Incentivising Innovation at the Bottom of the Pyramid - the experience of Enterprise Challenge Funds

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…..

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just

ed fi

nanc

ial r

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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


• 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


• 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+++


WHL Consulting – WHL Africa


• 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


• 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


• 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


• 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


• 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


• 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


• 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


Vodafone MPESA (Kenya) – FDCF


• 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

Documents

Incentivising Innovation at the Bottom of the Pyramid - the experience of Enterprise Challenge Funds