Give Philanthropy the Market Test

I’m always mystified by philanthropic foundations and how fruitlessly they disperse their capitalism-provided funds. Bloomberg Philanthropies spends a chunk of its $8 billion on “Sustainable Cities.” The new $10 billion Bezos Earth Fund is backing climate activists. The $12 billion Ford Foundation insists, “To address the climate crisis, we must address inequality.”

Huh? Way more than philanthropy, free-market capitalism gets people out of poverty, raises living standards and cures the world’s ills. Of the four things you can do with your money—spend it, pay taxes, give it away or invest it—investing is the only one that increases productivity, the scaffolding of capitalism and societal wealth.

So my eyebrows rose when I was offered a chance to meet Raj Shah, president of the $4 billion Rockefeller Foundation. Maybe I’d be able to gather some squishy grant-making examples to make fun of. Boy was I wrong.

Perhaps the Rockefeller difference traces in part to the foundation’s founder. John D. Rockefeller was an interesting guy, much maligned despite bringing light and heat to the masses (and saving whales). On top of his heroic business efforts, he understood where philanthropy could be useful.

A favorite book of mine, Ron Chernow’s 1998 “Titan,” describes how Rockefeller made his money, then gave it away. He looked for big projects only he could fund, such as eradicating hookworm—a parasite that struck people who walked barefoot, predominantly Southern blacks. Rockefeller funded tests for thousands of rural citizens and provided shoes. It worked. One branch of the Bill and Melinda Gates Foundation uses a similar philosophy to fight malaria and HIV.

Mr. Shah told me about the Rockefeller Foundation’s recent deal to bring reliable power to millions of people in India.

World-wide, 840 million people live without access to electricity. Hundreds of millions more get only a few hours a day of expensive government-monopoly-provided current. Digital bits drive the First World, while the Third World still needs electricity.

Mr. Shah had a previous job funding power in emerging markets, so he had Rockefeller team up with India’s Tata Power in 2019, launching a $1 billion deal to build 10,000 minigrids. With solar panels and battery backup, Mr. Shah explains, the project can deliver containers to remote parts of India and provide 24/7 electricity at a competitive price.

Wait, “price”? This is philanthropy; surely they give the electricity away. Nope. And that’s what makes this effort interesting. By providing smart meters, they create a market for electricity. Then voilà, all sorts of commerce is erupting. Someone buys a few sewing machines and starts a clothing company. Someone digs a well and provides irrigation to farms—all using juice from the grid, something we take for granted.

The Rockefeller Foundation and Tata Power hope to make electricity available to 25 million people. The 30-kilowatt-hour grids cost $60,000, a figure that drops as lithium-ion batteries get more efficient. They estimate that three-quarters of power will go to small businesses. Electricity prices have dropped from 80 cents to 23 cents, and may soon hit 12 to 15 cents—less than in California!

Rockefeller and its local affiliate, Smart Power India, have already enabled 250 mini-grids so far supporting 300,000 people and almost 10,000 enterprises. In the past three years energy consumption has doubled, and revenue has increased by one-third for shops and more than 50% for commercial enterprises. That includes carpentry, wheat grinding, honey processing, mustard-oil production and water purification—much of which was unavailable before Rockefeller got involved. That’s productivity.

For the Rockefeller and Tata Power deal, 30% of the proposed funding is equity, split 80/20 between Tata and Rockefeller. The rest is debt. I learned a new term, as Mr. Shah calls his contribution “concessional capital”: No return-driven investor in his right mind would provide it, based on the risks of currency, rule of law and execution. Rockefeller intends to reap a small return or break even. That allows Tata to seek a 14% return on investment, which helps it get better debt financing—the road to scale.

A foundation seeding a project, then selling its output: It almost feels like, dare I say, capitalism! An abstract calculation might suggest $200 billion in grants could electrify the whole world. Sadly, that squishy stuff crowds out real investment. Instead, like venture capitalists, Rockefeller is to fund a sustainable business that will eventually build out all those grids. Africa is next, where a lack of electricity helps keep 400 million in poverty.

It’s too soon to know how far this could scale, because governments often get in the way. But it could popularize a new model for philanthropy—perhaps a fork in the road for a stodgy sector. Mr. Shah calls it “unlocking a solution for poverty.” Put up risk capital to identify a big problem, find a low-cost solution, and try a new business model to execute it. It could work for food distribution, water, internet access and maybe even the trendy climate stuff.

We knew capitalism and productivity fund philanthropy. Now philanthropy is mimicking capitalism! I didn’t see that coming.

This article was first published in The Wall Street Journal