Market-driven Strategies: The Key to Social Impact in Peru and Colombia

Over the past decade, Peru and Colombia, like many other emerging economies in Latin America, have experienced a rapid decline in poverty. Data from the World Bank show that between 2004 and 2011 the poverty rate decreased from 54% to 28% in the former and from 47% to 34% in the latter. Much of this can be attributed to the market-expanding effects of globalization and subsequent export-driven growth.

Nevertheless, poverty rates are still high in both countries and, more importantly, the level of inequality has increased. According to the CIA World Factbook’s 2011 inequality ranking, based on the Gini index, Peru ranked 103rd and Colombia was seven spots from the bottom at 129th. Thus, despite significant socioeconomic progress, pressing problems remain for Peruvian and Colombian populations at the bottom of the pyramid. Ollanta Moises Humala Tasso, the president of Peru, drove this point home at the World Economic Forum on Latin America in April 2013 when he said, “We need to grow economically and be able to distribute that growth — what we call social inclusion: growing to include and including to grow.”

In both countries, the social impact sector has grown in recent years with a goal of narrowing the income gap and bringing more prosperity to poor populations. While there have been some success stories, many organizations face tremendous challenges, such as limited access to knowledge and information, inadequate funding, and difficulty in achieving scale. To overcome these challenges, the social impact sectors in Peru and Colombia are turning increasingly to market-driven strategies. In this context, “market-driven” implies an approach or mindset that is typically characteristic of the private sector.

The Knowledge Gap

The challenge of knowledge access for the social innovation sectors in Peru and Colombia is experienced in all areas of running an organization — from contracting new employees to communicating with clients and constituents. To overcome this challenge, an organization could turn to the government or the public sector for assistance. However, many social innovators in Peru and Colombia have been implementing market-driven strategies, such as those that provide transparency, promote and prioritize local consumer insights, and embrace new technologies.

Many organizations face tremendous challenges, such as limited access to knowledge and information, inadequate funding, and difficulty in achieving scale.

The case of Caja Los Andes, located in Puno, Peru, illustrates how providing transparency and prioritizing local consumer insights can be effective market-based strategies. Caja Los Andes is a profitable microfinance organization that has helped thousands of clients overcome poverty by providing savings, insurance, and working-capital loans. A fundamental challenge it has encountered is that many clients distrust banks and rely on myths and misinformation. Hence, the organization strongly emphasizes transparency and publicizes its interest rates as well as those of its competitors. “Caja Los Andes firmly believes and practices full transparency towards its customers,” says Rosanna Ramos-Velita, chairman of the board of Caja Los Andes. In addition, the company stresses that employees educate clients and prospective clients on the basics of loans before offering services. According to Ramos-Velita, “We bring financial education training to our rural micro savings and credit clients because we believe in empowering them and in helping them understand the benefits and responsibilities of working with a fully regulated financial institution.”

Another challenge for Caja Los Andes is that more than a quarter of its clients are illiterate and speak different languages, and most of them live in remote areas that are sometimes inaccessible to automobiles. The organization has implemented strategies that are characteristically market-based. First, it strives to hire locally, and advertises that, in more than 80% of its branches, clients are welcomed in their native languages, including Aymara and Quechua. A branch manager in the town of Azangaro noted that she requires her employees to be able to ride motorbikes so they can see clients at their homes, many of which are located far from paved roads. Knowledge of the clients is so fundamental for Caja Los Andes that its motto is to be the “financial entity that best understands our clients, rural Andean entrepreneurs.”

Social impact organizations have also embraced new technologies and media platforms. In the case of Compartamos con Colombia, a Colombian organization that creates initiatives to overcome extreme poverty (living on less than US$1 a day), a large part of its success has been derived from using technical knowledge and private sector resources. The organization works closely with leading consultancies such as McKinsey and PricewaterhouseCoopers as well as banks and law firms. For a new project that aims to promote initiatives to reduce poverty, Compartamos turned to online crowdsourcing to solicit the best ideas, thus demonstrating how embracing new technologies is key for the social innovation sector to overcome knowledge-based challenges.

Measuring the Impact

Attracting funding is another fundamental obstacle for many social enterprises in Peru and Colombia. In a 2013 interview with the Christian Science Monitor, César Rodríguez, director of the Global Justice and Human Rights program at Universidad de los Andes in Bogotá, noted that, “Organizations are finding themselves without a source of financing and there is no replacement for those sources.” In an environment in which funders operate like market-driven investors, social impact organizations are, in turn, implementing market-driven strategies to secure funding.

The case of the Corporación Universitaria Minuto de Dios (UNIMINUTO) in Colombia illustrates how a company that seeks social impact can be effective with a market-based funding model. UNIMINUTO began in 1992 as a for-profit corporation to provide a university-level education to members of the lowest socioeconomic classes. It has grown to 42 locations with 60,000 students and won the award for the G20 Challenge on Inclusive Business Innovation in 2012. Not only is UNIMINUTO having a social impact; the company is financially sustainable through profits generated by the small tuition payments all students make, as well as interest earned on loans provided to students.

In addition, it exemplifies how market-driven social impact organizations can be effective. Specifically, they are more stable, have to be held accountable for performance, and are typically extremely focused in a particular area of expertise. The vibrant Peruvian microfinance business environment, ranked the best in the world by the Inter-American Development Bank (IADB) for five years running, offers many examples of businesses that are profitable and contribute to the social good. What these organizations have in common is that they perceive the population at the bottom of the pyramid as consumers, not as the hopeless poor looking for handouts.

