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NGOs in inclusive business: Contradiction or a complementarity?

By Dr. Aline Menden and Christian Pirzer

You are probably aware of aid projects run by NGOs to fight HIV Aids in Sub-Saharan Africa or combat yet another hunger crisis. But are you aware NGOs are also pursuing business approaches to achieve development objectives?

Why should NGOs engage in (inclusive) business?

Many still think that traditional NGO work and business approaches are a contradiction. Wouldn’t business activities deviate attention from the important aid programs that NGOs have so carefully developed over many years and decades?

Those who think they are complementary approaches may have a simple answer: Donor money is decreasing, and there is a need to focus on more sustainable and efficient usage of resources.

But isn’t there more to it? Is it possible that NGOs have a role to play in inclusive business because they can offer something that traditional players cannot? A real value added that could help the sector to increase innovation and scale – and ultimately achieve greater impact for the poor?

…because they have unique strengths and assets!

Indeed, NGOs have strong local networks and deep technical knowledge on, for example, local value chains. They have established relationships to various players globally, and on the ground. And most importantly, through their work, they have gained the trust of the ultimate target group of all inclusive business efforts: the local people.

The quest for the right role in the inclusive business landscape

Nevertheless, many international NGOs are still struggling to work out how they can best leverage these assets and find their role in the inclusive business landscape. We see three major roles that NGOs play currently:

Partnering with companies to establish or support inclusive business models:

Partnering with a company, either with a MNC (multi-national corporation) or a SME (small and medium sized enterprise), is probably the most common way for NGOs to engage in inclusive business. Such partnerships have nothing to do with philanthropy or donations. When companies integrate smallholder farmers into their value chains, like Mondelez in Ghana, they often need the strong local footprint of NGOs, as Katharina Jeschke explains in her blogpost. In their Weconomy program, World Vision, even brings local communities and companies together to jointly develop inclusive business models.

A recent trend that we observe is that NGOs and companies engage in larger consortia with various partners to be able to address the systemic challenges that are typical for low-income contexts. A good example is the GAIN Nordic Partnership, a business model that brings fortified yoghurt to low-income consumers in Ethiopia, addressing malnutrition amongst children. In the multi-stakeholder partnership, Arla Food Ingredients provides the whey permeate and technology, DanChurchAid (DCA) is responsible for connecting the smallholder farmers and improving milk quality, and the Danish BoP Learning Lab develops the business model.

 
Setting up inclusive businesses of their own:
 

By setting up inclusive businesses (IBs), NGOs aim to create socially driven business entities that work independently from the NGO and its usual grant-based programming. Take the example of Living Blue: The origins, as Mishael Aziz Ahmad explains in his blogpost, were an NGO program aimed at empowering villagers to become leaders that would help their communities meet their basic needs. Villagers requested more income-generating activities, which resulted in the creation of Living Blue. The social enterprise, which is partly owned by local artisans and CARE Enterprise Inc., sells quality hand-made products to high end markets in Europe and the US.

PSI in India found a unique approach for its NGO arm to work with its newly established social enterprise, PSI-India Private Limited (LLC) for mutual benefit. Aiming to create better access to health services, the NGO focuses on systems change, while the social enterprises focuses on marketing, sales and distribution of health products.

Both examples above demonstrate that social enterprises can be a more sustainable way to create positive social outcome than grant-funding alone. However, managing expectations is key: IBs do not realize high returns on investment that can cross-subsidize other NGO activities – an assumption that is still common amongst many NGOs.

Acting as impact investors:

Impact investing has become a “hot topic” for many NGOs. A study published by various NGOs on the topic shows that 60% of international NGOs are actively engaged or piloting approaches in impact investing with NGO-managed or founded funds of $545.1 million in assets. Roles of NGOs in impact investing can range from investing own funds (e.g., ICCO Investment) to managing funds (e.g., HIVOS), to helping social enterprises become investment ready and matchmaking them with investors. The latter approach is explained in detail by Deirdre O’Sullivan-Winks, who describes the activities of ACRE in her blogpost

Besides a few successful examples, the question still is: Do NGOs have the right knowledge, people and set-up to engage in impact investing? If set up right, the activities of NGOs and investment entities can complement and accelerate each other – as Jaap Jan Verboom shows for the case of ICCO’s Agribusiness Booster. Nevertheless, Mark Joenje, CEO of ICCO Investments, argues in his blogpost that NGOs may do better to focus on improving what they are good at, e.g., providing grants (but with a business mindset) or offering BDS (business development services) to local players. Also Oxfam, in a critical paper, has called out the unrealistic expectations of financial returns in the sector in general. Engaging in such investments with false expectations may thus move NGOs even further away from their mission.

And, what if NGOs still want to play a role in impact investing? Joenje argues that they could position themselves as partners to investors, offering their knowledge, networks and local footprint – or co-invest in existing funds of NGOs, like ICCO’s Capital 4 Development Fund, benefiting from hard-earned learnings.

New roles require new strategies and structures

All roles described above are fairly new territory for NGOs, and many have hard-earned experiences from first failed attempts or various project-iterations. But also those who are already experienced players in inclusive business continue to struggle with a number of questions:

  • Strategy: should we focus on one of these roles, or try out all three approaches?
  • Structures: how can we embed these activities in to existing structures? Or, do inclusive business activities of NGOs require the creation of separate entities, that provide a safe space for innovation and learning?
  • Internal buy-in and managing expectations: how do we convince our top management or peers of the value of engaging in business approaches? And how do we ensure they do not have unrealistic expectations regarding financial returns?
  • People: do we have the right people to engage in business activities, that require a strong business mindset in combination with development expertise?

At the beginning of 2017, Endeva started to informally discuss inclusive business approaches with leading international NGOs in our partner network. The discussions made us realize that all had similar questions, but very complementary experiences. Together with BoP Inc. and IBAN, we thus brought them together in a peer-learning workshop in early September 2017 to exchange experiences and learnings in a confidential atmosphere. The result was an inspiring but realistic discussion on what role NGOs can play in inclusive business, and the need and benefits of supporting each other on that learning journey. Many of the NGOs that participated share their lessons in the blogposts of this series  !

Join our learning journey!

With co-funding from GIZ’s IBAN, and the support of the participating NGOs, we will publish a report in 2018 that will capture the learnings of NGOs shared in the peer-learning workshop and beyond. The publication aims to provide insights on the different roles of NGOs in inclusive business, and how they address challenges they face on an organizational and project level.

The report still needs additional support to come to fruition! If you have relevant insights to share, or would like to financially support this paper, do get in touch and join our learning journey!

 

About the authors: Dr. Aline Menden is a Founder and Managing Director of Endeva. Christian Pirzer is a consultant at Endeva.

 

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This blog is a part of the October 2017 series on NGOs in inclusive business, in partnership with endeva.

Read the full series for insights on what kind of roles NGOs have carved out for themselves, either as partners of companies, as intermediaries, investors, or even as entrepreneurs and their lessons learnt in doing so.

Aline Menden
Aline Menden
Endeva is an independent research and consulting institute that fosters enterprise solutions for development. In our projects, we build, share and apply knowledge to develop, implement and grow inclusive business models.

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