Microeconomic Development and Social Enterprise in Ukraine: A “Marshall Plan” for Ukraine
Copyright © Terry Hallman 2007. All rights reserved.
Special thanks to Jeff Mowatt for his invaluable contributions to background research for this paper, for provision of the software engineering service that drives P-CED’s financial backing, and for fulfilling the original vision of P-CED in 1996 that was written and published years before we met. Thanks to Peter Crosby for his sage guidance and advice during the production phase of this paper. Thanks to my family and friends for their support in the early going. Thanks to an unending cavalcade of Ukrainians from all walks of life for their help with understanding Ukraine. And, finally, thanks to New College of Florida for the opportunity to learn to educate oneself on a daily, lifelong trajectory.
The original Marshall Plan came from U.S. Secretary of State George Marshall in a speech delivered at Harvard University on June 5, 1947:
“Our policy is directed not against any country or doctrine but against hunger, poverty, desperation and chaos. Its purpose should be the revival of a working economy in the world so as to permit the emergence of political and social conditions in which free institutions can exist. Such assistance, I am convinced, must not be on a piecemeal basis as various crises develop. Any assistance that this Government may render in the future should provide a cure rather than a mere palliative. Any government that is willing to assist in the task of recovery will find full co-operation I am sure, on the part of the United States Government. Any government which maneuvers to block the recovery of other countries cannot expect help from us. Furthermore, governments, political parties, or groups which seek to perpetuate human misery in order to profit therefrom politically or otherwise will encounter the opposition of the United States.”
Focus of this plan is on the microeconomic sector because this is the most effective way to immediately meet the fundamental objectives of a Marshall Plan: policy directed against hunger, poverty, desperation, and chaos. Tools, innovations and methodologies are available today that were not available sixty years ago for tightly-focused microeconomic development aimed specifically and very effectively at target objectives. This is not to diminish nor detract from macroeconomic factors that continue to impede Ukraine’s development. Those factors include such things as tax reform, energy policy, continued reduction of systemic corruption, Constitutional reform, and fostering further development of civil society and freedom of media.
The most urgent component of the project below is relief and modern medical treatment for tens of thousands of Ukraine’s children diagnosed as psychoneurologically handicapped. Many have died in state care, in primitive and inhumane conditions. Many are misdiagnosed, and end up in atrocious conditions. Following intense publicity and public discussion of the issue during final preparation of this project, Ukraine’s government agreed on 5 March, 2007 to open more than 400 new treatment facilities for these children all over Ukraine. That commitment from Ukraine’s government was a major step forward, clearly demonstrating Ukraine’s willingness and ability to take initiative in childcare reform first and foremost.
As will become clear, childcare reform involves a complex, intertwined, interconnected set of issues and problems. It is therefore essential to outline these issues and problems and deal with them together as a whole. Key elements are childcare reform, poverty reduction, and communications infrastructure. Underpinning this effort is a new Center for Social Enterprise to be based in Kharkiv National University. CSE will include an academic program combining business, social services, social sciences and modern medical science into a new interdisciplinary academic discipline and program, social enterprise. This Center will engage students, faculty, business leaders, policy makers and citizen organizations and citizens in a common, unified program toward fulfilling the initial objectives outlined herein. The Center will further create new programs as participants learn new, innovative ways of thinking in identifying, analyzing, understanding and resolving Ukraine’s social and economic problems.
Release date for this plan was October 2006, since which time it has been in circulation and discussion among officials in Ukraine. First results, indicated above, were agreement by Ukraine’s government to open more than 400 new treatment centers for psychoneurologically disabled children – the most urgent need. This is an abridged version of the original for Ukraine’s ForUm (part 1, part 2), whose staff were instrumental in communicating and helping tremendously in achieving that first critical objective.
Introduction / ComponentsEssential components for the start phase of this project include childcare reform; microenterprise and microcredit support; Internet development; support for research in fundamental science; and, a new center for social enterprise. Each component is discussed briefly in this section and elaborated in individual sections below.
Childcare reform is focused primarily on 1) provision of healthy living conditions for children in all orphanages, internats, and state care facilities for children throughout Ukraine; and 2) reducing need for future placement of children in state-care facilities. Reducing need first and foremost means poverty relief. Poverty is the primary reason for children ending up in state-care facilities.
Microenterprise and microcredit support are focused on provision of business training and small start-up loan programs to the poorest people in Ukraine who currently have no access or opportunity for such assistance.
Internet development aims to significantly expand affordable access to the Information Age for average Ukrainians. This means broadband Internet access at affordable prices in line with US and European standards. Affordable information access ties in directly with business and economic development from grassroots to big business, and will serve to further decrease poverty by opening communications channels throughout Ukraine that either do not exist or are too expensive. Surplus revenues generated by this component go to a fund to further develop social benefit programs.
Social enterprise is aimed at providing a new, sustained research and development center for extended social enterprise efforts throughout Ukraine. This project itself is an example of social enterprise. During the past decade, social enterprise programs have been adopted in top business schools in the West, including Stanford, Yale, Duke, Oxford, Cambridge, and London School of Economics. This will be the first major center for social enterprise established in Ukraine, and possibly the first in the former USSR.
Each component is summarized in terms of social enterprise operational models. Information about these models is included in the “Center for Social Enterprise” section.
During the course of research for this proposal, via a range of official numbers to anecdotal information, I have found a range of estimates from forty thousand to one hundred thousand children in Ukraine’s orphanages, internats, and other state childcare institutions.
