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THE NEED FOR PPP ARRANGEMENTS TO MAKE BUSINESS PROPOOR AND GREEN
By Mel Jones and Manuel de Vela, Asian Institute of Management

Background paper for Conference on Targeting the Environments of the Poor in the Context of Climate Change and the Green Economy, 24-26 Nov 2010, New Delhi

SUMMARY 1. There has been a series of recent moves by business and development practitioners alike to first, recognize, and second, promote, the role of business in tackling poverty and environmental and climate change issues. The Asian Institute of Management (AIM) has conducted a series of case studies to gain a better understanding of how this principle works in practice. This paper presents a survey of the lessons learned from the case studies. Two forces are driving commercial relations between business and the poor. The first is rising spending power in emerging economies; the second is innovation on the supply side. However, incorporating measures into the production and supply process to protect the environment and reduce the impact on climate change often involves additional costs. Moreover, there are particular difficulties of doing business with the poor. While success is being achieved in bringing consumer goods within the spending power of the poor, and with linking poor farmers’ production to commercial agro-processors, challenges remain in finding ways of delivering public goods including environmental services such as water and sanitation to the poor via the private sector. Private sector-led development is neither a panacea nor a universal development model. The “externalities” of economic growth may not always be to the benefit of society, or to the liking of government. There is, therefore, a case for governments to intervene to correct distortions. Public-Private Partnerships (PPPs) are one means of government intervention. They have been conventionally used to finance public infrastructure off-budget, thereby creating the illusion of reducing public debt. However, recently PPPs have been extending into new areas like pharmaceuticals and biotechnology with a view to tackling developing country environmental health and food security issues. There is now a wide range of ways in which governments can support and encourage the private sector to drive growth and pursue inclusive and green business strategies. Nevertheless, measures should be chosen carefully so as not to undermine opportunities for the private sector. It is also important to recognize that the partnerships that are helping to elevate the role of the private sector in poverty alleviation and environmental sustainability often include other actors, especially NGOs. Further, green growth is not necessarily pro-poor. The AIM case studies report on several successful, or potentially successful, supply chain linkages between commercial crop processing firms and poor farmers. They also highlight the problems of establishing commercial relationships between businesses and the poor when it comes to supplying public goods. There remains a need for further research, pilots and evaluations.

INTRODUCTION 2. This paper sets out to bring together several threads of this conference. It recognizes that environmental degradation is a major cause of poverty in Asia and that there is a need to bring the environment and poverty agenda closer together. It seeks to demonstrate that growth need not be anti-poor or un-green. It recognizes the central role of the private sector as the engine for growth; and it cautions about the limits to a private sector-led approach to poverty-alleviation and green growth. Because of these constraints, there is a prima facie case for intervention by the state, “non state actors” (e.g. NGOs) and international development agencies, possibly through the use of Public-Private Partnerships (PPPs). Yet these interventions themselves are laced with risks. 3. The paper uses a series of case studies to learn lessons, both positive and negative, about the role of the private sector in reducing poverty in the context of environmental constraints and looming climate change. The case studies were prepared by the Asian Institute of Management (AIM) under the project: Mainstreaming Poverty Alleviation Initiatives among ASEAN-member Countries. The project is funded by the ASEAN Foundation through the Japan-ASEAN Solidarity Fund, and has been developed in collaboration with the Asian Development Bank’s Regional Technical Assistance Report (ADB RETA) on Regional Knowledge and Partnership Networks on Poverty Reduction and Inclusive Growth. 4. The Asian Institute of Management (AIM), is a graduate school of business based in Philippines. It was established in partnership with Harvard Business School and uses the Harvard Business School case study teaching methodology. It was described by Asiaweek magazine as the best in the Asia-Pacific region in terms of executive education. AIM’s Center for Development Management (CDM) conducts research, and offers both Masters and Certificate courses, in Development Management intended for executives and managers from developing nations. 5. The basic message of this paper is that, although the private sector is the “engine of growth”, commercial activities do not enable governments to achieve all their development objectives. In many cases incentives will have to be offered to encourage private companies to trade with the poor and to follow sustainable business practices. Partnerships involving companies, government and NGOs can be an effective way of closing the gap between the outcomes of private commercial activity and development objectives. This relates in particular to poverty reduction and environmental sustainability. DOING SUSTAINABLE BUSINESS WITH THE POOR 6. There has been a series of recent moves by business and development practitioners alike to first, recognize, and second, promote the role of business in tackling poverty and environmental and climate change issues. These ideas were reflected in, among others, the following initiatives: • Agenda 21 created by the Rio Conference on Environment and Development promote partnerships involving business (1992) • Sustainability Reporting guidelines of the Global Reporting Initiative (1997) • World Summit on Sustainable Development, Johannesburg (2002) to

