Support to SMSEs - an effective strategy for foundations and international agencies

SMSEs receive almost no external support. International agencies focus on state provision of social services, believing private enterprises will not offer good quality and affordable services for the poor. Charities and foundations tend to focus on NGOs.

Yet small, local enterprises provide most social services to the poor. Supporting them either through social investing or by funding grants is a good strategy for a foundation or an agency.

Investment in a social enterprise can have a large multiplier effect. Once started a good business will grow by itself, a good business model will be copied - stimulating a market is a more effective way to ensure a service is provided than funding an institution. 

With good project design, investment or grants to social enterprises can be administered easily as success is easy to measure and local partners will work to improve their own efficiency, not rely upon external guidance.

To work with SMSEs, investors and funders need to identify good enterprises and minimise transaction costs.  This is not simple

This paper addresses these two issues. It is based on a series of interviews with SMSEs in one small town in Sri Lanka, Ambalantota. By studying the 'on-the ground' operations of SMSEs, it aims to understand the characteristics of the social sector market, the business issues that these enterprises face, ways that these enterprises can grow and ways in which external agencies can support this growth. (See Appendix 1 for detailed case studies and Appendix 2 for description of the area surveyed)

The paper will be of use to any organization that wants to provide effective social services in developing countries, or wants to invest in social enterprises.  The paper refers to 'investors' (organizations such as social investment funds and financing organizations who seeking at least partial cost recovery) and 'funders' (organizations seeking to give grants, such as NGOs, foundations and donor agencies). In practice, a project may combine 'investing' and 'funding', for example supplying loans at the same time as funding skills development.

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Box: Support for SMSEs

Social investors can:

  • Fund banks that invest in SMSEs

  • Set up lending companies for capital intensive sectors, such as water

  • Provide equity to SMSEs, for expansion, consolidation

  • Fund SMSEs networks

Grant providers can

  • Train and support entrepreneurs

  • Build capabilities of organisations that help SMSEs, like banks

  • Use SMSEs as a channel to provide social services

  • Most effective organisations may use a combination of mechanisms

More and detailed examples are given below, and in the case studies.