Microeconomic Development and Social Enterprise in Ukraine: A “Marshall Plan” for Ukraine

Focus of this plan is on the microeconomic sector because this is the most effective way to immediately meet the fundamental objectives of a Marshall Plan: policy directed against hunger, poverty, desperation, and chaos. Tools, innovations and methodologies are available today that were not available sixty years ago for tightly-focused microeconomic development aimed specifically and very effectively at target objectives. This is not to diminish nor detract from macroeconomic factors that continue to impede Ukraine's development. Those factors include such things as tax reform, energy policy, continued reduction of systemic corruption, Constitutional reform, and fostering further development of civil society and freedom of media.

The most urgent component of the project below is relief and modern medical treatment for tens of thousands of Ukraine's children diagnosed as psychoneurologically handicapped. Many have died in state care, in primitive and inhumane conditions. Many are misdiagnosed, and end up in atrocious conditions. Following intense publicity and public discussion of the issue during final preparation of this project, Ukraine's government agreed on 5 March, 2007 to open more than 400 new treatment facilities for these children all over Ukraine. That commitment from Ukraine’s government was a major step forward, clearly demonstrating Ukraine’s willingness and ability to take initiative in childcare reform first and foremost.

As will become clear, childcare reform involves a complex, intertwined, interconnected set of issues and problems. It is therefore essential to outline these issues and problems and deal with them together as a whole. Key elements are childcare reform, poverty reduction, and communications infrastructure. Underpinning this effort is a new Center for Social Enterprise to be based in Kharkiv National University. CSE will include an academic program combining business, social services, social sciences and modern medical science into a new interdisciplinary academic discipline and program, social enterprise. This Center will engage students, faculty, business leaders, policy makers and citizen organizations and citizens in a common, unified program toward fulfilling the initial objectives outlined herein. The Center will further create new programs as participants learn new, innovative ways of thinking in identifying, analyzing, understanding and resolving Ukraine’s social and economic problems.

Release date for this plan was October 2006, since which time it has been in circulation and discussion among officials in Ukraine. First results, indicated above, were agreement by Ukraine’s government to open more than 400 new treatment centers for psychoneurologically disabled children – the most urgent need. This is an abridged version of the original for FoRum, whose staff were instrumental in communicating and helping tremendously in achieving that first critical objective.

Introduction / Components

Essential components for the start phase of this project include childcare reform; microenterprise and microcredit support; Internet development; support for research in fundamental science; and, a new center for social enterprise. Each component is discussed briefly in this section and elaborated in individual sections below.

Childcare reform is focused primarily on 1) provision of healthy living conditions for children in all orphanages, internats, and state care facilities for children throughout Ukraine; and 2) reducing need for future placement of children in state-care facilities. Reducing need first and foremost means poverty relief. Poverty is the primary reason for children ending up in state-care facilities.

Microenterprise and microcredit support are focused on provision of business training and small start-up loan programs to the poorest people in Ukraine who currently have no access or opportunity for such assistance.

Internet development aims to significantly expand affordable access to the Information Age for average Ukrainians. This means broadband Internet access at affordable prices in line with US and European standards. Affordable information access ties in directly with business and economic development from grassroots to big business, and will serve to further decrease poverty by opening communications channels throughout Ukraine that either do not exist or are too expensive. Surplus revenues generated by this component go to a fund to further develop social benefit programs.

Social enterprise is aimed at providing a new, sustained research and development center for extended social enterprise efforts throughout Ukraine. This project itself is an example of social enterprise. During the past decade, social enterprise programs have been adopted in top business schools in the West, including Stanford, Yale, Duke, Oxford, Cambridge, and London School of Economics. This will be the first major center for social enterprise established in Ukraine, and possibly the first in the former USSR.

Each component is summarized in terms of social enterprise operational models. Information about these models is included in the “Center for Social Enterprise” section.

Childcare Reform

During the course of research for this proposal, via a range of official numbers to anecdotal information, I have found a range of estimates from forty thousand to one hundred thousand children in Ukraine’s orphanages, internats, and other state childcare institutions.

It will be necessary to remove children now in state-care institutions into family-care: return to their own families, foster care, adoption inside Ukraine, and family-type homes with a maximum of ten children per home. This follows from research and experience in such programs as TACIS-sponsored Every Child (UK).