It will be necessary to remove children now in state-care institutions into family-care: return to their own families, foster care, adoption inside Ukraine, and family-type homes with a maximum of ten children per home. This follows from research and experience in such programs as TACIS-sponsored Every Child (UK).
According to years of research within Ukraine and the former Soviet bloc by Every Child, 90% of children could possibly be returned to their families, with relatively small financial support to families. The cost of financial support needed is estimated to be less than half the cost of keeping the children in state children homes with dozens or hundreds of children per institution. If children can be safely removed from state homes back to their own families, at half the cost of keeping them in state homes, it makes absolutely no sense not to return them to their families.
In cases where children can’t be returned due to incapable family (incapable for reasons other than poverty), no family, and/or assessment of psychoneurological handicap, small group family-type homes, foster care, adoption within Ukraine, and new specialized care for handicapped children are next options.
Foster care and adoption are relatively rare in Ukraine, although public education programs are underway to promote these options. For the interim, there is great need for family-type small group homes. Small group homes should consist of small enough groups of children to approximate a more intimate, supportive family-type environment. According to Every Child’s research, the few small group homes that already exist have about twenty children per home. Having worked in a group home in the US, I believe that is too many children for one setting. Ten should be the maximum number, with full-time childcare workers or foster parents in each home. Facilities or land might be provided by local governments, making use of some of the larger vacant buildings in most cities in Ukraine. Otherwise, it is necessary to build new homes.
It is difficult if not impossible to know exactly how many children are currently living in orphanages and other state institutions in Ukraine. Research from Every Child cites the following reasons for this:
Lack of reliable statistics. Many countries in the region are still in what is euphemistically described as the ‘transition’ from semi-totalitarian to democratic rule. Civil society is in an early stage of development and the state organs remain extremely powerful. There are few checks and balances against the state and no tradition of state-collected statistics being questioned.
Inconsistent data collection. Responsibility for childcare is generally divided between four or more ministries, each with their own budgets and information systems. Collecting consistent data across the different ministries clearly presents problems. For example, during the course of a situation analysis of childcare in Azerbaijan, EveryChild was quoted figures for the numbers of children in institutional care in the country that ranged between 8,000 and 120,000.
Problems of definition. For the purposes of this report we define an institution as a large residential home for long-term childcare. We would expect such a home to house at least 15 children; anything much smaller can be regarded as a substitute family. But the definition used in state-collected data is often uncertain.
Lack of clarity of purpose. Children’s institutions that were originally provided for orphans (or for educational or health reasons) are frequently used to house children for social reasons. For example, in many countries in the region, boarding schools give an education to children who live in remote rural areas that do not have an adequate population to support their own schools. However, children are also frequently placed there because their parents are simply too poor to support them.
Faulty collection of data. Poor data collection can be the result of inadequate mechanisms or manipulation. For example, a study in Georgia found that some officially-recorded institutions did not exist and others that did were not recognised by the system.
Given these data limitations, as of 2002 Every Child’s best estimate was 80,000 children in orphanages. Going on the assumptions that numbers remain roughly similar and 90% of children might be returned to their families by providing financial support to those families at net cost savings of at least 50% per child versus orphanage care, that works out to a projected cost savings of about 45%. Thus, returning children to their birth homes where the main problem was insufficient money would reduce state-funded support by almost half. Every Child estimates a state cost of current equivalent of 575 hrivnia, or about $115, per child per month. For 80,000 children, total cost is about $110.4 million per year. 45% savings reduces total cost to $60.7 million per year.
That leaves 10%, perhaps 8,000 children , remaining to be placed in foster care, home-country adoptions, family-type small group homes, and specialized care for handicapped children. Specialized care for psychoneurological handicapped children is severely lacking.
Attitudes regarding foster care and adoptions within Ukraine will take time to change and overcome. Additionally, expert social workers must be trained and made available as part of an in-home support program for children returning to families. New training must include a shift away from finding reasons for removal of children from homes, to emphasis on family support to help families cope with keeping their children. It appears that in many or most cases, poverty and insufficient monthly income to care for children is the main reason for placement into state care. In those cases, social support payments to these families will fulfill that primary need and yield an overall cost savings as outlined above. Nevertheless, returning children to their family homes must be monitored for the best interests, safety, and security of each child. Without exception, each child’s safety, health, and security must be the absolute guiding factors in each individual case. Foster care and adoptions within Ukraine must also be monitored with the same level of diligence and respect for each child’s best interests.
Foster care and adoptions within Ukraine are not likely to be a significant relief factor in the near future. As suggested above, both will require a public education and awareness campaign. Both will also require careful screening processes for families who do apply to become foster or adoptive parents, to prevent situations where support income for the child is the motivation for foster care or adoption, instead of caring for the child. Returning children to their families if and when possible, and family type homes, are the most immediate needs.
Without being able to know for certain how many children can be safely returned to their families, it is impossible to predict how many family type homes will be required. A conservative starting point is to allow that homes for at least ten percent of children will be required. A safer start point is to allow that homes for at least twenty percent of children will be required, with half of these homes being set up to care for the most difficult cases: severely disabled children. Staffing needs will differ between standard and specialized homes.
This comes to 1600 family type homes needed immediately, with sufficient space for ten children and caretakers in each home, estimated 200 square meters. New homes of this size can be built for $60,000 each, for a total of $96 million. There are minor differences between standard and specialized-care homes. Specialized homes for disabled children must include such things as wheelchair access for entry/exit, and specialized toilet and bath accommodations. These do not add significant cost difference for each type of home.
Due to growing questions about gas supplies for heating, it is wise to include heating equipment using renewable biofuels rather than depending on gas supplies. This is in line with ensuring health, safety, and security for each child, circumventing unstable and/or increasingly expensive gas supplies.
