Counting Revenue. And Health Impact.
By Karl Hofmann, President and CEO, PSI
The Sustainable Development Goals (SDGs) mark a number of shifts – one notable shift is developed country donor agencies are increasingly relying on governments in the Global South for more of the funding needed to ensure health goals are met. Achieving Universal Health Coverage and domestic resource mobilization are firmly on the international agenda. The next decade will be more about shared responsibility and greater financial sustainability, rather than the north-to-south donor flows of yesterday.
Don’t get me wrong, there is clearly still a need for development assistance – extreme poverty and infectious diseases won’t disappear simply because of a UN declaration.
But the handwriting is on the wall: the donor landscape is changing.
At PSI, we’re changing, too. Or, rather, we’re evolving.
That Was Then
PSI was founded in 1970 to put contraception and greater choice in the hands of people in developing countries. Our approach was based on marketing principles that – even today – are the cornerstone of our work.
What marketing allowed us to do is make contraception more attractive, affordable and available. We worked with the formal and informal private sector to sell products, and used the revenue generated to reinvest in our work.
Over time, our work expanded from product (social) marketing to include provision of health services and behavior change communications. And we expanded our work to include HIV prevention and treatment, malaria, TB, child survival, non-communicable diseases, water and sanitation, safe abortion and post-abortion care, and more.
We’ve always sold health products – condoms, oral contraceptives, household water treatment, oral rehydration salts – subsidized by government donors from the US, UK, Germany, the Netherlands, and private foundations, such as The Bill and Melinda Gates Foundation and others. And the “consumer” pays something marginal for the product.
When the health benefit is clear and compelling, we give our products away for free, like insecticide-treated mosquito nets.
From Subsidized Sale to Social Enterprise
Today, our business model is under pressure to change. Donors are unable to provide never-ending subsidies. National governments in the host countries where we work are shouldering more of the burden of health expenditures. And, significantly, our consumer – let’s call her Sara – is in many cases better off than she was 10 or even five years ago, with more disposable income and a greater ability to pay for her and her family’s health care.
Staying Ahead of the Curve
It was the Dutch and the Swedes who first challenged us: Can PSI shift its model from the subsidized sale of condoms in South Africa to a true social business where we not only act like a business, but we also incorporate as one?
The Dutch Foreign Ministry agreed to provide transitional funding for our donor-supported condom brands in South and Southern Africa as long as we drove toward financial sustainability. The Swedish Development Agency (SIDA) joined in and sweetened the pot for us by co-funding the transition.
The journey from talking and thinking like a commercial business to actually acting like one has been eye opening.
First, we had to recruit the right leadership for a commercial activity whose success would depend on meeting sales and cost targets not donor deliverables. In our case, we hired Guy Rogers, whose background is in the pharmaceutical industry and FMCG, to run our new Southern Africa commercial condom enterprise.
Second, our legal status had to change. Even though we had sold condoms in South Africa, Lesotho, Swaziland and Botswana for many years through our South African-registered Society for Family Health nonprofit, this was different. We established a wholly owned South African commercial entity, PSI South Africa, which now pays taxes to the South African Revenue Service.
Third, our cost structure had to change. Dramatically. We centralized our operations in Johannesburg. We outsourced and established new partnerships with wholesalers and the trade. We reduced our marketing and sales in the region by two-thirds in three years.
Fourth, we adjusted our prices with an eye on volumes as well as equity. Were we leaving people behind as we raised condom prices? It doesn’t appear so since volumes of our Trust and Lovers+ branded condoms are higher now than they were under our subsidized approach four years ago. And the business makes a profit after taxes.
What explains this? We left prices unadjusted for years while the South and Southern African markets developed and grew. Our consumer was prepared to pay more once we asked it. Also, our intermediary wholesalers were reaping significant profits thanks to our very low prices to them. Raising our prices to the trade has captured some of those profits back for us as opposed to the middlemen, which allows us to reinvest more in our nonprofit work.
No Safety Net
The declining subsidy from the Dutch and Swedes shrunk to zero and we have been operating PSI South Africa as a true profitable commercial entity for two years.
The experience has been instructive, all the more so because our operating environment in South Africa has been tough with the rapidly depreciating rand and slow economic growth.
The donor/NGO relationship can be paralyzing and counterproductive. The focus is too often on spending available budgets rather than achieving the best cost-per-outcome. It’s expected that NGOs spend the entire budget. That model and mindset is not the recipe for success in the commercial sector.
I’m Counting Something Different Now
Our experience in Southern Africa is lighting the way for us in other parts of the world. PSI’s Central America program, PASMO, has operated parts of its activities as a social business and we now have a standardized commercial profit and loss statement (P&L) that we use across all commercial enterprises.
PSI Paraguay, which has operated as a social business for more than ten years, sells a range of contraceptive products. In India, changes to Indian law have expedited PSI India’s transition from our (social) marketing of condoms and other products to a commercial limited liability company, which will pay taxes in India. Our India LLC is a wholly owned subsidiary of PSI in Washington.
PSI will continue its work, subsidized by donors, to make it easier for people in the developing world to lead healthier lives and plan the families they desire. And we’ll continue to expand our portfolio of social businesses.
I had no idea when I joined PSI nine years ago that I would be spending much of my time reviewing commercial P&L statements. But on my calendar today is a meeting of several of our commercial operations, using our standardized commercial P&L format. And, it wouldn’t be Washington, DC without adding a new acronym to my vocabulary: EBITDA. Earnings Before Interest, Taxes, Depreciation and Amortization. We’ll be better able to meet the goals of the SDG-era with a wider vocabulary, and yes, a few more acronyms.
Photo Credit: Courtesy of PSI