and the external market. The social enterprise functions as a broker connecting buyers to producers and vice versa, and charging fees for this service. Selling market information and research services is a second type of business common in the market linkage model. Unlike the market intermediary model, this type of social enterprise does not sell or market clients' products; rather it connects clients to markets.

The market linkage model can be either embedded or integrated. If the enterprise is standalone; its mission revolving around linking markets, and its social programs support this objective, the model is embedded. In this case, the social program is the business, income generated from enterprise activities is used as a self-financing mechanism for its social programs. Market linkage social enterprises are also created by commercializing an organization's social services or leveraging its intangible assets, such as trade relationships, and income is used to subsidize its other client services. In this second example, social program and business activities overlap, hence follows the integrated model . Many trade associations, cooperatives, private sector partnership and business development programs use the market linkage model of social enterprise. Types of social enterprises include import-export, market research and broker service.

- Organizational support model

The organizational support model of social enterprise sells products and services to an external market, businesses or general public. In some cases the target population or "client" is the customer.

The organizational support model is usually external: Business activities are separate from social programs, net revenues from the social enterprise provide a funding stream to cover social program costs and operating expenses of the nonprofit parent organization. Although organizational support models may have social attributes, profit not social impact is the perquisite for this type of social enterprise. This model of social enterprise is created as a funding mechanism for the organization and is often structured as a subsidiary business (a nonprofit or for-profit entity) owned by the nonprofit parent. Successful examples of this model cover all or a major portion of the parent organizations budget.

Similar to service subsidization model, the organizational support model may implement virtually any type of business that leverages its assets. This model is commonplace among western nonprofit organizations across sectors.

Combined Models: Complex and Mixed Models

Model combinations occur within a social enterprise (Complex Model) or at the level of the parent organization (Mixed Model).

Social enterprise models are combined to

1. facilitate enterprise or social program growth;

2. increase revenues by entering new markets or businesses;

3. augment breath or depth of social impact by reaching more people in need or new target populations.

A complex model of social enterprise combines two or more operational models. Complex models are flexible; virtually any number or type of operational models can be combined into one social enterprise. Models are combined to achieve desired impact and revenue objectives. For example, operational models that fall into integrated or external social enterprise categories may yield greater financial benefit, whereas embedded social enterprises offer higher social return, thus models are combined to achieve the dual objectives of the social enterprise. If appropriate for an organization's target population, the employment model is often combined with one of the other models to add social valuei.e. employment and organizational support model. Operational models are often combined as part of a natural diversification and growth strategy as the social enterprise matures.

Mixed models are often a product of an organizations maturity and social enterprise experience. This model is common among large multi-sector organizations that establish separate departments or subsidiaries for each technical areai.e. education, health, economic development, etc. and new business ventures. In nonprofits with mature social enterprises, mixed models are the convention, not the exception, a result of expansion and diversification.

Many nonprofit organizations run multi-unit (mixed) operations, each with different social programs, financial objectives, market opportunities and funding structures. Each unit within the mixed model may be related vis-à-vis target population, social sector, mission, markets, or core competencies. A museum for example, in addition to educational art exhibits, might have both a for-profit catalogue business and highly subsidized research and acquisition operation.

Enhanced Models: Franchise and Private-Sector Partnership

The Franchise Model enhances social enterprises by addressing common nonprofit challenges of replication and scale. Technically, any social enterprise that can be reproduced may be applied to the franchise model. Reproduction requires a viable social enterprise model with clear business and social parameters, which is applicable in different markets or across geographical regions.

An organization can franchise its "proven social enterprise model" and sell it to other nonprofits to operate as their own business. Franchising enhancesnonprofit organizations that have viable, yet non-scaleable social enterprises, through replication. For example, a café that employs disabled people may be profitable only when it employs 12 or fewer disabled people. However, if franchised, the café social enterprise can create employment for hundreds of disabled people. Goodwill Industries [http://www.goodwill.org] used clothing and furniture retail stores are a good example of an employment model social enterprise achieving scale through the franchise model.

Hence, the franchise model enhances scalability and social value creation through replication. Purchasers pay franchise fees to receive the social enterprise model, methodology, etc., and ongoing technical support from the franchiser. Buying a franchise enables nonprofit organizations to focus on running operations of a proven enterprise, rather than worrying about what type of business to start, which products to sell, or what markets to enter. Becoming a franchiser creates a new social enterprise for the organization that leverages the organizations industry and business expertise, and in turn creates new social impact opportunities and another source of earned income.

The Private-Sector Partnership Model represents a mutually beneficial relationship between a for-profit company and a nonprofit social enterprise. Relationships are forged on commercial grounds, whereby each partner is a contributor to the commercial success of the venture. The partnership adds value or enhancesthe nonprofit social enterprise by increasing its viability, and hence its social impact, either directly by reaching more clients through its business model, or indirectly by generating funding for social programs. The private partner also benefits vis-à-vis improving goodwill, increasing customer loyalty, penetrating new markets, attracting more socially conscious consumers, etc., which subsequently translates into higher sales and more profit.

The private-nonprofit partnership model of social enterprise is a mutually beneficial business partnership or joint venture between a for-profit company and a nonprofit organization. The partnership may occur with an existing social enterprise, or may result in the creation of a new entity or a profit center. The social enterprise may or may not be mission-related and leverages the nonprofit organization's assets, such as relationships with their target population, community, brand, or expertise. For the for-profit, the partnership yields one or more of the following benefits: lowers costs (cheaper labor/lower research and development costs); reduces restrictions (no strict regulatory oversight); improves community relations or public image; enables new product development; penetrates new markets; or increases sales. Partnership benefits for the nonprofit are financial return, marketing and brand equity, and in cases where the activity is mission-related, social impact. The market is most often externalthe public, but examples exist where the paying customer and the client are one. The private-nonprofit relationship may be structured as a joint venture, a licensing agreement, or formal partnership.