The transitional phase, moving children out of existing institutions and into individual homes – family homes or family type homes – can be completed within five years. This allows time for construction of new homes and training social workers and caretakers. A focused effort on home construction can produce 1600 homes needed within five years, if managed according to Western, particularly US, standards and practices. This will of course require tight financial management, to be sure that funds are used as intended. Due to rising costs and inflation, monthly total for children remaining in state care – family type homes – should be adjusted upwards from $115 per month cited above, to $140. During the transition phase, it will be necessary to operate the “old” system of state institutions as the “new” system is built and children are gradually transferred either to family homes or new family type homes. Thus old and new must be operated simultaneously during the transition phase, creating a temporary but significant increase in overall childcare budget for the state. Afterwards, cost savings from having children returned to their birth families will offset longer-term costs as described above. Care for children in new family type homes will be about the same is in existing orphanages. New homes are a one-time cost – a cost insignificant in comparison with giving each child a family type of home environment.
There is no substitute for a loving family environment for growing children. Existing state care institutions do not and cannot possibly provide this – despite occasional, lingering claims that state care is the best care for children. This attitude is a holdover from Soviet times when the state was idealized as the best possible caretaker for all, including children. Stark reality does not support that notion.
While this section has strong focus on financial aspects for reforming childcare in Ukraine, these are just financial numbers to demonstrate that this can be done for an overall, long-term cost reduction to state budget. That is to say, simply, this reform program is at the least financially feasible. The barrier between old and new is the cost of the transitional phase.
However, it is essential to not get lost in financial numbers and budgets. These are only important to show how this will work and will end up costing less money as the new program is fleshed out and the old program is closed. Most important is the welfare of each of these children. There are at this time, for example, numerous institutions across Ukraine where children die on a daily basis from little more than lack of knowledge about how to help them. The actual cost of helping them immediately is nothing more than one-day workshops for existing staff, to demonstrate basic, simple medical interventions common in the West. These institutions are generally closed to the outside world, difficult to access due to imposed secrecy, and are mostly in very rural areas where even the closest neighbors have no idea of the reality of these facilities.
The point, again, is very simple: to protect safety, health, and security of each and every child in Ukraine. There is absolutely no reason why this cannot be done. EveryChild’s research, published less than a year ago, provides an excellent starting point. Dzherelo Children’s Rehabilitation Center in Lviv has years of experience and available expertise in caring for severely disabled children. It is noteworthy that Dzherelo must rely on private funding because Ukraine’s state budget will not pay for or support a program that is in every way superior to official state care. Many of Dzherelo’s clients are able to remain with their own families, and are transported by minivan to and from Dzherelo’s modern care facilities for basic, periodic medical treatment such as physical and occupational therapy.
In terms of social enterprise, the childcare reform component can be characterized as an “enhanced: franchise model.” Existing programs already exist for creation of family-type homes – indeed, villages of family-type homes – for orphans in Europe. Very small programs for assistance to severely handicapped children already exist within Ukraine. Returning children to their families, family-type homes and modern treatment for handicapped children are the most urgent needs in Ukraine’s childcare reform efforts. Expanding on existing models – franchises – is the primary solution in this case.
Poverty Relief: Microenterprise Development
This component is based on microenterprise support. This will require a nationwide microfinance initiative unlike most existing microfinance in Ukraine. Existing microfinance programs effectively exclude people who need them most, those in poverty. Material collateral is required for virtually all microfinance programs now available in Ukraine. Most microfinance is set up to help people with existing businesses, but not to help people start new businesses. This situation is the exact opposite of what is needed. That is, access to loan funding without regard to material collateral; along with training and preparing people for success in their own business. People living in poverty by definition do not have material resources available for loan collateral.
Further aggravating the microenterprise environment have been extortionist “protection” schemes. The deal is simple: a merchant must pay “protection” money, or else they could find their business damaged one way or another. In some cases, so much money has been forced from business owners that the business was forced to close. Once the business is closed, it is very difficult if not impossible for the owner to get financing to try and restart, since most microfinance comes into play only for existing businesses.
The new microfinance program will include a mechanism for reporting this sort of corruption, with reports going to local, regional and national authorities, with expectation of appropriate action against any and all attempts aimed at “protection payments.”
Loan funding will be available to anyone who needs it if they are able to undertake a free training program for business planning and market research to prepare for success. This approach has been very successful and beneficial in other post-Soviet locations such as Tomsk oblast, Russia. This component should be funded in the same amount per capita as in Tomsk oblast, $10 million per one million population. That amounts to $480 million in Ukraine. Funding should be provided in equal installments over a five-year period with each installment depending on program performance in the previous year.
At least 25% of Ukraine’s population lives in poverty. Poverty in Ukraine is a numerical measure of income having little to do with actual quality of life. Talking to hundreds of ordinary people even in the relatively higher income city of Kharkiv, common opinion is a poverty level of 50%. Assuming what seems to be a very conservative estimate of 25% of Ukrainians living in poverty brings a total of twelve million people.
Starting, owning, and operating a small business is not for everyone for a variety of reasons. Some people simply are not capable of developing the skills required for running a business. Some are invalid, elderly, or too young. Some are not honest enough in the eyes of their neighbors to be trusted to provide any product or service.
Consequently, it is difficult to determine just how many people will be able to take advantage of a new microfinance program. Nevertheless, based on the Tomsk model, ten million dollars per one million overall population proved adequate to meet initial demand. Further capitalization can be made available depending on need, and on performance of the microfinance program.