• WBCSD Business for Development (2005) • UN Commission on Private Sector and Development report: Unleashing Entrepreneurship: Making Businesses Work for the Poor (2004). Followed by: Growing Inclusive Business.(2008) • Business Call to Action (2008) 7. The importance of these recent moves is that firms aim to include poverty and environmental sustainability considerations in their commercial relations “through their core business”. It marks a clear shift away from “philanthropy” (charitable gifts to worthy causes) and “corporate social responsibility” (essentially, doing no harm). It asserts that sustainable business can be done on commercial terms that can also benefit the poor, particularly in developing countries; that synergy between commercial value and social value is attainable. 8. A variety of terms have been applied to this principle of doing core business with the poor. After Ashley1, these include: • Inclusive business • Bottom of the Pyramid • Supply chains, and • Sustainable business (which adds the dimension of environmental considerations). WHO IS DOING IT AND WHY? 9. The World Business Council for Sustainable Development has 175 members drawn from some most valuable “blue chip” companies in the world. Members include ABN Amro, Anglo American, BP, GE, Toyota, Unilever and Vodaphone. The WBCSD “Statement of Intent for doing business with the world” begins:
As business leaders, we believe that business cannot succeed in societies that fail. We believe that globalization can be made to be inclusive and that the leading global companies of the future will be those that do business in ways that address, openly and transparently, the world’s major challenges, including poverty and inequity, climate change, pollution, resource depletion, globalization and demographic shifts.

10. The Business Call to Action was supported by 80 of the world’s leading CEOs. It asserted that:
By signing the Declaration, CEOs and Chairmen are committing their company to take action through their core business [emphasis added] in a transformative and scalable manner that will enhance growth and help meet the Millennium Development Goals.

AIM’s case studies contain three examples of multinational companies that are tackling poverty and environmental issues: Nestle in Malaysia is purchasing red rice from indigenous minority farmers; Sompo Japan is test marketing weather index insurance for rice farmers in Thailand; and Yamaha in Indonesia is bringing clean water to rural communities. 11. Yet it is not just large multi-national companies that are working in this direction. UNDP’s Unleashing Entrepreneurship contains several examples of how smaller companies
1

Harnessing Core Business for Development Impact, ODI Background Note, February 2009

are developing strategies with similar objectives. AIM’s own case studies identified more. SCG Forestry in Thailand is promoting smallholder cultivation of eucalyptus trees; Green Energy and Huong Hoa in Vietnam are purchasing smallholder production of Jatropha seed (for industrial oil) and cassava (for starch) respectively. Sunlabob in Laos and SURE in Philippines are selling environmentally-friendly solar powered lanterns. 12. So why should private companies with the responsibility to make a profit for their owners be concerned about poverty and environmental issues? The answer often lies in the extent to which companies can enhance their reputation and competitive advantage, develop markets and strengthen local supply chains by working with the poor and improving the environment at the same time. But the far-sighted see the importance of improving the spending power of the poor and contributing to the institutional and environmental conditions that underpin future profits. Indeed, businesses have a large stake in creating peaceful, stable and prosperous societies. Without these three conditions future profits will surely be difficult to obtain. 13. Development practitioners have recognized for some time that government-driven poverty reduction approaches and environmental protection policies alone are insufficient. Various studies have also highlighted the limited impact of international development assistance. Exploitation of productive opportunities needs the full involvement of the private sector. Private enterprises not only create direct economic benefits like employment and income, while delivering goods and services in demand, but also contribute the tax money that finances government social development programs. HOW IS IT BEING DONE? 14. Two forces are driving commercial relations between business and the poor. The first is rising spending power in emerging economies; the second is innovation on the supply side. The high rates of growth that have been attained in recent years in Asia have led to a general increase in spending power and the lifting of millions out of poverty. China and India have led the way, with Vietnam, Cambodia, Laos and other SE Asian nations all enjoying growth rates well in excess of those achieved by more the more mature economies in the United States and Europe. This has created new market opportunities for local and international businesses. At the same time, there has been a burst of innovation by the private sector to take advantage of these new opportunities. 15. The Economist Special Report on Innovation in Emerging Markets notes that Unilever and Procter & Gamble started selling shampoo and washing powder in small sachets more than two decades ago to customers with limited budgets. Now “the very nature of innovation is having to be rethought”. This may involve: • • • technological breakthroughs, incremental improvements to products and processes stripping products down to their bare essentials.

