If you are in the UK aid and third world development business, 2005 is shaping up to be a big year. Prime minister Tony Blair’s government has signalled an intention to use the dual UK chairmanship of the G8 and the EU to persuade the rich countries to mount a renewed assault on poverty in the third world.

 

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It is hard to argue with this goal. Two billion people – a third of the human race – live on less than $1 a day. This means they lack access to clean water, have no lights at night and often go to sleep hungry. Many children of the poor die young: one in five compared to one in 250 in the rich countries. The litany of their suffering is familiar and appears likely to continue.

 

UK chancellor Gordon Brown has recently cautioned that on the basis of current progress, the 2015 Millennium Development Goals for slashing poverty, malnutrition and child mortality may not be achievable for 150 years.

 

The aid lobby has a ready answer to this nightmare scenario, captured in recent impassioned pleas to Messrs Blair and Brown under the banner: “Aid works. Increase it now.” Alongside this assertion, the aid community also calls for debt forgiveness on the grounds that it is the poorest who suffer most from the debt burden incurred by their governments and should therefore be relieved of this burden.

Charity achievements

Is the road to poverty reduction through charity paved with good intentions but leading nowhere? If only it was so simple. The disturbing reality is that after 50 years of effort by the development community and more than $1000bn of aid spend ($55bn in 2003 alone), the jury is still out on whether and how aid helps poor people to escape poverty – especially if that means helping the poor get started and helping them on the road to earning a living so they can feed, clothe and look after themselves rather than being dependent on charity.

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Unfortunately, many countries that were poor in the 1950s are still poor. There have been great gains recently in some countries: the Asian Tigers in the 1980s for example, and India and China in the 1990s. However, taken as a group, per capita growth in income in developing countries between 1980 and 1998 was 0.0%. That means that the poorest countries and the poorest people in those countries must have fared much worse.

 

Debt relief

Debt relief does not appear to have been much help either. From 1989 to 1997, 41 heavily indebted developing countries received debt relief of $33bn, took out new loans of $41bn and still saw their per capita income decline by 13% over the same period. This means that the poor who did not benefit from the original debt incurred by their governments also did not benefit from the debt relief and are not likely to get any benefit out of the new loans.

 

Development aid was not the cause of this extremely poor performance. There are many other factors at work and there are many cases of micro and macro success associated with aid. Still, aid clearly has not had the long-term, dynamic development effect among the poorest that everyone had hoped for.

 

So bold statements that aid works and inferences that we can achieve the Millennium Development Goals only by making more money available – while valuable in drawing attention to the plight of the poor – are open to challenge.

 

This challenge is not with the goal of seeking a cut in aid levels, but to emphasise that good intentions are not enough when it comes to tackling poverty. Before more aid money is committed and spent, we need to understand more clearly what has gone wrong – and right – with efforts in the past 50 years to use the hard-earned tax dollars of our parents and grandparents to tackle the poverty challenge.

Judging outcomes

Unfortunately, the aid and development community can not assess what has worked and what has not with any precision – even at the highly aggregated (and therefore practically useless) level of sophisticated statistical analysis, the aid/impact question is examined by macro economists who are constantly proving and then disproving themselves.

 

In the real world, the picture is even more alarming. Consider this assessment in a recent New York Times* article by a journalist trying to understand whether aid works or not: “Wealthy nations and international organisations spend more than $55bn annually to improve the lot of the world’s poor people, yet they have scant evidence the myriad projects they finance have made any real difference … [for example] a $7bn [World Bank] portfolio of local community development programmes had a dearth of well-designed evaluations … while in India, the World Bank spent more than a billion dollars without knowing why they were doing what they were doing.”

 

Similar conclusions could be drawn about the state of knowledge of the impact of the aid billions that does not flow through multilateral agencies but is spent by the many thousands of non-governmental organisations (NGO) that are engaged in development work and dependent on charitable donations.

 

Since the mid-1990s, the development NGO community has been responding to growing pressure to demonstrate the impact of what they spend and do. And some of the bigger groups have developed innovative ways of trying to measure their impacts.

 

However, the challenges they face in achieving real rigour in this area are considerable and, unfortunately, many of the smaller NGOs do not have the resources or inclination to tackle the impact question**.

