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Handing out free money hinders local private enterprise

The traditional approach to solving Africa’s problems has been to rely on charity and aid – free money, more or less. And while charity has done much good for millions across the continent in terms of food security, health care, emergency response, and education, its chief weakness is that its results have not proven sustainable.

Africa finds itself continually going back to donors simply to maintain the status quo. What the continent really needs is to create the environment – political, economic, and social – to achieve self-sufficiency. Experience teaches that connecting the private sector to economic development is the most effective way to build wealth and resources in local economies, and ensure sustainable development. Philanthropists, nonprofits, and nongovernmental organizations can help achieve this self-sufficiency if they harness their resources to create change in the private sector.

Consider my own experience as a founder of Standard Trust Bank (STB), which later became United Bank for Africa. We started with a defunct bank and a $5 million investment in 1997 – partially funded with “development” capital.

By the time I retired in 2010 we had created a pan-African financial institution, now serving nearly 7 million customers, through 750 branches in 18 African countries – and providing direct or indirect employment to 20,000 employees. That business now contributes to employment and skills development, a growing tax base in local economies, and an integrated financial infrastructure to facilitate trade and investment. Donor funds flowing into Africa annually are many times the $5 million investment that started our bank, but have they created equivalent impact? Philanthropy and development aid can, and should, be components of Africa’s growth strategy. But perhaps it is time to rethink how that capital is deployed and to focus more on sustainable private sector solutions. Take water, for example. Charity can pay for a new well, but if no one has a personal interest in it, or responsibility for maintaining it, soon it will fall into disrepair and disuse. Structuring that donation as a for-profit, micro-utility creates incentives and resources to maintain it – improving its sustainability and long-term impact. Local commercial enterprises have proven to be much more sustainable than charity projects. This flies in the face of the common misperception that developing economies are “aid dependent” – i.e., they cannot possibly have the resources to support commercial enterprises.

On the contrary, free money can crowd out vital private sector solutions. Private enterprise cannot compete with highly subsidized capital, and the net result is that charity often provides a short-term fix at the expense of a long-term solution.

A better approach is to partner with communities to use the donor subsidies to reduce the risk to investors to enter developing markets, by helping to fund private, for-profit ventures. This is an approach we advocate and practice at The Tony O. Elumelu Foundation and Heirs Holdings.

Private investors are willing to take risk, but are often wary of taking the full brunt of development risk in emerging regions. Philanthropic dollars can help in many ways, from co-investing with the private sector, to partially subsidizing operations until businesses can achieve profitability and sustainability, or subsidizing management training to help specific businesses gain the skill sets they need for growth.

Based on our experience, and the experience of many other forward-thinking philanthropic organizations, I believe it is time for a philosophical shift in how aid is deployed in Africa. The impact of African philanthropy could be substantially improved by adopting three key tenets:

Focus on social wealth. In many traditional development sectors, fully non-profit models have limited long-term growth prospects compared to for-profit models. The for-profit models may provide the same service to the community, but they leverage the minimal revenue streams of the business to ensure greater sustainability.

Even when the profit stream is small, it can be reinvested back into the organization to build greater capacity and provide more goods and services, as well as hiring more people, paying higher wages, contributing to the community’s tax base, and purchasing more goods and services to support its operations.

True “sustainability” comes from a positive cycle of growth, and having sufficient resources to grow on its own with drastically reduced or even no charitable support.

Deploy funds not just for short-term impact, but for systemic change. Does your capital donation change the conditions on the ground and create value in the community – or does it provide only temporary relief without addressing the underlying causes of the problem? Creating value within the community should be a chief aim of philanthropy, as it creates resources for future problem solving and reduces the likelihood of long-term dependency.

Focus on long-term sustainability. Modern philanthropy grew up with the belief that any problem can be solved with enough charity. Unfortunately, that has not worked out in practice. If sustainable growth and change is the goal, then programs must be selected and designed specifically with that goal in mind.

Success metrics and reporting must also evolve. Rather than reporting what is given away, and how many annual beneficiaries there are, philanthropies should report how successful their donations are in creating long-term solutions and reducing the chance that more charity will be needed in the future to address the same issue.

For example, grant funding that leverages private capital to help launch a micro-utility is far more catalytic than grant funding for a community water project that is not sustainable.

Private sector solutions that create social wealth constitute a development approach in Africa that I call “Africapitalism.” And within this development model, there is an important role for philanthropies to play. The challenge is to be judicious in how we deploy our capital, paying careful attention to sustainability, so that we secure a future of independence for Africa.

Tony O. Elumelu is an entrepreneur, a philanthropist, and the chairman of Heirs Holdings Limited, a pan-African investment company commited to driving economic prosperity and social wealth in Africa. He is former CEO of United Bank for Africa and current chairman of Transcorp.

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