As debate continues over the best way to combat global poverty, the Shell Foundation (www.shellfoundation.org) is making the case for putting pro-poor enterprise front and center in this campaign.
Since its launch five years ago, the foundation has been systematically exploring the question of how to catalyze and scale up market-based solutions to poverty and how to harness to that same end the powerful, but largely untapped, value-creating assets of multinational corporations -- their business expertise, convening power and knowledge of local communities.
The foundation is refining its model through a range of pilot programs, a number of which are aimed at jump-starting the underdeveloped small enterprise sector in Africa, Latin America and India. Based on the success of several of these pilots, the foundation is now scaling up in an effort to demonstrate that its market-based model can generate both financial and social returns in some of the poorest communities in the world.
Created in 2000 with a $250 million endowment from the Royal Dutch Shell Group, the foundation is a registered charity based in the United Kingdom. First as architect, then director, Kurt Hoffman has been involved from the beginning in leading the consultation and design of the Shell Foundation and getting its major grant programs under way.
A development economist by training, Hoffman has worked in academia and private foundations, as well as for the United Nations, World Bank and various bilateral development agencies -- and has also launched and managed three small businesses. Just back from the G8 summit at Gleneagles, Scotland, Hoffman spoke to Global Giving Matters about the evolution of the foundation and some of its early successes and challenges.
Global Giving Matters: You've aimed to create an entirely new form of corporate foundation at Shell that couples social investment explicitly to issues associated with Shell's core business and multinational character. Why did Shell move away from its more traditional approach to corporate social responsibility?
Kurt Hoffman: That whole process started back in 1997 when the [Shell] Group was going through a major transformation in response to both business and social pressures. There were issues to do with our role in Nigeria and the Brent Spar oil platform, for example, that crystallized the changes in how Shell related to society that the Group knew were coming, but it hadn't quite appreciated the urgency of them.
I was brought in to help rethink and restructure the Group's overall global social investment program, which was pretty large then as it is now. It was run at the national level through the many country units that Shell operates, and was driven by local concerns which tended to be translated into traditional corporate social investment activities to do with culture, education, health. These were all perfectly good activities, but they did not really focus on strategic issues in which the group could have a big impact and on which it was increasingly expected to play a new and different role on the global stage.
That led to the decision, first, to create a new global strategic social investment program that would operate on its own, but also act as a change agent within the Group. And second, to focus on social issues linked to our character as an energy company and as a multinational. The reasoning behind that was that we could bring much more than money to the table when we began to get involved in projects.
The Group, like any big business, was the repository of a great deal of knowledge and expertise that was mainly deployed to create value for the business, as it should be. The hypothesis was that these business practices and principles also had great social benefits if applied externally to the social issues that we wanted to be involved in. We became aware that there was often a huge gulf between the level of capability among our potential partners in these areas and what Shell had to offer and we began to focus in on that.
GGM: Based on the success of two earlier pilots, the Uganda Energy Fund and the Empowerment through Energy Fund (ETEF) in South Africa, Shell Foundation and its investment partners rolled out an expanded $100 million East Africa Small Enterprise Fund in July. What were your main objectives in launching these pilots?
Hoffman: Energy is clearly one of those services that poor people must have access to in order to get on the road to economic development, so it was an obvious entry point for us to the poverty problem. It was clear from the outset that typical state- or donor-supported attempts to extend clean and modern energy services to poor communities were never going to reach the two billion or so people in the world who lacked access to them. There had to be some other way of reaching them, and the logical landing point for us was market-based mechanisms.
We started out engaging with the normal NGO and grantee communities to come up with ideas about how you get energy services to poor people, and found that while there was no lack of competence and knowledge of communities on their part, there was a real lack of understanding of the market.
We funded a lot of projects early on with the grantee community but we discovered that they really were not delivering what we wanted. We were looking for pilots -- pilots that could later be picked up by the market in some form, not necessarily with full profit, but with some financial drivers and investors in place. So we shifted focus and tried to find more businesslike partners, and that led us to the Uganda fund and the ETEF fund, where we decided to partner with local banks.
