incentivising innovation at the bottom of the pyramid - the experience of enterprise challenge...
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25 February 2010
Incentivising Innovation at the Bottom of the Pyramid
- the experience of Enterprise Challenge FundsWits Innovation for Development Symposium - Private Sector Roundtable
Context• Conventional wisdom – the poor exist beyond markets; need to
be insulated from market forces; different rules apply => subsidy-driven development interventions & welfare
• Growing recognition that sustainability & impact demands we move beyond state-based, supply-driven, top-down approaches to poverty challenges
• Experience reveals the power of markets and the private sector in lifting people out of poverty - reflected in the Making Markets Work for the Poor (M4P) approach to development & poverty reduction
• Recognise real barriers to the market’s ability to realise economic opportunities and deliver outcomes in poor areas (SA context of duality, dislocation and distortion)
• Challenge is to understand the barriers that inhibit private investment and innovation in poor areas & to devise market compatible incentives to overcome these
Challenge Funds - demand-side, market-based and competitive incentive mechanism to incentivise pro-poor innovation
The rationale for ‘pro-poor’ incentives to market players
• Low-income markets have unique characteristics• Serving these markets requires new approaches• Successful innovation leads quickly to replication
Pro-poor growth requires innovation
• Inherently more risky than mainstream markets• Information uncertainties contribute to high risk
• Inherent inertia within firms, esp if no competition
Firms are slow to respond to opportunities at the ‘base of
the pyramid’
• Can prioritise sectors & markets, not investments• Ill-equipped to assess & manage risk
• Interventions likely to distort rather than facilitate
Public money can trigger sustainable development
outcomes - but is unable to pick winners
• Social impact must be explicit & proportional• Clear criteria, widely communicated
• Independent, transparent adjudication • Once-off financial contribution, leading to exit
Public money for private initiative - requires a clear development logic, open
competition and exit
Challenge Fund logic: trigger private investment & innovation by changing attitudes to risk…..
Ris
k ad
just
ed fi
nanc
ial r
etur
n
Social impact
Minimum level of return required by firm (hurdle rate)
Minimum impact required by donor
High
Low High
Source: FDCF OPR, fig.1
Aim of the challenge fund:
to incentivise companies to move from the bottom right to the top right quadrant
The logic applies across sectors and development objectives
Challenge funds promote risk-taking and innovation so that established businesses extend their core activities in innovative ways which have a high social impact
Characteristics of Enterprise Challenge Funds
Key design characteristics
• A once-off, limited duration financial contribution•Awarded through an open competitive process, independently adjudicated•To a private firm or a consortium led by a private firm•Against a matching contribution
•To be implemented by the firm – must have proven capacity•For long-term commercial gain with a defined social impact
A temporary market development catalyst… stimulate innovation by private firms… improve market access for those historically excluded
from enterprise opportunities
Challenge Funds ‘start races rather than pick winners’
Development impact
• Limits scope for distortion or dependency• Demand driven + competitive focus, innovation, quality, additionality•Leverages existing activities, not new projects or organisations•Leverages private funding and risk-sharing ownership & success•Capacity to implement, driven by the logic of the transaction•Development impact likely to be sustainable if it is profitable
• Strong partnerships forged• Top management involved
• Innovation criterion flexibly applied
• Recipients not previously donor funded
• Real competition for funds• Genuine risk sharing by private partner
What does a successful portfolio look like?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 2 3 4 5Likelihood of success on scale of 1 (likely to completely achieve success) to 5 (unlikely to be realised)
% o
f pro
ject
s
20% of projects: highly likely to be successful
50% of projects: moderate chance of success 30% of projects: unlikely to
achieve success
Projects likely to succeed when
Great Lakes Cotton (Malawi) - BLCF
Context OutcomesParticipation
• Partnership: Great Lakes Cotton, Syngenta, the Association of
Smallholder Farmers• Offering: improved quality & availability
of seed, and other technical inputs to pre-registered farmers
• 180,000 small holders;• 35,000 “ganyu” (casual labour) • 500 private extension workers
• 2 seed-treatment plants installed• 43,000 tonnes small holder cotton production in
2003/4 Vs 16,000 tonnes in 2002• +265% in productivity attributed to project
• spin-off activity (transport sector) already apparent• BLCF input UKP0.29m; private input UKP1.3m
What does private sector-led development impact look like?
Vodafone MPESA (Kenya) – FDCF
Context OutcomesParticipation
• Partnership: Vodafone Kenya & FDCF• Offering: co-funding of a pilot to test technology to use cell-phones for money transfer to remote areas using air-time
retailers as ATM network.
• Millions of rural Kenyans & Tanzanian h’holds and SMEs
• Banks & MFIs improving products at the BoP
• dramatically reduced transactions costs & improved security for poor users
• Improved productivity across economy• Barriers between banks & MFIs overcome
• FDCF input UKP1m; Vodafone: UKP15m after roll-out
A N Other Banking Group – Southern Africa
Context OutcomesParticipation
• Partnership: AN Other Banking Group throughout Southern Africa, Integra
Micro Systems (India)• Offering: Correspondence Banking
Transactional Platform; providing access to basic financial services for poor and
low income individuals
• 4.7 million South African low income clients
• Retail outlets able to contain point of sale devices (spaza owners,
restaurants, shops)
• Removal of cost barriers• Each pilot area (3 initial areas) seeing 20 000
clients per area transacting• Five year outcome 2.3 million clients engaged
directly with CBTP• Lower cost of interaction up to 3 times for bank and
5-8 times for client• SGCF input R1,998,750 Own capital input
R1,988,750+++
What does private sector-led development impact look like?
