How The U.S. Government Can Accelerate The Impact Economy

Originally appeared in Forbes in partnership with the Skoll World Forum. Click here for the original article.

Written by: Shrupti Shah, Ross Rocketto, and Rob Terrin

Momentum is building for government to play a larger role in the impact economy, the ecosystem where social entrepreneurs who have sustainable business models to generate both profit and good meet impact investors who want to invest in their ideas.

This was highlighted by the inclusion of impact investing on the 2013 G8 Summit agenda. Prior to the meeting the Omidyar Network, Big Society Capital, and the Global Impact Investing Network (GIIN) wrote a letter urging global leaders to recognize the need to further develop and support this ecosystem. The letter was co-signed by over 90 large banks, fund managers, service providers, and other stakeholders in the impact economy. Additionally, the White House unveiled its National Impact Initiative (NII) at the G8 Social Impact Investing Forum.

These initiatives are steps in the right direction and add to an ongoing conversation about government’s role in the impact economy. In an era of tight budgets, the private sector can be a part of solving our nation’s toughest challenges.

On the domestic front there are three ways the federal government can catalyze growth in this space:

• Build infrastructure – laying foundations for the impact economy to increase the flow of capital the same way it built the interstate highway system to encourage automobile travel.
• Incentivize private sector investment – encouraging private sector investment through regulatory adjustments and clarifications as well as tax policy.
• Develop new programs and re-purposing existing ones – delivering excellent citizen services while saving taxpayer money by re-purposing existing programs to focus on impact.

Building infrastructure

At the recent Growing the Impact Economy Summit at Harvard University, Don Graves, Deputy Assistant Secretary for Small Business, Community Development and Housing Policy, noted that government has the opportunity to build the infrastructure for the impact economy, like with the highway system, and then let the industry grow organically.

Two specific ways government can build this infrastructure include clarifying and streamlining regulations as well as standardizing impact measurement. The first ranges from developing a certification process for social enterprises and impact investors, to new guidance around pension funds making Economically Targeted Investments (ETI) through the Employee Retirement Income Security Act (ERISA). The second is working with the actors in the space to harmonize the measurement of the impacts of individual social enterprise–this would increase transparency and allow investors to make informed decisions. It would also increase the effectiveness of social enterprises in a given sector by providing a mechanism to identify which business models are particularly cost effective.

Incentivizing Investment

Government has a number of tools to incentivize private sector investment that include the creation of new vehicles to leverage private sector capital to create public value, like loan guarantee programs or the creation of a fund of funds. Another is through various applications of the tax code.

To do this government must see beyond the binary choice of public versus private. This was highlighted by Nick O’Donohoe of Big Society Capital in a joint World Economic Forum and Schwab Foundation report on social innovation in the public sector:

“Do we really just have binary choices: between public or private provision of education, health and other social services; between charities and aid agencies focused only on dire needs or corporations focused only on maximizing profits; between investors who can choose only to maximize their returns or make philanthropic donations?”

There is a different way, and the tax code can be a major part of that through levers such as tax credits, deferred liabilities, and deductions.

Developing New Programs and Repurposing Existing Ones

Government has experimented with innovative tools like pay for performance, loan guarantees, and impact-related grant programs. Examples include the almost $100 million Workforce Innovation Fund created by the Department of Labor to “enhance innovative employment and training programs.” Additionally, the President’s most recent budget request included a $300 million Pay for Performance program to be administered by the Treasury Department.

One of the more successful examples of a repurposed program is the Small Business Investment Company (SBIC) impact investment initiative. In 2011, approximately $1 billion was explicitly committed from the broader SBIC program to create an impact investing initiative that seeks to “generate both financial and social return in areas of national priority.” As of 2012, the SBIC had issued $400 million in SBA-guaranteed leverage to make impact investments. The program has seen success by demonstrating that there doesn’t have to be a correlation between impact investments and increased fund loss rates.

Next Steps

The potential of the impact economy has generated a lot of buzz and excitement, culminating with this year’s G8 and G20 summits along with the administration’s announcement of the NII. However, scaling the impact economy will likely require a commitment of time and energy on the part of policy-makers to understand the space and work with the existing actors to push forward effective policy. By focusing on building infrastructure, incentivizing private sector investment, and developing additional innovative programs government can go a long way towards facilitating growth in impact economy.

Editor’s Note: Shrupti Shah leads GovLab on behalf of Deloitte Consulting, LLP. GovLab works closely with senior government executives and thought leaders from across the globe, and seeks to develop innovative yet practical ways that governments can transform the way they deliver their services and prepare for the challenges ahead. Ross Rocketto is a GovLab Innovation Fellow, and Rob Terrin is a GovLab Innovation Fellow.