According to years of research within Ukraine and the former Soviet bloc by Every Child, 90% of children could possibly be returned to their families, with relatively small financial support to families. The cost of financial support needed is estimated to be less than half the cost of keeping the children in state children homes with dozens or hundreds of children per institution. If children can be safely removed from state homes back to their own families, at half the cost of keeping them in state homes, it makes absolutely no sense not to return them to their families.

In cases where children can’t be returned due to incapable family (incapable for reasons other than poverty), no family, and/or assessment of psychoneurological handicap, small group family-type homes, foster care, adoption within Ukraine, and new specialized care for handicapped children are next options.

Foster care and adoption are relatively rare in Ukraine, although public education programs are underway to promote these options. For the interim, there is great need for family-type small group homes. Small group homes should consist of small enough groups of children to approximate a more intimate, supportive family-type environment. According to Every Child’s research, the few small group homes that already exist have about twenty children per home. Having worked in a group home in the US, I believe that is too many children for one setting. Ten should be the maximum number, with full-time childcare workers or foster parents in each home. Facilities or land might be provided by local governments, making use of some of the larger vacant buildings in most cities in Ukraine. Otherwise, it is necessary to build new homes.

It is difficult if not impossible to know exactly how many children are currently living in orphanages and other state institutions in Ukraine. Research from Every Child cites the following reasons for this:

Lack of reliable statistics. Many countries in the region are still in what is euphemistically described as the ‘transition’ from semi-totalitarian to democratic rule. Civil society is in an early stage of development and the state organs remain extremely powerful. There are few checks and balances against the state and no tradition of state-collected statistics being questioned.

Inconsistent data collection. Responsibility for childcare is generally divided between four or more ministries, each with their own budgets and information systems. Collecting consistent data across the different ministries clearly presents problems. For example, during the course of a situation analysis of childcare in Azerbaijan, EveryChild was quoted figures for the numbers of children in institutional care in the country that ranged between 8,000 and 120,000.

Problems of definition. For the purposes of this report we define an institution as a large residential home for long-term childcare. We would expect such a home to house at least 15 children; anything much smaller can be regarded as a substitute family. But the definition used in state-collected data is often uncertain.

Lack of clarity of purpose. Children’s institutions that were originally provided for

orphans (or for educational or health reasons) are frequently used to house children for social reasons. For example, in many countries in the region, boarding schools give an education to children who live in remote rural areas that do not have an adequate population to support their own schools. However, children are also frequently placed there because their parents are simply too poor to support them.

Faulty collection of data. Poor data collection can be the result of inadequate mechanisms or manipulation. For example, a study in Georgia found that some officially-recorded institutions did not exist and others that did were not recognised by the system.

Given these data limitations, as of 2002 Every Child’s best estimate was 80,000 children in orphanages. Going on the assumptions that numbers remain roughly similar and 90% of children might be returned to their families by providing financial support to those families at net cost savings of at least 50% per child versus orphanage care, that works out to a projected cost savings of about 45%. Thus, returning children to their birth homes where the main problem was insufficient money would reduce state-funded support by almost half. Every Child estimates a state cost of current equivalent of 575 hrivnia, or about $115, per child per month. For 80,000 children, total cost is about $110.4 million per year. 45% savings reduces total cost to $60.7 million per year.

That leaves 10%, perhaps 8,000 children , remaining to be placed in foster care, home-country adoptions, family-type small group homes, and specialized care for handicapped children. Specialized care for psychoneurological handicapped children is severely lacking.

Attitudes regarding foster care and adoptions within Ukraine will take time to change and overcome. Additionally, expert social workers must be trained and made available as part of an in-home support program for children returning to families. New training must include a shift away from finding reasons for removal of children from homes, to emphasis on family support to help families cope with keeping their children. It appears that in many or most cases, poverty and insufficient monthly income to care for children is the main reason for placement into state care. In those cases, social support payments to these families will fulfill that primary need and yield an overall cost savings as outlined above. Nevertheless, returning children to their family homes must be monitored for the best interests, safety, and security of each child. Without exception, each child’s safety, health, and security must be the absolute guiding factors in each individual case. Foster care and adoptions within Ukraine must also be monitored with the same level of diligence and respect for each child’s best interests.

Foster care and adoptions within Ukraine are not likely to be a significant relief factor in the near future. As suggested above, both will require a public education and awareness campaign. Both will also require careful screening processes for families who do apply to become foster or adoptive parents, to prevent situations where support income for the child is the motivation for foster care or adoption, instead of caring for the child. Returning children to their families if and when possible, and family type homes, are the most immediate needs.