Business approach

Does the business way of doing things offer an alternative? Is there an approach that might have an impact? Perhaps rather than simply increasing the level of charity, more business thinking needs to be injected into the development supply-chain to offer a new, different, distinct and powerful way forward in the battle against third world poverty.

 

Since its establishment by Royal Dutch/Shell in June 2000, the Shell Foundation has been exploring this line of thinking in its work. Two features define the core character of the foundation’s approach.

 

The first feature is linked to the focus of the foundation’s work and links to the Shell Group. The Shell Foundation’s goals are to catalyse self-sustaining solutions to social problems linked to energy and poverty, energy and the environment and the impact of globalisation on vulnerable communities. These are important social issues on their own, but are also associated with Shell’s core business and its multinational character.

 

This may seem dicey ground for a corporate charity to occupy but the foundation believes this focus could be a critical source of comparative advantage as a donor. This is partly because access to Shell’s knowledge and experience base means risks can be more effectively assessed in these areas, than if health or education or cultural issues were the focus. In addition, the foundation can realise the social value-creating potential of Shell’s intangible assets, such as its convening power, presence on the ground and knowledge of local conditions in many countries where the company operates.

 

These ‘assets’, when combined with the best-practice skills of partners and grantees, can generate significant social value – conceivably greater than traditional corporate and indeed private philanthropy.

 

The second key feature of the foundation’s approach is the emphasis placed on ensuring that only initiatives that will be self-sustaining (financially and in a policy sense) and scaleable are undertaken. The reasoning for this focus is simple. Poverty-attacking projects must be designed from the beginning to be taken to scale on a financially sustainable (but not necessarily profit-making) basis. Otherwise they are likely to deliver at best only short-term, locally constrained benefits, which are not much good to the rest of the two billion poor people who remain at dire risk.

 

In short, the Shell Foundation believes that charitable money could generate greater and more sustainable economic development gains among the poor if development projects are designed, managed and run as business projects, using business principles, business skills and business tools.

Action in Uganda

Shell Foundation followed this sort of business thinking in the design and management of a project targeting the rural poor when it set up a $5m small and medium-sized enterprise (SME) closed-end financing fund in a 50/50 partnership with a local bank in Uganda.

 

This fund, the Uganda Energy Fund (UEF), targets SMEs that want to provide energy services to the rural poor – who do not have access to the grid or modern energy sources – but that need finance to acquire the equipment, technology and products to do so, and are too large for microfinance but lack the collateral needed to secure commercial money.

 

In keeping with the principle of exploiting Shell assets to achieve charitable objectives, the input of Shell Uganda has been sought – identifying the best local bank to partner with and providing risk assessment advice on proposals submitted. This business thinking has proved invaluable.

 

But most importantly, the UEF is being run along business principles by a partner who is “at risk” alongside the foundation on a for-profit (albeit not a full market RoR) basis, offering commercial financing products to SMEs designed expressly to meet their unique needs – most do not have collateral and lack extensive business experience. Grant money, managed by the local bank, is also provided to offer business development support to UEF clients.

 

Since its launch, this $5m SME energy fund in Uganda has provided support to more than 100 beneficiaries in 24 months, and is on course to achieve its expected developmental and financial returns. A $6.3m sister fund has now been set up in South Africa with similar local banking partners and further funds across Africa are being rolled out. All have the objective of generating realistic returns from investing in creating swarms of pro-poor, financially sustainable, job and wealth creating businesses, which are so crucial to poverty alleviation in Africa.

 

It is still early days and our efforts, and those of others adopting a similar approach, are only just starting to yield measurable success. Time will tell whether these successes are sustainable but, nevertheless, the rationale for taking a business approach to tackling poverty alleviation must be worthy of consideration and debate.

 

 

For further information see:

www.shellfoundation.org

See also recent articles in Harvard Business Review by Michael Porter

* Celia Dugger, World Bank takes closer look at aid’s impact, New York Times, July 25, 2004.

** See NGOs and Impact Assessment, NGO Policy Briefing Paper No 3. A Report for OECD/DAC by INTRAC, March 2001.

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