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A Market Brief
September 2012
Developing the Business Case for Investing in Inclusive Business in the Mekong:
A Market Brief
Written by W. Robert de Jongh, the Red Mantra Group. All rights reserved. Published 2012. Printed in the Philippines.
Publication Stock No. RPTXXXXXX Cataloging-In-Publication Data Asian Development Bank and SNV. Developing the Business Case for Investing in Inclusive Business in the Mekong Mandaluyong City, Philippines: Asian Development Bank, 2012. 1. Inclusive Business. 2. Mekong. I. Asian Development Bank.
The views expressed in this publication are those of the authors and do not necessarily reect the views and policies of the Asian Development Bank (ADB), its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accept no responsibility for any consequence of their use. By making any designation of our reference to a particular territory or geographic area, or by using the term country in this document, ADB does not intend to make any judgements as to the legal or other status of any territory or area. ADB encourages printing or copying exclusively for personal and noncommercial use with proper acknowledgement of ADB and the authors. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB. Note: In this publication, $ refers to US dollars. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel + 63 2 632 4444 Fax + 63 2 636 4444 www.adb.org
Contents
Executive Summary I. Background The ADBs Inclusive Business Initiative Purpose of and Approach to the Market Brief The Mekong: A Snapshot II. Inclusive Business and Social Enterprise Inclusive Business and Social Enterprise Dened Inclusive Business and Social Enterprise in the Mekong Vietnam
The Context The Opportunity Sector Opportunities for Inclusive Business
6 10 11 12 13 16 16 19 21
21 21 22
Lao PDR
The Context The Opportunity Sector Opportunities for Inclusive Business
27
27 27 28
Cambodia
The Context The Opportunity Sector Opportunities for Inclusive Business
31
31 31 32
Thailand
The Context The Opportunity Sector Opportunities for Inclusive Business
34
34 34 35
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Myanmar
The Context The Opportunity Sector Opportunities for Inclusive Business
36
36 36 37
III. Inclusive Business Opportunities Overview of the Inclusive Business Opportunities 1. Inclusive Business Case Study - Green Energy Biomass, Vietnam
38 38 39
2. Inclusive Business Case Study - Huong Hoa Tapioca Starch Factory (SEPON), Vietnam 40 3. Inclusive Business Case Study - TPC, Cambodia 4. Inclusive Business Case Study: Duc Viet Foods JSC, Vietnam 5. Inclusive Business Case Study: ANTESCO JSC, Vietnam 6. Inclusive Business Case Study - Acleda Bank Lao Ltd., Lao PDR 7. Inclusive Business Case Study - IPR Ltd, Cambodia 8. Inclusive Business Case Study - Urmatt Ltd., Thailand 9. Inclusive Business Case Study - Nestl, Vietnam 10. Inclusive Business Case Study - First Finance PLC, Cambodia 11. Inclusive Business Case Study - Sunlabob Renewable Energy Ltd, Lao PDR 12. Inclusive Business Case Study: Hydrologic Social Enterprise, Cambodia 13. Inclusive Business Case Study - Shan Maw Myae Co, Ld, Myanmar 14. Inclusive Business Case Study - Proximity Designs, Myanmar 15. Inclusive Business Case Study, WING, Cambodia IV. Conclusions and Recommendations Appendices 41 42 43 44 45 46 47 48 49 50 51 52 53 54 58
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Executive Summary
Executive Summary
One of the key leadership challenges of our time is to nd new ways to harness the innovation, technology, networks and problem-solving skills of the private sector, in partnership with others, to support international development goals. And to do so in a manner that makes sound business sense, and does not replace or undermine the role of government. Business leaders have a growing interest, both in terms of risk management and harnessing new opportunities, to get engaged. Partnering for Success: Business perspectives on multi-stakeholder partnerships The World Economic Forum, the International Business Leaders Forum, and the CSR Initiative, Kennedy School of Government, Harvard, January 2005.
As part of its long-term Strategy 2020, the Asian Development Bank (ADB) has dened inclusive growth as one of its three main strategic pillars, aiming to broaden economic and social opportunities for lower-income and excluded groups in part through private sector development opportunities. Beyond large-scale infrastructure investments in the region, the ADB is also looking to tap into the innovation and entrepreneurial potential of social enterprise and inclusive business -- twin strategies that seek to create social value through scalable market-based approaches that generate market or above market returns.
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Executive Summary
This market brief was commissioned to determine the potential for inclusive business nancing and development in the Mekong region (Vietnam, Laos, Cambodia, Thailand and Myanmar). In builds on the results of two previous studies: a market scoping study of inclusive business in Vietnam completed in 2010 and updated in 2012, and a due diligence report for the Mekong region completed in 2011. The purpose was to answer three interrelated questions:
What is the relevance, market opportunity and feasibility for the development of an ADBsponsored inclusive business private equity fund in the Mekong? What are key risks to consider when developing an investment strategy? What inclusive business opportunities exist that could form the basis for an investment pipeline?
Following several on-the-ground assessments and due diligence of the Mekong region including interviews with fund managers, social entrepreneurs, company executives, donor agencies and other relevant stakeholders, and secondary research and analysis, the study concluded that despite numerous, but manageable risks, there is a unique opportunity for the ADB to sponsor the establishment of a Mekong Inclusive Business Private Equity Fund (Mekong Fund) that could a) meet underserved nancial needs in the market; and, b) contribute to accelerating the development of an emerging segment of wellmanaged and viable businesses focused on addressing critical market failures and systemic issues related to poverty, productivity, and sustainable livelihoods. In particular, the feasibility for the fund is due to the following reasons:
The regions dynamic growth coupled with substantial poverty and market failures creates opportunities for inclusive businesses that leverage countriesproductive base and entrepreneurial predisposition; There is signicant but unsatised demand for innovative nancial instruments that target inclusive business1 models in underserved markets; There is a favorable and nascent enabling policy environment that can contribute to accelerating inclusive business development There is a unique opportunity for the ADB to crowd-in other investors and catalyze the development of a new asset class that can enable market-led solutions to some of the regions most systemic poverty challenges; There are notable examples of viable businesses across the region that can be impactful, scalable, can generate above market nancial returns and form the basis for an investment pipeline; The Greater Mekong Subregional (GMS) initiative, initially sponsored by the ADB and which helps implement high priority projects ranging from transport to energy, agriculture to private sector investment, can be leveraged and optimized to support inclusive business development in the region due to some of its contributions to risk mitigation;
Due to recent political reforms and an investment gold rush, opportunities in other parts of the Mekong.
drive a renewed culture of social innovation and corporate responsibility that could strengthen
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Executive Summary
A USD 80-100 million ADB-sponsored private equity fund focused on the Mekong region is feasible and should target USD 500K to USD 10 million dollar investments in equity and subordinated debt; Due to variable country risks and management capacity issues, the funds investment strategy should be lightly sector-agnostic (agribusiness, renewable energy, nancial services, consumer products focused on basic services) but geographically weighted (hedging risk by focusing on the larger countries in the region);
Despite an initial subsidized movement promoting social enterprise in the region, there is a growing segment of mature social enterprises requiring additional investment, particularly in equity, while there remains an increasing need of larger enterprises to share risk and move beyond a pilot phase to grow and scale their inclusive businesses with additional investment;
There is both company and fund manager interest in the ADB taking a leadership role in promoting inclusive business in the region and unlocking the potential for impact investment to target this emerging market segment; There are important risks in these markets ranging from opaque ownership structures to poor management and governance structures, volatile macroeconomic fundamentals and challenging operating environments. Notwithstanding, these risks can be adequately managed through an appropriate investment strategy and selection of the right fund manager to manage the fund;
Given management and operational limitations in the region, a USD 5 million regional technical assistance facility is proposed to provide pre- and post-investment management support to mitigate pre-investment and execution risks.
Considering the underlying rationale and main conclusions, this market brief recommends that the ADB:
Establish the Mekong Fund and accompanying TA facility in the near term to take full advantage of the increased awareness and potential for leverage generated through its fact nding, due diligence and fundraising eorts carried out across the region; Rene its investment strategy and fund design to comply with evolving standards, return expectations and risk management criteria. anticipated nancial returns; These renements should include a reassessment of geographic scope and the private equity/debt mix in order to better dene a clear route to the
Brand inclusive business as a means to accelerate the impact of second stage social enterprise opportunities as well as a means for larger companies to share risk when seeking to leverage the BoP as an integral part of their value proposition and business strategy; Outline the parameters, scope and functionality for the Technical Assistance Facility in order to ensure its relevance and strategic contribution to the objectives of the Mekong Fund, particularly in the context of risk mitigation and investment readiness of potential opportunities across the region;
Finalize the impact assessment parameters and tools to ensure the fund manager and investees are clear as to the expected standards, compliance and reporting mechanisms; Optimize complementarity and alignment with the GMS, public policy incentives and/or other donor/co-investor interests where relevant to maximize opportunities for synergy, risk sharing, and impact at scale.
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Executive Summary
Given the high rate of growth, increasing diversication, intra-regional trade, and improving infrastructure, the opportunities for inclusion across the economies of the Mekong as a strategy to mitigate the specter of inequality and social exclusion are notable. Establishing that inclusive business is not a byproduct of business as usual, but rather a core business strategy that can actively and measurably contribute to inclusive growth through enabling the active and qualied participation of the low-income segment in the creation of shared value, can make a meaningful contribution to addressing some of the regions most dicult social challenges. A Mekong Fund anchored by the Asian Development Bank can provide reasonable condence that these types of business models not only require careful consideration and attention, but also that they can supplement other large-scale development strategies being implemented in the region, critical for the regions sustainable future.
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I. Background
I. Background
For the past two or three decades, rising inequalityinequality of incomes, of economic outcomes and of economic opportunitieshas taken a back seat to the goal of boosting overall growth. But growing discontent with the fallout of the global nancial crisis has put inequality back on top of the policy agenda. While the symptoms may be dierent, tackling inequality is no less an issue in Asia. Indeed, research shows that inequality can be counterproductive to sustaining longer-term growth. So, in increasingly turbulent global economic times, this gives added importance to promoting sharedor inclusivegrowth in Asia that is more likely to be sustained.