Program design is the same as recommended and implemented in Tomsk. Material collateral is not required, which removes the barrier for access for poorest people – those in poverty. Training for business planning is provided at no cost to the client, and is required for participation. Each client is placed in a loan circle, a group of about seven clients. After satisfactory completion of a business plan, including basic market research, each client is eligible to borrow a small amount of money, enough to get started. This amount is usually around one thousand dollars. Each client in the loan circle must repay their loan in full before anyone in the circle can borrow a larger amount of money. Once these loans have been repaid, this completes round one. Each client is then eligible to borrow a larger amount of money, under the same rules and conditions in round one. Once those loans have been repaid, this completes round two. Again, each client is then eligible to borrow a larger amount of money to advance their business. After each loan is repaid, round three is complete and clients then have their own business in operation. Clients are at this point eligible to borrow money as needed from existing microfinance banks in Ukraine, such as ProCredit. Loan repayment and business survival in the Tomsk program exceed 97%. Tomsk Microcredit Bank became self-sustaining and growing in less than two years, with income from interest on loans. Approximately fourteen thousand loans were made during the first four years of operation.
Businesses created in this way typically support at least two families, the owner’s family and the family of one or more workers. Thus these businesses not only allow for self-support for the owner (usually women with children in the Tomsk experiment), but also create jobs for other people. Each business has an extended positive effect for the community by way of purchasing more products and services from other people. This “ripple effect” continues as more businesses are created, existing businesses sell more products or services, and the cycle continues until needs are met for most people in the community.
This microfinance strategy provides monetary access and resources to some of the millions of people in Ukraine who have been left with almost nothing. This strategy is aimed directly at helping them.
In terms of social enterprise, this component can be characterized as “fundamental: entrepreneur support model.”
This component aims to provide low-cost broadband Internet service and access throughout Ukraine. Even in the few areas where it is available, broadband is expensive by international standards.
This component will also function as a revenue engine that ensures the overall project has a cash surplus and is self-sustaining. Specific attention will be given to the transitional costs of the childcare initiative.
Specifics of the business plan for this component should not be needed here. Details can be discussed at length, privately, with appropriate parties primarily limited to financiers and legitimate business or social enterprise partnering organizations. Suffice to say for purposes of this document, and in terms of common sense, if the plan will produce as indicated herein, it will quite possibly become a tempting proposition to extract from the plan for private gain rather than its intended social benefit. Therefore, for purposes of this discussion, a general outline is offered.
Ukraine is in urgent need of nationwide high-speed Internet at an affordable cost. This does not exist in Ukraine at this time. Availability of affordable, modern day Internet access is crucial to any nation’s economic development. This is by now a truism and does not need much elaboration. It is enough to understand that nothing whatsoever can happen in terms of social, economic, civic, and political development without communication. To the extent that communication is limited or completely absent, development is equally limited. If demonstration of this is needed, each reader is invited to do the following. For the next week, do not speak, do not write, do not read, do not listen to or access any form of communication in any way. With those restrictions, it might still be possible to survive for a week. Extend the same restrictions indefinitely, and basic survival will be at risk. It is almost impossible to imagine life without communications of any kind.
In most of Ukraine, citizens have about the same degree of connection to the modern world. Information is usually one-way, receive only, by way of television, radio, and newspapers.
The needs for drastically improved communication infrastructure in Ukraine are manifold. We see a democratic political movement in its infancy that will have difficulty in advancing without the same basic and affordable communication infrastructure available in each and every democratic nation in the world. Ukraine does not have this.
We see a nation staggering under the crushing burden of widespread poverty, the extent of which no one is sure but which most people assessing the situation realistically is at least twenty five percent of the population. We understand that communication – particularly high-speed Internet communication at a cost that is affordable to half the population and all businesses – is essential for economic growth and development so that poverty can be reduced.
We see a staggering array of social problems arising directly from poverty, including but not limited to tens of thousands of children in orphanages or other state care; crime; disrespect for civil government because government cannot be felt or seen as civil for anyone left to suffer in poverty; young people prostituting themselves on the street; drug abuse to alleviate the aches and pains of the suffering that arises from poverty and misery; HIV/AIDS spreading like a plague amidst prostitution, unprotected sex, and drug abuse; more children being born into this mix and ending up in state care at further cost to the state; criminals coming from poverty backgrounds, ending up as bandits, returning to communities after prison, with few options except further criminal activity. These are all part and parcel of the vicious negative cycle of poverty, and this threatens to destroy Ukraine, if Ukraine is defined in terms of people rather than mere geographic boundaries. Overall, population is steadily declining; families have not sufficient confidence in tomorrow to reproduce more than 1.2 children on average per couple.
At the very same time, there are excellent minds and people all over the country struggling to alleviate these problems. The communication infrastructure that can most effectively and quickly facilitate these efforts does not exist. Nor are there any serious plans for it. Draconian barriers stand in the way of progress. In Ukraine, people can be fined or jailed for operating simple wi-fi devices, which are common and unlicenced in all democracies and developed nations. In Ukraine, a license to operate a simple wi-fi device is required. Licenses are costly and almost impossible to get through a central-controlled Ministry. These devices hold the promise of rapid, community-wide high-speed Internet deployment from a single point of access, the cost of which can be shared equally among each user.
