The Poor as Profit Center

Posted on April 29, 2014

 

Companies in Asia are discovering that. helping the poor can be profitable

These companies, which are engaged in what is called “inclusive business,” are commercially profitable operations whose core business model is to provide large-scale innovative solutions to the problems of people who live on less than US$3 a day – or about 60% of Asia’s population.

This group of people, sometimes called the “base of the pyramid,” is neglected by many companies as customers. They are often only helped by companies through corporate charity or other programs.

“Inclusive business differs from corporate social responsibility and social enterprise because of its business scale, growth potential, and focus on systemic changes for poor people,” said Armin Bauer, a Principal Economist with the Manila-based Asian Development Bank (ADB).

Inclusive business is also distinguished from impact investments in that it places the impact on poor and vulnerable people and de-emphasizes impact on the environment or good governance, he said.

Inclusive business relies on profit-making as an incentive to improve the well-being of low-income and vulnerable populations.

Manila Water: A business model

The Manila Water Company, which provides water utility services to about seven million people in the eastern part of Manila, is an example of this business model.

The company took over as the public water provider for the eastern part of Manila in 1999. Rather than focusing on wealthy or middle class neighborhoods, the company prioritized serving slum areas, in which about one in four people had access to clean, piped water.

The company, part of listed conglomerate Metro Pacific Investments Corp., connected about a million people, mostly the poor in urban slum areas, with water and made significant profits.

“The business plan of Manila Water was to start with providing service to poor areas, not just do it as an add-on later,” said Mr. Bauer. “They upgraded service to the wealthy areas after they made substantial profits serving the poor first.”

ADB and its partners are supporting such inclusive business models through a variety of means. This includes a US$3.6 million grant that will help companies throughout Asia become better at inclusive business, or assisting the poor while making a profit.The grant will help ADB improve its expertise at making inclusive business deals with private sector companies, and also help ADB member-countries develop policies that promote businesses that directly benefit the poor.

This includes, for example, linking inclusive business startups to existing government resources, such as small business loans. Other assistance includes supporting government job creation programs thatbenefit the poor, such as slum upgrading programs and climate-proofing poor neighborhoods.

Among the potential projects to receive support this year are a cacao project and seafarers scholarships in the Philippines; spice production in Cambodia and India; a water project in China; a drip irrigation program in India; and rural bank loan projects in Pakistan and Tajikistan.Prior to this most recent grant, ADB conducted market studies in countries throughout Asia to better understand the potential for inclusive business in the region.

The studies looked at how many inclusive business companies are already operating in the region, how many financial institutions support inclusive business, the problems the companies face and possible solutions, as well as opportunities to start new inclusive businesses.

ADB’s investments in inclusive business companies have steadily increased in recent years. Six out of the 22 approved private sector projects in 2013 were considered inclusive business. This was up from 5% from the period between 2000 and 2012.