GGM: What were some of the challenges you encountered in establishing these small enterprise investment funds?
Hoffman: We quickly discovered that local banks, particularly in Africa, are sitting on a lot of money. But they are very risk averse when it comes to lending to the small enterprise sector, which we had identified as the key constraint in getting energy services to the poor. So we decided to use the Shell muscle, the brand and the commercial credibility, and challenge them to join us as joint investment partners in these funds. We ended up working with DFCU Bank in Uganda and ABSA Bank in South Africa.
We realized from our own experience that, since their skill is in managing assets, banks were not familiar with managing small enterprises. So we had to find a way to channel the other missing ingredient to these enterprises, and we call this business development assistance. We experimented a lot, and eventually ended up bringing in a specialist fund manager, South Africa-based GroFin Capital, with expertise in both small enterprise development and commercial finance.
GGM: How do these funds work? How do they differ from conventional financing, and what kind of results have you seen from your pilots in Uganda and South Africa?
Hoffman: The funds rely on the well-understood mechanism of closed-end investment vehicles of fixed size, but we've been innovating in the areas of deal flow, flexible forms of finance, and the provision of business development assistance. Via the first two pilot funds, totaling some $13 million, we've assisted more than 350 start-up and first stage SMEs.
These businesses have created thousands of pro-poor jobs and most importantly are maintaining repayment and growth schedules that will deliver a commercial rate of return to our funds. Based on this success, we just announced closure on the first stage of a $100 million African Small Enterprise Fund. The first stage of this will be $22 million targeting East Africa, with the majority of the risk capital provided by local banks and international finance organizations, and, critically, offering a commercial rate of return to these investors.
GGM: In promoting the foundation's market-oriented approach to helping the poor, you've issued some rather pointed critiques of the development community and its historical inability to find sustainable solutions to poverty -- a rather strong line in the sand. Has this position made it even harder to reach out to this sector in your work?
Hoffman: It's led to some interesting debates and discussion. But as development professionals, we felt it was worthwhile drawing the line as sharply as possible in order to draw attention to it. We find in the development community a lot of heads that nod in agreement with us, at the individual level, but they operate systems that constrained them in terms of what they can actually do. As a result, we tend to gravitate increasingly to business-based organizations because they are much quicker to understand how to incorporate development angles into their business model, than the development community is to incorporate issues of financial viability into their development model.
GGM: You put forward your pro-poor business model in a well-publicized manifesto, Enterprise Solutions to Poverty released in March and took part in the Business Action for Africa conference during the recent G8 summit, where you made a similar case and talked about your work. Is your message finding fertile ground among others who are in a position to push new solutions for development aid?
Hoffman: We definitely sense a change in the tenor in the debate and in the level of interest in collaboration out there. We're engaged in discussions with parts of the G8 mechanism, particularly on the UK side, to take things forward. We also have agreements with Unilever, Coca-Cola and the business arm of Shell Africa to channel to our funds very small businesses who are seeking to become part of their supply chains in the region but are unable to raise the finance to do so. Large companies are approached all the time by such entrepreneurs but are not in the business of establishing small enterprises. So we are in a sense harnessing that flow into our deal flow. At the Business Action for Africa conference, I was deluged with people wanting to talk more about what we're doing.
GGM: Do you expect to see a benefit to Shell, in terms of its operating environment, from the foundation's current activities?
Hoffman: We're keen to demonstrate benefits to Shell, because if we do, and the Shell business side picks up on some of the things we do, it sends a powerful message to other companies that the strategic social investment approach works. In fact, we will soon announce a Shell company in Latin America that's going to set up one of these funds, but it's going to do it without us, without our money. It will do it in partnership with local banks, but apply the same principles. And that's an important indicator that the business side of Shell sees that there's both business and social value in these things. It's exciting because it's proof of concept.