During the past twenty years, economic globalization, innovations in technology, and political liberalization have led to a remarkable transfer of assets to the private sector, bringing business to the fore of the international development agenda. Even though small and medium enterprise (SMEs) are considered to be the engine of growth and job creation in most countries, larger domestic enterprises and multi-national corporations have played an increasingly important role in economic development -- particularly given their economic footprint and inuence across their supply chains. At the same time, social enterprises nurtured over the past decade through a mix of angel investment and patient capital are reaching a tipping point. And, having demonstrated the proof of concept of their mission-driven
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I. Background
business model, some of these businesses require additional capital to scale. Under the right conditions and given the right business strategy, the private sector generally and these kinds of companies specically can oer immense potential to catalyze innovation, transfer technology, spur competitiveness, contribute to sustainable wealth creation, increase access to basic needs, and improve the livelihoods of million of people. This Mekong market brief (which includes Cambodia, Lao PDR, Myanmar, Thailand and Vietnam) is a supplement to the rst inclusive business investment fund market scoping study which focused exclusively on Vietnam. Much like the Vietnam report, this brief recognizes that as the Mekong region further accelerates its ambitious pace to integrate and consolidate economic and social performance, it not only has to sustain record growth, increased trade, foreign direct investment, and competitiveness, but also improve equity, equality of opportunity, and protection in market and employment transitions. While the Mekongs rapidly expanding private sector, nascent private equity markets, and policy reforms, are projected to be the driver of 7.2% economic growth in 2012, the BoP still comprises more that 43% of the population in the region.2 As such, unless both the pace and pattern of growth are addressed through specic policy and market interventions, there is a potential risk of increased inequity and unsustainable growth in the medium to long term. Providing medium and long-term capital, including risk capital, at competitive rates that complement and build upon the Mekong region s existing, but nascent growth-centered private equity market could be a useful incentive in raising awareness about the market opportunity for inclusive business ventures while establishing a new asset class for investments that could catalyze new investments with competitive returns into this underserved sector. This form of liquidity could help unlock the potential of entrepreneurs within the private sector to take risks pursuing innovative business models that contribute to record growth while creating shared value.
Based on population of people living on less that $2/day as per the World Bank, 2011. World Resources Institute and International Finance Corporation. (2007). The Next 4 Billion: Market Size and Business Strategy at
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I. Background
sector development opportunities that through their business models accelerate economic growth while integrating the low-income segment into their value chains. Companies improve their bottom line while the low-income segment can benet through new income and employment opportunities and/or access to good and services that meaningfully contributes to their livelihoods. Since 2007, the ADB has taken proactive steps to further explore and develop the inclusive business concept as an important element of its private sector development strategy - leveraging lessons learned in particular from the IFC and the Inter-American Development Bank. (IDB). For example, in 2007, IDB President Luis Alberto Moreno created the Opportunities for the Majority (OMJ) to promote and nance market-based, sustainable business models that engage private sector companies, local governments and communities in the development and delivery of quality products and services for the BoP in Latin America. Through loans, guarantees, and grants, OMJ has sought to increase productivity, bring the poor into the formal economy, create jobs, address market failures that raise costs for those least able to aord them, and bring quality goods and services to the 360 million people in Latin America who are at the BoP. OMJ has built a portfolio of 35 investment projects for $220 million since it began operations in 2008. Building in part on this experience, the ADB developed the regional technical assistance project Promoting Inclusive Growth through Business Development at the Base of the Pyramid that aims to assess the feasibility of developing regional and/or country-based impact investment facilities/ private equity funds for BoP ventures in ten Asian countries (Bangladesh, India/Sri Lanka, Indonesia, Pakistan, the Philippines, and Vietnam/(Mekong which includes Laos, Cambodia and Thailand) while increasing awareness about the market opportunity for the same. The expected impact of the overall ADB initiative is to create a new class of private equity funds that can invest in innovative, replicable and scalable inclusive businesses that can in turn contribute to promoting inclusive growth in the region.4 In this regard, one of the key considerations that drives the analysis of this market brief is what are the critical success factors for inclusive business development in an emerging market region like the Mekong that would provide sucient deal ow and competitive social and nancial returns for an inclusive business private equity fund like the one being considered by the ADB. Recognizing that the private sector is the major contributor to economic growth and employment creation, promoting a more dynamic and vibrant private sector consequently has a central place in renewed eorts to reduce poverty. Notably, expanding market access to all private sector actors and improving how markets function can lead to more jobs, better returns on goods sold, greater aordability of essential goods and services, and reduced exposure to risk. When integrating the poor in this approach, the outcomes can signicantly inuence the pace and pattern of economic growth.
See Promoting Inclusive Growth through Business Development at the Base of the Pyramid (Project Note for the
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I. Background
conclude that there is an opportunity for the Asian Development Bank to sponsor the establishment of a fund (an IB Fund) which both contributes to poverty alleviation by addressing production, consumption and employment-related challenges that aect the BoP, and helps to build the base of wellmanaged, protable businesses in the target countries.
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ment of a Technical Assistance Facility to help nurture a pipeline of viable inclusive businesses, address pre-investment risks, and support the development, replicability and scalability of inclusive businesses once investments have been made. The approach used for the market brief included the following four elements: Desktop Analysis: Review of existing literature about private sector development, inclusive business, and impact investing in the Mekong and in Southeast Asia and analysis of 40 to 50 inclusive business and social enterprise case studies relevant to the Mekong region in particular; Market Research: Rapid assessment of the political landscape, economic policy and performance, operating environment, sector opportunities and prospects for an IB fund in the ve countries of the Mekong region (Cambodia, Lao PDR, Myanmar, Thailand and Vietnam); Company Interviews: Face-to-face interviews with 15 to 20 companies currently engaging in or interested in engaging in inclusive business strategies as part of their core business model in the countries of the Mekong (case studies are summarized in section III of this report. Due to the condentiality of some of the company information, all company names have been excluded from this report. The Asian Development Bank reserves the right to disclose additional information from these interviews on a case-by-case basis provided company consent is previously secured; Fund Manager Interviews: Engagement with fund managers and donors active in the Mekong region to gain insights from the current pipeline of investments and recommendations of portfolio companies that could be included in this report. Due to the limited scope and time for this assignment, the ndings and analysis considered herein are not a substitute for more extensive market research and due diligence that should be conducted if and when investment decisions are to be taken. Notwithstanding, this report provides additional insights into what a portfolio of potential investments might look like consistent with the ADBs planned inclusive business Mekong fund selection criteria and social and nancial return expectations.
The country analyses included in this report summarizes and complements the ndings included in the Due Diligence Report on
Cambodia, Vietnam, Thailand and Laos for the ADB Inclusive Business Fund undertaken by Noah Beckwith, Asian Development Bank, December 2011.
6
Beckwith, Noah. Due Diligence Report on Cambodia, Vietnam, Thailand and Laos for the ADB Inclusive Business Fund. Asian Devel-
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I. Background
sication of these economies to include industry, manufacturing and services, focusing not only on the cheap supply of labor but also investing in developing value added products and services (see Table 1 below7 ). It also led to more regional integration, foreign direct investment (which was at USD 209 billion in 2010 or 48% of GDP) and intra-regional trade that has helped the countries in the Mekong improve their ability to withstand global economic shocks such as the recent Great Recession.
Source: The World Bank Trade Indicators 2009/10 and World Development Indicators, April 2011.
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I. Background
As noted in Table 28 , this economic transformation has contributed to and accelerated human development outcomes across the region. Infant mortality rates have dropped, literacy has improved, GDP per capita has almost doubled in most countries in the region, while poverty rates have fallen dramatically. Yes despite this impressive track record of growth in the Mekong, progress remains fragile. On the one hand, while extreme poverty rates (at USD 1.25/day) have fallen to below 35% in most parts of the region, the percentage of people living in poverty or who are deemed near poor continues to exceed 60% in most countries. On the other hand, critical inputs such as a stable and sustainable source of energy, nancial services for the unbanked and entrepreneurial small and medium size enterprises, reliable infrastructure and enabling environment for business development, are still either sub-standard or lacking altogether. Notwithstanding, the Mekong region contains numerous enabling conditions for inclusive business development including an increasingly inclusive public policy environment, growing foreign direct investment, market diversication including international, regional and domestic market segmentation, increasing awareness of impact investment and social entrepreneurship accompanied by an emerging private equity market that is contributing more and more to private sector development eorts. the Mekong. It is in part with this backdrop that this paper analyzes the potential for and current practice of inclusive business in
Source: The World Bank Trade Indicators 2009/10 and World Development Indicators, April 2011.
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the social enterprises they often lead recognize that making a prot, creating wealth, or serving the desires of customers may be part of the model, but these are a means to a social end, not the end in itself. Prot is not the gauge of value creation; nor is customer satisfaction; social impact is the gauge.
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Social enterprises often start small, seeking to address root causes rather than symptoms of social and/or environmental problems through systemic change, and begin with modest investment -- a mix between patient (philanthropic) capital and nancial capital (though the latter is often reserved for later stage growth and scalability if and when the social enterprise reaches this stage). According to the results of the Regional Technical Assistance Project: Developing a Regional Social Investment Exchange Initiative: while there are many denitions of social enterprise, this report used the term to refer to an entity that meets the following key criteria:
exists primarily to create specic positive social and environmental impact (vs. ancillary or secondary development, such as a companys corporate social responsibility program); adopts a market orientation; focuses on nancial sustainability.
An SE meeting these criteria may be structured as a for-prot or a not-for-prot. Given the present surge of global interest in SEs, one may think that SE and social entrepreneurship are emerging phenomena. However SEs, primarily in micro-nance, have existed for over three decades. Some SEs have overcome barriers to scale and successfully merged an explicit and intrinsic social mission with commercial viability. Faced with challenges such a sunk costs in establishing their organizations, razor sharp margins in serving marginalized communities and challenging the hegemony of multinational and megacorporations, and operating with a permanent lack of available capital and credit, SEs such as BRAC and Grameen Bank in Bangladesh have successfully scaled to become multi-million-dollar enterprises. SEs may employ market-based solutions to tackle a given social or environmental challenge, but SEs often operate in the intersection of private, public and charitable sectors relying to a greater extent on the concerted eorts of parties in all sectors. Such SEs may take growth capital from commercial investors as well as impact investors, while also attracting donations from traditional philanthropic organizations, receiving support from governments and corporate social responsibility initiatives.
