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Social enterprises and development

Federal and provincial governments can greatly encourage social enterprises through preferred treatment under public procurement of goods and services

Social enterprises and development

Social enterprises (SEs) in Pakistan pursue objectives in line with societal needs, and engage in business activities to generate growth, jobs and innovative service delivery solutions. They also reinvest their surplus earnings back into the enterprise activity.

The primary focus in the business model of such enterprises is social impact which can come in several forms. The recent increase in the number of SEs in Pakistan comes in the backdrop of weak long term economic growth and jobs outlook, and constraints on the state’s financial and other forms of capacities to provide even the most basic forms of social services. Today, SEs operate across a range of activities, including health, education, low-cost energy, housing, retail, wholesale and retail trade, and manufacturing.

The growth of SEs in Pakistan has been helped by a fast urbanising and connected youth, having access to much greater information on demand and supply for local service delivery solutions. Many are reconnecting with their communities at grass roots level through not just creation of businesses but also skills and assets which in turn translate in to sustained empowerment.

While the literature on SEs recognises their current and potential role towards sustainable development in Pakistan, most SEs however confront a harsh business environment and often end up facing an unfair competition from for-profit business concerns and enterprises. Despite their contribution to social imperatives, there is no specific legislative, regulatory or policy support for SEs at the federal or provincial level.

Recent research on Pakistan’s SEs explains that due to lack of legislation for these firms, many in this sector are operating as part or unit of an already existing organisation. Some function as subsidiaries of commercial entity and several may end up being registered as independent private limited companies, single member companies, and non-government organisations, in turn making them prone to the weaknesses of existing business models and transactions costs towards excessive paperwork and permissions.

There are significant number of SEs who have not registered as a formal entity due to reasons such as lack of knowledge about best suited (registration) option available to them, apprehensions regarding interface with tax and regulatory bodies (including labour and environment departments), and a desire to avoid the kind of rent-seeking faced by mainstream businesses.

The lack of legislation and policy on SEs also implies that these businesses cannot access shared equity and more flexible borrowing opportunities from the formal sector. It is due to these reasons that most social entrepreneurs have to wait until they can accumulate personal savings, persuade peers for financing, or be able to access grants from local and foreign development partners. All these options have limitations for future sustainability of their work.

Recent research on Pakistan’s SEs explains that due to lack of legislation for these firms, many in this sector are operating as part or unit of an already existing organisation. Some function as subsidiaries of commercial entity and several may end up being registered as independent private limited companies.

The inability to access finance from formal and institutional sources limits possibilities of product sophistication, expansion of services, reaching wider markets, and investing in human resources. This partly explains why in times of economic slowdown, SEs are the first to lay-off their staff, slash salaries, drawdown endowment funds and reduce business services. Again due to lack of legislation there are no formal facilities that provide funds or technical services for restructuring of operations and liabilities.

In order to move towards a more conducive business environment for SEs and to ensure their contribution towards sustainable development, these ventures will require help in five major areas of their operations. These include funding – primarily based on social impact and not just net profits (while latter will remain an important consideration), tax policy support, targeted support for SEs delivering to lifeline consumers, capacity building of human resources available to SEs, and marketing of their output and services.

A good starting point to approach the above mentioned, desired support will be to offer a legal identity to these entities. This could start by invigorating Centre for Social Entrepreneurship (CSE) at Planning Commission which in turn can devise a working definition of SEs in liaison with stakeholders and Securities and Exchange Commission of Pakistan (SECP). Both these institutions can also work together towards a comprehensive policy for SEs — aimed at facilitating social business models and lowering their cost of doing business.

In doing so, it is important to create linkages with government’s existing framework for economic activities provided under various polices e.g. Pakistan Vision 2025, Finance Act 2016-17, Strategic Trade Policy Framework, and sectoral policies at Ministry of Industries and Production.

Second, CSE can initiate work with provincial Planning and Development Departments and promise support to SEs through provincial growth and development strategies, already under implementation in most provinces. This will be well received given the growing recognition of SEs work, increased number of incubation centres across Punjab and Sindh provinces.

Third, start-ups will need capacity building in business planning, organisational development, and strengthening compliance with legal and financial requirements. There is a clear role here for organisations who directly deal with several such entrepreneurs at the grass roots level. These organisations, including Benazir Income Support Programme, Pakistan Poverty Alleviation Fund, and Small and Medium Enterprise Development Authority. These entities may join hands to devise innovative outreach methods for scaling up and ensuring uptake of capacity building efforts across SEs. Most of these organisations already have funding windows for SEs with in which regular capacity building can be embedded.

There is also a case for promoting SEs having capacity to participate in regional and global value chains. The Trade Development Authority of Pakistan (TDAP) in collaboration with provincial governments’ industries departments, can help in regional and global integration through support in marketing and visibility at foreign exhibitions. For integration in agriculture supply chains, Ministry of National Food Security and Research in collaboration with TDAP and provincial business development arms of the government’s agriculture departments e.g. Punjab Agriculture and Meat Company and Sindh Agriculture Growth Project can raise new support services for SEs.

Fourth, Federal Board of Revenue will have to devise a tax system for SEs that values social impact. There are models from several developing economies, which have incentivised the growth of SEs through appropriate changes in national and sub-national tax policy. To support FBR’s future taxation regime for SEs, the government may invite a working group having participation of Planning Commission, SECP, relevant think tanks, and representatives of SEs.

This group can provide recommendations which can be implemented through amendment in the Finance Act. Given the modalities of Eighteenth Amendment, similar working groups will be required to assist provincial revenue authorities. Currently all provinces offer a different tax regime. The overlaps in tax policy and administration across federal and provincial revenue authorities is also resulting in double taxation issues – particularly seen for SEs in information technology, health and education services.

Fifth, State Bank of Pakistan (SBP) will need to assess why formal finance is not reaching the SEs. Existing financial framework and prudential regulations may be appropriately modified for meeting needs of social impact investments and incentivising commercial lending institutions to take calculated risks.

SBP could go an extra mile to demand a minimum lending percentage for SEs, by each commercial lender in the formal sector. Similarly the interest rates faced by SEs should be lower than the ongoing market rate. If this is not possible through existing monetary policy framework, equity models, as already available through Islamic banking windows may be encouraged. In the medium to longer run SBP will also need to encourage participation of business angels, venture capital, crowd funding and public private partnerships in SEs.

Finally, federal and provincial governments can greatly encourage SEs through preferred treatment under public procurement of goods and services. For this CSE may approach SECP and Public Procurement Regulatory Authority to amend rules and ensure minimum quota for SEs, at least for projects with social impact at local level. A community-benefit clause under official (procurement) rules will ensure inclusion of social outcomes in procurement objectives.

Dr Vaqar Ahmed

The writer’s book ‘Pakistan’s Agenda for Economic Reforms’ was recently published by the Oxford University Press. He is Joint Executive Director, SDPI and can be followed on twitter @vaqarahmed

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