One of the key issues faced by funders of social innovation projects is quantifying the social impact achieved.

One of the key issues faced by funders of social innovation projects is quantifying the social impact achieved. Funders want to know how much their investment is paying off, even if not monetarily. For example, if an organization assures a municipality that it can cut teen pregnancy rates by 10% over the course of a few years, the municipality will want to quantify how much health care savings and economic growth benefits will be generated. Avnish Gungadurdoss, managing partner of Instiglio — a fledgling social impact organization based in Medellín, Colombia — said that before making an investment, funders typically ask, “What is the service, what are the social outcomes and targets you are pursuing, how will you measure that impact and most importantly, what evidence is there that the service will achieve those targets?”

To make social impact initiatives quantifiable and, thus, financially feasible, Instiglio created a new mechanism for raising capital in financial markets. The so-called social impact bond is a form of results-based financing that can theoretically expand financial resources, increase accountability by paying for success, and offer an upside to financial institutions or foundations seeking a new kind of risk or seeking to expand their portfolio of social impact investments. According to Gungadurdoss, small but effective social impact organizations “often have a hard time accessing scale funding, because in a paradigm where looks matter more than impact, they appear more risky than larger and well-established providers, even when the latter are less effective. Grassroots organizations with the necessary local knowledge, community ties and impact model thus often find it hard to scale.” With the social impact bond, Instiglio introduced market-based funding methods to the social-innovation space.

Achieving Scale

Even after bridging the knowledge gap and successfully launching their ideas, social innovators often hit a plateau. The idea — whether an after-school dance academy for urban youth (Escuela D1 in Lima, Peru) or low-cost devices to aid people with disabilities (Todos Podemos Ayudar in Medellín, Colombia) — may have a tremendous impact on the local community yet never spread beyond the immediate surroundings. According to Jenny Melo, Spanish editor of NextBillion.net and cofounder of eSe Conectivo, a social enterprise in Medellín, the challenge is that “there are many new organizations, but few that have achieved the scale to be all over the country. In Colombia, we are at a moment in which many are at that point of asking, ‘How do we achieve scale?’”

Small social enterprises seeking to grow can now benefit from more resources aimed at helping them develop sustainable and scalable business models. Although these methods are sometimes government-led, the strategies themselves are market-driven. For example, government initiatives such as Colombia’s Social Innovation Center (CIS) have worked to consolidate the network of resources required by social innovators by bringing together leading academic and research institutions, international development organizations, philanthropic foundations, and private entities into partnerships such as the Alianza Pioneros de Innovación Social (Alliance of Social Innovation Pioneers). Such ready-made networks make it easier for social entrepreneurs to engage with knowledgeable stakeholders who can offer support and advice on how to design and implement a scalable program.

Several promising ideas include new water-filtration systems, affordable-housing designs, and behavioral interventions for children.

In addition, CIS-sponsored innovation competitions focus on providing not just seed funding for aspiring social entrepreneurs, but also plentiful consulting and technical resources to ensure that the winning business models are viable in the long run and reach the broader population. According to Ana María Rojas, director of the CIS, such competitions have spawned more than 25 ongoing projects to date, including 10 in the evaluation stage and one in the replication stage. Several promising ideas include new water-filtration systems, affordable-housing designs, and behavioral interventions for children. Another CIS program, Hilando, is a curated catalog of exemplary social innovations that target populations in extreme poverty. It aids in the diffusion of successful ideas that can be replicated across other parts of Colombia. A key tenet to the initiative, in line with the market-driven approach, is that community needs and demand should drive the design and implementation of social innovations.

The path to scalability is neither easy nor straightforward for social innovators in Peru and Colombia, but stakeholders from all sides seem to agree that the social innovation sector cannot rely wholly on the government to grow and that the best solutions draw from market-based models and leverage private sector resources. Indeed, at the Social Innovation Summit in Lima, Carolina Trivelli, Peru’s first Minister of Development and Social Inclusion, acknowledged that “the government is a poor innovator. There are no better innovations than those that come from the private sector.”

Approximately eight million and 16 million people in Peru and Colombia, respectively, live below the poverty line. Helping these large populations improve their status may seem like an overwhelming challenge. Yet both countries have reaped the benefits of strong and growing economies in recent years and maintain positive future outlooks. However, in order to preserve social stability in the long run, they cannot allow their most economically disadvantaged segments to be left behind by growing inequality.

While market-based initiatives can make a big difference, it is important to note that the governments in Peru and Colombia still play a critical role for social impact organizations. For precisely this purpose, in October 2011 Peru created the Ministry of Development and Social Inclusion (MIDIS), around the same time that Colombia established the National Agency for Overcoming Extreme Poverty (ANSPE), which oversees the activities of the CIS. In addition, Peru is in the early stages of launching a social innovation fund, which it announced in April 2013 after hosting the first Social Innovation Summit of the World Economic Forum on Latin America. Both government organizations are focused on providing resources, financial and human, to innovative social enterprises directed at the base of the pyramid. However, even with government help, the challenges discussed above remain for many organizations.

The experiences of the social impact sector in Peru and Colombia suggest that market-oriented strategies are effective in overcoming certain challenges. As Peru’s Trivelli noted, an institutional setting is emerging across Latin America that is causing a shift in the role of government “towards catalyzing the relevant actors and markets and incentivizing collaborative efforts, especially with the private sector.” Social innovators and agencies seeking to bridge the gap between rich and poor in other Latin American countries and beyond could learn much from these methods.

This article was written by Patrick Burns, Carrie Nguyen, and Eduardo Nihill, members of the Lauder Class of 2015.

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