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Progress but time to get more sophisticated in the detail

Progress in the inclusive business space

More companies, investors, and governments are interested in developing or supporting inclusive business (IB) models for the BoP, and the impact investing industry is growing. Increasingly, the need for private sector solutions to poverty reduction and more inclusive societies has been recognised.

There is a better understanding that IB models, activities and initiatives have to be made and cannot be found. Therefore, business development support for finding deals is getting more important, while funding needs of good deals can easily be met.

But considerable gaps remain

Focus on the bottom 40%

The perception on what is IB and what not is still very unclear. Many investments that claim to be IB or Shared Value do not provide solutions to the relevant problems of the poor and low-income people. There is a need for more clarity among investors, governments and development partners.

The discussion on inclusion broadens the development focus towards low-income people and away from very poor people.   A clear focus on the bottom 40% income groups and on relevant solutions would help the IB discussions.  The shared value discussion risks  emphasising more the benefits for the bottom line of the company rather than relevant solutions for the poor and low income women and men. 

To focus on ‘who gains’, less superficial ex-ante poverty impact assessments are needed. For example, while most solar solutions reach poor urban areas, they do not reach the bottom 40% in a village, and companies could do better in targeting.

Investment and innovation to reduce risks

People assessing the investment risks of IB need more adequate understanding on how innovative IB companies address the risk of the poor as part of their business strategy. That needs to be reflected not only in the pricing of the investment but especially in its structuring (e.g. longer maturity payments).

Some banks see IB as new investment opportunity – for example,  see the recently established Credit Suisse Southeast Asia Impact Fund.  But they might need catalytic investments from development banks. However, while IFC is still active in the IB sphere and some bilateral development banks (such as AfD and FMO) just entered the IB sphere, others (such as ADB and IADB) have somehow move away from IB (in their push for doing faster and easier business through infrastructure and other investments).

Companies with IB models are often family owned business, that have different ways of doing business and reporting on it. Development partners’  support programs – due to their own reporting requirements –  sometimes overburden such enterprises with demands on how to structure the business (especially on the commercial side).

Looking ahead, five trends and one unknown

  • The social enterprise discussion and the inclusive business discussions will come closer.
  • Governments are increasingly interested in including IB in their investment priority plans, and develop specific programs for IB and social enterprises either under poverty reduction (e.g. China-Shanxi or Pakistan) or under industry promotion (Philippines, Thailand).
  • Transparent accreditation is the only way to distinguish real IB models from others. Also, without accreditation, government cannot build up support policies for IB, as it is difficult for the government to explain to the public why it gives support to specific private sector companies and not to others. For accreditation a clear impact matrix is needed that goes much beyond reach (number of beneficiaries) towards depth (e.g. how much more do farmers in supplier models earn compared to other companies) and systemic change on poverty in the sector and the geographic area. 
  • Business associations are increasingly interested in the IB discussion and wish to provide more information to their members.
  • The impact investing industry will further grow and also include more commercial banks.

It is not clear, whether development partners really are enhancing their support to IB. In the name of private sector development, traditional approaches are still prevailing, and IB is not yet much integrated in industry policies, SME development, and enabling environment programs. A stronger push from key actors such as development banks is needed.

This blog post is part of the December 2017 edition of the ‘Monthly Theme’ that reflects recent and future developments in inclusive business.

What progress have we made? Where are the missing links? And what needs to change in 2018 in order to increase momentum on inclusive business? Read the full series to see what thought leaders and practitioners think about these questions.

 

Armin BAUER
Armin BAUER
Dr. Armin Bauer is development economist and was the former coordinator of ADB's Inclusive Business initiative.

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