Famine or Feast ?Famine or Feast ?

Arthur Wood awood@ashoka.org

The Current Status Quo The Current Status Quo The Current System is Highly InefficientThe Current System is Highly Inefficient

Despite Bono (or Geldoff if you are my Despite Bono (or Geldoff if you are my generation)generation)

If things are left as they are – it will get worseIf things are left as they are – it will get worse

Demographics and Aging & Health in Demographics and Aging & Health in Western CountriesWestern Countries

Compounded by Political Fudge – i.e. Compounded by Political Fudge – i.e. Maastricht CriteriaMaastricht Criteria

Unfunded Pension Liabilities raise GNP/ Unfunded Pension Liabilities raise GNP/ Debt from 110 % to 300% + in Italy or in Debt from 110 % to 300% + in Italy or in Canada $300bn> $2.2 trnCanada $300bn> $2.2 trn

To maintain current system in Germany To maintain current system in Germany tax take must rise from 20% - 40% of total tax take must rise from 20% - 40% of total tax take in Germanytax take in Germany

PEOPLE WE SERVE ARE AT THE BOTTOM OF THE FOOD CHAINPEOPLE WE SERVE ARE AT THE BOTTOM OF THE FOOD CHAIN

“Population aging is a worldwide phenomenon that will affect all G-7

countries”

“The projected decline in the employment-to-population ratio will gradually become a hindrance to growth in living standards

beyond 2010”

“Population aging will be a key challenge facing the Canadian economy

over the coming decades”

How Bad is the Financing Structure?How Bad is the Financing Structure?

Primary Pillars of Financing – State and Primary Pillars of Financing – State and Market:Market:

State Model – Picking winners in State Model – Picking winners in developmentdevelopment Developing world $2 trillion allocated 1955 - Developing world $2 trillion allocated 1955 -

2004 (in 2004 Dollars) adding at $100bn2004 (in 2004 Dollars) adding at $100bn

50% of All African Govt Expenditure. Sub 50% of All African Govt Expenditure. Sub Saharan Africa - 80% of All Capital Saharan Africa - 80% of All Capital allocations > Capital Flight in 1 yearallocations > Capital Flight in 1 year

Top Down “Donor” Model – Government Top Down “Donor” Model – Government knows best Bretton Woods 1944knows best Bretton Woods 1944

Not a way to target capital to the base – i.e. Not a way to target capital to the base – i.e. Ashoka Fellow Fabio RosaAshoka Fellow Fabio Rosa

So 20-80% of the Capital does not even arriveSo 20-80% of the Capital does not even arrive

Market System Any Better ?Market System Any Better ?

System invented by Carnegie in 1888 and System invented by Carnegie in 1888 and crystalised in the US tax system in 1921 /35crystalised in the US tax system in 1921 /35

Market is Huge - Social Capital Market $1 Market is Huge - Social Capital Market $1 trillion + in US alone – $300bn funding gaptrillion + in US alone – $300bn funding gap

BUTBUT

In US only 3.8% of C.O/NGO have revenues In US only 3.8% of C.O/NGO have revenues greater than $10 milliongreater than $10 million

Only 0.1% of Entities Founded since 1973 Only 0.1% of Entities Founded since 1973 have achieved $50m + in Revs - Of which have achieved $50m + in Revs - Of which Foundations / Individuals account for 8% of Foundations / Individuals account for 8% of the 0.1% in sustainable funding.the 0.1% in sustainable funding.

Market System Any Better ? (ctd)Market System Any Better ? (ctd)

Everybody Negotiates Bilaterally – no Everybody Negotiates Bilaterally – no aggregation systems. No Economies of aggregation systems. No Economies of ScaleScale

Competitive Advantage in such a Capital Competitive Advantage in such a Capital market is about Innovation market is about Innovation NOTNOT Innovation in Scale nor collaborativeInnovation in Scale nor collaborative

The process results in further The process results in further Fragmentation Fragmentation

On the Funding side >>Small band aid On the Funding side >>Small band aid solutions or Large Foundation take up to 2 solutions or Large Foundation take up to 2 years + to do due diligenceyears + to do due diligence

Cost of Capital Allocation 20-50% vs. 2-5% Cost of Capital Allocation 20-50% vs. 2-5%

Irony for Donors – 50 cents on the DollarIrony for Donors – 50 cents on the Dollar

Inefficiency of the Current Inefficiency of the Current Capital MarketCapital Market

Compounds the ProblemCompounds the Problem Current allocation systems are takingCurrent allocation systems are taking

20%-50% + off before usage20%-50% + off before usage Indeed how efficient is the current Market Indeed how efficient is the current Market

allocation system allocation system even after it arriveseven after it arrives – – with a huge number of small entities with with a huge number of small entities with limited Economies of Scalelimited Economies of Scale

Or on the Governmental side driving top Or on the Governmental side driving top down through the existing status quo. down through the existing status quo.

