In Search of a New Model for Government-Social Enterprise Collaboration

In an ideal world, social enterprises and government would work together, each enabling and leveraging the other’s unique strengths and successes. Government in this utopia would enable a wide variety of social innovations. It would welcome all fiduciary models—public, private, hybrid, and partnerships—and experiment cheerfully with them, mixing and matching where necessary to address different social challenges. And meanwhile it would keep a paternal eye on profitability, fully understanding the need to remain commercially sustainable (for entirely sound social reasons), and finely balancing it with the need to remain affordable and deliver effective social impact.

If social entrepreneurs and government could work in harmony anywhere, it ought to be in India. India has a large and highly concentrated population, an active and entrepreneurial private sector, an ingrained cultural respect for the notion of earning good karma, a gifted economist at the head of its government, and—perhaps unexpectedly—heartfelt democracy. Together, these factors should create the likeliest environment in the world for a social enterprise utopia.

Regrettably, it doesn’t quite work like that. In fact, as seen last year in microfinance, government and social enterprise have sometimes come into open conflict.

That occasional conflict, between social enterprises and government, comes down to a simple matter of market overlap. As unarguably put by social entrepreneur Vijay Mahajan in a speech at the last Sankalp Forum, “The poor vote.” In India, as in any country where the poor still represent a significant chunk of the electorate, elected governments cannot be completely indifferent to the Base of the Pyramid (BoP)—the very segment of the population that social enterprise mostly serves.

In the real world of India’s BoP, government and social entrepreneurs are still hesitantly working their way toward an accommodation. The recent Economist special on business in India reported that India’s capitalism had not conformed to anyone’s template and that India would likely evolve its own model. The same might well happen with India’s social enterprise sector.

Social enterprise in India—perhaps more than in other markets—has developed partly in response to a failure in social services delivery. Regulation, which usually starts with the assumption that service delivery is proceeding as planned, is all too often in catch-up mode. Many good examples of regulation being left behind by fast-evolving enterprises come from the same microfinance crisis—though the Reserve Bank of India remains one of the more effective regulators in the country. The central bank’s committee on microfinance, for example, recommended both an overall cap on interest rates and a cap on interest rate margins. The capital structure of most Indian MFIs (usually including some equity as well as debt) and the efficiency improvements that they were driving anyway were such that some were on the verge of reducing their interest rates to levels even below those mandated by the regulator. The regulator’s belt-and-suspenders approach—instead of protecting borrowers from higher rates—gave some lenders freedom to quietly raise their rates a percentage point or two above what they had intended to charge.

All of us who hope for good things from social enterprise must hope that the microfinance crisis in India is a single, temporary aberration. It is, as we say, asking too much for government and policy-makers to let social enterprises run entirely without some oversight. But it would be nice to think that India, with all of the advantages set out above, will build the models of the future in social enterprise and regulation.

Read more stories by K Sree Kumar.