The point here is to illustrate what is – and more importantly what is not – going on in Ukraine to remove a massive information deficiency and bottleneck. It is possible, and financially feasible, to provide high-speed Internet for an investment of $100 million per 125,000 subscribers at $30 per month per subscriber. This can be done without traffic limit, which is the main price barrier in the few existing high-speed services that now exist. Three gigabytes per month, common usage in the US and Europe, usually costs around $150 per month in Ukraine (in the few locations where it is available at all) compared to $50 or less in Europe, the US, and east Asia. This is far beyond affordable for most Ukrainians and, indeed, for most users in other regions of the world where per capita income is much higher. The price target in Ukraine is $30 per month with unlimited traffic, and there is nothing near that cost in most of Ukraine at this time.
In that this service is desperately needed and is practically non-existent in Ukraine, market economics dictate that it is only a matter of time until the required price target is first understood, and then hit. However, market manipulation exists to delay that outcome as long as possible.
Investment of $100 million will service 125,000 users and produce a net profit of at least $20 million per year. One billion dollars investment will service 1.25 million users and return $200 million per year.
Inevitably, a significant amount of money and profit will be generated by those who get to market first at the $30 per month price target. This can be done.
In that case, there is no reason why a business enterprise cannot be set up to fulfill this critical market need – and steer profits in full to support equally critical social needs such as the transition phase of childcare reform, and providing eternal funding for other social benefits.
In terms of social enterprise, this component can be characterized as “combined: complex model”, combining fundamental models: marketing intermediary, service subsidization, and organizational support.
Center for Social Enterprise
It is almost impossible to overstate the need for social enterprise in Ukraine. The nation is plagued by widespread socioeconomic problems and deficiencies, with a host of disparate, haphazard, uncoordinated efforts aimed at solving them. In order to understand the overwhelming critical need for social enterprise and a formal national center to facilitate social enterprise, an operational definition for social enterprise is essential.
Enterprise is any organizational activity aimed at a specific output or outcome. Once the output or outcome – the primary objective – is clear, an organization operating to fulfill the objective is by definition an enterprise. Business is the most prominent example of enterprise. A business plan, or organizational map, provides a reference regarding how an organizational scheme will operate to produce a specific outcome: provision of products or services in a way to create profit. Profit in turn is measured numerically in terms of monetary gains, the “bottom line.”
This is the function of classic capitalism, which has proven to be the most powerful economic engine ever devised.
An inherent assumption about capitalism is that profit is defined only in terms of monetary gain. This assumption is virtually unquestioned in most of the world. However, it is not a valid assumption. Business enterprise, capitalism, must be measured in terms of monetary profit. That rule is not arguable. A business enterprise must make monetary profit, or it will merely cease to exist. That is an absolute requirement. But it does not follow that this must necessarily be the final bottom line and the sole aim of the enterprise. How this profit is used is another question. It is commonly assumed that profit will enrich enterprise owners and investors, which in turn gives them incentive to participate financially in the enterprise to start with.
That, however, is not the only possible outcome for use of profits. Profits can be directly applied to help resolve a broad range of social problems: poverty relief, improving childcare, seeding scientific research for nationwide economic advancement, improving communications infrastructure and accessibility, for examples – the target objectives of this particular project plan. The same financial discipline required of any conventional for-profit business can be applied to projects with the primary aim of improving socioeconomic conditions. Profitability provides money needed to be self-sustaining for the purpose of achieving social and economic objectives such as benefit of a nation’s poorest, neediest people. In which case, the enterprise is a social enterprise.
In this case, for the project now being proposed, it is constructed precisely along these lines. Childcare reform as outlined above will pay for itself in reduced costs to the state. It will need investment for about five years in order to cover the cost of running two programs in parallel: the existing, extremely problematic state childcare scheme, and the new program needed to replace it for the purpose of giving children a decent life. The old program will be phased out as the new program is phased in. After this phase transition is complete, the state will from that time forward pay out less money for state childcare. Children will have a better life, and will be more likely to become healthy, productive assets to the nation rather than liabilities with diminished human development, diminished education, and the message that they are not important – the basis for serious trouble. There is no need whatsoever to give these children less than a good quality of life as they grow and mature. The only problem is reorganization of existing resources.
The microenterprise and microfinance component will support itself, as was the case in a previous effort in Tomsk oblast, Russia, and is the case with most microfinance programs around the world.
The Internet component taps into an almost completely undeveloped market sector in Ukraine, and provides a strategy to deploy a nationwide high-speed Internet communication infrastructure profitably – estimated minimum 15% return on investment annually. In doing so, it provides badly needed high-speed Internet communication infrastructure across most of Ukraine at a price that much of the population can already afford, but don’t have now because it is not available. Profits can then be used to help subsidize social development programs. This is only one example for creating a profit center for the purpose of providing funding for social benefit.
The Center for Social Enterprise will engender and foster exactly this sort of enterprise thinking for the purpose of further addressing and resolving the wide range of desperate social needs throughout Ukraine. Programs can be designed and deployed all over the country – as long as there is a strong nucleus – center – to make them happen.
The Center for Social Enterprise will be created in cooperation with Kharkiv National University. It will require a one-time foundation grant of $5 million, after which it will be permanently self-sustaining. That amount can be deposited into any one of several existing banks, with returns of about 14% per year in interest on a hrivnia deposit account. That amount provides CSE a comfortable operating budget of $500,000 per year and a comfortable reserve margin above operating costs. Note that funding for projects designed and implemented by CSE is a separate budget account.
A Brief Overview of Social Enterprise
The following section is excerpted from “Social Enterprise Typology”, by Kim Alter, April 13, 2006. Excerpts are rearranged and edited for presentation in this document.
Embedded Social Enterprises – Social programs and business activities are one and the same.Non-profits create Embedded Social Enterprises expressly for programmatic purposes. The enterprise activities are “embedded” within the organization’s operations and social programs, and are central to its mission. Social programs are self-financed through enterprise activities and thus, the embedded social enterprise also functions as a sustainable program strategy.