16. In addition, firms are improving knowledge of, and relations with, poor people, opening new markets, squeezing costs, narrowing their margins, and going to scale. C.K. Prahalad lists “Twelve Principles of Innovation for Bottom of the Pyramid Markets”: • • • Focus on price performance of products and services Innovation requires hybrid solutions Solutions must be scalable and transportable across countries, cultures and languages

• • • • • • • • •

All innovations must focus on conserving resources Product development must start from a deep understanding of functionality, not just form Process innovations are just as important as product innovations Deskiling work is critical Education of customers on product usage is key Products must work in hostile environments Research on interfaces is critical given the heterogeneity of consumers Innovations must reach the consumer, so methods need to be found to access the poor at low cost Product “platforms” should be designed so that new features can be easily incorporated.

17. The Asian Institute of Management (AIM) prepared a series of case studies in 2010 to examine practical examples of how poverty is being tackled in SE Asia by the private sector and NGOs. This was under the project: Mainstreaming Poverty Alleviation Initiatives among ASEAN-member Countries. These case studies will shortly be published online. The annex to this paper contains abstracts of the studies. 18. Several of these principles of innovation may be observed in AIM’s case studies. Nestle in Sarawak has spent years improving red rice varieties, Sunlabob in Laos has gradually improved the solar lantern over time to make it more versatile and more durable; SCG Forestry in Thailand has invested heavily in R&D to produce new eucalyptus clones and has refined its extension methods over time to make it both farmer-responsive and effective in delivering trees to the paper mill; Huong Hoa Tapioca Starch Factory in Vietnam is a persistent innovator. First it re-engineered its starch-extraction process to remove the acrid smell and caustic effluent; then it moved on to improve its supply chain links with farmers; it is using cassava waste to make organic fertilizer that is then re-sold back to farmers to maintain crop productivity and soil fertility. Green Energy, also in Vietnam, has entered the market for bio-fuels and has rapidly embarked on an R&D program to produce improved planting material and has devised a comprehensive procurement system that involves a detailed extension package for jatropha farmers. Sompo Japan Insurance in Thailand is using new ways of modelling the relationship between rainfall and rice production to help deliver affordable insurance to farmers. Yamaha in Indonesia has spent 15 years developing and testing a decentralised safe water supply system. WHY THEY’RE NOT ALL DOING IT 19. While the dynamics of emerging markets is creating huge opportunities for new business, it is often observed that this may be at the expense of environmental damage, the generation of the greenhouse gases that are a contributory cause of climate change and, often, the exclusion of the poor. Beyond philanthropy and corporate social responsibility, the objective of a private business is to make a profit. This normally involves seeking out the least cost source of inputs and the markets best able to bear a viable price. Incorporating measures into the production and supply process to protect the environment and reduce the impact on climate change involves additional costs. Moreover, there are particular difficulties of doing business with the poor. 20. The UNDP Report, Creating Value for All: Strategies for Doing Business with the Poor, notes five main constraints on businesses seeking to be more inclusive: information, institutions, infrastructure, spending power and finance.

21. Information Poor consumers are often ignorant of new products; firms are equally at a loss to understand the needs and desires of the poor. Overcoming these barriers caused by lack of information can be costly. Making poor people aware of new products is not enough; as new consumers, they need to be trained in their use as well. Training is expensive. Large firms like Unilever in India prepared large teams of trainers to go out into poor neighborhoods to promote good hygiene and the use of Unilever’s soaps and shampoos. Smaller firms find the overhead cost of breaking into new markets hard to bear. In the AIM case studies, Sunlabob finds it difficult to meet the cost of training communities in operating a solar lantern scheme; Huong Hoa Tapioca Starch Factory and Green Energy in Vietnam incur high costs of training farmers, who traditionally practice shifting cultivation, in sustainable soil management. Sompo Japan in Thailand is using the branch network of the Bank of Agricultural and Agricultural Co-operatives (BAAC) to reach out to farmers and promote its new insurance product. Sumadi in Indonesia and the World Toilet Organization in Cambodia both find it necessary to invest heavily in user education to promote the sale and use of low-cost latrines. 22. Institutions Markets in which the poor trade often lack regulation. It is difficult to enforce rules and contracts. Legal systems are weak and offer scant protection against rule-breakers. Patents and copyrights are often infringed with impunity. Contracts provide no guarantee of performance. Under such conditions firms may be reluctant to invest and offer services that can be undermined or copied. In Vietnam Huong Hoa has to beware the possibility that farmers may choose to sell their cassava to other buyers, even if they have signed a contract to supply the factory. Green Energy is working closely with government agencies to give itself some protection against farmer defaults on contractual obligations to supply jatropha seed. Nestle in Malaysia is offsetting some of the risk of non-compliance with contracts for the supply of red rice by working with and through a local company that has built a close relationship with farmers. 23. Infrastructure In poor countries public infrastructure is often inadequate for the needs of a growing economy. In poor areas of those countries physical infrastructure is often in a very dilapidated state. Poor roads hinder markets links; weak telecommunication services reduce the flow of information; lack of water and sanitation facilities leads to poor health and lost productivity. The AIM case studies demonstrate how the vast improvement in rural roads in the last generation in Thailand and Vietnam has removed marketing constraints for many farmers; whereas in Laos, Sunlabob is still struggling to cope with the need to reach remote villages in the face of a rudimentary national transport system. Sompo Japan Insurance in Thailand is dependent on government investment in new weather monitoring stations for the data it needs to operate its weather index insurance. 24. Spending power People subsisting on a couple of dollars a day do not make much of a ripple in the markets. Firms need to sell their products, so they are obliged to honor the demands of spending power. In order to reach the poor, firms often make compromises on quality of product and service; they scale up to compensate for reduced margins. But in the end, gaps often remain between the minimum cost of supplying a product and the maximum ability to pay of most of the poor. This is most obvious in the case study of World Concern and Habitat for Humanity in Myanmar. Here the reconstruction effort after Cyclone Nargis has involved provision of new, low cost homes for those made destitute by the storm. The cost of a basic house which includes rainwater catchment, latrine and solar lantern is $600-800. As low as this cost is, however, it is still well beyond the means of the people who live in the Ayeyarwaddy