Post 1980 is this how we now drive Post 1980 is this how we now drive change ?change ?

BUTBUT Grounds for Optimism Grounds for Optimism

Largest ever transfer of Human wealthLargest ever transfer of Human wealth - $41 - $41 Trillion in US alone with 1% transferring 60% Trillion in US alone with 1% transferring 60% of this wealth – the Gates effect >> Private of this wealth – the Gates effect >> Private BanksBanks

Growth of Philanthropy – Values, Globalization Growth of Philanthropy – Values, Globalization – I.T.– I.T.

The Third Pillar - Growth of Market AllocationThe Third Pillar - Growth of Market Allocation

Social Entrepreneurship – Social Entrepreneurship – 500m people 500m people impactedimpacted

Venture Philanthropy - Venture Philanthropy - $400 m$400 m

Investment / Asset Mgmt / Banking Investment / Asset Mgmt / Banking Engagement Engagement - $6.5bn- $6.5bn

Microfinance – Yunus – Microfinance – Yunus – Estimated Market Estimated Market 3bn users3bn users

Growth of Citizens Organization and Growth of Citizens Organization and EntrepreneurshipEntrepreneurship

THE SAME HISTORICAL FORCES ARE AT WORK INTHE GERMAN HEART OF EUROPE

Source: McKinsey analysis of data from Johns Hopkins Nonprofit Sector Series

German Employment Indexed to 1960German Employment Indexed to 1960German Employment Indexed to 1960German Employment Indexed to 1960

Number of Organizations Indexed to 1982Number of Organizations Indexed to 1982Number of Organizations Indexed to 1982Number of Organizations Indexed to 1982

Source: The Independent Sector: The New Non-Profit Almanac in Brief (2001), IRS (2002)

CITIZEN SECTOR GROWTH IS ACCELERATING IN THE US

““Providing capital to poor Farmers at LIBOR Providing capital to poor Farmers at LIBOR or below”or below”

Currently Investors in the Social Sector primarily offered Currently Investors in the Social Sector primarily offered only two options – Negative 100% IRR or Plus 5% IRRonly two options – Negative 100% IRR or Plus 5% IRR

But conceptually Best Practice / Metrics / Investors in But conceptually Best Practice / Metrics / Investors in reality between these two Pointsreality between these two Points

Reallocation of existing subsidies. A Capital market where Reallocation of existing subsidies. A Capital market where two players already accept -100% - UHNW’s & Supra-two players already accept -100% - UHNW’s & Supra-nationalsnationals

The tools of 2008 not 1888 - Leverage Structured Risk The tools of 2008 not 1888 - Leverage Structured Risk Return / Derivative productsReturn / Derivative products

>> >> Improve the RISKImprove the RISK Products - Credit structure – Products - Credit structure – CCC>>AA CCC>>AA

>> >> Increase RETURNIncrease RETURN - provide High Contingent Returns - provide High Contingent Returns

>> >> Risk ManagementRisk Management – Insurance models – Insurance models

>> TO BRING PRIVATE CAPITAL AND IDEAS IN SCALE >> TO BRING PRIVATE CAPITAL AND IDEAS IN SCALE INTO THE MARKETINTO THE MARKET

Minus 100% IRRMinus 100% IRR Plus 5% (and Plus 5% (and beyond) IRRbeyond) IRR

“Not For profit” Foundation

Grant model

“For Profit” Iterations of

Venture Capital models

Social Investing Ventures

Breaking down legal

structure CIC & L3C

Entry of banks with Capital

Market Instruments

THE IMPORTANCE OF COLLABORATION AND CHANGE

To solve the problems on a systemic basis requires:

Collaboration from the social sector

Creation / Evolving of Intermediaries to create Collaborative behaviour

Foundations – Leverage Capital, Increase Innovation but HOW to draw in more Private capital

Governments to change legislation – Tax treatment and Legal structures

Banks to bring their skills to bear

PRI / LLC

Expanding the Product Range

Maritime Theme