When the poor can't pay but there's still a profit

The past 20 years have seen an unprecedented rise in wealth, along with new technologies and the growth of global markets. But globalisation is also increasing the divide between rich and poor, making it increasingly urgent that we extend the benefits of the global economy to the three billion people — half the world’s population — who live on less than three dollars a day.

This inequality is a concern not only for ethical reasons, but because such an imbalance implies economic and security risks associated with such an imbalance. Capitalism must continue to fuel innovation and productivity while ensuring opportunity for those at the bottom of the economic pyramid.

Aid and charity have been deployed to address global crises but have often failed to deliver lasting change. And while the development community has begun to focus on enhancing livelihoods by providing greater access to jobs and credit, the poor also need access to affordable goods and services like safe water, healthcare, housing and energy.

Those in the lower two-thirds of the income pyramid have traditionally been ‘invisible’ — ignored by the private marketplace and addressed by top-down government programmes that lead to further dependence.

Creating real access for the poor requires a range of investment and charitable approaches. But because flexible philanthropic capital can be the most risk-seeking, a new class of social investors is experimenting with innovative ways to bring goods and services to the poor. The use of ‘patient capital’ — capital targeted at investments with clear social impact and lowered expectations for the timing and size of financial returns — is leading to the development of enterprises that can address the needs of low-income consumers in challenging markets.

Acumen Fund, a non-profit venture capital fund established in 2001, reflects the growing interest in using markets to solve tough problems of poverty. Acumen Fund raises charitable funds which it then invests as equity and loans in enterprises that deliver affordable healthcare, water, housing and energy to the poor. Acumen Fund is active in Pakistan, India, Kenya, Tanzania and South Africa, managing more than $30m in investments. It aims to be repaid its capital plus modest interest; any returns are reinvested into other enterprises working to solve problems in these areas.

Acumen Fund sits at the center of the ‘blended value’ discussion. It is a non-profit fund seeking charitable donations that it invests in private enterprises from which it expects a reasonable but often below-market financial return on the capital invested. It partners with corporations, foundations, individuals and government. In addition to capital, Acumen Fund provides investees with management assistance, strategic planning and on-the-ground support by Acumen Fund Fellows.

Acumen Fund also invests in sharing best practices and lessons around specific business models, metrics, etc. It measures success by its social impact as well as its ability to be repaid on obligations outstanding. The financial returns measured by the Acumen Fund es are meant to be indicators of the potential for these enterprises to attract private capital. This capital is ultimately more plentiful than aid or philanthropic funding and perhaps better suited to addressing the needs of the majority of the global population.

Mumbai is a city of 18 million, a crowded and unruly maze of streets with few ambulances fitted to serve emergency needs. Emergency medical services are in the early stages of development in India and ambulance service is extremely fragmented and disorganised. Shaffi Mather, Ravi Krishna, Manish Sacheti and Naresh Jain, four well-heeled professionals, decided there had to be a better way to provide services than to rely solely on charities and government. They found such institutions to offer well-intentioned but ineffective services in an industry that was growing increasingly corrupt.

So in 2002, Shaffi and his partners founded ‘1298’ to become India’s first world-class ambulance company with an ethos of ‘service for all’ and an emphasis on professionalism. The company focusses on profitability but does not maximize profits as its paramount objective. Instead, it measures success based on numbers served, quality of services and ability to turn a profit.

The business applies a sliding-scale pricing model, based on the hospital to which one is taken. Those who go to public hospitals for the poor do not pay. Those who are driven to more expensive hospitals pay accordingly. In other words, there is a cross-subsidy pricing model inherent in the business.

The company covers its costs through a combination of premium payments made by wealthier clients and by reduced capital costs for ambulances. (As city residents learned of the for-profit model’s effectiveness, they began to donate new vehicles to 1298 rather than giving them to a standard charity.) Furthermore the company is operated efficiently with a constant push to lower costs while maintaining quality service.

1298 originally intended to staff each ambulance with a driver and a doctor only. However, doctors are accorded high status in India and are expected to behave in a certain way. When customers saw doctors lifting patients, they assumed them to be of low quality. Until attitudes change, 1298 employs assistants to lift patients with the drivers and to support the doctors’ needs.

There is no better listening device than the market. By holding itself accountable to reliability and profitability, 1298 must understand its customers — even those who can’t afford to pay. Customers provide feedback and 1298 listens. Others are also taking note: recently, the government of Maharastra adopted 1298 as the main call-in number for ambulances.

Not only have thousands of lives been saved through its operations, but 1298 has also created a blueprint for building an efficient public-oriented company that can effectively serve the needs of all people regardless of ability to pay.