Delta region – especially after most of their assets were destroyed by the cyclone. They therefore remain dependent on the budgets of government, NGOs and international relief agencies. A similar story emerges from several studies of the private supply of public goods such as clean water and sanitation. Lack of spending power and lack of willingness to pay were major problems encountered by Yamaha’s decentralized clean water system in Indonesia, the World Toilet Organisation’s latrines in Cambodia and Sumadi’s latrines in Indonesia. It is also a recurring problem for rural electrification programs everywhere, including Sunlabob’s market in Laos and SURE’s in Philippines. Which leads to the fifth constraint …… 25. Finance The ability to save and to borrow can create spending power where it otherwise might not exist. Rural areas in developing countries are poorly served by banks. There are few options for the safekeeping of savings. Although in Pakistan some banks recognize that the poor in rural areas are net savers and therefore contribute funds that can be re-lent elsewhere at a profit, in many SE Asian countries the rural landscape is not notable for the number of banks. Micro-finance services are increasingly filling the void left by absent commercial banks. However, this is mainly in the provision of credit - although services offering the safe holding of savings are also growing. In any case, most poor and rural areas in developing countries remain underserved by financial institutions. Countries such as Laos, Vietnam and Myanmar actively obstruct the development of a local micro-finance industry. Micro-insurance is still at the developmental stage. MicroEnsure is nevertheless making strides in a number of countries and has piloted crop insurance schemes in Malawi, Tanzania, Rwanda, India, and the Philippines, covering a variety of crops including rice, maize, and tomatoes. The AIM project covered the case of Sompo Japan weather-index insurance for rice farmers in Thailand. This is being tested in a pilot project in Khon Kaen Province. However, considerable obstacles remain to be overcome if the scheme is to be scaled up and rolled out to a large number of farmers. Much work still has to be done on developing farmer demand and a low cost distribution system for the insurance product. 26. To this list we should add a comment on the particular difficulty of delivering public goods to the poor via the private sector. The AIM case studies followed several attempts by businesses and “social entrepreneurs” to deliver public infrastructure and services to those beyond the reach of government facilities. Water and sanitation services have important implications for the environments of the poor. Low levels of hygiene, poor water quality and open defecation present serious environmental health risks to rural communities and those living in urban slums. In urban middle class areas, government provision of clean water and sewage disposal is expected, and, mostly, provided. The same goes for electricity. Different conditions exist in shanty towns and rural areas which are notable for the absence of these services. This has given rise to a number of entrepreneurs who see a potential market in improving environmental health through a commercial approach to the provision of electricity, water and sanitation. 27. The record, as observed in AIM’s case studies, is, sadly, rather dismal. Yamaha’s attempt to serve rural areas with potable water have failed to get off the ground, largely because of the need to fund an initial capital cost of $50,000 for the water purification unit and of a failure to maintain the systems established for distribution and regulation. Both the World Toilet Organization in Cambodia and Sumadi in Indonesia faced the difficulty of creating a market for latrines where people are accustomed to defecating for free in the open. The World Toilet Organization is addressing this by mounting campaigns that promote the idea of latrines as a status symbol. By implication, this means that they cannot start by targeting the poorest. However, it does point to a possible way forward in a difficult market.

