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

1. 25 February 2010 Incentivising Innovation at the Bottom of the Pyramid - the experience of Enterprise Challenge Funds Wits Innovation for Development Symposium - Private Sector Roundtable

2. 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

3. The rationale for ‘pro-poor’ incentives to market players

4. Challenge Fund logic: trigger private investment & innovation by changing attitudes to risk….. Challenge funds promote risk-taking and innovation so that established businesses extend their core activities in innovative ways which have a high social impact Minimum impact required by donor High Risk adjusted financial return Minimum level of return required by firm (hurdle rate) Aim of the challenge fund: to incentivise companies to move from the bottom right to the top right quadrant Low High Social impact Source: FDCF OPR, fig.1 • The logic applies across sectors and development objectives

5. Characteristics of Enterprise Challenge Funds • 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’

6. What does a successful portfolio look like? • 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 Projects likely to succeed when 100% 90% 80% 70% 60% 50% 50% of 40% projects: moderate 30% chance of % of projects 30% of projects: unlikely to 20% of projects: success 20% achieve success highly likely to be successful 10% 0% 5 3 4 1 2 Likelihood of success on scale of 1 (likely to completely achieve success) to 5 (unlikely to be realised)

7. What does private sector-led development impact look like? Great Lakes Cotton (Malawi) - BLCF Context Participation Outcomes • 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 • 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 Vodafone MPESA (Kenya) – FDCF Context Participation Outcomes • 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 • 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

8. What does private sector-led development impact look like? A N Other Banking Group – Southern Africa Context Participation Outcomes • 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+++ • 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) WHL Consulting – WHL Africa Context Participation Outcomes • 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 • 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

9. Thank you

10. Project Concept Note Stage Full Application Stage 83 Project Concept Notes received 14 rejected on eligibility grounds 69 PCN’s reviewed by internal assessment panel 41 rejected irt criteria Decisions 28 selected to submit full application. 7 did not submit 21 Full applications received 10 Rejected 1 Pending 10 Funded

11. 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

12. What does success look like (SA)? Clyral – KwaZulu Natal Context Participation Outcomes • 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 • 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 Madi a Thavha Lodge – Northern Limpopo Context Participation Outcomes • 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 • 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

13. What does success look like? A N Other Banking Group – Southern Africa Context Participation Outcomes • 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+++ • 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) WHL Consulting – WHL Africa Context Participation Outcomes • 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 • 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

14. What does success look like? Raizcorp – Richards Bay, Gauteng Context Participation Outcomes • 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 • 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.

15. What does private sector-led development impact look like? Great Lakes Cotton (Malawi) - BLCF Context Participation Outcomes • 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 • 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 Vodafone MPESA (Kenya) – FDCF Context Participation Outcomes • 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 • 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