The Obama Administration is to be congratulated for immediately committing food, doctors, military assistance and $100 million in aid for the people of Haiti following their devastating earthquake. Our country's swift response has been essential to saving lives and giving hope to the survivors. In the short term, grants have been the necessary form of assistance. But in the long run, another very useful tool the U.S. should consider is a Haitian Enterprise Fund, similar to the Southern Africa Enterprise Development Fund (SAEDF) or eastern European equivalents that have proven so effective for economic development and sustainable growth in developing countries.
Haiti needs assistance that will produce a sustainable economy, not just a relief economy. This horrible tragedy may present just the opportunity for Americans to put their resources to work in a way that will create long-term economic sustainability in a country bereft of stability.
The History of Enterprise Funds
Enterprise Funds are an innovative tool that President George H. W. Bush created in the late 1980s when countries of Eastern Europe and the former Soviet Union were emerging from Communist rule and command economies. Enterprise Funds are modeled after private equity and venture capital funds, but they are funded by U.S. tax dollars and are run by independent and unpaid boards of talented individuals with investment and business expertise. Sen. Richard G. Lugar of the Senate Committee on Foreign Relations, who was instrumental in creating the Enterprise Fund concept, has called them "revolutionary public-private partnerships".
The initial goal was to take the unique combination of public funding and private skill and encourage free-market development through loans and equity investments in small and medium sized enterprises. At first, Congress was concerned about turning hundreds of millions of dollars over to private citizens with minimal government oversight, but today this important leap of faith has been vindicated. More than fifteen years later, the U.S. government's $1.5 billion investment in Enterprise Funds is hard at work. To date, the Funds have invested in more than 500 companies in Europe and Africa and created more than 250,000 jobs. Every dollar invested by the Funds has attracted an additional two dollars from other investors. Overall, the Funds have been profitable and, upon liquidation, have either returned their original capital to the U.S. Treasury and/or have set up legacy nonprofit entities that live on in the Funds' countries. Some of these nonprofits have set up scholarship funds enabling indigenous people to attend college in the United States and others have even established local business schools. Almost all Enterprise Funds have transitioned to the private sector by seeding and raising private equity funds, which in turn raised follow-on private equity funds that stayed in their regions fueling more economic growth through investment.
The Southern Africa Enterprise Development Fund (SAEDF)
Since 1989, the U.S. Congress has created 10 Enterprise Funds in Eastern Europe and one in Africa, the Southern Africa Enterprise Development Fund, known as SAEDF. SAEDF was established in 1994 on a handshake between South African President Nelson Mandela and U.S. President Bill Clinton to help South Africa emerge from its apartheid rule by providing economic opportunity to its formerly disenfranchised population. I have chaired the SAEDF Board since its inception.
SAEDF has been successful financially and by other important measures. In its early days, it was one of the first investment firms "on the ground" in post-apartheid South Africa. By partnering with them, SAEDF was able to help American institutional investors find investments in South Africa long before the institutional investors were situated to do so on their own. SAEDF has invested more than $80 million tax dollars in 25 new business operations owned by formerly disadvantaged indigenous people. Those businesses have employed over 2,000 workers and have created employment for an estimated 50,000 people in spin off jobs. SAEDF's investments have returned over $67 million to date, and its remaining investments are worth almost $50 million and appreciating. SAEDF has also trained and mentored more than 50 indigenous staff members, at least 20 of whom are now senior managers of other local investment funds and businesses, representing a new generation of investment professionals in southern Africa. SAEDF has also sponsored 12 financial intermediary firms, extending the reach of SAEDF's limited capital by leveraging additional monies for local financing in southern Africa. Now, SAEDF intends to follow the path of its European counterparts, which created private investment funds to continue the mission of investing in small and medium-sized local businesses.
The Haitian economy is much like some of the economies of the 11 countries that SAEDF serves. Like the Haitians, the Africans aided by SAEDF also faced overwhelming poverty, staggering unemployment, a history of corruption, almost no economic infrastructure and lack of an educated work force. Nonetheless, with the backing of the U.S. government, SAEDF has profited, educated a generation of new financial managers and created thousands of jobs in Africa. The same could be done in Haiti.
Current SAEDF Projects and Lessons for the Future
We have learned many lessons in SAEDF that could be helpful in a Haitian Enterprise Fund. One question is whether "development" should be part of an investment fund's name and mission. While SAEDF embraced the development portion of its mission, the competing interests of making a profit and serving the development needs of the Fund's region sometimes seemed at odds. For example, SAEDF put $5 million dollars into a badly needed hospital in the township of Gugaletto, South Africa, and then turned the hospital over to the local population to operate. The hospital continues to operate to this day with four local doctors and U.S. surgeons who rotate in periodically, but such a hospital is not a for-profit venture. Therefore, SAEDF's financial return was zero and some might say that the hospital has been a financial drag on the Fund's overall performance. Nonetheless, it is fine to have the opposing goals of development and profitability, as long as those judging a Fund's successes employ different measurements of success to evaluate all goals. For example, SAEDF has been evaluated by internationally known consultants Dalberg Global Development Advisers not only on its profitability but also on how well it addressed other goals mandated in its grant agreement. Dalberg Advisers rated SAEDF highly against five specific performance indicators: job creation, minority ownership, previously disadvantaged ownership, sector strengthening and infrastructure development and social and economic impact, in addition to profitability. .
Another lesson learned from SAEDF is probably that multi country Enterprise Funds are much more difficult and more expensive to run than single country funds. In SAEDF's case, it has served an 11-country region that is half the size of the African continent--from Botswana to Tanzania and every country in between--with all different currencies, languages and legal systems. Most of the European Funds generally served single countries and therefore cost less to operate. In the case of Haiti, there should be no issue. Because of the history and recent tragedy there, a single country fund should be used.
All of the Enterprise Funds have had their detractors along the way, from skeptical members of Congress to the media. But one by one those who have examined the rewards of this kind of innovative U.S. foreign aid have been converted to fans. What American taxpayer wouldn't be happy making a profit while doing so much social good at the same time?
I have had a commitment to Africa and its Diaspora all of my life. In the last 15 years, I decided to try to export to Africa the concept of "Public Purpose Capitalism". It is a philosophy we adopted in Atlanta when I was mayor. The goal of my administration was to make Atlanta a thriving city through honest and creative public-private partnerships to stimulate the economy and put people to work. We convinced the private sector to invest in public purpose facilities, buildings and businesses. They did, and that investment benefitted all segments of that city's economy and society. Given a fair chance, SAEDF and its legacy institutions will play a more critical role than ever in Africa's continued economic evolution.
A Haitian Enterprise Fund, which would invest U.S. tax dollars in private businesses, could revolutionize that country, too.