Both cases of rural electrification – SURE in Philippines and Sunlabob in Laos – point to the importance of government subsidy for successful roll-out. Habitat for Humanity International and World Concern in Myanmar could only construct cyclone-resistant housing for those left destitute by Cyclone Nargis through a 100% grant to meet construction costs as well as paying cash-for-work for land clearance and carrying building materials. Livelihoods and spending power had been destroyed by the cyclone. In Philippines, SURE received the backing of the Departments of Energy and Social Welfare and the World Bank and operated with a subsidy through a government scheme: the Comprehensive and Integrated Delivery of Social Services Project (KALAHI-CIDSS). In Laos, Sunlabob has to compete with a donor-backed government rural electrification scheme that undermines its market and prevents it going to scale. ROLE FOR GOVERNMENTS AND AID AGENCIES 28. We have seen that there is great potential to be realized by harnessing the private sector to efforts to reduce poverty. Nevertheless, private sector-led development is an imperfect model. Private firms produce goods in demand by consumers. In doing so, they provide employment and income, buy farmers’ crops and pay taxes. In this way, the private sector is the engine of growth. The “externalities” of this growth, however, may not always be to the benefit of society, or to the liking of government. Resource exploitation can cause damage to the environment and local communities. As economies grow, the rising consumption of fossil fuels and the destruction of forests lead to a build-up of carbon that contributes to global warming and climate change. The poor are often the last to benefit from new consumer opportunities and the first to suffer from a degraded environment. “Private sector as an engine of growth” is therefore not necessarily synonymous with “private sector as an engine of sustainable development”. 29. Aneel Karnani has called the Bottom of the Pyramid strategy for reducing poverty: “a failed promise”. Businesses’ commitments, such as those of WBCSD, to “do the right thing” are, alone, not enough to achieve development objectives. Karnani sees a huge need for complementary government spending on health and education and special programs that target the poor. It seems the private sector-led development model could do with tweaking. It is here that governments, international development agencies and NGOs see a role for themselves. The private sector may be encouraged move closer to delivering the desired outcomes of poverty alleviation and green growth, either through complementary action or incentives. 30. The question then is: “How far should we go?” i.e. to what extent should governments intervene? There is a broad range of choice. At the one extreme there are Cuba and North Korea with almost complete government ownership of the means of production (with Venezuela apparently heading in that direction). Moving rightwards we pass through China, Vietnam, Laos and others which prefer to maintain considerable government involvement in production. Singapore, Hong Kong, Taiwan and South Korea are towards the laissez-faire end of the spectrum where governments tend to rely on the private sector to produce private goods whilst limiting themselves to providing a sound legal and regulatory environment and contributing public infrastructure. As this paper is concerned with the role that businesses can play in the development process, we are more interested in the goingson at the liberal end of the range of government interventions. Here, even the provision of basic infrastructure - an activity once reserved almost exclusively for governments - is being challenged by Public-Private Partnerships.

Public–private partnerships (PPPs). 31. A PPP describes a government service or private business venture that is funded and operated through a partnership of government and one or more private sector companies. A PPP involves a contract between a public sector authority and a private party, in which the private party delivers a public service and assumes substantial financial, technical and operational risk in the project. In some types of PPP, the cost of using the service is borne exclusively by the users of the service and not by the taxpayer (e.g by means of a toll for use of a highway or bridge). Alternatively, (notably the UK’s private finance initiative), capital investment is made by the private sector to provide agreed services with the cost borne mostly or wholly by the government. Kinds of infrastructure projects that have successfully involved PPPs include: power generation and distribution, water and sanitation, refuse disposal, pipelines, hospitals, school buildings and teaching facilities, stadiums, air traffic control, prisons, railways, roads and housing. 32. Early attempts at introducing PPPs in the 1970s were largely motivated by a desire to reduce the level of public debt. Private investment in infrastructure was appealing because public accounts did not distinguish between recurrent and capital expenditures. By privatizing investment, governments could create the illusion of reducing debt by taking investment out of the budget. Of course, recurrent expenditures increased in future years to pay back the private companies for their investment. A second justification for PPPs was that the private sector could share the risks of an investment while the government remained publicly accountable for the service provision. 33. Over time, however, the objectives of PPPs have changed and the scope for their application has broadened. Now, increasingly, governments (and international development agencies) are using PPPs to provide incentives for private sector investment to support a wide range of development activities, not just infrastructure construction and operation. 34. Product development partnerships (PDPs) are a class of public–private partnerships that focus on pharmaceutical product development for diseases in the developing world. These include preventive medicines such as vaccines and microbicides, as well as treatments for otherwise neglected diseases. PDPs were first created in the 1990s to support the commitment to develop international public goods for health whilst protecting privately-owned intellectual property rights. International PDPs help to accelerate research and development of pharmaceutical products for underserved populations that would not be profitable for private companies acting alone. 35. PPPs have also been recognized for their potential to have an instrumental role in promoting food security:
Biotechnology can contribute to future food security if it benefits sustainable small-farm agriculture in developing countries. …. Protection of intellectual property rights encourages private sector investment in agrobiotechnology, but in developing countries the needs of smallholder farmers and environmental conservation are unlikely to attract private funds. Public investment will be needed, and new and imaginative public-private collaboration can make the gene revolution beneficial to developing countries. This is crucial for the well-being of today's hungry people and future generations. Ismail Serageldin, Science 285: 387, July 16, 1999.