WHL Consulting – WHL Africa
Context OutcomesParticipation
• Partnership: WHL Africa, Community based tourism providers (township B&Bs, indigenous cultural experiences, MSME
providers)• Offering: Elevating experiential tourism by empowering South African low income
tourism providers
• Medium Small Micro Enterprises and local Marketplace Operators
• Currently 70 destination sites live across Africa
• MSMEs and low income tourism owners cultivating their offering, working with multiple
intermediaries and communicating their offering to a global marketplace
• Connecting MSMEs directly with travelers via online market access.
• Generating market access• SGCF input R2,361,734 Own capital input
R2,091,433
Thank you
Decisions
83 Project Concept Notes received
69 PCN’s reviewed by internal assessment panel
28 selected to submit full application.
14 rejected on eligibility grounds
7 did not submit
21 Full applications received
10 Rejected
1 Pending
10 Funded
41 rejected irt criteria
Project Concept Note Stage Full Application Stage
4 principles to ameliorate the risks inherent in grant financing
• Have an explicit view of sustainability from the start - a credible vision of how things will work unsupported by ongoing subsidy
• Focus on realistic, context-appropriate solutions - avoid importing solutions devised in better-resourced situations
• Will the intervention leverage local market activity? Apply a simple but critical test – will it develop or 'crowd in' the market or distort it?
• Is there scope for systemic change in the way the market system works? Are we addressing the underlying causes of poverty, not merely sponsoring individual projects?
Take the best features of venture capitalism to maximise social outcomes
Clyral – KwaZulu Natal
Context OutcomesParticipation
• Partnership: Mobile Human Intelligence Panel, World Changes Academy
• Offering: Development of technology platform allowing unskilled, remote fieldworkers, using low cost mobile phones, to process data used for a
variety of R&D and information processing applications
• Thousands of unemployed and low income earners with access
to mobile phones
• 1st phase pilot study will train and develop 100 individuals
• Subsequent roll out to thousands of individual participants
• Applying BPO success to mobile technology networks in South Africa
• SGCF input R1,050,000 Own capital input R293,750
What does success look like (SA)?
Madi a Thavha Lodge – Northern Limpopo
Context OutcomesParticipation
• Partnership: Madi a Thavha, Lesheba Community Trust, Village Tourism Trust
• Offering: Establishing a marketing and sales organisation for heritage based arts
and crafts in Limpopo
• 20 local craft units (average 8 crafters per unit=160 crafters)
• Area covering Northern Limpopo to Zimbabwean border
• Business and skills development of 20 production units and surrounding communities
• Market access for traditional crafters & product lines
• Demand-side support Vs supply-driven interventions = market relevance &
sustainability• SGCF input R582,500 Own capital input
R411,000
A N Other Banking Group – Southern Africa
Context OutcomesParticipation
• Partnership: AN Other Banking Group throughout Southern Africa, Integra
Micro Systems (India)• Offering: Correspondence Banking
Transactional Platform; providing access to basic financial services for poor and
low income individuals
• 4.7 million South African low income clients
• Retail outlets able to contain point of sale devices (spaza owners,
restaurants, shops)
• Removal of cost barriers• Each pilot area (3 initial areas) seeing 20 000
clients per area transacting• Five year outcome 2.3 million clients engaged
directly with CBTP• Lower cost of interaction up to 3 times for bank and
5-8 times for client• SGCF input R1,998,750 Own capital input
R1,988,750+++
What does success look like?
WHL Consulting – WHL Africa
Context OutcomesParticipation
• Partnership: WHL Africa, Community based tourism providers (township B&Bs, indigenous cultural experiences, MSME
providers)• Offering: Elevating experiential tourism by empowering South African low income
tourism providers
• Medium Small Micro Enterprises and local Marketplace Operators
• Currently 70 destination sites live across Africa
• MSMEs and low income tourism owners cultivating their offering, working with multiple
intermediaries and communicating their offering to a global marketplace
• Connecting MSMEs directly with travelers via online market access.
• Generating market access• SGCF input R2,361,734 Own capital input
R2,091,433
What does success look like?
Raizcorp – Richards Bay, Gauteng
Context OutcomesParticipation
• Partnership: BHP Billiton, Samancor• Partner companies in small
underserviced towns• Offering: Operation of business
incubators for own account• Deliver high quality entrepreneurial
support services
• 28 smaller companies developed in equity and fee based models, serviced by Business Support
Centre.
• Breaking the economic barrier• Increasing profile of entrepreneurs with
surrounding communities• Proving a business model
• Transfer of skills• SGCF input R2,852,640 Own capital input
R2,425,000
Great Lakes Cotton (Malawi) - BLCF
Context OutcomesParticipation
• Partnership: Great Lakes Cotton, Syngenta, the Association of
Smallholder Farmers• Offering: improved quality & availability
of seed, and other technical inputs to pre-registered farmers
• 180,000 small holders;• 35,000 “ganyu” (casual labour) • 500 private extension workers
• 2 seed-treatment plants installed• 43,000 tonnes small holder cotton production in
2003/4 Vs 16,000 tonnes in 2002• +265% in productivity attributed to project
• spin-off activity (transport sector) already apparent• BLCF input UKP0.29m; private input UKP1.3m
What does private sector-led development impact look like?
Vodafone MPESA (Kenya) – FDCF
Context OutcomesParticipation
• Partnership: Vodafone Kenya & FDCF• Offering: co-funding of a pilot to test technology to use cell-phones for money transfer to remote areas using air-time
retailers as ATM network.
• Millions of rural Kenyans & Tanzanian h’holds and SMEs
• Banks & MFIs improving products at the BoP
• dramatically reduced transactions costs & improved security for poor users
• Improved productivity across economy• Barriers between banks & MFIs overcome
• FDCF input UKP1m; Vodafone: UKP15m after roll-out
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