Integrated Social Enterprises – Social programs overlap with business activities, often sharing costs and assets. Organizations create integrated social enterprises as a funding mechanism to support the nonprofit’s operations and mission activities.
External Social Enterprises – Social programs are distinct from business activities. Nonprofits create external social enterprises to fund their social services and/or operating costs. The enterprise’s activities are “external” from the organization’s operations, but support its social programs through supplementary financing.
Social Enterprise Operational Models
Social enterprise models fall into three distinct categories: fundamental models, combined models, and enhanced models. Fundamental models can be combined and enhanced to achieve maximum social value and social benefit creation.
Fundamental social enterprise models include:
· Entrepreneur Support Model
· Market Intermediary Model
· Employment Model
· Fee-for-service Model
· Service subsidization model
· Market linkage model
· Organizational support model
– Entrepreneur Support Model
The entrepreneur support model of social enterprise sells business support and financial services to its target population or “clients,” self-employed individuals or firms. Social enterprise clients then sell their products and services in the open market
The entrepreneur support model is usually embedded: the social program is the business, its mission centers on facilitating the financial security of its clients by supporting their entrepreneurial activities. The social enterprise achieves financial self sufficiency through the sales of its services to clients, and uses this income to cover costs associated with delivering entrepreneur support services as well as the business’ operating expenses. Economic development organizations, including microfinance institutions, small and medium enterprise (SME) and business development service (BDS) programs use the entrepreneur support model.
– Market Intermediary Model
The market intermediary model of social enterprise provides services to its target population or “clients,” small producers (individuals, firm or cooperatives), to help them access markets. Social enterprise services add value to client-made products, typically these services include: product development; production and marketing assistance; and credit. The market intermediary either purchases the client-made products outright or takes them on consignment, and then sells the products in high margin markets at a mark-up.
The market intermediary model is usually embedded: the social program is the business, its mission centers on strengthening markets and facilitating clients’ financial security by helping them develop and sell their products. The social enterprise achieves financial self-sufficiency through the sale of its client-made products. Income is used to pay the business’ operating expenses and to cover program costs of rendering product development, marketing and credit services to clients. Marketing supply cooperatives, as well as fair trade, agriculture, and handicraft organizations frequently use the market intermediary model of social enterprise. Common types of business that apply this model are: marketing organizations, consumer product firms, or those selling processed foods or agricultural products.
– Employment Model
The employment model of social enterprise provides employment opportunities and job training to its target populations or “clients”, people with high barriers to employment such as market dysfunction, physical and/or mental disability, homeless, at-risk youth, and ex-offenders. The organization operates an enterprise employing its clients, and sells its products or services in the open market. The type of business is predicated on the appropriateness of jobs it creates for its clients, regarding skills development, and consistency with clients’ capabilities and limitations, as well as its commercial viability.
The employment model is usually embedded: the social program is the business, its mission centers on creating employment opportunities for clients. Social support services for employees such as “job coaches,” soft skill training, physical therapy, mental health counseling, or transitional housing are built into the enterprise model and create an enabling work environment for clients. The social enterprise achieves financial self-sufficiency through the sales of its products and services. Income is used to pay standard operating expenses associated with the business and additional social costs incurred by employing its clients.
– Fee-for-service Model
The fee-for-service model of social enterprise commercializes its social services, and then sells them directly to the target populations or “clients,” individuals, firms, communities, or to a third party payer.
The fee-for-service model is usually embedded: the social program is the business, its mission centers on rendering social services in the sector it works in, such as health or education. The social enterprise achieves financial self-sufficiency through fees charged for services. This income is used as a cost-recovery mechanism for the organization to pay the expenses to deliver the service and business expenses such as marketing associated with commercializing the social service. Surpluses (net revenue) may be used to subsidize social programs that do not have a built-in cost-recovery component.
– Service subsidization model
The service subsidization model of social enterprise sells products or services to an external market and uses the income it generates to fund its social programs.
The service subsidization model is usually integrated: business activities and social programs overlap, sharing costs, assets, operations income and often program attributes. Although the service subsidization model is employed primarily as a financing mechanism–the business mandate is separate from its social mission–the business activities may enlarge or enhance the organization’s mission.
Non-profits that implement service subsidization social enterprises operate many different types of businesses, however, most leverage their tangible assets (building, land, or equipment) or intangible assets (methodology, know-how, relationships, or brand) as the basis of their enterprise activities. Commercialization of core social services leads to enterprise activities that are close in nature to the organization’s social programs and may enhance the mission; whereas leveraging physical assets to sell to the public may result in an enterprise that is very different from the organization’s social programs. In financial terms the business benefits from leveraging and cost sharing relationships, and provides a stream of unrestricted revenue to “subsidize” or wholly fund one or more social services. Service subsidization is one of the most common types of social enterprises because it can be applied to virtually any nonprofit. The service subsidization model may conceivably grow into an organizational support model if it becomes profitable enough to throw off revenue to the parent organization.
Service subsidization model social enterprises can be any type of business. Those that leverage intangible assets such as expertise, propriety content or methodologies, or exclusive relationships tend toward service businesses that commercialize these assets: consulting, counseling, logistics, employment training or marketing. Those that leverage tangible assets such as buildings, equipment, land, employees, computers, etc. may launch any number of enterprises that utilize infrastructure and capital assets: leasing, property management, product-based retail businesses; copying, transportation or printing services, etc.