Without being able to know for certain how many children can be safely returned to their families, it is impossible to predict how many family type homes will be required. A conservative starting point is to allow that homes for at least ten percent of children will be required. A safer start point is to allow that homes for at least twenty percent of children will be required, with half of these homes being set up to care for the most difficult cases: severely disabled children. Staffing needs will differ between standard and specialized homes.

This comes to 1600 family type homes needed immediately, with sufficient space for ten children and caretakers in each home, estimated 200 square meters. New homes of this size can be built for $60,000 each, for a total of $96 million. There are minor differences between standard and specialized-care homes. Specialized homes for disabled children must include such things as wheelchair access for entry/exit, and specialized toilet and bath accommodations. These do not add significant cost difference for each type of home.

Due to growing questions about gas supplies for heating, it is wise to include heating equipment using renewable biofuels rather than depending on gas supplies. This is in line with ensuring health, safety, and security for each child, circumventing unstable and/or increasingly expensive gas supplies.

The transitional phase, moving children out of existing institutions and into individual homes – family homes or family type homes – can be completed within five years. This allows time for construction of new homes and training social workers and caretakers. A focused effort on home construction can produce 1600 homes needed within five years, if managed according to Western, particularly US, standards and practices. This will of course require tight financial management, to be sure that funds are used as intended. Due to rising costs and inflation, monthly total for children remaining in state care – family type homes – should be adjusted upwards from $115 per month cited above, to $140. During the transition phase, it will be necessary to operate the “old” system of state institutions as the “new” system is built and children are gradually transferred either to family homes or new family type homes. Thus old and new must be operated simultaneously during the transition phase, creating a temporary but significant increase in overall childcare budget for the state. Afterwards, cost savings from having children returned to their birth families will offset longer-term costs as described above. Care for children in new family type homes will be about the same is in existing orphanages. New homes are a one-time cost – a cost insignificant in comparison with giving each child a family type of home environment.

There is no substitute for a loving family environment for growing children. Existing state care institutions do not and cannot possibly provide this – despite occasional, lingering claims that state care is the best care for children. This attitude is a holdover from Soviet times when the state was idealized as the best possible caretaker for all, including children. Stark reality does not support that notion.

While this section has strong focus on financial aspects for reforming childcare in Ukraine, these are just financial numbers to demonstrate that this can be done for an overall, long-term cost reduction to state budget. That is to say, simply, this reform program is at the least financially feasible. The barrier between old and new is the cost of the transitional phase.

However, it is essential to not get lost in financial numbers and budgets. These are only important to show how this will work and will end up costing less money as the new program is fleshed out and the old program is closed. Most important is the welfare of each of these children. There are at this time, for example, numerous institutions across Ukraine where children die on a daily basis from little more than lack of knowledge about how to help them. The actual cost of helping them immediately is nothing more than one-day workshops for existing staff, to demonstrate basic, simple medical interventions common in the West. These institutions are generally closed to the outside world, difficult to access due to imposed secrecy, and are mostly in very rural areas where even the closest neighbors have no idea of the reality of these facilities.

The point, again, is very simple: to protect safety, health, and security of each and every child in Ukraine. There is absolutely no reason why this cannot be done. EveryChild’s research, published less than a year ago, provides an excellent starting point. Dzherelo Children's Rehabilitation Center in Lviv has years of experience and available expertise in caring for severely disabled children. It is noteworthy that Dzherelo must rely on private funding because Ukraine’s state budget will not pay for or support a program that is in every way superior to official state care. Many of Dzherelo’s clients are able to remain with their own families, and are transported by minivan to and from Dzherelo’s modern care facilities for basic, periodic medical treatment such as physical and occupational therapy.

In terms of social enterprise, the childcare reform component can be characterized as an “enhanced: franchise model.” Existing programs already exist for creation of family-type homes – indeed, villages of family-type homes – for orphans in Europe. Very small programs for assistance to severely handicapped children already exist within Ukraine. Returning children to their families, family-type homes and modern treatment for handicapped children are the most urgent needs in Ukraine’s childcare reform efforts. Expanding on existing models – franchises – is the primary solution in this case.

Poverty Relief: Microenterprise Development

This component is based on microenterprise support. This will require a nationwide microfinance initiative unlike most existing microfinance in Ukraine. Existing microfinance programs effectively exclude people who need them most, those in poverty. Material collateral is required for virtually all microfinance programs now available in Ukraine. Most microfinance is set up to help people with existing businesses, but not to help people start new businesses. This situation is the exact opposite of what is needed. That is, access to loan funding without regard to material collateral; along with training and preparing people for success in their own business. People living in poverty by definition do not have material resources available for loan collateral.