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In contrast to traditional social enterprise, inclusive businesses are dened as businesses that has found protable ways to integrate the low-income segment into their business operations in a way that benets these communities, creates sustainable livelihoods and generates shared value. Within this model, the low-income segment lls one or more of three important roles: consumers: new markets for aordable goods and services; distributors: new distribution networks; and suppliers: new sources of supply/inputs;
They can often be larger, well-established, viable businesses that are a) seeking to accelerate growth by pursuing new market segments and/or distribution channels and/or b) focused on mitigating supply chain, labour and reputational risks or they can be successful social enterprises with a proven business model that are seeking scale. Inclusive businesses maximize these opportunities and address these
Dees, J. Gregory. The Meaning of Social Entrepreneurship Asian Development Bank. Impact Investors in Asia: Characteristics and preferences for investing in social enterprises in Asia and
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risks by integrating the low-income segment into their value chain in such a way that they contribute meaningfully to a companys bottom line by increasing prots and reducing costs on the one hand, and on the other, they provide income and employment opportunities for the low-income segment and/or access to goods and services that improve their livelihoods in a sustainable manner. To the ADB, inclusive businesses tend to have the following characteristics that integrate both denitional and strategic/tactical considerations: 1. 2. 3. 4. IBs are strictly for-prot; IBs must be strictly core business; IBs must include the low-income segment within their business model through one or more of the following ways: as suppliers, as consumers, and as distributors; IBs must generate nancial returns. The level of returns depends on either investment criteria set by an impact investor, company ambition, strategy and business model or a combination of both. 5. Ideally, an inclusive business should generate market returns commensurate with their business model and risk prole; IBs must generate social returns. The scale and scope of the anticipated social returns will also depend on the investment criteria set by an impact investor, company ambition, strategy and business model, or a combination of both. 6. 7. 8. IBs are designed from the start with scale in mind to a) maximize and optimize their route to impact and b) maximize the creation of company value; IBs do not seek trade-os between nancial and social returns. Rather, they continuously seek solutions through which both can be optimized simultaneously; IBs often require blended capital priced for their their level of risk and relevant stage of development. 9. Therefore, dierent forms of capital (patient, debt, equity, and others) are often deployed at dierent stages of an IBs life cycle; IBs actively assess and measure both social and economic performance in a standardized manner; 10. IBs normally evolve from social enterprises seeking to scale their proven (social purpose) business model or mid- to large-sized established companies seeking to create shared value through supply chain, labor-related and/or product innovation. See Figure 1 below. Beyond these standard attributes, the ADB in particular requires IBs to:
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11. Achieve at least a 15% gross nancial return; 12. Measurably and meaningfully impact at least 5,000 people during the investment period;11 13. Optimize their businesses value proposition in such a way that it also addresses a systemic and relevant poverty-related issue in a specic geographic context; 14. Demonstrate a clear route to impact; 15. Identify and manage pre- and post-investment risks. In summary, the ADB aims to target its investment strategy on a specic type of inclusive business -- it is by no means a generic approach to inclusive business development. As such, the ADB has a qualied perspective on selection criteria and focus: one that assures market returns or above and scalable, meaningful and measurable impacts on the livelihoods of the poor.
Total impact is case dependent. The number of beneciaries may vary based on the local context, business model and opportunity. A list of all Schwab Foundation Social Entrepreneurs can be found at
12
www.schwabfound.org/sf/socialantrepreneurs/proles/index.htm
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folio of social and economic returns could prove catalytic in unlocking the potential of a new asset class in the Mekong region -- essential for further spurring the private sector to shape the development agenda for years to come. Each of the country summaries below provides a summary of the context, opportunities and sectorbased opportunities for inclusive business. Furthermore, each summary includes the relevant Bertelsmann Stiftungs Transformation Index (BTI) Country Report Summary which provides qualitative comparative data on democracy, market economy and political management in order to assess the countries transformation status and challenges. From a regional perspective, it is evident that investment opportunities tend to be found in the same sectors across the region (agribusiness, renewable energy, light manufacturing, nancial services, and basic services including water and sanitation, health and education) given the concentration of low-income families in these areas. However, each country does have its own unique features and challenges that do not necessarily aect sector choices, but rather investment strategy and the allocation of capital in a Mekong Fund.
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Vietnam
The Context
Characterized by Goldman Sachs as one of the Next 11 -- Vietnam has been characterized as one of the countries that has a strong potential of becoming, along with the BRICS, one the worlds largest economies in the 21st century. While real GDP per capita grew by over 6.6 percent annually between 1998 and 2010 and lifted over 26 million people out of poverty, 43.4% still live on less than $2 per day and more than 65% on less than $3 per day.13 Despite public sector expenditure, foreign direct investment, and foreign aid, challenges of rising inequity, slowing growth, and fragile economic gains for the low-income segment have increased the interest to explore alternative market-based solutions -- solutions that contribute to long-term economic growth while materially and sustainably improving the livelihoods of the low-income segment. This is especially true It is given that Vietnam dropped 10 places to 75th in the World Economic Forums 2012 Global Competitiveness Report and plunged 41 places in its macroeconomic environment ranking (to 106th). therefore clear that the economic hardships created as a result of the Great Recession of 2009-2010 has accelerated the Vietnamese governments interest in addressing increasing ination, especially in the prices of staple foods and also taught the Vietnamese marketplace some valuable lessons about speculation, valuation, and over-reliance on export markets.
The Opportunity
While the Great Recession of 2009-2010 hit Vietnam particularly hard, causing wild uctuations in the stock market, the bursting of the Vietnamese housing bubble, low business sentiment, and an overly cautious capital market, these factors have ironically contributed to an enabling environment for an IB Private Equity Fund; in particular due to:
An unprecedented focus on company value over short-term prot. Due to the collapse of many businesses during the crisis and increased tolerance of the government to allow companies, especially state-owned enterprises (SOEs) to fail, has demonstrated that underlying company value might well be more important than short-term prot;
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Increased openness to private equity. Due to a historical over-reliance on debt to fuel company growth, Vietnamese companies were not compelled to leverage additional nancial instruments. However, given the stock-exchange fall-out coupled with more stringent commercial lending conditions, companies have increasingly sought to explore other nancing options, including private equity. As such, the Mekong Fund would fulll a current and urgent niche in the Vietnamese capital market;
Reprioritization of supply-chain related SMEs. The government and private sector have realized and are now emphasizing the important contribution of localization and industrialization within target value chains -- particularly as they recognize the need to reduce dependence on the import-content of exports in order to increase domestic growth and employment. Therefore, there is a growing realization and as a result increasing government and private sector investment, in aligning value chain and supply chain activities in such a way as to maximize local value, especially between SMEs and the larger businesses they serve.
Increased transparency regarding valuations. Due to the fact that the boom years of excess liquidity clouded realistic valuations, the post-crisis liquidity gap has forced companies to recalibrate their valuations and restructure in order to become more attractive to potential investors;
Increased number of underfunded transactions. Due to post-crisis indebtedness within the corporate sector, commercial banks are reluctant to lend to all but their largest and most stable clients. This undercapitalized group of companies may provide a unique pipeline of opportunities previously unavailable when the markets were ush with cheaper debt.
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The country analyses included in this report summarizes and complements the ndings included in the Due Diligence Report on
Cambodia, Vietnam, Thailand and Laos for the ADB Inclusive Business Fund undertaken by Noah Beckwith, Asian Development Bank, December 2011.
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Agribusiness.
well-known,15 even though signicant challenges need to be overcome in order for the country to realize the kind of rapid and consistent growth it seeks while trying to increase and leverage the capacity of its rural productive base. Within agribusiness, inclusive business opportunities can have systemic impacts and create value in the following areas:
lenges such as a) weak processing capacity that cause processing to occur in neighboring countries; b) the consistency and quality of supply by strengthening farmer systems and building lasting, and mutually-benecial relationships with farmers and farmer groups in target supply chains; c) value chain dislocations that cause ineective distribution of products to and predatory pricing in target domestic markets in Hanoi and HCMC; d) rudimentary growing techniques that are not mechanized, have inadequate inputs, that leads to low and inconsistent productivity; e) erratic land tenure and distribution that can be subject to random government expropriation for other industrial or infrastructure purposes; e) poor cooperation among farmers due to the fact that top-down collectivism never functioned eectively in Vietnam leaving farmers susceptible to predatory lenders and buyers; and, f) the lack contract enforceability and the need to rely on trust and established relationships. Therefore, inclusive businesses that ensure quality supply through appropriate investments in inputs and technology, establish adequate links in the supply chain based on relationships of trust and shared value, and can leverage local processing capacity and ecient logistics can create enormous value with signicant upside potential in the Vietnamese context. Good examples of this can be found in the SEPON and Nestl case studies later in the report on pages 39 and 46 respectively.
Agro-processing for domestic consumption. The size and growing purchasing power parity of the domestic consumer base has substantially increased demand for processed fruits, vegetables, meat products (as in the case of Duc Viet case study included on page 41 and ANTESCO included on page 42) and most notably sh sauces. As such, while the market has an abundant supply of foreign imports that are often ve to ten times more expensive than their local counterparts, domestic brands must improve their quality, marketing, packaging, and branding in order to maximize this growing opportunity. This includes investing in compliance and traceability systems to improve food safety and also identifying higher-end niche opportunities for the growing and more discerning Vietnamese middle class, including in fast moving consumer goods. Furthermore, as supply chains consolidate, there are increasingly opportunities for exit for IB Fund as larger companies seek to consolidate in order to increase their market share -- an excellent proxy indicator for the pent up demand that exists for processed foods.
Agricultural Inputs. As mentioned previously, the Vietnamese agricultural sector is adversely aected by poor quality inputs which aects the quality, reliability and cost of agricultural production in many areas. As such, the demand for quality factor inputs is substantial and opportunities about for several players to enter the market and provide safe, reliable and aordable products through eective farmer engagement.
15
Vietnam is known for its agricultural production in coee, tea, cardamom, pepper, acacia, cassava, fresh fruits and vegetables, sh-
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Fisheries.
The growing market for seafood, sh products and sauces and the limitations of
reliable and quality supply suggest a growing opportunity from locally sourced and processed sh products, especially by including local farmers and households given the current limitation in aggregator and processor supply. The encouraging pre-approval by the US Food and Drug Administration two sh processors has provided additional incentives for other businesses to make the necessary investments in technology to assure quality control and stimulate growth in what could be a lucrative industry. Healthcare. Vietnam is the second-highest self-medicating country in the world and as such due to
rising drug consumption and government investment, the healthcare and pharmaceutical market in particular are attractive from an investment point of view. Espicom research estimates suggest that pharmaceutical production has increased by a CAGR of over 25% during the period 2005 to 2010 and drug consumption in per capita terms is expected to increase by around 70% from 2010 to 2014.16 Furthermore, the government has announced that boosting the domestic pharmaceutical industry in the health sectors highest priority over the next few years. As such, analysts predict that the Vietnamese pharmaceutical industry could triple from USD .6 billion in 2012 to more than USD 1.8 billion in 2020.17 Beyond pharmaceuticals, there is growing demand for better healthcare services outside the countrys main urban centers while the growing upper segment of the BoP is willing and able to spend some of their limited disposable income on quality healthcare -- specically in areas such as oncology and cancer treatment, maternal and pediatric healthcare. Finally, the growing needs of quality healthcare in rural areas, the strain on the overtaxed public healthcare system, and issues related to aordability suggest that opportunities exist in formalized hub-and-spoke structures through which healthcare services can be provided to rural communities, new models of nancing healthcare that oer pooled products and risk-adjusted model for coverage to lower-income groups are emerging, while privatization has also increased demand for investment in order for these facilities to be able to serve low-income groups and rural areas eectively. Education. Two decades after Doi Moi, the Vietnamese education system has grown from having just 162,000 students enrolled in 1993 in 110 institutions to having more than 1.3 million Vietnamese enrolled in more than 230 higher education institutions.18The speed and pace of the Vietnamese economy coupled with the increased value being placed on the higher skill-sets required for more diversied and industrialized economy has only increased the demand for better quality education. This phenomenon is not limited to the wealthy and to urban centers, but also in rural areas where beyond the formal education, there are growing needs in vocational education critical to preparing Vietnams young and growing labor force for the jobs of the future. For example, the Kinderworld Groups investments into private education in Vietnam (covering kindergartens all the way through private Colleges) has helped them grow from having 5 students in 2000 in one school to more than 1,500 students on 12 campuses across the country in 2012. Their rapid expansion and success demonstrates the potential of the private education sector in Vietnam and how the IB fund could aim to strengthen the quality and accessibility of education, including for the low-income segment.
