Published in March 2018 edition of Business360

When the Indian Government in 2018 decided to confer the Padma Shri award on Nepali ophthalmologist Dr. Sanduk Ruit, they were recognizing more than three decades of relentless service to humanity. Padma Shri is the fourth highest civilian honor in India. Dr. Ruit’s innovation like the intraocular lens available for just three dollars has helped people from more than 30 countries around the world. While the Tilganga Institute of Ophthalmology (TIO), founded by Ruit and Fredrick Hollow in 1992 deserves all the appreciation, their business model is worth appreciating too. Registered as a community-based non-governmental not-for-profit organization, it ventures into social entrepreneurship by utilizing the exploits of the market. Services provided by TIO are of the highest quality, yet affordable. Alongside fairly economic contributions from its customers (beneficiaries), TIO accepts donations, grants, and contributions.

According to the Social Welfare Council (SWC), the number of non-governmental organizations increased from 313 in 1990 to 13,268 in 2001, 33,903 in 2011 and 46,230 in 2017. These organizations have been key to Nepal’s progress in democracy, education, and development. However, relying only on donations has limited their growth, increased concerns over the financial sustainability of their programs and kept them away from the prospects of for-profit tools like equity financing, investments, and market. Organizations like TIO explain why promoting the social enterprise model could solve larger problems of Nepal. As the country transitions to a federal system, where state laws and national laws are being framed, reframed and discussed, social enterprise and its legal entity is a theme not to be missed out.

Scholars, practitioners, and lawmakers struggle to find a consensus in defining social enterprise and standardizing it, mostly because it is a relatively new and overwhelmingly diverse sector. Young and Lecy explain its diversity using the metaphor of a ‘modern zoo’, stating it as “expansive open areas for various types of animals to share and interact, but also one which may separate species that are hostile to one another and also has a boundary separating the zoo from the economy of public and private organizations at large”. They identified six major species of zoo animals: for-profit business corporations, social businesses, social cooperatives, commercial nonprofit organizations, public-private partnerships, and the hybrids. These forms differ in their definition and operations. Social enterprises around the world have existed in different forms over the years.

In the U.S.: The United States experienced an expansion in the social enterprise sector since the 1980s. The term social enterprise was developed in the 1970s to explain the trend of nonprofits adopting business activities to create jobs for disadvantaged groups and more so to survive cutbacks in federal funding. Nonprofits outside the healthcare were responding to government’s welfare retrenchment policies and reduction in government funding of around $38 billion, as Salamon states, “between 1977 and 1989, nearly 40% of the growth of social service organization income…came from fees and other commercial sources”. The trend has been ever-present since. From 1982 to 2002, the share of commercial income on total nonprofit revenue increased by almost 10%, increasing from 48.1% to 57.6%. During the period, private contributions and government grants only grew by 2.3% and 0.2% respectively. 

While nonprofits (501[c][3]s) can raise revenue through tax-exempt mission-related commercial activities, they can also experiment with unrelated business activities that are taxed through Unrelated Business Income Tax (UBIT). The legal system of the U.S. has incorporated social enterprises and hybrids by modifying existing legal provisions and introducing new forms. Three legal structures for social enterprises and hybrids exist, including the L3C (Low-profit Limited Liability Corporation), the Benefit Corporation and the Flexible Purpose Corporation. The L3C is a modified version of LLC that allows corporations to access investments from tax-exempt sources. The Benefit Corporations, authorized by more than 30 states in the U.S., is a type of for-profit corporation that includes positive impacts on society, workers and the environment in its mission. The Flexible Purpose Corporation requires boards and management to agree on one or more social purpose with the shareholders.

In Western Europe and the U.K.: In Western Europe increase in social enterprises was a response to increased unemployment – “many countries in the European Union experienced a rise in unemployment from 3 or 4% to more than 10% in the 1980s and 90s”; the crisis of European welfare states and the need to diversify revenue streams for the third sector. Most social enterprises in Western Europe operate as either a nonprofit association – in countries where there is a certain degree of freedom for associations to sell goods and services in the open market, or as cooperative – where associations are more limited. For example, employment-focused cooperatives in Europe are grouped under Work Integration Social Enterprises (WISE). “A-type and B-type social cooperatives” introduced by Italy in 1990, “company with a social purpose” by Belgium in 1995, “social cooperative with limited liability” introduced by Greece in 1999, represent some of the many forms of social enterprises experimented in Europe. The United Kingdom, most recently, introduced the “Community Interest Company (CIC)” in 2005. CIC provides tax benefits to enterprises that agree to limit their dividends to investors and work towards social change. The assets of a CIC are ‘frozen’ as community welfare goods, while the investors can never claim their principal investment.

Over the years, Nepal’s economy has shifted from aid dependency to remittance dependency. In the fiscal year 2015/16, remittance accounted for 30% of the national GDP. Unemployment is still a major concern for job seekers. On the other hand, nonprofits who deserve appreciation for their role in filling the gaps of market and government failures, have been relying heavily on foreign aid and international funding to finance their projects. Consequently, changing donor demands and shifting to a similar developing nation often leads them to a dead end. The social enterprise is a solution to bridge the vacuum created by aid dependence, unemployment, and remittance. The rise of ecosystem players like incubators, small and micro-enterprise investors, microcredit lenders including commercial banks, proven cooperative models, significant discussions in academia and a stable political system, the social enterprise ecosystem looks more favorable than ever before. The current legal status of social enterprise is in the form of a company-not-distributing-profit that can be incorporated under the Companies Act 2006, similar to the L3C module implemented in the U.S. However, it limits the advantages of other systems like the CIC of the U.K. where shareholders have an incentive of receiving some dividends. It also fails to integrate social projects implemented by private sector firms and other modules discussed by Young and Lecy. While making a firm claim on the best legal provision for a social enterprise can be debated, its debate is not to be ignored in a progressive federal Nepal and its nonprofit sector.

Notes:

  • Battilana, J., Lee, M., Walker, J., & Dorsey, C. (2012). In search of the hybrid ideal. Stanford Social Innovation Review.
  • Gupta, B., Adhikari, N., & Karki, A. (2018, February 25). OPED: A game-changer. Retrieved from the Kathmandu Post: http://kathmandupost.ekantipur.com/news/2018-02-25/a-game-changer.html
  • Himalayan News Service. (2018, January 26). India confers Padma Shri on Dr. Ruit. Retrieved March 2018, from The Himalayan Times: https://thehimalayantimes.com/nepal/india-confers-padma-shri-dr-sanduk-ruit/
  • Hussain, N. (2012). Manjil Rana. (N. Hussain, Producer) Retrieved March 2018, from Vimeo: https://vimeo.com/38691952
  • KC, D. (2017). Determinants of NGO placement: Empirical evidence from Nepal. ISTR 10th Asia Pacific Regional Conference. Jakarta.
  • Kerlin, J. A. (2006). Social Enterprise in the United States and Europe: Understanding and Learning from the Differences. International Society for Third-Sector Research and The Johns Hopkins University.
  • Young, D. R., & Lecy, J. D. (2013). Defining the Universe of Social Enterprise: Competing Metaphors. International Society for Third-Sector Research and The Johns Hopkins University.