Further aggravating the microenterprise environment have been extortionist “protection” schemes. The deal is simple: a merchant must pay “protection” money, or else they could find their business damaged one way or another. In some cases, so much money has been forced from business owners that the business was forced to close. Once the business is closed, it is very difficult if not impossible for the owner to get financing to try and restart, since most microfinance comes into play only for existing businesses.

The new microfinance program will include a mechanism for reporting this sort of corruption, with reports going to local, regional and national authorities, with expectation of appropriate action against any and all attempts aimed at “protection payments.”

Loan funding will be available to anyone who needs it if they are able to undertake a free training program for business planning and market research to prepare for success. This approach has been very successful and beneficial in other post-Soviet locations such as Tomsk oblast, Russia. This component should be funded in the same amount per capita as in Tomsk oblast, $10 million per one million population. That amounts to $480 million in Ukraine. Funding should be provided in equal installments over a five-year period with each installment depending on program performance in the previous year.

At least 25% of Ukraine’s population lives in poverty. Poverty in Ukraine is a numerical measure of income having little to do with actual quality of life. Talking to hundreds of ordinary people even in the relatively higher income city of Kharkiv, common opinion is a poverty level of 50%. Assuming what seems to be a very conservative estimate of 25% of Ukrainians living in poverty brings a total of twelve million people.

Starting, owning, and operating a small business is not for everyone for a variety of reasons. Some people simply are not capable of developing the skills required for running a business. Some are invalid, elderly, or too young. Some are not honest enough in the eyes of their neighbors to be trusted to provide any product or service.

Consequently, it is difficult to determine just how many people will be able to take advantage of a new microfinance program. Nevertheless, based on the Tomsk model, ten million dollars per one million overall population proved adequate to meet initial demand. Further capitalization can be made available depending on need, and on performance of the microfinance program.

Program design is the same as recommended and implemented in Tomsk. Material collateral is not required, which removes the barrier for access for poorest people – those in poverty. Training for business planning is provided at no cost to the client, and is required for participation. Each client is placed in a loan circle, a group of about seven clients. After satisfactory completion of a business plan, including basic market research, each client is eligible to borrow a small amount of money, enough to get started. This amount is usually around one thousand dollars. Each client in the loan circle must repay their loan in full before anyone in the circle can borrow a larger amount of money. Once these loans have been repaid, this completes round one. Each client is then eligible to borrow a larger amount of money, under the same rules and conditions in round one. Once those loans have been repaid, this completes round two. Again, each client is then eligible to borrow a larger amount of money to advance their business. After each loan is repaid, round three is complete and clients then have their own business in operation. Clients are at this point eligible to borrow money as needed from existing microfinance banks in Ukraine, such as ProCredit. Loan repayment and business survival in the Tomsk program exceed 97%. Tomsk Microcredit Bank became self-sustaining and growing in less than two years, with income from interest on loans. Approximately fourteen thousand loans were made during the first four years of operation.

Businesses created in this way typically support at least two families, the owner’s family and the family of one or more workers. Thus these businesses not only allow for self-support for the owner (usually women with children in the Tomsk experiment), but also create jobs for other people. Each business has an extended positive effect for the community by way of purchasing more products and services from other people. This “ripple effect” continues as more businesses are created, existing businesses sell more products or services, and the cycle continues until needs are met for most people in the community.

This microfinance strategy provides monetary access and resources to some of the millions of people in Ukraine who have been left with almost nothing. This strategy is aimed directly at helping them.

In terms of social enterprise, this component can be characterized as “fundamental: entrepreneur support model.”

Internet Development

This component aims to provide low-cost broadband Internet service and access throughout Ukraine. Even in the few areas where it is available, broadband is expensive by international standards.

This component will also function as a revenue engine that ensures the overall project has a cash surplus and is self-sustaining. Specific attention will be given to the transitional costs of the childcare initiative.

Specifics of the business plan for this component should not be needed here. Details can be discussed at length, privately, with appropriate parties primarily limited to financiers and legitimate business or social enterprise partnering organizations. Suffice to say for purposes of this document, and in terms of common sense, if the plan will produce as indicated herein, it will quite possibly become a tempting proposition to extract from the plan for private gain rather than its intended social benefit. Therefore, for purposes of this discussion, a general outline is offered.

