STANFORD SOCIAL INNOVATION REVIEW / APRIL 17, 2012
As the social entrepreneurship movement gains momentum in the United States, many are asking whether public policy can support and promote these social entrepreneurs.
Social entrepreneurship—market-based solutions to social and environmental problems—is one of those rare issues that plays well across both sides of the aisle. Liberals love it because it proves that business can be socially and environmentally responsible. Conservatives love it because it offers the free market, not government, as the solution to social and environmental problems. Given Paul Ryan’s new austerity budget, which slashes $5.3 trillion in federal government spending over the next decade, the need for private sector solutions is more relevant than ever.
Most importantly, both sides are starting to support social entrepreneurship because it is a job-creating engine. Social entrepreneurship represents a new, innovative type of business that could create … yes, you guessed it, the favorite word on the campaign trail—jobs!
Below is a survey of policy initiatives at the federal and state level that support the growing social enterprise sector.
Social Enterprise and Economic Development Act
The Social Enterprise Ecosystem and Economic Development Act is a proposed piece of legislation announced by Congressman David Cicilline (D-RI) during the SEEED conference at Brown University on March 17. As the name suggests, it seeks to create an ecosystem that will promote the establishment and growth of social enterprise across the US.
The act has a few key provisions to empower social entrepreneurs. First, it encourages the expansion ofSmall Business Administration (SBA) lending programs to social enterprises and creates an Office of Social Entrepreneurship inside the SBA. Second, it encourages federal government to procure goods and services from social enterprises, including the implementation of social impact bonds (see below). Lastly, it establishes a federal commission to define, study, and advise on social enterprises across the federal government.
Status: An outline of draft legislation was announced but not yet introduced in the US House of Representatives.
Social impact bonds
On January 18, Governor Deval Patrick (D-MA) announced that Massachusetts would be the first state in the US to pursue social innovation financing contracts such as social impact bonds (SIBs), the “pay for success” approach to government service whereby the government pays only for social programs that work. Private/philanthropic capital fronts the money to the nonprofit or social enterprise to cover the cost of the program. If the nonprofit or social enterprise achieves certain predetermined metrics, then the government will pay the private or philanthropic source of funding the amount of capital it fronted plus an additional predetermined amount. The SIB essentially shifts the financial risk of prevention programs away from the public to the private sector based on the expectation of future recoverable savings.
The first SIB was launched in the UK as an initiative to reduce prison recidivism. A dedicated intermediary nonprofit received capital from seventeen social investors to fund a program to help transition recently released prisoners back into society. If the 8-year project reduces re-offending by 7.5 percent or more, the UK government will use a portion of its net savings to repay investors. The government has the potential to realize huge savings by avoiding the costly downstream remediation services for housing inmates as they come back into the prison system. The private sector is taking the risk. The public will benefit.
Status: Governor Patrick’s office has issued a request for proposals from interested parties in Massachusetts.
Philanthropic Facilitation Act of 2011
Introduced into the US House by Representatives’ Aaron Schock (R-IL) and Jared Polis (D-CO), the Philanthropic Facilitation Act of 2011 streamlines the process for program-related investments (PRIs). A PRI is a social investment or loan made by a foundation to for-profit social enterprises that operate for a charitable purpose. Foundations expect enterprises to repay PRIs, often with at least a modest rate of return. PRIs are potentially a great source of risk capital for social entrepreneurs, but the process of creating them has been inefficient and costly, resulting in limited use.
The Philanthropic Facilitation Act of 2011 will streamline the process of PRIs in two primary ways. First, it requires the IRS to rule on whether a social enterprise is eligible to receive a PRI within 120 days. Second, the act allows social enterprises to directly apply to the IRS for this determination. Under current practice, foundations seek a private letter ruling from the IRS to ensure the social enterprise qualifies for PRI, but under the new legislation, a social enterprise can go directly to the IRS to receive a determination of its eligibility for PRI. Once an enterprise has this determination, multiple foundations may rely upon this to make PRIs.
Status: In Committee in the US House of Representatives.
Emerging legal structures
Traditional legal structures have created a binary for-profit vs. nonprofit choice. These legal structures are largely inadequate for the social entrepreneur who seeks to blend profit and purpose. Thus, there has been a movement in a number of states to create new legal structures, inlculding the L3C, Flexible Purpose Corporation, and the Benefit Corporation, to support the unique needs of social entrepreneurs. These new legal structures have largely received bi-partisan support at state houses across the country. The most striking example of sweeping bi-partisan support is the passage of the Benefit Corporation in 7 states. The total vote count across all states is 892 “yes” votes to 82 “no” votes including 8 unanimous floor votes and has been signed into law by 3 Republican governors and 4 Democratic governors.
Status: Adoption in states across the US.
In an election year full of polarizing rhetoric, supporting social entrepreneurship is a policy that both parties can get behind. If they do, our nation might just stand a chance to innovate our way out of this recession, to grow our economy by creating real value for our society, and to bring quality jobs to the ranks of unemployed. Politicians, at a state and federal level, on the election trail this year would be well advised to add a social entrepreneurship plank to their platform.
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