– Market linkage model
The market linkage model of social enterprise facilitates trade relationships between the target population or “clients,” small producers, local firms and cooperatives, and the external market. The social enterprise functions as a broker connecting buyers to producers and vice versa, and charging fees for this service. Selling market information and research services is a second type of business common in the market linkage model. Unlike the market intermediary model, this type of social enterprise does not sell or market clients’ products; rather it connects clients to markets.
The market linkage model can be either embedded or integrated. If the enterprise is standalone; its mission revolving around linking markets, and its social programs support this objective, the model is embedded. In this case, the social program is the business, income generated from enterprise activities is used as a self-financing mechanism for its social programs. Market linkage social enterprises are also created by commercializing an organization’s social services or leveraging its intangible assets, such as trade relationships, and income is used to subsidize its other client services. In this second example, social program and business activities overlap, hence follows the integrated model . Many trade associations, cooperatives, private sector partnership and business development programs use the market linkage model of social enterprise. Types of social enterprises include import-export, market research and broker service.
– Organizational support model
The organizational support model of social enterprise sells products and services to an external market, businesses or general public. In some cases the target population or “client” is the customer.
The organizational support model is usually external: Business activities are separate from social programs, net revenues from the social enterprise provide a funding stream to cover social program costs and operating expenses of the nonprofit parent organization. Although organizational support models may have social attributes, profit not social impact is the perquisite for this type of social enterprise. This model of social enterprise is created as a funding mechanism for the organization and is often structured as a subsidiary business (a nonprofit or for-profit entity) owned by the nonprofit parent. Successful examples of this model cover all or a major portion of the parent organization’s budget.
Similar to service subsidization model, the organizational support model may implement virtually any type of business that leverages its assets. This model is commonplace among western nonprofit organizations across sectors.
Combined Models: Complex and Mixed Models
Model combinations occur within a social enterprise (Complex Model) or at the level of the parent organization (Mixed Model).
Social enterprise models are combined to
1. facilitate enterprise or social program growth;
2. increase revenues by entering new markets or businesses;
3. augment breath or depth of social impact by reaching more people in need or new target populations.
A complex model of social enterprise combines two or more operational models. Complex models are flexible; virtually any number or type of operational models can be combined into one social enterprise. Models are combined to achieve desired impact and revenue objectives. For example, operational models that fall into integrated or external social enterprise categories may yield greater financial benefit, whereas embedded social enterprises offer higher social return, thus models are combined to achieve the dual objectives of the social enterprise. If appropriate for an organization’s target population, the employment model is often combined with one of the other models to add social value–i.e. employment and organizational support model. Operational models are often combined as part of a natural diversification and growth strategy as the social enterprise matures.
Mixed models are often a product of an organization’s maturity and social enterprise experience. This model is common among large multi-sector organizations that establish separate departments or subsidiaries for each technical area–i.e. education, health, economic development, etc. and new business ventures. In nonprofits with mature social enterprises, mixed models are the convention, not the exception, a result of expansion and diversification.
Many nonprofit organizations run multi-unit (mixed) operations, each with different social programs, financial objectives, market opportunities and funding structures. Each unit within the mixed model may be related vis-à-vis target population, social sector, mission, markets, or core competencies. A museum for example, in addition to educational art exhibits, might have both a for-profit catalogue business and highly subsidized research and acquisition operation.
Enhanced Models: Franchise and Private-Sector Partnership
The Franchise Model enhances social enterprises by addressing common nonprofit challenges of replication and scale. Technically, any social enterprise that can be reproduced may be applied to the franchise model. Reproduction requires a viable social enterprise model with clear business and social parameters, which is applicable in different markets or across geographical regions.
An organization can franchise its “proven social enterprise model” and sell it to other nonprofits to operate as their own business. Franchising enhancesnonprofit organizations that have viable, yet non-scaleable social enterprises, through replication. For example, a café that employs disabled people may be profitable only when it employs 12 or fewer disabled people. However, if franchised, the café social enterprise can create employment for hundreds of disabled people. Goodwill Industries’ [http://www.goodwill.org] used clothing and furniture retail stores are a good example of an employment model social enterprise achieving scale through the franchise model.
Hence, the franchise model enhances scalability and social value creation through replication. Purchasers pay franchise fees to receive the social enterprise model, methodology, etc., and ongoing technical support from the franchiser. Buying a franchise enables nonprofit organizations to focus on running operations of a proven enterprise, rather than worrying about what type of business to start, which products to sell, or what markets to enter. Becoming a franchiser creates a new social enterprise for the organization that leverages the organization’s industry and business expertise, and in turn creates new social impact opportunities and another source of earned income.
The Private-Sector Partnership Model represents a mutually beneficial relationship between a for-profit company and a nonprofit social enterprise. Relationships are forged on commercial grounds, whereby each partner is a contributor to the commercial success of the venture. The partnership adds value or enhancesthe nonprofit social enterprise by increasing its viability, and hence its social impact, either directly by reaching more clients through its business model, or indirectly by generating funding for social programs. The private partner also benefits vis-à-vis improving goodwill, increasing customer loyalty, penetrating new markets, attracting more socially conscious consumers, etc., which subsequently translates into higher sales and more profit.
The private-nonprofit partnership model of social enterprise is a mutually beneficial business partnership or joint venture between a for-profit company and a nonprofit organization. The partnership may occur with an existing social enterprise, or may result in the creation of a new entity or a profit center. The social enterprise may or may not be mission-related and leverages the nonprofit organization’s assets, such as relationships with their target population, community, brand, or expertise. For the for-profit, the partnership yields one or more of the following benefits: lowers costs (cheaper labor/lower research and development costs); reduces restrictions (no strict regulatory oversight); improves community relations or public image; enables new product development; penetrates new markets; or increases sales. Partnership benefits for the nonprofit are financial return, marketing and brand equity, and in cases where the activity is mission-related, social impact. The market is most often external–the public, but examples exist where the paying customer and the client are one. The private-nonprofit relationship may be structured as a joint venture, a licensing agreement, or formal partnership.