Ukraine is in urgent need of nationwide high-speed Internet at an affordable cost. This does not exist in Ukraine at this time. Availability of affordable, modern day Internet access is crucial to any nation’s economic development. This is by now a truism and does not need much elaboration. It is enough to understand that nothing whatsoever can happen in terms of social, economic, civic, and political development without communication. To the extent that communication is limited or completely absent, development is equally limited. If demonstration of this is needed, each reader is invited to do the following. For the next week, do not speak, do not write, do not read, do not listen to or access any form of communication in any way. With those restrictions, it might still be possible to survive for a week. Extend the same restrictions indefinitely, and basic survival will be at risk. It is almost impossible to imagine life without communications of any kind.

In most of Ukraine, citizens have about the same degree of connection to the modern world. Information is usually one-way, receive only, by way of television, radio, and newspapers.

The needs for drastically improved communication infrastructure in Ukraine are manifold. We see a democratic political movement in its infancy that will have difficulty in advancing without the same basic and affordable communication infrastructure available in each and every democratic nation in the world. Ukraine does not have this.

We see a nation staggering under the crushing burden of widespread poverty, the extent of which no one is sure but which most people assessing the situation realistically is at least twenty five percent of the population. We understand that communication – particularly high-speed Internet communication at a cost that is affordable to half the population and all businesses – is essential for economic growth and development so that poverty can be reduced.

We see a staggering array of social problems arising directly from poverty, including but not limited to tens of thousands of children in orphanages or other state care; crime; disrespect for civil government because government cannot be felt or seen as civil for anyone left to suffer in poverty; young people prostituting themselves on the street; drug abuse to alleviate the aches and pains of the suffering that arises from poverty and misery; HIV/AIDS spreading like a plague amidst prostitution, unprotected sex, and drug abuse; more children being born into this mix and ending up in state care at further cost to the state; criminals coming from poverty backgrounds, ending up as bandits, returning to communities after prison, with few options except further criminal activity. These are all part and parcel of the vicious negative cycle of poverty, and this threatens to destroy Ukraine, if Ukraine is defined in terms of people rather than mere geographic boundaries. Overall, population is steadily declining; families have not sufficient confidence in tomorrow to reproduce more than 1.2 children on average per couple.

At the very same time, there are excellent minds and people all over the country struggling to alleviate these problems. The communication infrastructure that can most effectively and quickly facilitate these efforts does not exist. Nor are there any serious plans for it. Draconian barriers stand in the way of progress. In Ukraine, people can be fined or jailed for operating simple wi-fi devices, which are common and unlicenced in all democracies and developed nations. In Ukraine, a license to operate a simple wi-fi device is required. Licenses are costly and almost impossible to get through a central-controlled Ministry. These devices hold the promise of rapid, community-wide high-speed Internet deployment from a single point of access, the cost of which can be shared equally among each user.

The point here is to illustrate what is – and more importantly what is not – going on in Ukraine to remove a massive information deficiency and bottleneck. It is possible, and financially feasible, to provide high-speed Internet for an investment of $100 million per 125,000 subscribers at $30 per month per subscriber. This can be done without traffic limit, which is the main price barrier in the few existing high-speed services that now exist. Three gigabytes per month, common usage in the US and Europe, usually costs around $150 per month in Ukraine (in the few locations where it is available at all) compared to $50 or less in Europe, the US, and east Asia. This is far beyond affordable for most Ukrainians and, indeed, for most users in other regions of the world where per capita income is much higher. The price target in Ukraine is $30 per month with unlimited traffic, and there is nothing near that cost in most of Ukraine at this time.

In that this service is desperately needed and is practically non-existent in Ukraine, market economics dictate that it is only a matter of time until the required price target is first understood, and then hit. However, market manipulation exists to delay that outcome as long as possible.

Investment of $100 million will service 125,000 users and produce a net profit of at least $20 million per year. One billion dollars investment will service 1.25 million users and return $200 million per year.

Inevitably, a significant amount of money and profit will be generated by those who get to market first at the $30 per month price target. This can be done.

In that case, there is no reason why a business enterprise cannot be set up to fulfill this critical market need – and steer profits in full to support equally critical social needs such as the transition phase of childcare reform, and providing eternal funding for other social benefits.

In terms of social enterprise, this component can be characterized as “combined: complex model”, combining fundamental models: marketing intermediary, service subsidization, and organizational support.

Next: Part Two – Center for Social Enterprise