Summary and Conclusion

The program will be based in eastern Ukraine, in Kharkiv, and will serve as a leading light and example for eastern Ukraine as well as all of Ukraine. Civil society is action, proof, clear examples demonstrated and carried out with the involvement and intelligence of Ukraines citizens who are Ukraines great reservoir for hope, prosperity, safety, and security. Nothing less than an opportunity to become actively, positively engaged in their own, their families, and their neighbors well-being and improvement of social standards is needed.

It is proposed that the United States of America be actively engaged in supporting this project, financially and any other way possible. Ukraine has clearly demonstrated common will for democracy. Ukraine has also unilaterally taken the first critical step to fulfill this program, thus clearly demonstrating initiative and commitment to participation required in the original Marshall Plan sixty years ago. The US side is presumably attempting to foster democracy in another country, which never expressed much interest and shows little real interest now. That of course is Iraq, where recent estimates indicate a cost of $1.5 billion per week.

That same amount of money, spread over five years instead of one week, would more than cover the investment cost of the initial components of this project, and allow a reserve fund for creating new projects as Ukraines intelligentsia invents them in the Center for Social Enterprise. It is proposed that Ukraine and the US provide equal portions of this amount. Ukraine is certainly able to provide that level of funding, given that projects are designed with the same fiscal discipline employed in the traditional business sector. That means they pay for themselves, one way or another.

Project funding should be placed as a social-benefit fund under oversight of an independent board of directors, particularly including representatives from grassroots level Ukraine citizens action groups, networks, and human rights leaders.

This program provides for near-term social relief for Ukraines neediest citizens, most particularly children who normally have least possible influence and no public voice. Over a few years time, the net cost financially is zero. Every component is designed to become financially solvent, through mechanisms of cost-savings and shared revenue with other components. One component, Internet, provides essential communications infrastructure as well as a cash surplus to be used to offset any lingering costs of other components such as childcare, and otherwise goes to a permanent social benefit fund under oversight of the aforementioned independent, citizens-based non-government board of directors.

Any number of other social enterprises can be created. Furthermore, any number of existing for-profit enterprises are entirely free to contribute any percentage of profits they wish to increase the proposed initial $1.5 billion social investment fund. If for example the total fund comes to $3 billion, that amount would generate at least $300 million per year in a hryvnia deposit accounts at any one of several major Ukrainian banks, to provide ongoing funding to continue to create and expand social enterprises.

This strategy places adequate funding for social benefit under control and management independent of government and the very obvious vicissitudes and conflicts inherent therein.

This is a long-term permanently sustainable program, the basis for "people-centered" economic development. Core focus is always on people and their needs, with neediest people having first priority as contrasted with the eternal chase for financial profit and numbers where people, social benefit, and human well-being are often and routinely overlooked or ignored altogether. This is in keeping with the fundamental objectives of Marshall Plan: policy aimed at hunger, poverty, desperation and chaos. This is a bottom-up approach, starting with Ukraine's poorest and most desperate citizens, rather than a "top-down" approach that might not ever benefit them. They cannot wait, particularly children. Impedance by anyone or any group of people constitutes precisely what the original Marshall Plan was dedicated to opposing. Those who suffer most, and those in greatest need, must be helped first -- not secondarily, along the way or by the way.

From there, broad economic and social development can develop "upwards" concurrently with more conventional top-down approaches to economic development. Moreover, this program will not only meet initial, most critical and urgent objectives of childcare reform and poverty relief in Ukraine, it will also provide training for ever-growing numbers of specialists educated in social enterprise economic thinking with sufficient funding to put ever more well-designed projects into action as Ukrainian citizens invent them.

Due to Kharkiv National Universitys international student body, education and training will be further distributed throughout the world. This is a program for the common good in Ukraine, with common ground among all political factions regardless of what differences exist otherwise. It will benefit not only Ukraines poorest and most vulnerable people, but also Ukraines overall economic development and advancement. It will further benefit the developing world as international students train in Ukraine and return for benefit of their home country.

Ukraine now stands on the brink of remarkable opportunity to emerge as an international leader in political, economic and social transformation. Nothing more than real, honest opportunity to fulfill this potential, by ordinary Ukrainian citizens, is needed for that potential to manifest and become reality. The original Marshall Plan greatly assisted Europe. Ukraines time has come.

Godspeed.

T. Hallman

Kharkiv, Ukraine

ForUm edition August 2007

Terry Hallman is founder of People-Centered Economic Development, 1997.

References

Assessment of the Adoption System in Ukraine. [PDF] OSCE, October 2005.

Children and Young People Living or Working on the Streets: The Missing Face of the HIV Epidemic in Ukraine. [PDF] Anja Teltschik, 2006.

Community-Based Networks and Innovative Technologies: New models to serve and empower the poor. [PDF] United Nations Development Program series: Making ICT Work for the Poor, 2005.

Constitution of Ukraine, Chapter 2: Human and Citizens Rights, Freedoms and Duties. Ukraine, 1996, 2007.

Family Matters - Report on Central and Eastern European Orphanages. [PDF] EveryChild.org, November 2005.

Social Enterprise Typologies. Kim Alter, Virtue Ventures LLC, April 2006.

The Marshall Plan. Organization for Economic Cooperation and Development. (Europe)

Ukraine to see creation of over 400 rehab centers for mentally disabled children. Government of Ukraine, 5 March 2007.

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