Last year, six of the 22 deals the Asian Development Bank’s private sector department approved qualified as inclusive business. So why isn’t the bank investing in more inclusive business projects, an approach that has been widely promoted as a more commercially viable way to doing good?
Inclusive businesses aim to create a tangible impact on a core problem. Unlike social enterprises, which usually start small and are not always profitable, inclusive businesses are greater in scale and realize higher revenues.
One main reason the bank isn’t supporting more inclusive business projects, the principal economist at ADB’s regional and sustainable development department told Devex, is that companies are not submitting financially viable business plans. And even among those that do, many of them do not understand the business of the poor.
“Companies don’t understand the economy of the poor because they only work with the rich,” Armin Bauer said. Because of this, many of the proposals they submit fail to meet the criteria ADB uses to evaluate whether a project qualifies as inclusive business or not.
While specific criteria depend on several factors such as sector and location, they are always based on four major points.
1. Reach. How many people are benefiting and what types of people are these? A project that proposes to create 100 jobs, for example, would rank very low on ADB’s scale. A program that can provide 1,000 jobs, meanwhile, would score higher on the inclusive business scale.
2. Depth. How deep a change can your project make? In the case of jobs, creating 10,000 jobs would not qualify as inclusive business if these are exploitative jobs. Nestle, for instance, tapped 70,000 farmers to produce coffee. Not only does it provide steady income for 70,000 farmers, it also pays 20 percent more than the average coffee trader.
3. Systemic impact. What change do you really make on the core development problem? In the case of the education sector in the Philippines, creating a primary school program would not create systemic impact as it will only compete with existing government services.
“The core problem is to find the business model in college education,” Bauer noted. “So if I’m having an inclusive business model on primary school, it will get a lower score on this systemic impact.”
One of the programs the ADB is helping develop in the Philippines is on providing college education to future seamen. The idea is for potential employers, such as shipping lines, to subsidize the bulk of these students’ tuition upfront. Once the students graduate, these employers would hire them and just deduct the fees from their salaries on a staggered basis.
4. Business plan. How profitable is the business plan? Is it financially and environmentally sustainable? Does it address key cross-cutting issues such as gender? In some cases, ADB does help companies create viable business plans. In the case of housing , which is a big problem in the Philippines, land is a major financial investment. One suggestion the ADB has for companies that want to provide low-cost housing is to come up with a leasing arrangement with the government for the land, instead of purchasing the property outright.
Apart from helping hone business plans, ADB is implementing several measures to encourage the private sector to engage in inclusive business.
Through its private sector department, the ADB finances projects that meet its inclusive business criteria. In addition, these projects must be worth at least $2 million and stand up against the bank’s business check. The firms must pass the integrity evaluations as well.
ADB also works with governments to create an enabling environment for inclusive business. In a study, the bank found that while countries in Asia have normal business operating environments, none of them have a good enabling environment for inclusive business.
“The specific environment for inclusive business starts when you have specific targets, specific programs [and] specific accreditation for inclusive business,” Bauer said.
At the government and policy level, the Philippines is actually the first country in Southeast Asia to start the inclusive business discussion. Led by Undersecretary for ITG Adrian Cristobal, the high-level discussion between the Board of Investments — under the government’s Department of Trade and Industry — and ADB is working to create an accreditation scheme for inclusive business, similar to a free trade deal.
“The idea is to give [inclusive businesses] priority access to existing government support like tax incentives and other things, which are already there,” Bauer noted. For instance, the Philippines currently waives taxes for seven years for corporations that build high-rise buildings as long as they build at least one house for a poor family. Under the accreditation scheme, tax incentives would apply only for every low-cost house built.
But accreditation would be done in coordination with relevant industry associations so that there will be some neutrality.
“I don’t want it to be done just by the government because it will open it up to corruption,” Bauer emphasized.
In addition, the Philippine government has asked ADB for a $250 million public sector loan to support job creation under an inclusive business approach. The loan is still being developed for approval in 2015.
Knowledge exchange is a key part of the bank’s inclusive business strategy as well. It hosts workshops and conducts studies on opportunities for inclusive business. In the Philippines, the bank has hosted two major conferences that connect impact investors with inclusive businesses. Six or seven companies were able to obtain financing from those impact investors through the conferences.
ADB is also training bankers so that they would have a better understanding of what inclusive business is and be more open to lending to such companies.
Join Devex, the largest online community for international development, to network with peers, discover talent and forge new partnerships — it’s free. Then sign up for the Devex Impact newsletter to receive cutting-edge news and analysis every month on the intersection of business and development.