This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 16 - 22, 2016.
Datuk Dr Kim Tan, pioneer of impact investing, realised that charity rarely helps the causes it champions and came up with a more intelligent solution.
Impact investing — that is, putting money into projects or companies that help solve a social problem and make money — seems like a natural progression. Yet, we have only started to notice this trend in the past few years.
The old way of doing things, channelling charitable funds or aid money into projects with social impact, had been going on for decades. Few questioned the efficacy of these projects or looked to see how effective they actually were.
One of these few was Malaysian-born biotech entrepreneur Datuk Dr Kim Tan, who visited a shanty town in South Africa in 2001, and was appalled at the conditions he found and the seeming hopelessness of the situation.
“I was there on holiday with my family and we were going to a really nice safari game park. But I didn’t feel I could take them there without showing them the other side.
“So, we spent half a day in a township just outside Cape Town with a big NGO (non-governmental organisation) and what I saw disillusioned me,” he says.
As a venture capitalist, he was used to looking at businesses, figuring out which would succeed and which would fail. The NGO in question was trying to help the locals develop their own cottage industries but he could see that their efforts were destined to fail.
“I thought, these are good-hearted people but teaching the poor to make furniture by hand, clothes by hand, crafts by hand, with no quality control, is not going to change anything,” he says.
Tan, who is the chairman of SpringHill Management Ltd, went home to the UK and decided to tackle the problem in a scientific manner. First, he needed the data. And then, to look at what the data indicated.
“What I saw frightened me. Over a 30-year period, as we have given more and more aid to sub-Saharan African countries, their gross domestic product collapsed.
“I’m not saying there is cause and effect. But we have given aid to the equivalent of five Marshall Plans to Africa,” he says.
He compared this to how Asian economies, especially the Tiger economies had developed — not through outside aid, but through enterprise. And he realised that what Africa needed was not more aid. It was industry.
“The evidence was clear, it is just that I had been blinded. Like everyone else, I just wrote my cheques and gave my money to the different charities. And in actual fact, we were damaging the economies we intended to help even further.”
He likened aid to a drug. “It makes you dependent. And when you’re hooked on philanthropy, you can’t get off it. You think, ‘why do I have to work when someone will come and save me at the end of the year with a big cheque?’ And it is this type of thinking that impoverishes a nation.”
Tan decided that there must be some other way to approach this problem, and so he created the Transformational Business Network (TBN) with some friends, an alliance of “disillusioned philanthropists who happened to be fund managers — either venture capital or private equity — as well as investment bankers, business professionals … owners who realise that what the poor actually need is our time, expertise and talent on top of our money.”
“If you throw 10 NGOs into every slum we have around the world, in five years, nothing would have changed. But, if in every slum we have 10 businesses and each of those businesses employs 100 people, there would be considerable change in that time,” he says.
But who could effect this change? “It would have to be the business people. So the question became, how do you mobilise and inspire business people to go and do that?”
It proved challenging but Tan was up for it. “We had conferences to inspire, teach and challenge and then we would arm-twist people to come on a journey with us. Get on a plane, come for five days, seven days, into the slums. Walk the slums and smell the poverty.”
Tan says there are now 2,000 in the network. “Each one is passionate about certain countries. They find a few businesses they like in the slums, find local entrepreneurs whom they trust and put in ‘patient’ capital to help them grow.”
The idea is to set up a business that employed two to three people and help it expand until it employs 100 to 200 people. “These businesses are making real products, providing real services. They are not a charity.”
The field has grown and now within TBN’s network itself, members have raised several funds for impact investing.
One of the first few funds Tan set up is Inqo and its first project was to build a safari game park, the Kuzuko Lodge, in South Africa. “This is a district in the Eastern Cape where there was 85% unemployment and almost 30% of the population are HIV positive.”
Inqo bought 22 farms in the area, which combined, gave it a total of 40,000 acres to convert into a game reserve. “This was degraded farmland that we then had to restore to a pristine state, build a five-star lodge on it and put animals on it that hadn’t been there for 150 years, such as elephants and lions, all the big game.
“What else can you do in a district that has massive unemployment and HIV/AIDS? This brings in tourists from Europe and from the US and that is what is changing and transforming the community,” he says.
The Kuzuko Lodge hires children whose parents have died from AIDS and trains them to become chefs, food and beverage-related employees and game rangers. Archbishop Desmond Tutu very kindly came and officially opened the lodge.
“We used local materials to build the lodge. Everything that we do is intentionally geared towards stimulating the economy in the local area.
“We run conservation for rhinos (there are only about 500 black rhinos left in South Africa), buffaloes and lions. My favourite is the cheetah because we can walk with them. They are wild but they have got used to humans. And it’s an amazing experience; really gets your adrenaline going,” Tan enthuses.
Inqo is the largest private investor in that area. “We contribute the most to the local economy every month. We want to know we are improving the lives of the people in the community when we make an investment.”
This improvement is measured using a number of different matrices. For instance, it measures the ratio of male to female employees and the average salary (excluding managers). “We want to know what’s happening at the bottom. If our investments don’t help them to improve year on year, we’re just doing good, we’re not doing transformation. And doing good is not good enough.
“We need to be intentional about helping to bring change. We measure, among other things, the amount of income tax that is paid, because if a country doesn’t collect taxes, it is going to need aid,” he says.
A country that doesn’t collect enough taxes cannot build roads, schools or provide proper sanitation. It can’t get clean water and power to everybody.
“So, in the businesses that we do, we want to help countries increase their tax base. One of the key things we say to the people we employ is that they have to pay their taxes. If they don’t want to, they can’t work for us.”
As Tan comes from a biotech background, he is very interested in the health of the community. “Health is very difficult to measure but it is correlated to housing. If you improve housing and sanitation, you improve health.”
What does he regard as standard housing? “Concrete floors, concrete walls, clean water, electricity on a switch, indoor bathrooms, flush toilets, solar panels. Unless we improve the housing, the people’s health will never improve.”
The company tracks the percentage of its employees who live in standard housing. “Over time, we’ve gone from zero to 100%.”
Another measurement of progress is the number of children who go on to tertiary education. “Primary and secondary education are a given. What I want to know is how many of our staff have a change in mindset and start saving money for their children’s education.”
The importance of tertiary education is another lesson he picked up from the Asian Tiger economies. “My father came to Malaysia at 18 years old. He had nothing, but he managed to build a small business and ploughed everything he earned into his children’s education. So, in one generation he was able to transform the economics of our family.”
How does this filter into how Kuzuko Lodge operates? “We spread this message, that we pay our staff a higher salary and that they need to learn to save. The men, particularly, are very bad at saving. They just spend money, whether it’s on gambling, alcohol or cigarettes. So, in the early years, we imposed a kind of forced savings on them, something like the EPF (Employees Provident Fund).”
But as time went on, the company stopped doing this because the transformation in mindset had set in and it no longer needed to.“For instance, we were seeing more children going for tertiary education and we were also seeing staff buy their own vehicles and houses. This told us that their personal fiscal discipline was changing.”
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.