Should Social Enterprises Get Preferential Treatment?

By Rolfe Larson on May 14, 2013

I’ve been wondering lately: is it always a good thing for social enterprises and related organizations to receive preferential treatment, in the form of public or philanthropy subsidies and other forms of preferential treatment?

Family Farm

There’s a parallel capital marketplace of community development finance institutions (CDFIs), community development corporations (CDCs), micro-finance organizations, and so on, largely funded with public and philanthropic resources, that provides preferential financing to early-stage companies that promise important social or economic development benefits to the community.

Typical benefits include free or low cost technical assistance (essentially free or low-cost training and consulting), below-market interest rates, reduced collateral requirements, greater repayment “patience,” and so on. And the track record for these investments is pretty good, in terms of social outcomes and high repayment rates. So it’s a good idea to continue to fund these efforts, right?

Sure, it’s hard to argue against good results, but what those results seldom consider is what would have happened if that preferential treatment did not exist.

In many areas of social benefit, subsidies and preferential treatment have over time worked to the disadvantage of the very causes they were intended to support. Examples: agricultural subsidies intended to preserve the family farm have largely had the opposite effect. Likewise minority business preferences; possibly also veteran-owned businesses.

We can probably agree these are good causes, but the unintended long term results not so much. One more disadvantage to these approaches is that they  tend to provide “just enough” support to keep marginal businesses alive, while undermining the marketplace’s ability to select the most efficient companies, so they can grow and flourish. There have been a lot of marginal family farms kept barely alive for generations due to federal subsidies; it might be better to let them fend for themselves, enabling the more efficient ones to become stronger and compete more effectively with agri-business, ultimately leading to stronger, more sustainable family farms.

In the social enterprise field, there are lobbying efforts underway for government contracts to provide preferential treatment to social businesses. The logic is that training and providing long term employment  to these employees are more expensive and thus it’s more difficult for these businesses to compete. Government should be willing to “pay” for what it  saves (in terms of reduced public assistance programs, for example) from these activities. Social Impact Bonds are built around that model, and there are also efforts at both national and state levels to secure legislation along these lines.

I don’t have an easy answer to this, other than to suggest that we should not presume subsidies and preferential treatment are necessarily the solution.  Or if they are the solution, at least for awhile, perhaps there’s a logical time when they should go away, not just to save public and philanthropic resources for other purposes, but more importantly for the sake of the important causes they are intended to support.

What do you think?