36. There is a range of methods by which governments (and international development agencies) now support private sector involvement in the pursuit of development

objectives. We may now talk about PPPs in the sense of a broader partnership that might also include international development agencies and NGOs. Approaches begin with cosponsorship of specific projects, continue through sector-wide co-operation and go on to the establishment of supportive national legislation and regulatory regimes (and, in some cases, international agreements and commitments). Various mixes of these measures have been observed in the AIM case studies. We present some examples below. 37. In Sarawak, the Malaysian Agricultural Research and Development Institute (MARDI) teamed up with a multinational company (Nestle), a local enterprise (Empire Rice Mills) and smallholder farmers of indigenous, non-Malay, origins. MARDI co-operated with Nestle to develop a disease-resistant, high yielding red rice seed. Empire Rice Mills multiplied the new variety to produce the quantities needed by the outgrowers. It then bought back the harvested rice at the end of the season. Nestle, in turn, purchased the rice from Empire and used it as an ingredient in a high quality infant feed. MARDI’s involvement reduced the risk to Nestle of the long gestation period of the research and development effort, which took ten years. Now over 500 indigenous farmers are now receiving a good income from growing a high-value crop using advanced cultivation techniques. 38. In the Philippines, Solutions Using Renewable Technology (SURE) partnered with the Department of Energy, local government units, NGOs and micro-finance institutions to deliver affordable solar power to rural communities lying beyond the reach of the electricity grid. The government was keen to promote rural electrification and was prepared to offer a subsidy – made possible by a World Bank loan - to make it profitable for SURE to sell solar lanterns to remote, off-grid communities. Now beneficiary communities save on outlays on kerosene, children have better quality light for doing homework, women can work on their handicrafts after dark and households have a safer source of light. Further, the involvement of NGOs has enabled lantern sales to be linked to micro-finance which helps to make non-subsidised units more affordable. 39. In Vietnam, Green Energy, a local company with 60 full time employees, has linked up with the government in a variety of ways. It sits on the government’s National Jatropha Programme Founding Committee and it is working closely with the government’s Center for Bio-technology in Forestry to produce improved jatropha phenotypes. GEV has a contract with the government-sponsored Quang Tri Co-operative Alliance to work with farmer organisations in the province. In addition, the government is reclassifying marginal and unproductive land for jatropha cultivation. It has mandated that by 2015 petro-diesel must include a 5% blend of bio-diesel and provided for test planting of 300,000 hectares of jatropha by 2015. The regulatory framework is being improved by strengthening crop purchasers’ rights in terms of enforcement of contracts with growers. In addition the Dutch International Development Agency, SNV, has been advising both GEV - on “inclusive business” approaches - and its field staff - on the specifics of giving advice to farmers. 40. Sompo Japan Insurance in Thailand is piloting weather-index insurance for rice farmers in Khon Kaen province. It is working closely with the government-owned Bank for Agriculture and Agricultural Co-operatives (BAAC), which acts as distributor and prime promoter of weather-index insurance with farmers. The government is subsidizing BAAC’s outreach work with farmers to keep costs down. It is also playing a role through supporting the participation of the Thai Meteorological Department in the provision of rainfall data and investment in new weather stations to improve knowledge of rainfall patterns. The Fiscal Policy Office is following the pilot closely as it prepares a national strategy for the development of crop insurance. Additionally, JBIC, the Japan Bank for International Co-

operation, has acted as initiator and co-ordinator of the pilot. Without this outside stimulus it is unlikely that the pilot project would have taken off on its own. 41. Examples of the measures government might call on to support private sector activities are presented below beginning with the project-specific and progressing to national and international initiatives: • • • • • • • • • • • • Co-fund research and development Co-fund pilot projects Co-fund start-up costs (such as farmer awareness and education, early years price guarantees) Facilitate stakeholder dialogue Build capacity of local SMEs Create conditions for development of a local (micro-) finance industry Invest in infrastructure Offer tax incentives Provide subsidies Establish national strategies Create strong national legal and regulatory framework Enter into international policy and practice frameworks.