16
Espicom Business Intelligence, July 2012. Business Monitor International. Vietnam Pharmaceuticals and Healthcare Report Q4 2010, September 2010. The World Bank. Vietnam: Higher Education and Skills for Growth, June 2008.
17
18
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Sanitation. While the access to basic household sanitation increase from 35% in 1990 to 75% in 2008, 33% of the rural population (approximately 20 million people) is without access to improved sanitation, and in some of the poorer regions, this can be as high as 50%.19. Notwithstanding public eorts to address this issue, there are opportunities for lucrative private sector interventions with signicant opportunities for impact at scale. IDEs success in demonstrating the eectiveness of selling sanitation and hygiene through to the poor through market-based systems oer encouraging signs that larger scale private investments could yield attractive results.20
Under its Power Master Plan VII approved in September This anticipated growth in the renewable
2011, Vietnam established a 6% renewable energy target by 2030 and a commitment to complete rural electrication in the country by 2020.21 energy eld could be in part driven through build-operate-transfer (BOT) modalities through which the private sector develops o-grid energy supply that can be subsequently integrated into the grid, increased innovation in waste-to-energy biomass projects (such as Green Energy Biomass included later in this report on page 38), and small hydro aggregator models across communities. IB opportunities could not only yield access to energy for currently underserved poor rural households, but also provide additional income opportunities for low-income farmers to sell their agricultural waste and/or target oilseed crops (should it be a specic biofuel initiative);
Light Manufacturing. Inclusive business opportunities in both export-driven retail markets in products such as clothing, shoes, leather goods, furniture, and wooden ooring as well as domestic products that can be dierentiated from less expensive and potentially lower quality imports could oer interesting investment potential provided the opportunities are developed with the required investment in technology, know-how, skills development, and quality assurance while providing above market labor conditions in order to improve labor retention and mitigate the costs of high turnover rates;
Garments. While the garment sector in Vietnam is one of the largest contributors to GDP (more than USD 4 billion), it is risky given that its main export is the United States, it is not very competitive (of the USD 4 billion, USD 3.6 billion is import content), and has some of the worst labor conditions in the country. As such, nding inclusive business investment opportunities that can help the industry boost competitiveness through import substitution, attract and maintain skilled and semi-skilled workers through nancial and non-nancial incentives and labor retention schemes, and improve quality while diversifying their export markets, could contribute to improving wages of these low-income workers, improve company productivity, reduce production costs, and create additional value.
19
Water and Sanitation Program. The Economic Returns of Sanitation Interventions in Vietnam, 2011. IDE. Harnessing Market Power for Rural Sanitation: Selling Sanitation and Hygiene Services to the Poor in Vietnam, March 2005. Green Chip Stocks. Top 10 Clean Energy Highlights of Vietnam. April 18, 2012.
20
21
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Financial Services.
compelled to develop new products and services to remain competitive. In particular, commercial banks are seeing opportunities to engage the low-income segment particularly in rural areas with products such as crop insurance, disaster relief, micro-health insurance, mobile banking, and agricultural nance products, in addition to more traditional collateral free lending, factoring, reverse factoring and others. Given that access to nance, especially for low-income farmers may be a systemic barrier to entry limiting their ability to participate in some of the opportunities listed above (especially those in agribusiness), the Mekong Fund may consider investing in MFIs and/or commercial banks pursuing these types nancing innovations for the low-income segment. Several examples of these types of MFIs and commercial banks in Vietnam and in the wider Mekong region and their innovations are included later in this report (see TPC Cambodia on page 40, Acleda Bank Lao on page 43, IPR on page 44 and First Finance on page 48). It cannot be overstated how the 2009 - 2010 economic downturn has shaken the business mind-set and nancing landscape within the VIetnamese nancial community. It is clear that access to cheap debt, unbridled issuing of corporate bonds and their subsequent treatment as assets rather than liabilities all helped fuel the unsustainable boom of the mid 2000s. As a result, as part of the post crisis environment, commercial banks have tightened lending policies, interest rates have risen, and collateral requirements have become stricter -- all in all reserving access to capital to the privileged few and strongest Vietnamese companies. Conditions for higher risk ventures involving the BoP will have even a more dicult time nding capital. The overall result however is that the acute credit constriction and the inability to raise funds from speculative investors on the capital markets has incentivized the creation of a private equity culture in Vietnam -- which bodes well for the establishment of an IB fund and in particular an IB fund that can concentrate in the aforementioned sectoral priorities.
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Lao PDR
The Context
While Lao PDR has suered from economic isolation for many years, it has emerged as a rapidly growing economy albeit heavily dependent on the sale of high-priced commodities and strong foreign investment in hydro-electric projects -- contributing to average growth rate of about 6.5 percent between 1990 and 2009. Per capita income more than doubled since 1990 (reaching $1010 in 2010) and GDP growth was projected to be around 8 percent in 2011. As such, Lao PDR s real GDP growth will likely remain robust in 2011 with projected growth of 8.0 percent. With these levels of growth, it is no surprise that poverty levels have also fallen -declining from half the population to below one quarter within a decade (the absolute number of the poor now hovers around 1.5 million people). Notwithstanding these positive trends, the absolute numbers hide geographic and ethnic disparities within the country, particularly given that rapid growth has been conned largely to urban centers and districts along the Thailand-Lao PDR border. Furthermore, the countrys demographic dividend (with more than half of the population under 20 years of age) while potentially an economic boon, can only be seen as such if policy responses are developed that are commensurate with these young peoples aspirations.
The Opportunity
Due to years of economic isolation and market distortions accentuated by government interference and central planning, Laos is one of the most challenging environments in which to deploy risk capital in Asia. Yet, from the perspective of the IB Fund, Lao PDR oers unique investment opportunities given incremental steps towards market transformations to improve business transactions but are taking place while borrowing rates are very low (5%), lending rates are punitive and collateral requirements are excessively stringent at approximately three times the requested loan amounts. In this regard, the availability of loans to the private sector, particularly among small and medium-sized businesses is virtually nonexistent. While the private sector within Laos may need additional time to meet basic requirements for IB investments, it may also be possible to utilize their counterpart/partner businesses in Thailand, Cambodia and Vietnam as preliminary access points. Other factors contributing to a favorable environment for an IB fund include the following:
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From land-locked to land-linked economy. Government-led economic development plans include taking advantage of the country s central location in the Mekong region to foment greater cooperation and collaboration with neighboring countries with more robust economies. Already, the concept of risk capital is becoming familiar in Laos through transactions with Cambodia and Vietnam.
Increased Foreign Inows. Between 2003 and 2010, foreign investments increased from $110 million to nearly $800 million with 80% accounted for by the natural resource sector (mining and hydropower development) and the remainder in non-resource sectors including agriculture, tourism and manufacturing. Main investors originated from GMR members - Thailand and Vietnam - as well as China, that has supported the integration of Laos into the regional economy. Apart from the economic growth these investments have aorded, they are also a formidable force for economic reforms to decrease business transaction costs, increase transparency and formalize a largely informal market economy driven by micro-enterprises that present the IB fund with investment opportunities.
Catalytic Entrepreneurship. As Laos transitions from a socialist economy to one that is globally integrated, private sector growth is stimulating entrepreneurship at multiple levels including the BOP. Moreover, approximately 30 to 40% of growing entrepreneurs are women whose informal businesses render them largely unqualied for mainstream loans and investments. Only 3% of total enterprises utilize external nancing for investments and only 19% have bank loans. This provides fertile ground for IB fund investments that could have signicant impacts on enterprise growth and unprecedented impacts on Laos low income majority.
Growth in the Natural Resource Sector. Laos is currently channeling economic development investments into the natural resource sector, mostly in the form of mining and hydroelectric power, which are labor-intensive sectors that have a high absorption capacity for skilled workers, many of whom would have to come from low-income segments of the country s workforce. However, while this sector is growing rapidly, mainstay non-resource sector GDP contributors in the form of agriculture, tourism and manufacturing in which the BOP are already engaged, will continue to form the backbone of the economy, projected to account for 75% of expected GDP and about half of future GDP growth. As such, the natural resource sector s contribution to GDP growth increased from about 2.6 percentage points in 2009 to 4.8 percentage points in 2010 and is projected to average 4.0 percentage points between 2011 and 2015, and 3.5 percentage points between 2016 and 2020. This growth in resource led growth marks a structural shift from agriculture to natural- resource based industry. Natural resources have been growing very rapidly during the past decade, at an annual average of 20.7 percent in 2003-2010. As a result, the share of the sector in GDP almost tripled between 1998 and 2010, increasing to about 16.1 percent by 2010 from 5.9 percent in 1998
inclusive business strategies. The main sectors through which this paradigm shift can best occur are the following:
Agriculture. To date and for the foreseeable future, Laos remains an agrarian state dependent on small to medium-scale farms that absorb more than 80% of the country s economically active population. If Laos economy continues to develop, it will have to not only include but focus on rural-based improvements where, a) the majority of the country s economic activities occur and b) where the majority of low-income populations participate in the economy. In this regard, rural based farmers will necessitate investment in building their capacity to take advantage of emerging markets such as organic farming and specialty commodities as well as developing the appropriate infrastructure (e.g. high quality seeds, modernized irrigation, post-harvest treatment facilities etc.) for farm production to be competitive domestically but also among its GMR neighbors.
Sustainable Forestry. Timber resources in Laos represent some of the richest in the region with wood processing accounting for 25% of total manufacturing jobs. With forest area rapidly dwindling elsewhere in the GMR and in the broader Asia/Pacic region, the demand for high quality wood and wood products is growing within the GMR countries, China, Korea and Japan. The key in the sector is for investments to develop a sustainable timber and wood product industry that conserves the natural resource while maximizing returns through value addition along with a regulatory and political framework that ensures the value remains in-country, within the domestic private sector and their beneciaries.
Aquaculture. Although IB investments in this sector may not constitute an immediate priority for the Fund, the increasing demand for sh protein presents another emerging market to invest in. As a landlocked country, freshwater biodiversity constitutes a major portion of protein sources and, economically, sheries accounts for 13% of GDP (Phommavong 2010). Growth in this sector, though potentially signicant, is limited by various factors including competing hydro projects that impact river ow and are much more heavily invested in. To date, the main challenge of developing aquaculture as a viable industry is a lack of aquaculture techniques and technology for appropriate sh-farming systems including sh-paddies.