Summary and Conclusion
The program will be based in eastern Ukraine, in Kharkiv, and will serve as a leading light and example for eastern Ukraine as well as all of Ukraine. Civil society is action, proof, clear examples demonstrated and carried out with the involvement and intelligence of Ukraine’s citizens who are Ukraine’s great reservoir for hope, prosperity, safety, and security. Nothing less than an opportunity to become actively, positively engaged in their own, their families’, and their neighbors’ well-being and improvement of social standards is needed.
It is proposed that the United States of America be actively engaged in supporting this project, financially and any other way possible. Ukraine has clearly demonstrated common will for democracy. Ukraine has also unilaterally taken the first critical step to fulfill this program, thus clearly demonstrating initiative and commitment to participation required in the original Marshall Plan sixty years ago. The US side is presumably attempting to foster democracy in another country, which never expressed much interest and shows little real interest now. That of course is Iraq, where recent estimates indicate a cost of $1.5 billion per week.
That same amount of money, spread over five years instead of one week, would more than cover the investment cost of the initial components of this project, and allow a reserve fund for creating new projects as Ukraine’s intelligentsia invents them in the Center for Social Enterprise. It is proposed that Ukraine and the US provide equal portions of this amount. Ukraine is certainly able to provide that level of funding, given that projects are designed with the same fiscal discipline employed in the traditional business sector. That means they pay for themselves, one way or another.
Project funding should be placed as a social-benefit fund under oversight of an independent board of directors, particularly including representatives from grassroots level Ukraine citizens action groups, networks, and human rights leaders.
This program provides for near-term social relief for Ukraine’s neediest citizens, most particularly children who normally have least possible influence and no public voice. Over a few years time, the net cost financially is zero. Every component is designed to become financially solvent, through mechanisms of cost-savings and shared revenue with other components. One component, Internet, provides essential communications infrastructure as well as a cash surplus to be used to offset any lingering costs of other components such as childcare, and otherwise goes to a permanent social benefit fund under oversight of the aforementioned independent, citizens-based non-government board of directors.
Any number of other social enterprises can be created. Furthermore, any number of existing for-profit enterprises are entirely free to contribute any percentage of profits they wish to increase the proposed initial $1.5 billion social investment fund. If for example the total fund comes to $3 billion, that amount would generate at least $300 million per year in a hryvnia deposit accounts at any one of several major Ukrainian banks, to provide ongoing funding to continue to create and expand social enterprises.
This strategy places adequate funding for social benefit under control and management independent of government and the very obvious vicissitudes and conflicts inherent therein.
This is a long-term permanently sustainable program, the basis for “people-centered” economic development. Core focus is always on people and their needs, with neediest people having first priority – as contrasted with the eternal chase for financial profit and numbers where people, social benefit, and human well-being are often and routinely overlooked or ignored altogether. This is in keeping with the fundamental objectives of Marshall Plan: policy aimed at hunger, poverty, desperation and chaos. This is a bottom-up approach, starting with Ukraine’s poorest and most desperate citizens, rather than a “top-down” approach that might not ever benefit them. They cannot wait, particularly children. Impedance by anyone or any group of people constitutes precisely what the original Marshall Plan was dedicated to opposing. Those who suffer most, and those in greatest need, must be helped first — not secondarily, along the way or by the way.
From there, broad economic and social development can develop “upwards” concurrently with more conventional top-down approaches to economic development. Moreover, this program will not only meet initial, most critical and urgent objectives of childcare reform and poverty relief in Ukraine, it will also provide training for ever-growing numbers of specialists educated in social enterprise economic thinking with sufficient funding to put ever more well-designed projects into action as Ukrainian citizens invent them.
Due to Kharkiv National University’s international student body, education and training will be further distributed throughout the world. This is a program for the common good in Ukraine, with common ground among all political factions regardless of what differences exist otherwise. It will benefit not only Ukraine’s poorest and most vulnerable people, but also Ukraine’s overall economic development and advancement. It will further benefit the developing world as international students train in Ukraine and return for benefit of their home country.
Ukraine now stands on the brink of remarkable opportunity to emerge as an international leader in political, economic and social transformation. Nothing more than real, honest opportunity to fulfill this potential, by ordinary Ukrainian citizens, is needed for that potential to manifest and become reality. The original Marshall Plan greatly assisted Europe. Ukraine’s time has come.
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Children and Young People Living or Working on the Streets: The Missing Face of the HIV Epidemic in Ukraine. [PDF] Anja Teltschik, 2006.
Community-Based Networks and Innovative Technologies: New models to serve and empower the poor. [PDF] United Nations Development Program series: Making ICT Work for the Poor, 2005.
Constitution of Ukraine, Chapter 2: Human and Citizens’ Rights, Freedoms and Duties. Ukraine, 1996, 2007.
Family Matters – Report on Central and Eastern European Orphanages. [PDF] EveryChild.org, November 2005.
Social Enterprise Typologies. Kim Alter, Virtue Ventures LLC, [PDF] April 2006.
Ukraine to see creation of over 400 rehab centers for mentally disabled children. Government of Ukraine, 5 March 2007.
(archive: Ukraine to see creation of over 400 rehab centers for mentally disabled children. Government of Ukraine, 5 March 2007)