42. It is important to recognize that the partnerships that are helping to elevate the role of the private sector in poverty alleviation and environmental sustainability often include actors other than governments and multi-lateral and bi-lateral development agencies. A number of international NGOs, SNV in particular, are encouraging collaboration. They are: • • • • Advocating with governments to encourage sustainable business transactions with the poor Advising private companies on “how to do” pro-poor and green business Participating in, and often co-funding, innovation and experimentation, and Training and organizing beneficiaries

43. Green growth is not necessarily pro-poor. There is often a conflict between measures designed to benefit the poor and those to protect the environment. Areas of exclusion around forests on which many poor depend for their livelihoods is a commonly quoted example. The AIM studies provide other cases. An SNV program in Cambodia is promoting the construction of biodigestors that use animal manure to generate gas for cooking and lighting. This is renewable, environmentally-friendly, energy that also promotes improved family health. However, in order to benefit, a household must own livestock, preferably cattle, and this, of course, excludes the very poorest. The Puerta Princesa Tricycle project in Paluwan, Philippines, introduced electric-powered tricycles to reduce the pollution caused by traditional petrol-engined three-wheelers. Here the main objective was to improve air quality in the town. The financial benefit to the trishaw drivers (who may be numbered among the poor) was less obvious, although there may have been health advantages. PITFALLS AND DANGERS OF DOING THE WRONG THING 44. To make the case that governments, international development agencies and NGOs should intervene to encourage pro-poor, environmentally-sustainable, private sectorled development is not to say that all measures taken are necessarily good. Actions

need to be carefully chosen. They should be based on a careful assessment of the particular situation. Vigilance is necessary to guard against intervention that undermines the role of the private sector. For instance, untargeted subsidies can destroy a commercial market opportunity. This appears to be happening with government-subsidized weatherindex insurance in India. If the Thai government eventually opts for a national crop insurance scheme, it will surely have to commit to widespread use of subsidies and these will undermine attempts by companies like Sompo Japan that are trying to develop a commercial model. The situation is similar in Laos with solar electricity. A private company, Sunlabob, cannot compete with a subsidized government-run scheme. 45. Further, controls on financial institutions and interest rates prevent the emergence of an independent micro-finance industry in such countries as Vietnam, Myanmar and Laos. This in turn deprives the poor of potential spending power and therefore limits the growth of markets that serve them. With government subsidies in Laos being given to an alternative rural electrification scheme and with a still-born local micro-finance industry, Sunlabob is dependent on international awards and grants to finance its solar lantern schemes. Green Energy and Huong Hoa in Vietnam would benefit if a local rural microfinance industry existed and could provide farms with credit to buy improved farm inputs farmers thereby increasing the prospects of sustainable cultivation. 46. In Thailand the government had to revise its original policy on promoting plantations of exotic trees. It also had to become serious about enforcing the limits it imposed on plantation landholdings and to prevent incursions into primary forest and the displacement of communities. The revised limits on plantation size have been instrumental in generating a surge in smallholder eucalyptus cultivation. The government in Vietnam is considering similar limits on plantation size in order to support its own smallholder farmers. CURRENT STATUS AND FUTURE ACTIONS 47. In general, there is a lack of hard data on the success or failure of pro-poor and green business. The anecdotal approach of the AIM case studies does not change that. The case studies do, nevertheless, give tentative indications of some trends. Care must be taken, however, not to draw hard conclusions given the limited number of cases and the nonrandom nature of their selection. 48. Firstly, the cases appear to suggest that agro-processing businesses can be successful buying from smallholders and poor farmers. The AIM case studies report on several successful, or potentially successful, supply chain linkages between commercial crop processing firms and poor farmers. Nestle in Sarawak, both Huong Hoa and Green Energy in Vietnam and SCG Forestry in Thailand all reveal the potential for agricultural supply chains linking smallholders to private crop processing businesses. In many cases the relationships also contribute to improving, or at least maintaining, the fertility of soils – the natural resource on which farmers’ livelihoods depends. But there is another lesson in the documentation of the difficulty and high cost faced by companies like Huong Hoa starch factory and Green Energy of setting up supply chains with poor farmers. This is that a case may exist for public funding. Firstly this would extend marketing opportunities to groups of farmers poorer than those that might be selected by companies concerned with keeping costs down. Secondly funds could be used to encourage those farmers to manage, rather than mine, their soils, for example through subsidizing the production of organic fertilizer. 49. Although the AIM studies contain no real success stories of firms selling to the poor, the Economist Special Report on Innovation in Developing Markets contains