Renewable Energy. Despite the fact that Laos does not have abundant conventional energy resources such as natural gas, oil and coal, the country does have substantial renewable energy potential such as biomass, hydropower and solar energy. According to a Ministry of Energy and Mines report,22 Lao PDR has signicant potential in biomass through energy crops and organic waste such as oily crops (such as palm, jatropha, sunower, beans, coconut, etc), sugar and starch (including cassava and corn), as well as fast growing trees and aquatic cultures. Furthermore, solar irradiance in Laos is between 3.6 to 5.5 kWh per square meter (approximately 1,800 to 2,000 hours per year) -- as such, if photovoltaic technology were to be used, it would generate 12 million tons of oil equivalent per square km per year. Finally, while hydropower is considered the most important energy source currently with technical potential to be as high as 26,000 MW, only 2,500 MW is the current installed capacity. As such, there is scope for the IB fund to consider renewable energy initiatives in Lao, such as the eorts made by Sunlabob, featured later as a case study in this report on page 49.
22
Lao PDR Ministry of Energy and Mines. Renewable Energy Development Strategy in the Lao PDR, October 2011.
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Access to Finance. Assuming relaxation of government restrictions on foreign entities participating in the country s nancial sector, it may be feasible for the IB Fund to capitalize a domestic nancial institution that then provides micro-nance and other services to enable IB and IBrelated eorts. However, such a strategy has to be carefully evaluated and weighed against other investment opportunities and strategies, as well as the risks in a slowly developing nancial market. See the Acleda Bank case study on page 43 which is an example that goes beyond micro-nance.
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Cambodia
The Context
Cambodia is a largely cash-based economy that heavily relies on three major sectors contributing to GDP agriculture, tourism and manufacturing. Following an investment boon in tourism infrastructure in the mid 2000s that boosted annual growth to 13%, Cambodia s economy has since plateaued at a 6 to 6.5% annual growth rate since 2008 and is expected to hold for the next several years. Simultaneous high dependence on exports and reliance on imports (i.e. agriculture inputs), a dollarized economy, insecure land tenure and tenuous internal politics and external relations in terms of border disputes with Thailand, all contribute to economic instability and increased vulnerability of the Cambodian BOP who are small-scale farmers or employees of manufacturing and tourism companies. Unlike Laos, the banking sector of Cambodia suers from a surplus of liquidity compounded by a formal and informal loan system oered by foreign entities that do not have an interest in building long-term partnerships or maintaining economic value in-country. However, government eorts to strengthen nancial regulations to create and retain domestic value along with a business-friendly environment contributes to the case for IB investments.
The Opportunity
As the government and private sector alike seek to improve their market positions regionally and globally, the IB Fund could play a pivotal role in supporting key aspects of value creation and value retention. A distinct advantage is that Cambodia s banking sector is more open to foreign participation and there is growing recognition of the need for growth through scale. Other favorable factors include:
Economic Diversication. The government is creating new policy regimes for the agriculture and other sectors that favor product diversication through value added processing or product development. At the same time, socio-political and economic changes occurring in major markets such as China are highlighting the need for the private sector have greater parity and ownership of the value chains in which they are investing.
Recognition of Value Creation. The global economic downturn of 2009-2010 and returning foreign-educated Cambodians are generating private sector changes based on creating value in
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the marketplace to replace inherent management systems historically based on revolving cashow designed to meet family expenditures.
The Need for Partnerships. The current formal and informal loan structure in Cambodia is built on short-term gains and not long-term growth. True economic development will require the private sector to acquire in-house business services, technology, skilled labor capacity, and management systems to support value creation and that the current nancial sector, both formal and informal, do not oer. Moreover, if plans for economic diversication come to fruition, the current collateral-based banking system will not meet private sector investment needs. The IB Fund can potentially fulll this niche for the growing number of enterprises that cannot meet collateral requirements and also need a more holistic support system beyond money to create added value.
Emergence of an Equity Culture. In addition to increased awareness of value creation, the impending establishment of the Cambodia Stock Exchange is bringing to the forefront a shift from debt-based to equity-based lending that is forcing businesses large and small to follow a structured valuation system thereby encouraging formalization of both the sector and process. A government policy that will require businesses to disclose audited nancial statements is reinforcing the process of formalization as well.
Agriculture. Agriculture and aquaculture has consistently contributed approximately one third of national GDP from 2002 to the present (32%) and remains the largest employer of Cambodia s economically active population. While agriculture products are already well diversied into a broad range of food commodities and raw materials, value can be added through organic production being increasingly demanded in Asian markets. The IB Fund can make investments in smallholder farms for them to gain access to appropriate techniques and technologies (e.g. transition farming, modernization of growing and harvesting, certication etc.) for growing organic produce according to industry standards as well as gain access to infrastructure necessary for market access (e.g. logistical support, distribution, cold chain development etc.). Corollary investments could also be made in strengthening the organic produce value chain from supplier to market to maximize as well as ensure a more equitable distribution of benets.
Agro-Processing. Value added through processing is a potentially viable prospect within Cambodia s agriculture production value chain. Rice, in particular presents a ready opportunity for investment due to a recent government target of increasing rice exports to 1 million tons by 2015, an ambitious goal given that rice exports were a mere 60,000 tons in 2010. Nevertheless,
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rice production is clearly a priority and both government and private sector are looking for ways to increase outputs, improve quality and increase overall competitiveness within and beyond the GMR. The IB Fund can contribute to addressing the key challenges to rice production for export including investing in modernized production techniques, improved milling infrastructure and marketing capacity that will stabilize supply chains into reliables sources.
Agricultural Inputs and Infrastructure. As a separate but parallel investment in the agriculture sector, the IB Fund could support domestic manufacturing and distribution of agricultural inputs (e.g. pesticides, herbicides, fertilizers etc.) that have to be imported are generally expensive and are not readily available. Other investments could include updating outmoded irrigation systems or establishing them in remote areas that have no access. Similarly, logistics support in the form of adequate and timely transport, a cold chain, appropriate storage facilities, etc. will contribute signicantly to improving market access.
Access to Finance. The private sector in Cambodia either struggle to nd nancing and those who have it struggle with over-indebtedness from perpetual renancing. Meanwhile, many producer communities are under-banked or un-banked altogether and have no recourse for seeking investments to improve their production. The IB Fund can ll a critical investment gap through directly or indirectly investing in micro-lending to the poor, crop insurance for farmers, micro-health insurance, and mobile banking to facilitate overall productivity. In addition, the parallel development of a Technical Assistance (TA) Facility will help ensure that appropriate skills for business development and production reside in-country as part of a strategy to foment long-term economic growth. Innovation in access to nance can be found in the WING case on page 54.
Renewable Energy. Eorts at utilizing secondary products of agriculture in the form of rice husks, cassava peel, sugarcane by-products etc. as energy sources is becoming a more common practice in Cambodia. Such waste-to-energy initiatives would necessitate a signicant investment to reach viable levels of use, however, in the absence of an electricity grid in Cambodia, such initiatives present alternative options for homegrown energy generation and additional value for producers.
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Thailand
The Context
Barring insecurity and instability from social unrest, Thailand is the most robust economy within countries of the Greater Mekong Region. While the economy was greatly affected by the global economic crisis of 2009-2010, impacts were, to some, extent mitigated by increased domestic demand for and investment in domestically produced goods and services. Thailand enjoyed a growth rate of 7.8% in 2010 and is expected to remain stable at 4.5% into 2015. The Thai economy s resilience is largely due to diversication eorts in the mid-2000s as part of a government eort to boost economic growth. Apart from mainstream agriculture, sheries, forestry and agro-processsing sectors, Thailand also developed outsourcing agreements for auto parts production with Japan and Korea. Other factors that contribute to an attractive investment climate include effective economic reform programs, more stringent controls in the banking sector, revived domestic lending and fair valuations of companies below unsustainable levels during the mid-2000s in other emerging markets. The overall strategic development of the Thai economy make is a leading candidate in the region for IB Fund investment.
The Opportunity
Thailand s economy is divided into highly developed industries in the greater Bangkok area and underdeveloped rural areas where poverty is omnipresent. As with other countries in the GMR, it is in the latter, where economic growth potential is increasing and low-income communities abound that the IB Fund should focus its investments. The rationale for investment lies primarily in the following:
BOP Majority. Although Thailand s middle class is increasing, majority of the country s population still constitutes the base of the pyramid. Despite that, domestic consumer demand has increased providing opportunities for growth for small and medium-sized enterprises.
Stability. The comparatively developed and structured economy of Thailand provides a stable environment for business investments. Investment Gap. Lending is isolated within upper tier companies while nancing remains elusive for smaller to medium-sized enterprises where growth potential is high. This leaves a gap which the IB Fund could fullll.
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Streamlined Value Chains. Consolidation within sectoral value chains through elimination or absorption of marginal actors is providing greater investment opportunities. Focus on Value Creation. Small and mid-sized companies are recognizing the importance of establishing company value in the marketplace and are able to respond more quickly to changing demand and conditions. The focus on value creation is also consistent with the overall purpose of the IB Fund.
Agriculture. As with the other GMR countries, agriculture is the backbone of Thailand s evolving economy with the dierence that it is highly diversied from small-scale subsistence to large-scale mechanized and also in its range of products. Rural farmers operating at a small scale will be the target beneciaries of the IB Fund. Within the sector it is suggested that the IB Fund oer a holistic package of service investments designed to address the main challenges of increasing both productivity and product quality standards. These services could include: technical capacity building through targeted extension services, improved technologies (e.g. irrigation, growing and post-harvest etc.), value-added processing, market access and product distribution (logistics, management and organization etc.), organic farming, animal husbandry and meat processing. The IB Fund can also support eorts aimed at enhanced livelihoods to oset fallow periods of seasonal and mono-crop farming as well as increased mechanization of the industry that is displacing farmers. A specialty commodity example in Thailand can be found on page 45 through Urmatt, a leading diversied organic rice producer.
Manufacturing. Small and medium-sized enterprises are more commonly found in the manufacturing sector responsible for about 70% of total employment within the sector. The IB Fund can invest in these SMEs to gain competitive skills and products that move them further up the value chain both domestically and internationally.
Access to Finance. Following the failure of the SME Development Bank of Thailand that left many SME s devastated by debt, there is growing openness for a non-bank nancial institution to provide support for pro-poor eorts. The IB Fund could invest in this new kind of nancial infrastructure to give the BOP and SME s access to micro-nance, crop/disaster/health insurance etc.
Renewable Energy. Since the mid-2000s much investment has been made in the research and development of biodiesel fuel with little success. However, with wide recognition of the inevitable need for fuel, alternatives continue to be explored. Hardy crops such as jatropha are of particular interest given their current history of successful production, their suitability for intercropping and for growing on less arable, non-productive land. The IB Fund could invest in development of the renewable energy that would impact not only BOP growers but also generate opportunities for inclusion into other aspects such as processing, rening, transportation, and distribution.
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Myanmar
The Context
Myanmar is currently the poorest country in Southeast Asia and is noted for its turbulent social and political history. Within the 20092010 period, an estimated 26% of Myanmar s population was living below the poverty line established at $0.85 per day. This number was already down from 36% in the 2004-2005 period. Under strict military rule, Myanmar has largely been isolated from the global economy and community. Political instability and unpredictability, a lack of transparency and corruption have earned the country nancial and economic sanctions from the US, the European Union and Canada and have staved o nearly all foreign investment though a natural resource-rich country. Myanmar relies on three major industries, agriculture (38.2% of GDP), industry (18.2 %) and services (43.6%). A reported 70% of the country s labor force is engaged in agriculture on rural farm land. Only 23% work in the services industry. Moreover, long-time military rule has neglected education, health and other basic services leaving a young but uneducated and unskilled population and an under-developed private sector that is controlled by a handful of elite. Additionally, the country is sorely lacking in basic infrastructure such as roads, accommodations, clean water, stable electricity and reliable communications that are imperative for business. Recent political changes, however, show promising prospects for economic growth and development, and therefore, investment as well.
The Opportunity
As an emerging economy slowly opening its borders to the outside world, investors are waiting in the wings to see in which development trajectory Myanmar will launch. While recent reforms are demonstrating government eorts to improve overall conditions in the country, investors remain wary and continue to weigh the high levels of risk involved in country investments. Current changes that may aid the rationale for inclusion in the IB Fund include the following:
Economic and Political Reforms. The current President of Myanmar is implementing a series of economic and political reforms aimed to demonstrate a willingness to open up to the global community. These changes include the notable appointment of long-time opposition Aung San Suu Kyi into parliament and the implementation of cease re agreements between the military and armed ethnic groups. On the economic front, the Central Bank has formalized it exchange
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rate establishment and the government has approved a new investment law that will provide 5year tax exemptions to foreign investors. Other incentives include relief on prots with the provision that savings are re-invested in the business within one year. The US and EU have since relaxed some economic sanctions against Myanmar.
New Poverty Reduction Goal. The Government of Myanmar last year announced a new and lofty objective to reduce its current poverty level of 26% to 16% by 2015 under the auspices of the UN Millennium Development Goals. The poverty alleviation plan is focused on the rural poor and includes strategies such improvements in agricultural productivity, micro-saving and credit, development of cottage industries and environmental conservation. In response, the UN released its own strategic poverty reduction plan that is based on models of inclusive growth through agriculture sectoral development support, improving access to quality social services, and improving employment opportunities.
Underdeveloped Financial Sector. Another consequence of military rule is the undeveloped nature of the nancial sector that has been described as being shrouded in a lack of transparency and corruption leaving a non-functional nancial support for local businesses and foreign investors wary to engage.
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Company Overview
Green Energy Biomass JSC (GEB) in the rst for-prot Vietnamese company structured to deliver market access to smallholder-produced energy biomass - delivering additional income to farmers in some of Vietnams poorest provinces and contributing to Vietnams increasing demand for renewable energy (i.e. according to USAID, demand for diesel is expected to reach 9.7 million tons by 2015). GEB is a feedstock company producing biomass derived from Jatropha Curcas - an ethical and sustainable second generation biofuel feedstock that is cultivated on marginallyproductive lands. GEB aims to become the leading provider of second generation biofuel feedstock in Vietnam. Because Vietnam has a shortfall of power generation capacity that is negatively aecting its economic growth (3 billion kWh in 2011), GEB is positioned to contribute renewable energy that can contribute to business development, investment and expansion while improving the livelihoods of low-income farmers.
Challenges
The key challenges to GEBs business model are as follows: 1) production risks attributable to climate, disease, pests, and natural disasters as with any other agriculture-based business; 2) market risks given that this is an emerging industry within Vietnam with the potential for many new competitors and variable input costs that could impact profitability; and, 3) regulatory risks that could be imposed by the Ministry of Agriculture through its National Jatropha Strategic Action Plan (currently under development); and most importantly, nancial risks stemming from the future price of crude oil (biofuels are competitive without subsidies when the costs of crude oil exceed between US$60 and US$100/barrel).
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2. Inclusive Business Case Study - Huong Hoa Tapioca Starch Factory (SEPON), Vietnam
Tapping Tapioca to create shared value in central Vietnam Sector: Agri-business Location of Operations: North Central Vietnam Year of establishment: 1973; 2004 for Huong Hoa Tapioca Factory (HHT) Turnover: Est. 2.2m USD based on 11,000 tons production Extent of BoP Engagement: 5,000 low-income cassava farmers
Company Overview
Home to some of the poorest and disadvantaged ethnic groups in Vietnam, Quang Tri province is heavily dependent on producing intensive cash crops, such as cassava, namely for the export of industrial starch. Because of poor farming practices, soil quality declined causing inconsistent quality and varying yields, leading to income instability for local farmers. Huong Hoa Tapioca Starch Factory (HHT) was established in 2004 and sought to source cassava locally but was also aected by inconsistent supply of raw materials which aected their level of production. Starting with a capacity of 50 tons of starch per day derived from an input of 200 tons of fresh cassava, HHT faced two challenges: 1) it was operating far below capacity and; 2) it was disposing of 3,000 tons of cassava waste annually at a cost of 300 million VND. By developing two inclusive business innovations, HHT has been able to expand its current capacity to over 200 tons per day and improved its starch production to 150 tons of starch per day. It is now the largest starch producers in the North Central Highlands and sells its processed starch to Chinese companies.
BoP as Suppliers HHT s inclusive business model targets poor farmers as suppliers. The company sources its fresh cassava supply directly from 5,866 smallholder farmers, mainly of the Paco and Van Kieu ethnic groups which are among the poorest groups in Viet Nam. HHT s eld sta organizes cassava farmers into groups to better provide training on planting new varieties of cassava, harvesting sequencing, sustainable production techniques and basic business skills. The company has also trained the farmers to use a slow-release micro-organic fertilizer that it produces from a mixture of cow dung and cassava waste priced at 1/3 the cost of chemical fertilizers which has not inly increased farmer margins, but reduced nearby deforestation that was being caused by farmer expansion into forested land due to declining productivity. At the same time, this innovation has raised productivity by over 25%.
Challenges
Most challenges related to cassava production are related to farmer capacity issues including access to nancial services and business planning, use of upgraded technologies related to intensive cultivation and inter-cropping (with acacia and rattan for example), access to relevant market information, and weak governance and management capacity of producer groups. Most of these challenges however are mitigated through HHTs collaboration with local and international NGOs committed to their inclusive business model.
Company Overview
Thaneakea Phum (Cambodia) Ltd is a rapidly growing regulated micro-nance institution with a focus on serving lowincome women in the rural areas of Cambodia. As the 5th largest MFI (in terms of number of borrowers) and 8th largest (in terms of portfolio size) in Cambodia, TPC focuses on socially responsible group lending. As of March 31, 2012, TPC had a total equity of approximately USD $8.7m, total assets of USD $49.8m, gross loan portfolio of USD $38.8m (an estimated 5% of market), average loan size of $377 and an annualized ROE of 25.7%. TPC currently serves 102,950 clients, an estimated 9% of market, through 622 dedicated management and sta.
Challenges
Core challenges facing TPC include maintaining exceptionally low default rates through quality assurance in the credit worthiness assessment process and expanding liquidity to grow the portfolio are core challenges facing TPC, especially while TPC continues to grow. Ensuring the right product mix and continuing to deliver value in the face of sti competition could also force TPC to over-stretch, driving up operating costs, weakening protability and potentially diluting quality standards.
Company Overview
Duc Viet Foods is a joint venture between Vietnamese (86%) and German (14%) partners focused on the production and commercialization of high quality processed foodstus (sausages, salami) and fresh meat (pork). Some of the inputs (namely pigs) for the production process have historically come from low-income rural households involved in animal husbandry. As the company continues to grow, the ecient and low-cost sourcing of inputs is critical to its high-volume, low-margin business model and its plans for expansion.
Challenges
Duc Viet continues to face a number of challenges on its pathway to continued growth. Fluctuations in interest rates from local banks (interest rates ranged from 18% to 25% for short-term debt) have historically put pressure on the company but as a result of their success in 2011, Duc Viet was able to self-nance its continued expansion. Duc Viet traditionally self-nances its investments in equipment, seeks debt for raw materials, and for the most part can count on its own cash-ow for working capital. Other challenges facing Duc Viet are the modernization of their product and processing facilities, continuing to lower the cost of direct and indirect (animal feed) inputs, and accelerating automation of certain processes. These ambitions will require an increasingly skilled labour force that, as its largely comprised by the BoP, can provide numerous opportunities to contribute to the development of their BoP workforce.
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6. Inclusive Business Case Study - Acleda Bank Lao Ltd., Lao PDR
Accelerating the growth of SMEs through nancial services Sector: Financial Services Location of Operations: 23 oces throughout Laos (branches, service units, HQ) Year of Establishment: 2008 Turnover: USD 8.1m; Total assets USD 55.9m (2011) Net Prot: USD 1.29m (2011) Extent of BoP engagement: 10% of current portfolio, 2,676 BoP clients; scaling to 50,000 BoP clients in 5 years
Company Overview
Acleda Bank Lao Ltd is a commercial bank providing inclusive nancial services primarily to small and medium size enterprises in Lao PDR. Acleda is a subsidiary of Acleda Bank Plc in Cambodia, one of the largest commercial banks in Cambodia. It provides products and services that include deposits (i.e. saving and current accounts), credit (small business and personal loans), funds transfers, cash management (payroll, direct debit, etc), trade nance (bid guarantees, performance guarantees) and electronic banking services. It currently has 22,528 customers in Laos with an outstanding loan portfolio of USD 48.6 million (average loan size is USD 3,000). 10% of Acledas customer base in from the BoP (2,676 clients).
Challenges
The core challenges faced by Acleda Bank in Lao include capacity building, particularly of new sta being being hired in Acledas rapidly expanding network of service units and branches, increasing the nancial literacy of their potential customer base so they can take full advantage of the Banks services and graduate from informal to formal nancial management practices, developing appropriate nancial services for rural clients were risk and the value proposition are adequately priced.
Developing the Business Case for an Inclusive Business Private Equity Fund in the Mekong Page 44
Company Overview
IPR was originally founded in 2003 as a credit union of the Federation of Cambodian Rice Millers Associations to alleviate the liquidity constraints of rice mill entrepreneurs who lacked access to credit to expand their production. IPR's clients are almost farmers in rural areas and they specically target areas where there is ample potential for agricultural production and where good irrigation systems are available. Small business owners are also targeted by IPR, but they make up a limited number in the portfolio. 72% for rice production, 11% cassava, 17% other crops (i.e. beans and maize), animal husbandry and crafts.