numerous examples. In many instances this is reflected in the dramatic increase in the sale of consumer goods. Notable pro-poor outcomes have emerged like the growth of mobile phone use, the spread of micro-finance and mobile money and the win-win success of Unilever and Proctor and Gamble’s sales of soaps and shampoos linked to hygiene education for the poor. Some, such as Aneel Karnani believe that the growth of sales in developing markets has more to do with rising disposable incomes than with firms reaching down to the “Bottom of the Pyramid”; that the poorest still remain beyond commercial reach. The private sector model does indeed lend itself to achieving financial viability by initially targeting the less risk-averse non-poor. Nevertheless, the demonstrated value of a product helps the poorer sections of society make their own spending decisions. And there is increasing evidence of the very poor participating in markets, especially in urban areas. The beauty of competitive markets is that it is very difficult for one section of society to hoard the supply of consumer goods to the detriment of a lower class. 50. Additional, often intractable, problems of establishing commercial relationships between businesses and the poor arise when it comes to selling public goods rather than private goods. These public goods are in many cases designed to improve the environments of the poor or mitigate the effects of climate change. Several AIM case studies point to these challenges. Sompo Japan Insurance in Thailand and Yamaha Water and Sumadi Latrines both in Indonesia, World Toilet Organisation in Cambodia, Sunlabob in Laos all demonstrate the difficulties inherent in designing products that promote environmental health and environmental sustainability and are for sale to the poor. The lesson from private sector–public service initiatives appears to indicate the need for funding similar to that of the UK’s Private Finance Initiative. Here government would contract a private company to build infrastructure and operate it to deliver a service and then would provide operational finance from the budget. Users would not pay the full price of the service. This will place a limit on the extent of roll-out. But perhaps the recognition that private enterprise alone cannot deliver public works may help governments to commit funds to schemes with a major role for the private sector in unconventional public infrastructure/service provision. Such a sharing of the costs, and a catalytic role being played by NGOs, should enable a much greater roll out of services and benefits than would be possible by either government or private sector working alone. 51. Finally, the effort needs to be made to move beyond anecdotes to scientific data on the role of the private sector in poverty alleviation and sustainable development. Data and evidence need to be generated. ILO has produced some research on whether inclusive/responsible business models hold during a recession, but more needs to be done. And here lies an important potential role for international development agencies: financing the studies and evaluations and closely-observed pilots that will fill the information gap.

References ADB, Public-Private Partnership Handbook, 2008 Ashley, Caroline, Harnessing Core Business for Development Impact: Evolving Ideas and Issues for Action, ODI Background Note, February 2009.

Ashley, Caroline, Returns On Investment In Responsible Business Practice: Higher In A Downturn? Overseas Development Institute, January 2009 Business Call to Action, http://www.businesscalltoaction.org/ Economist, The, Special Report on Innovation in Emerging Markets, April 2010 IFAD, The Potential for Scale and Sustainability in Weather Index Insurance for agriculture and rural livelihoods, 2010. International Labour Organization, Responsible and Sustainable Enterprise Level Practices at Time of Crisis, 2009. Karnani, Aneel, The Bottom of the Pyramid Strategy for Reducing Poverty: A Failed Promise, Desa Working Paper No. 80, August 2009. Krishna, Vijesh V and Qaim, Matin, Estimating the adoption of Bt eggplant in India: Who Benefits from public–private partnership? , Science Direct, 2009 Prahalad, C.K., The Fortune at the Bottom of the Pyramid. Eradicating Poverty through Profits. Wharton School Publishing, 2006. Serageldin, Ismail, Biotechnology and Food Security in the 21st Century, Science 285: 387, July 16, 1999. SNV-WBCSD, Inclusive Business: Profitable business for successful development (2007). Spielman, David J., and Klaus von Grebmer, Public-private partnerships in agricultural research: An analysis of challenges facing Industry and the consultative group on international Agricultural research, International Food Policy Research Institute, January 2004 UNDP, Growing Inclusive Markets, Creating Value for All: Strategies for Doing Business with the Poor, 2008 WBCSD, Business for Development: Business Solutions in Support of the Millenium Development Goals, WBCSD, Statement of Intent, November 2006 Wikipedia, "http://en.wikipedia.org/wiki/Public%E2%80%93private_partnership"

List of Case Studies Gawad Kalinga, Low Cost Housing, Cambodia and Philippines Green Energy, Jatropha Outgrowers, Vietnam Habitat for Humanity/World Concern, Low Cost Housing, Asia/Pacific, Cambodia and Myanmar Huong Hoa Tapioca Starch Factory, Cassava Outgrowers, Vietnam

Nestle, Red Rice Outgrowers, Sarawak, Malaysia Puerta Princesa, Tricycles, Philippines SCG Forestry, eucalyptus outgrowers, Thailand SNV, Biogas, Cambodia Sompo Japan, Weather-Index Insurance, Thailand Sumadi, Latrines, Indonesia Sunlabob, Solar Lanterns, Laos SURE, Solar Lanterns, Philippines, World Toilet Organisation, Latrines, Cambodia Yamaha Motors, Clean Water, Indonesia

Annex: Abstracts of Case Studies

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