Challenges
Given that Cambodia has 35 commercial or specialized banks, and 110 micro-nance institutions (of which only 25 are licensed), IPR faces sti competition, especially from new entrants positioning in IPRs target segment. Other key challenges faced by IPR are as follows: the potential for defaults due to natural disasters; regulatory changes given the informality of the sector in Cambodia; external risks related to natural disasters; product oering is too risky and if implemented poorly could have a high potential for default (namely in balloon payments) and risks related to eectively managing internal controls to prevent fraud.
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Company Overview
Urmatt is a Thailand-based, privately-held, high-growth global packaged food company focused on speciality rice (organic and fair trade) and specialty rice by-products such as rice protein derived from rice bran, rice snacks and sauces derived from broken rice, and bio-fertilizer and biomass from rice husk. Urmatt was founded in 1982 as the worlds rst basmati rice producer outside the Indian sub-continent. It has subsequently evolved into one of the leading organic rice producers in Thailand and is part of a global retail consortium that includes BioAsia (Simply Rice), Axiom Foods (in the United States), Organic Latin America (OLA based in Argentina), Nordic Food partners (in Denmark), and Ceres Organics(in New Zealand) that oer an integrated and diversied product line in organic rice, rice snacks, rice protein and related health products to markets in Asia, Oceania, the US, Europe and the Americas.
Challenges
While Urmatt is protable and continues to grow, regulatory constraints have compelled it to expand its production base outside of Thailand to meet growing global demand (it has needed to invest in organic rice production in Argentina). Furthermore, lack of access to capital at competitive rates has prevented the company from growing more rapidly and diversifying into other commodities such as organic sugar and dried fruits.
Company Overview
Nestl is the worlds leading nutrition, health and wellness company. It is the worlds largest food company measures by revenues. Its products include baby food, bottled water, breakfast cereals, coee, dairy products, ice cream, pet foods and snacks. Nestl operates 450 factories in 86 countries and employs 328,000 people.
Challenges
One of Nestls key challenges in Vietnam is to increase the quality and productivity of Vietnamese coee farmers through the introduction of new technology and seed and integrating small farmers into their value chain.
Company Overview
First Finance PLC became the rst nancial institution specialized in housing nance in Cambodia. It provides mortgages, home improvement and home equipment nancing for middle and low-income consumers in Cambodia. By partnering with numerous housing and urban/rural development organizations and providing much needed access to nance, it aims to scale aordable housing across Cambodia.
Challenges
The main challenge to First Finances long term growth is the availability of homes below USD 15,000 that fall witin the companys target market. Without sucient housing developments, First Finance will not have a suciently expanding customer segment from which to build and grow a successful business. Despite this challenge, First Finance sees improved social performance with a decline in the average loan size, average home value and house hold income of new clients. Another challenge is First Finances liquidity -- as the customer base grows, First Finance will need to have sucient liquidity in order to serve its clients growing nancing needs.
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11. Inclusive Business Case Study - Sunlabob Renewable Energy Ltd, Lao PDR
Developing last-mile, o-grid renewable energy solutions Sector: Renewable Energy Location of Operations: Laos, Cambodia, Thailand (Asia and Africa) Year of Establishment: 2000 Turnover: More than USD 4m (2011); Net Prot: USD 364.7K (2011) Extent of BoP engagement: 5,450 BoP clients in 2011;
Company Overview
Sunlabob is a Lao commercial company, set up in 2000 and licensed in 2001. The company operates as a protable, full-service renewable energy provider, providing commercially-viable energy services for remote areas underserved by the electrical grid. Sunlabob also focuses on urban areas, conducting energy audits, energy eciency consultancies for buildings and factories, and supplying and installing energy-ecient materials. Furthermore, Sunlabob was also the rst private Energy Saving Company in the Lao PDR to implement solar feed-in systems (hydro and solar plants). Sunlabob has also proven itself to be a reliable consultancy partner for assessment and feasibility studies for large scale infrastructure, combining the experience working in remote areas with applicable standards, common practices and available best quality technology. To date, it has impacted more than 200,000 households worldwide.
Challenges
Even though Sunlabob has experienced rapid growth, slowing rental fees and reprioritizing direct sales has required a change in strategy focusing on controlling costs and streamlining the companys operations in order to raise gross prots, manage overhead, and renance or convert some of the companys outstanding loans to free-up working capital. Beyond working capital, access to nance in Laos has been limited -- there is a lack of liquidity from commercial banks as Laos is not a Triple A country and foreign investments have also been quite limited.
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Company Overview
Hydrologic(HSE) is a wholly owned subsidiary which iDE set up to commercialize and expand the production and sales of water lters and, in the future, other water, sanitation and hygiene products. Hydrologic was formally registered as a limited company in December 2010. Grants from USAID and PATH and a loan from iDE has enabled Hydrologic to build a new factory and set up its sales network. In 2011 Hydrologic had an income of about US$700,000, 70% from sales and the rest from grants, and employed 41 people.
23 The information contained in this case study is an abbreviated version of the Ashden Award Case Study Summary that can be
found at www.ashden.org
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13. Inclusive Business Case Study - Shan Maw Myae Co, Ld, Myanmar
Promoting Sustainable Agriculture though local economic development Sector: Agri-business Location of Operations: Myanmar Year of Establishment: 2001. Turnover: n/a Net Prot: n/a Extent of BoP engagement: thousands of low-income farmers
Company Overview
Shan Maw Myae (SMM) is a market-oriented social business and is one of Myanmars largest producers of organic farm products and foods and promotes sustainable agriculture across Myanmar. The company employs more than 200 sta through 50 branch oces and distribution centers around the country. SMM spends more than 50% of its prots on local economic development and public education and has applied many principles of social entrepreneurship for local economic development.
Challenges
One of the main challenges facing SMM is country risk. While increasing openness and reforms have led to Western concessions in terms of lifting trade sanctions and recalibrating foreign direct investment, progress continues to be fragile, especially with regard to economic reforms and good governance. SMM will also require additional investment to expand and diversify its product base.
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Company Overview
Proximity designs is a non-prot design venture located in Myanmar (Burma). They design, manufacture and distribute products and services (such as irrigation and rural energy products) for rural families since 2004. From irrigation products to rural nancing, from cash-for-work infrastructure projects to farmer advisory services, Proximity leverage a nation-wide network of agents and dealers to sell their products that dramatically increase incomes and positively impact rural economies throughout Myanmar. They currently employ of 350 people spread throughout 30 teams across the country.
Challenges
Proximity has had enormous success in a very challenging political and socio-economic context that is Myanmar. Notwithstanding, Proximitys challenges likely include the ability to keep pace with the rising demand for its products and services, assuring that product innovations meet local needs, and to align ambition with their fundraising track record.
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The main conclusion from this Market Brief is that the ADB does have a catalytic role to play as an impact investor for inclusive business in the Mekong Region. The ADB is well positioned to share risk with other investors, can strengthen interest and crowd in other investors and donors, can provide the appropriate incentives to ensure appropriate focus on scalable and systemic impact as well as (above) market returns, and can add both liquidity and technical assistance in a way that can be cataDeveloping the Business Case for an Inclusive Business Private Equity Fund in the Mekong Page 54
lytic for the inclusive business cause in the region. Finding the right opportunities however is still more an art than a science as the market has yet to fully recognize and embrace the potential for inclusive business in the region. However, the growth and maturity of social entrepreneurship in the region over the last decade, and the evolution of their nancial needs from start-up to growth capital coupled with the emergence of company interest in creating shared value, has led to another missing middle. There are insucient debt and private equity funds and impact investors targeting these opportunities to assure their growth and accelerate their impact. ADB can be positioned to be the anchor investor that assures the market the inclusive growth requires private sector innovation, risk, and business models that can achieve above market returns and above market impact on the lives of the poor. The recommendations for the Mekong Fund are as follows: Establish the Mekong Fund and accompanying TA facility in the near term to take full advantage of the increased awareness and potential for leverage generated through its fact nding, due diligence and fundraising eorts carried out across the region. Given the interest expressed by both fund managers and companies and a clear market niche (albeit the niches depend on specic country circumstances), the ADB does have a role to play in accelerating inclusive business development by sharing risk, increasing liquidity, and providing access to technical assistance that could increase deal ow and assure investee readiness among high-impact companies in target sectors in the Mekong countries. It is clear from key stakeholders that the ADB could help crowd-in investors and help identify impact-oriented and bankable opportunities in the context of inclusive growth and strengthen the interest in and development of inclusive business models across the region. Rene its investment strategy and fund design to comply with evolving standards, return expectations and risk management criteria. These renements should include a reassessment of geographic scope and the private equity/debt mix in order to better dene a clear route to the anticipated nancial returns. As described briey in this report, the Mekong regions investment strategy will depend heavily on country risk, country context, market opportunities and most importantly, a viable pipeline. Preliminary analysis suggest a viable pipeline exists across key sectors -- namely in agribusiness, nancial services, renewable energy, and basic services and a few key IT-driven and/or logistics-driven market innovations that can benet multiple sectors. As such, the investment strategy for a possible Mekong Fund should set clear investment criteria that outline nancial return and impact expectations (specically being clear about if and where systemic impact should have preferential treatment) in order to assure a balanced investment portfolio across Mekong countries. For example, investing in a contract-farming scheme in Vietnam may not have the same systemic impact as investing in renewable energy in Laos, or increase access to clean water in Cambodia. Brand inclusive business as a means to accelerate the impact of second stage social enterprise opportunities as well as a means for larger companies to share risk when seeking to leverage the BoP as an integral part of their value proposition and business strategy. this report. There has been much debate about the dierence between social enterprise and inclusive business, addressed in part in However, rather than try and draw an academic distinction between the two, the focus should be on viable and impactful business models that generate market returns -- irrespective if the business began and still is a social purpose business or if the business happens to be adding the lowincome segment as an integral part of their business and for business reasons. As such, the ADB can contribute to branding inclusive business as business models that seek to leverage the BoP as an inte-
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gral part of their business model and value proposition -- irrespective of if they are a social enterprise or mainstream business. And, the ADB can and should clarify that from its own investment strategy perspective, it particularly prefers well-established companies and/or companies in their growth stage seeking investment (that is, where the inclusive business model has already been proven to some extent and requires additional nancing to scale). Outline the parameters, scope and functionality for the Technical Assistance Facility in order to ensure its relevance and strategic contribution to the objectives of the Mekong Fund, particularly in the context of risk mitigation and investment readiness of potential opportunities across the region. Given the risk prole of some of these countries and of the companies that could be eventually considered by a fund manager, there is a clear need for a technical assistance facility that in particular contributes to pipeline generation by enhancing investment readiness and can address postinvestment risks that can emerge while implementing an inclusive business model. Interviewees and other key stakeholders have all suggested that such a TA facility should provide tailor-made solutions that are context dependent rather than develop a core set of cookie-cutter management disciplines that would be managed centrally through a core team. The prevailing viewpoint is that the TA facility should include exible and resourceful coordination through which resources can be deployed eectively and eciently where they are needed most and in strong coordination with the eventual fund manager. Finalize the impact assessment parameters and tools to ensure the fund manager and investees are clear as to the expected standards, compliance and reporting mechanisms. Given ADBs focus on impact as a key element for rating fund manager performance, impact metrics and expectations should be outlined upfront in order to manage both fund manager and investee expectations. This will also require factoring the costs of impact assessment and ensuring that these costs can be covered by the TA facility or alternative nancing schemes. Expectation management should also include moderate, or benchmarking in order to provide clarity as to what might be considered substantial,
low impact tailor made to the specic sectors that might be part of the investment strategy. This is critical because it has arguably been dicult to compare adding 10,000 low-income suppliers to a companys value chain vs. providing access to safe drinking water to 10,000 low-income families. Optimize complementarity and alignment with the GMS, public policy incentives and/or other donor/co-investor interests where relevant to maximize opportunities for synergy, risk sharing, and impact at scale. The ADBs GMS Initiative provides signicant opportunities for alignment with the objectives of the fund given that GMS is seeking to unlock the potential of the Mekong through trade, infrastructure, and regional policy harmonization to accelerate growth. GMS investments as such could be targeting key areas core to inclusive business development, especially with regard to infrastructure, logistics and policy incentives. As such, seeking to optimize the Mekong Funds investment strategy by assessing strategic overlaps with GMS priority areas might contribute to more eective risk management, pooling of resources, and where relevant, the potential to create incentives that could spur inclusive business development in the region. Given the high rate of growth, increasing diversication, intra-regional trade, and improving infrastructure, the opportunities for inclusion across the economies of the Mekong as a strategy to mitigate the specter of inequality and social exclusion are notable. Establishing that inclusive business is not a byproduct of business as usual, but rather a core business strategy that can actively and measurably con-
Developing the Business Case for an Inclusive Business Private Equity Fund in the Mekong Page 56
tribute to inclusive growth through enabling the active and qualied participation of the low-income segment in the creation of shared value, can make a meaningful contribution to addressing some of the regions most dicult social challenges. A Mekong Fund anchored by the Asian Development Bank can provide reasonable condence that these types of business models not only require careful consideration and attention, but also that they can supplement other large-scale development strategies being implemented in the region, critical for the regions sustainable future.
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Appendices
Appendices
Bibliography
11.11.11. Doing Business to Fight Poverty: An Evaluation of the Belgian Investment Company for Developing Countries, 2012. http://www.11.be/11/11dossiers/artikel/detail/detail/doing_business_to_ght_poverty,104282 Asian Development Bank. Impact Investors in Asia: Characteristics and Preferences for investing in social enterprises in Asia and the Pacic, Asian Development Bank, 2011. http://beta.adb.org/sites/default/les/impact-investors.pdf Asean Foundation, ASIADHRRA, Vistoria-Gasteiz City Council and WRF. Linking Small Farmers to Markets: Building the Next Links in the Value Chain, 2009. Baker, Thomas A. Lessons for the Potential Use of Contract Farming with Small Land Holding Farmers in Myanmar. Vahu Development Institute, 2011.
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Appendices
Bertelsmann Transformation Project. Shaping Change -- Strategies of Development and Transformation. C o u n t r y R e p o r t s f o r C a m b o d i a , L a o P D R , M y a n m a r, T h a i l a n d , a n d V i e t n a m , 2 0 1 2 . www.bti-project.org/country-reports/aso/ Bridges Ventures and the Parthenon Group. Investing for Impact: Case Studies Across Asset Classes, 2010. Center for Social Initiative Promotion (CSIP) (2008). Preliminary Report on Social Entrepreneurs in Vietnam. Chhabara, Rajesh. Increasing Cambodias Competitiveness Through Corporate Social Responsibility: A SWOT Analysis of CSR in Cambodia. UNDP and CSR Works International, 2008. Council for the Development of Cambodia ,CDC. www.cambodiainvestment.gov.kh Dees, J. Gregory. (1998 and 2001). The Meaning of Social Entrepreneurship. de Jongh, W. Robert, Javier Ayala, Daniel Oporto, Sarah Howe, Manuel Fernandini, Maya P. Gorrez and Noah Beckwith. Establishing an Inclusive Business Private Equity Fund In Vietnam: A Market Scoping Study, Asian Development Bank and SNV, April 2012. Economic Institute of Cambodia. www.eicambodia.org E.T. Jackson and Associates for the Rockefeller Foundation. Next in Building the Impact Investing Industry, July, 2012. European Union Economic and Commercial Counsellors. (2010). Report on Vietnam. Website: www.delvnm.ec.europa.eu. General Statistics Oce of Vietnam. (2009). The current situation of services statistics in Vietnam. Vietnam. Global Finance Magazine. www.gfmag.com Grant Thornton Vietnam. (2011). Private Equity Investment Outlook Quarter 2, 2011. GTZ: Lao-German Programme on Human Resource Development for a Market Economy. Survey 2009: Summary Report. May, 2010. International Business Leaders Forum. Inclusive Business Sourcebook, 2011. International Finance Corporation and ideas42. Wing Mobile Payments: A Product Design Case Study, J.P Morgan. (2010). Impact Investments: An emerging asset class. www.morganmarkets.com. Enterprise 2012 Country Reports for Cambodia, Lao PDR; Thailand, and Vietnam. Achievements, Challenges and Whats
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Appendices
Koh, Harvey. Ashish Karamchandani, Robert Katz (2012). From Blueprint to Scale: The Case for Philanthropy in Impact Investing. The Monitor Group, April 2012. Lao Statistics Bureau. www.nsc.gov.la London, T.& Stewart Hart. (2011). Next Generation Business Strategies for the Base of the Pyramid: New Approaches for Building Mutual Value. Pearson Education Inc., New Jersey. Making Markets Work for the Poor. Fast Facts: Vietnam Challenge Funds Cassava Project in Quang Tri, 2011. Mennon, Jayant and Anna Cassandra Melendez. Trade and Investment in the Greater Mekong Subregion: Remaining Challenges and the Unnished Policy Agenda. Asian Development Bank Working Paper Series on Regional Economic Integration, May 2011. Ovesen, Jan; Ing-Britt Trankell, Heng Kimvan, and Chen Sochoeun. Rice Farming and Microcredit in Takeo Province, Cambodia: A socio-economic and social anthropological study with special reference to Intean Poalroath Rongroeurng (IPR) micronance institution, May 2012. Phommavong, Thavone. Country Report: ASEAN Training Course on Aquaculture Production. Ministry of Agriculture and Forestry Lao PDR Living Aquatic Resources Research Center, and National Agriculture and Forestry Research Institute, March 2010. Porter, M.E. (2005). National Competitiveness: Issues for Vietnam, Meeting with Prime Minister Phan Van Khai and his delegation. 200506 GCR Vietnam - KC 2005.06.24.ppt. www.isc.hbs.edu. Promoting Inclusive Growth through Business Development at the Base of the Pyramid (Project Note for the revised ADB TA No.6518-REG). Responsible Research. Impact Investing in Emerging Markets, May, 2010. Sriboonchitta, Songsak and Aree Wiboonpoongse. Overview of Contract Farming in Thailand: Lessons Learned. ADBI Discussion Paper No. 112, July 2008. SNV and the World Business Council for Sustainable Development (2011). Inclusive Business: Creating Value in Latin America. May 2011. Sciaroni, Bretton G. Cambodia Economy Outlook 2012. Presentation to the 3rd Cambodia Finance International Conference 2012, Sciaroni and Associates, Phnom Penh, February 2012. Setboonsarng, Sununtar, PingSun Leung, and Adam Stefan. 2008. Rice Contract Farming in Lao PDR: Moving from Subsistence to Commercial Agriculture. ADBI Discussion Paper 90. Tokyo: Asian Development Bank Institute. http://www.adbi.org/discussionpaper/2008/02/25/2492.rice.contract.farming.in.lao.pdr/
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Appendices
Vietnam General Statistics Oce. Website: http://www.gso.gov.vn Vietnam s Economy: Plus One Country. The Economist. September 2, 2010. The World Bank and The International Finance Corporation. (2011). Doing Business 2012: Making a Difference for Entrepreneurs. The World Bank. Washington, DC. World Bank Poverty Net. Website: http://www.worldbank.org/poverty. The World Bank. Bank Group, 2005. World Resources Institute and International Finance Corporation. (2007). The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. Washington, DC. A Better Investment Climate for Everyone. World Development Report. The World
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Appendices
Company
ACLEDA Bank*** Allianz An Giang Fruit Vegetables and Foodstu JSC (ANTESCO)
Sector
Financial Services - Micronance Financial Services - Microinsurance Agribusiness - fruits and vegetables
Country
Lao PDR Lao PDR Vietnam
IB Model
Consumer Consumer Supplier
4 5
Supplier Supplier
6 7
Cambodia Vietnam
Supplier Distribution
8 9 10 11 12 13 14 15
Duc Viet Food JSC ECOM Coee Group FPT Elead JSC Gentraco JSC Grand-Place Green Energy Biomass J.S.C. *** Huong Hoa *** Hydrologic Social Enterprise***
Agribusiness - processed meats Agribusiness - commodities Telecommunications - mobile phones Agribusiness Agribusiness - chocolate Renewable Energy - biomass Agribusiness - commodities Water and Sanitation - water purication
16 17 18 19 20 21
Intean Poalroath Rongroeurng Ltd (IPR)*** Interour Vietnam Kim Hang Aluminum Plastic Kien Long Bank KPN Pharma Co, Ltd. Lampang Food Products
Financial Services - micronance Agribusiness - commodities Manufacturing Financial Services - rural banking Agribusiness Agribusiness
22 23 24 25
Lao Agro Industry Co., Ltd. Lao Arrowny Corporation Leudnilan Import Export Linfox Logisitcs
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Appendices
#
26 27 28 29 30 31
Company
Nha Be Corporation Nestl Vietnam*** Philips Electronics Vietnam Prasac Project Alba Proximity Designs
Sector
Manufacturing - Garment Agribusiness Energy Financial Services - Micronance Agribusiness Agribusiness
Country
Vietnam Vietnam Vietnam Cambodia Cambodia Myanmar
IB Model
Employee Supplier Consumer Consumer Supplier Consumer
32
Vietnam
Supplier
33 34 35 36
Sahakreas CEDAC Sathapana Southat Rice Mill*** Sunlabob Renewable Energy Ltd***
Agribusiness - Rice Financial Services - Micronance Agriculture - rice production Renewable Energy - diversied renewable energy solutions
37 38
Cambodia Vietnam
Consumer Consumer
39
Urmatt Ltd.***
Thailand
Supplier
40 41
Vietnam Cambodia
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